Campbell’s quarter affected by high carrot costs, hurricanes and declining soup sales

22 Nov 2017 --- The Campbell Soup Company faced a number of headwinds including the rising cost of carrots and higher transportation and logistics costs following the hurricane season to report worse-than-expected results for the three months ended October 29. 

Net sales and organic sales decreased 2 percent, EBIT went down 10 percent; adjusted EBIT decreased 14 percent and Earnings Per Share (EPS) decreased 3 percent to US$0.91. 

The company, which is also struggling to diversify against a backdrop of changing consumer preferences for healthier foods, is cutting its annual profit forecast. 

First-quarter results
Sales decreased 2 percent to US$2.161 billion driven by a 2 percent decline in organic sales, reflecting lower volume.

Gross margin decreased from 38.6 percent to 36.2 percent. Excluding items impacting comparability in the current year, adjusted gross margin decreased 2.1 percentage points to 36.5 percent. The decrease in adjusted gross margin was primarily driven by cost inflation and higher supply chain costs, as well as unfavorable mix, partly offset by productivity improvements and the benefits from cost savings initiatives.

Marketing and selling expenses decreased 5 percent to US$219 million primarily due to lower advertising and consumer promotion expenses, as well as the benefits from cost savings initiatives. 

Administrative expenses increased 19 percent to US$149 million. Excluding items impacting comparability, adjusted administrative expenses increased 17 percent primarily due to an increase in information technology costs, costs associated with the pending acquisition of Pacific Foods of Oregon, the impact of inflation, and investments in long-term innovation.

In July 2017, Campbell Soup Company entered into an agreement to acquire Pacific Foods of Oregon (Pacific Foods) for US$700 million. The completion of the transaction is subject to customary closing conditions. However, in August the estate of a former Pacific Foods shareholder, Edward C. Lynch, filed a lawsuit against Pacific Foods, certain of its directors and others seeking more than US$250 million in damages. 

Other income was US$29 million in the current quarter as compared to other expenses of US$11 million in the prior-year quarter. Excluding the impact of pension and postretirement mark-to-market adjustments, adjusted other income increased to US$15 million from US$9 million a year ago primarily due to higher pension and postretirement benefit income, partly offset by losses on investments.

EBIT decreased 10 percent to US$412 million. Excluding items impacting comparability, adjusted EBIT decreased 14 percent to US$417 million, reflecting a lower adjusted gross margin, lower sales and higher adjusted administrative expenses, partly offset by lower marketing and selling expenses.

Net interest expense increased 7 percent to US$30 million reflecting higher average interest rates on the debt portfolio. The tax rate was 28.0 percent as compared to 31.9 percent in the prior year. Excluding items impacting comparability, the adjusted tax rate decreased 3.9 percentage points to 28.2 percent driven by the favorable settlement of certain US state tax matters.

EPS decreased 3 percent to US$0.91 per share. Excluding items impacting comparability, adjusted EPS decreased 8 percent to US$0.92 per share, reflecting declines in adjusted EBIT, partly offset by a lower adjusted tax rate and the benefit of share repurchases.

Cash flow from operations decreased to US$188 million from US$221 million a year ago primarily due to higher payments on hedging activities and higher working capital requirements, partly offset by higher cash earnings.

“This was a difficult quarter, particularly for our US soup business. The operating environment remains volatile with a rapidly evolving retailer landscape and competitive activity pressuring the top line,” said Denise Morrison, Campbell's President and CEO.

“Our bottom line performance was negatively impacted by a lower adjusted gross margin rate due in part to cost inflation, higher carrot costs and escalating transportation and logistics costs following the hurricane season.”

“The two percent decline in organic sales was largely due to the performance of our Americas Simple Meals and Beverages division, where US soup sales declined by 9 percent. Consumer takeaway decreased 2 percent in U.S. soup while significantly lower retailer inventory accounted for the remaining decline.”

“The sales decline was the result of one key customer's different promotional approach to the soup category for fiscal 2018, as we described last quarter. Importantly, our soup program was well received by most of our other key customers, where consumer takeaway of our soup was up slightly.”

Morrison explains how within Global Biscuits and Snacks, the company continued to drive momentum with increased sales and operating earnings. 

“Pepperidge Farm delivered another quarter of solid performance in the snacks business behind Goldfish crackers and a cookie portfolio rejuvenated by the launch of the Farmhouse brand and restaging of our American Classic Collection.”

Meanwhile, Campbell Fresh sales were comparable to a year ago. 

“We are encouraged that sales of products in our CPG portfolio increased for the second consecutive quarter behind Garden Fresh Gourmet and Bolthouse Farms salad dressing. Our carrot sales were negatively impacted by unfavorable weather, which led to customer allocations. The C-Fresh team is managing this situation while maintaining its focus on carrot quality and returning the beverage products to growth,” Morrison adds.

“In this challenging climate, we are focused on sharpening our plans for the remainder of the year while continuing to position Campbell for growth through investments to differentiate our brands, drive innovation and accelerate our e-commerce capabilities.”

Fiscal 2018 Guidance
For the full fiscal year, Campbell still expects the year-over-year change in net sales to be -2 to 0 percent. Campbell has lowered its earnings outlook and now expects adjusted EBIT to change by -4 to -2 percent (previously -1 to 1 percent) and adjusted EPS to change by -3 to -1 percent (previously 0 to 2 percent), or US$2.95 to US$3.02 per share. 

The change in guidance for adjusted EBIT and adjusted EPS is due primarily to Campbell's gross margin performance in the first-quarter and revised outlook for the balance of the fiscal year. 

This guidance assumes the impact from currency translation will be nominal. A non-GAAP reconciliation is not provided for 2018 guidance since certain items are not estimable, such as pension and postretirement mark-to-market adjustments, and these items are not considered to reflect the company's ongoing operating results.