CAMDEN, N.J. — Keith R. McLoughlin, interim chief executive officer of the Campbell Soup Co. following Denise M. Morrison’s abrupt retirement on May 18, and the company’s board of directors are facing two significant challenges — righting the ship and finding a replacement for Ms. Morrison. A company-wide strategy and portfolio review being undertaken by the board may provide solutions to both issues.
“…We’re facing some tough market conditions and also some poor operating performance …,” Mr. McLoughlin said May 18 during a conference call with securities analysts. “We have some hard and urgent work in front of us and we’ll face that head on.”
The interim c.e.o. emphasized “everything is on the table,” regarding the portfolio review and that “there are no sacred cows.” The company plans to unveil its strategy on Aug. 30, when it releases its fourth-quarter earnings.
One business unit sure to be under the review microscope is Campbell Fresh. For the third quarter ended April 29, Campbell Soup took a $619 million impairment charge against the business.
Campbell Fresh generated $251 million in sales during the quarter but had an operating loss of $19 million.
“The earnings decline was primarily driven by a lower gross margin percentage, reflecting lower manufacturing efficiencies and reduced carrot crop yields as well as cost inflation, including significantly higher transportation and logistics cost,” said Anthony P. DiSilvestro, chief financial officer. “The earnings performance of Campbell Fresh is significantly below our expectations as our gross margin has been impacted by the factors I listed.”
Issues that factored into the impairment charge included the overall performance of the Campbell Fresh business and the anticipated loss of private label refrigerated soup contracts with certain customers, Mr. DiSilvestro said.
When asked by a financial analyst about the problems facing Campbell Fresh, Mr. DiSilvestro provided a list of issues.
“We’re seeing lower manufacturing yields,” he said. “We’re seeing higher cost inflation in things like transportation and logistics. We’ve had to go to co-packers, and those are more expensive.
“The one thing that’s actually mitigating some of these issues is the benefit of the productivity program that our supply chain has brought to bear. But unfortunately, it hasn’t done enough to offset the other issue. So, we’re going to take a step back. We’re going to do a deeper dive in the fourth quarter and look at the drivers of that performance and figure out what do we do going forward with respect to the Campbell Fresh business.”
Inflationary pressures rising
For the quarter, Campbell Soup recorded a loss of $393 million. The result compared unfavorably with the same period of the previous year when the company earned $176 million, equal to 58c per share.
Sales rose to $2,125 million from $1,853 million, supported by the recent acquisition of Snyder’s-Lance and Pacific Foods.
Higher prices for dairy, meat, steel cans and aluminum combined with a higