Campbell Company: Reports Q3-2019 Results

Camden / NJ. (csc) Campbell Soup Company reported its third-quarter results for fiscal 2019. Highlights:

• Net Earnings Per Share (EPS) of USD 0.28; Adjusted Net EPS of USD 0.56
• Net Sales from Continuing Operations Increased 16 Percent; Total Combined Net Sales of USD 2.388 Billion; Organic Sales from Continuing Operations Comparable to the Prior Year
• Campbell Fresh Segment Reported as Discontinued Operations
• Campbell Updates Fiscal 2019 Guidance to Reflect Improved EPS Outlook and Divestitures

CEO Comments

Mark Clouse, Campbell’s President and CEO stated, «Our results this quarter were ahead of our expectations, making it the third consecutive quarter that we met or exceeded our outlook. I am also pleased to see profitability trends are improving, driven by sequential gross margin improvement.

«In the quarter, we continued to drive sales growth in Global Biscuits and Snacks, fueled by our U.S. Snacks portfolio. The business continues its growth trends on Pepperidge Farm, coupled with improvements in the Snyder’s-Lance portfolio. In the Meals and Beverages segment, although there is more to do, we are making steady improvements on gross margin and profit and this business is showing signs of stabilization.»

Background on the Presentation of Results

On April 12, 2019, the company announced that it had entered into an agreement to sell its Bolthouse Farms business. As a result of this, and along with the recently completed divestitures of the U.S. refrigerated soup and Garden Fresh Gourmet businesses in the third quarter of fiscal 2019, Campbell Fresh is now reported as discontinued operations. The following table is a summary of the third-quarter results for sales, earnings before interest and taxes (Ebit) and EPS for continuing operations, discontinued operations and on a total combined basis. Prior-year results have been adjusted to conform to the current-year presentation.

			Three Months Ended
(USD in millions, except per share)			April 28, 2019			April 29, 2018			Change
Continuing Operations
Net Sales as Reported (GAAP)			USD 2,178			USD 1,878			16%
Organic									-%
.
Ebit as Reported (GAAP)			USD 266			USD 158			68%
Adjusted Ebit			USD 316			USD 321			(2)%
.
Diluted EPS as Reported (GAAP)			USD 0.43			USD 0.24			79%
Adjusted Diluted EPS			USD 0.56			USD 0.59			(5)%
.
Discontinued Operations
Net Sales			USD 210			USD 247			(15)%
.
Ebit (Loss)			USD (17)			USD (633)			n/m
Adjusted Ebit (Loss)			USD 7			USD (13)			n/m
.
Diluted Loss Per Share as Reported (GAAP)			USD (0.16)			USD (1.55)			n/m
Adjusted Diluted EPS			USD –			USD 0.10			n/m
.
Total Combined Company
Combined Net Sales			USD 2,388			USD 2,125			12%
.
Combined Ebit (Loss)			USD 249			USD (475)			n/m
Adjusted Combined Ebit			USD 323			USD 308			5%
.
Diluted Net EPS as Reported (GAAP)			USD 0.28			USD (1.31)			n/m
Adjusted Diluted Net EPS			USD 0.56			USD 0.70			(20)%

n/m = not meaningful

Third-Quarter Results

Continuing Operations

Sales increased 16 percent to USD 2.2 billion reflecting a 17-point benefit from the acquisition of Snyder’s-Lance, which was completed on March 26, 2018, partly offset by a 1-point negative impact from currency translation. Organic sales were comparable to the prior year as gains in Global Biscuits and Snacks were offset by declines in Meals and Beverages. Sales in the quarter benefited by approximately 30 basis points from the change in the new revenue recognition standard adopted in fiscal 2019, which impacts the timing of expense related to promotional programs. The annual impact is not expected to be material.

Gross margin increased from 32.7 percent to 33.2 percent. Excluding items impacting comparability, adjusted gross margin decreased 2.1 percentage points to 33.4 percent, including a 170-basis-point dilutive mix impact from the acquisition of Snyder’s-Lance. The remaining decline in adjusted gross margin was driven primarily by cost inflation mostly offset by supply chain productivity improvements, lower promotional spending, the benefit from pricing actions and the benefits from cost savings initiatives.

Marketing and selling expenses increased 11 percent to USD 245 million reflecting a 14-point increase from the inclusion of the Snyder’s-Lance acquisition. Excluding items impacting comparability and the impact of the acquisition, adjusted marketing and selling expenses decreased driven primarily by lower marketing overhead and selling expenses, including the benefits from cost savings initiatives, partly offset by higher incentive compensation. Administrative expenses increased 8 percent to USD 165 million. Excluding items impacting comparability, adjusted administrative expenses increased 28 percent to USD 151 million primarily due to higher incentive compensation expense and the inclusion of the Snyder’s-Lance acquisition. The incentive compensation headwinds were due to lapping below-target levels in the prior-year quarter and improved performance in fiscal 2019.

Other expenses were USD 20 million as compared to USD 35 million in the prior year. Excluding items impacting comparability, other income decreased from USD 16 million in the prior year to USD 8 million reflecting amortization of intangible assets associated with acquisition of Snyder’s-Lance.

As reported Ebit was USD 266 million. Excluding items impacting comparability, adjusted Ebit decreased 2 percent to USD 316 million driven by declines in the base business reflecting higher adjusted administrative costs and gross margin pressure, offset mostly by incremental earnings from the acquisition of Snyder’s-Lance. The change in revenue recognition had a favorable 2-point impact in the quarter.

Net interest expense was USD 91 million compared to USD 42 million in the prior year. Excluding items impacting comparability in the prior year, adjusted net interest expense increased USD 31 million reflecting the debt associated with the acquisitions of Snyder’s-Lance and Pacific Foods, as well as higher short-term interest rates. The tax rate was 25.1 percent as compared to 37.1 percent in the prior year. Excluding items impacting comparability, the adjusted tax rate decreased 6.5 percentage points from 31.4 percent to 24.9 percent reflecting a lower U.S. federal tax rate.

The company reported EPS from continuing operations of USD 0.43 per share. Excluding items impacting comparability, adjusted EPS from continuing operations decreased 5 percent to USD 0.56 per share reflecting higher adjusted net interest expense, partly offset by a lower adjusted tax rate. The change in revenue recognition had a favorable USD 0.01 per share impact in the quarter.

Discontinued Operations

Sales decreased 15 percent to USD 210 million driven primarily by declines in refrigerated soup reflecting the previously announced plans of certain major private label customers to insource production in 2019. Adjusted Ebit was USD 7 million compared to a loss of USD 13 million in the prior-year quarter reflecting improved operational efficiency, including the benefit from cost saving initiatives. The company reported a loss from discontinued operations of USD 0.16 per share. Excluding items impacting comparability, adjusted EPS from discontinued operations was breakeven, compared to USD 0.10 per share in the prior year.

Total Combined Results

Total combined sales from continuing and discontinued operations increased 12 percent to USD 2.4 billion reflecting a 15-point benefit from the acquisition of Snyder’s-Lance. Adjusted combined gross margin decreased 0.4 percentage points to 31.6 percent. Adjusted combined Ebit increased 5 percent to USD 323 million reflecting incremental earnings from the acquisition, partly offset by declines on the base business. Adjusted net EPS was USD 0.56 per share compared to USD 0.70 per share in the prior year.

Nine-Month Results

The following table is a summary of the nine-month results for sales, Ebit and EPS for continuing operations, discontinued operations and on a total combined basis.

			Nine Months Ended
(USD in millions, except per share)			April 28, 2019			April 29, 2018			Change
Continuing Operations
Net Sales as Reported (GAAP)			USD 7,129			USD 5,743			24%
Organic									(1)%
.
Ebit as Reported (GAAP)			USD 1,010			USD 900			12%
Adjusted Ebit			USD 1,134			USD 1,151			(1)%
Diluted EPS as Reported (GAAP)			USD 1.82			USD 2.28			(20)%
Adjusted Diluted EPS			USD 2.14			USD 2.46			(13)%
.
Discontinued Operations
Net Sales			USD 666			USD 723			(8)%
.
Ebit (Loss)			USD (392)			USD (720)			n/m
Adjusted Ebit (Loss)			USD –			USD (24)			n/m
.
Diluted Loss Per Share as Reported (GAAP)			USD (1.10)			USD (1.73)			n/m
Adjusted Diluted Earnings (Loss) per Share			USD (0.01)			USD 0.16			n/m
.
Total Combined Company
Combined Net Sales			USD 7,795			USD 6,466			21%
.
Combined Ebit			USD 618			USD 180			n/m
Adjusted Combined Ebit			USD 1,134			USD 1,127			1%
.
Diluted Net EPS as Reported (GAAP)			USD 0.73			USD 0.55			33%
Adjusted Diluted Net EPS			USD 2.13			USD 2.62			(19)%

n/m = not meaningful

Nine-Month Results

Continuing Operations

Sales increased 24 percent to USD 7.1 billion reflecting a 26-point benefit from the acquisitions of Snyder’s-Lance and Pacific Foods. Organic sales declined 1 percent.

As reported Ebit increased 12 percent to USD 1.0 billion. Excluding items impacting comparability, adjusted Ebit decreased 1 percent to USD 1.1 billion reflecting declines in the base business offset mostly by incremental earnings from the acquisitions.

The company reported EPS from continuing operations of USD 1.82 per share. Excluding items impacting comparability, adjusted EPS from continuing operations decreased 13 percent to USD 2.14 per share reflecting higher adjusted net interest expense, partly offset by a lower adjusted tax rate. The change in revenue recognition had no impact on a year-to-date basis.

Discontinued Operations

Sales decreased 8 percent to USD 666 million. Adjusted Ebit was breakeven. The company reported a loss from discontinued operations of USD 1.10 per share. Excluding items impacting comparability, adjusted loss from discontinued operations was USD 0.01 per share, compared to earnings of USD 0.16 per share in the prior year.

Total Combined Results

Total combined sales from continuing and discontinued operations increased 21 percent to USD 7.8 billion reflecting a 23-point benefit from the acquisitions of Snyder’s-Lance and Pacific Foods. Adjusted combined Ebit increased 1 percent to USD 1.1 billion. Adjusted net EPS declined 19 percent to USD 2.13 per share.

Cash flow from operations increased to USD 1.1 billion from USD 1.0 billion a year ago due primarily to significant improvements from the company’s working capital management efforts, partly offset by lower cash earnings. In line with the company’s commitment to returning value to shareholders, during the first nine months of fiscal 2019, the company paid USD 318 million of cash dividends reflecting the quarterly dividend rate of USD 0.35 per share.

Campbell Updates Fiscal 2019 Guidance

Based on the company’s improved earnings outlook for fiscal 2019 and the impact of the Campbell Fresh divestitures, Campbell has updated its guidance as shown in the table below. This fiscal 2019 guidance includes an estimated 1 percentage-point negative impact from currency translation. As mentioned earlier in this release, Campbell Fresh is now reported as a discontinued operation and prior-year results have been adjusted to conform to the current-year presentation.

(USD in millions, except per share)

As Previously Disclosed

Updated Results and Guidance

2018 Results*

Previous 2019 Guidance

2018 Results

Revised 2019 Guidance

.

Net Sales

USD 8,685

USD 9,975 to USD 10,100

USD 7,735

USD 9,075 to USD 9,125

.

Adjusted Ebit

USD 1,408**

USD 1,370 to USD 1,410

USD 1,433**

USD 1,390 to USD 1,410

.

Adjusted EPS from continuing operations

n/a

n/a

USD 2.90**

USD 2.50 to USD 2.55

.

Adjusted Net EPS

USD 2.87**

USD 2.45 to USD 2.53

USD 2.87**

USD 2.50 to USD 2.55

n/a = not applicable — * Amounts represent 2018 results as previously disclosed prior to the presentation change for discontinued operations.

Cost Savings Program

In the third quarter of fiscal 2019, Campbell achieved USD 55 million in savings under its multi-year cost savings program, inclusive of Snyder’s-Lance synergies, bringing total program-to-date savings to USD 605 million. Year-to-date savings were USD 150 million through the first nine months of fiscal 2019, benefiting both continuing and discontinued operations. The previously announced cost savings target of USD 945 million included USD 95 million of savings related to Campbell Fresh, which is now reported as discontinued operations. For continuing operations, Campbell is targeting cumulative annualized savings of USD 850 million by the end of fiscal 2022, of which USD 535 million has been achieved program-to-date.

Segment Operating Review

An analysis of net sales and operating earnings by reportable segment follows:

(USD in millions)			Three Months Ended April 28, 2019
			Meals and Beverages			Global Biscuits and Snacks			Total
Net Sales, as Reported			USD 1,024			USD 1,154			USD 2,178
.
Volume and Mix			(3)%			1%			(1)%
Price and Sales Allowances			1%			(1)%			-%
Promotional Spending			1%			1%			1%
Organic Net Sales			-%*			1%			-%
Currency			-%			(2)%			(1)%
Acquisition			-%			38%			17%
Percent Change versus Prior Year			(1)%*			37%			16%
.
Segment Operating Earnings			USD 207			USD 139
Percent Change versus Prior Year			(5)%			15%

* Numbers do not add due to rounding.

(USD in millions)			Nine Months Ended April 28, 2019
			Meals and Beverages			Global Biscuits and Snacks			Total
Net Sales, as Reported			USD 3,513			USD 3,615			USD 7,129**
.
Volume and Mix			(1)%			1%			(1)%
Price and Sales Allowances			-%			1%			-%
Promotional Spending			(1)%			-%			(1)%
Organic Net Sales			(2)%			1%*			(1)%*
Currency			-%			(2)%			(1)%
Acquisitions			3%			63%			26%
Percent Change versus Prior Year			-%*			61%*			24%
.
Segment Operating Earnings			USD 753			USD 478
Percent Change versus Prior Year			(9)%			27%

* Numbers do not add due to rounding. — ** Includes Corporate

Meals and Beverages

Sales in the quarter decreased 1 percent to USD 1.024 billion. Organic sales were comparable to the prior year reflecting mixed results, as solid performance in Canada was offset by decreases in V8 beverages and Prego pasta sauces in the U.S. The adoption of new accounting guidance for revenue recognition resulted in a positive 1-point impact on sales. Sales of U.S. soup were comparable to the prior year as gains in broth were offset by moderating declines in condensed and ready-to-serve soups.

Segment operating earnings in the quarter decreased 5 percent to USD 207 million. The decrease was driven primarily by cost inflation and higher administrative expenses, partly offset by supply chain productivity programs, lower promotional spending and the benefit of recent pricing actions.

Global Biscuits and Snacks

Sales in the quarter increased 37 percent to USD 1.154 billion. Excluding the benefit from the acquisition of Snyder’s-Lance and the negative impact of currency translation, organic sales increased 1 percent. This performance reflects continued solid growth in Pepperidge Farm, driven by consumption gains in Pepperidge Farm fresh bakery products and Goldfish crackers, offset partly by declines in the international biscuits and snacks operating segment.

Segment operating earnings in the quarter increased 15 percent to USD 139 million, reflecting a 21-point benefit from the acquisition of Snyder’s-Lance. Excluding the impact of the acquisition, segment operating earnings decreased driven primarily by cost inflation and higher administrative expenses, partly offset by supply chain productivity programs.

Corporate

Corporate in the third quarter of fiscal 2019 included a pension settlement charge of USD 28 million associated with a U.S. pension plan, charges related to cost savings initiatives of USD 19 million, and costs of USD 2 million associated with the planned divestiture of the company’s international biscuits and snacks operating segment. Corporate in the third quarter of fiscal 2018 included transaction and integration costs of USD 72 million related to the acquisition of Snyder’s-Lance, charges related to cost savings initiatives of USD 45 million, and a charge of USD 22 million related to the settlement of a legal claim. The remaining increase in expenses primarily reflects losses on open commodity contracts and higher administrative expenses.

Reportable Segments

Campbell Soup Company earnings results are reported as follows:

Meals and Beverages includes the retail and food service businesses in the U.S. and Canada. The segment includes the following products: Campbell’s condensed and ready-to-serve soups; Swanson broth and stocks; Pacific broth, soups, non-dairy beverages and other simple meals; Prego pasta sauces; Pace Mexican sauces; Campbell’s gravies, pasta, beans and dinner sauces; Swanson canned poultry; Plum food and snacks; V8 juices and beverages; and, Campbell’s tomato juice. Beginning in fiscal 2019, the segment also includes the simple meals and shelf-stable beverages business in Latin America. Prior to fiscal 2019, the business in Latin America was managed as part of the Global Biscuits and Snacks segment. Beginning in the third quarter of fiscal 2019, the segment also includes a portion of the U.S. refrigerated soup business that was previously managed as part of the Campbell Fresh segment. Prior-period segment results have been adjusted retroactively to reflect these changes.

Global Biscuits and Snacks includes the U.S. snacks portfolio consisting of Pepperidge Farm cookies, crackers, bakery and frozen products in U.S. retail, and Snyder’s-Lance pretzels, sandwich crackers, potato chips, tortilla chips and other snacking products. The segment also includes Arnott’s biscuits in Australia and Asia Pacific, Kelsen cookies globally, and the simple meals and shelf-stable beverages business in Australia and Asia Pacific.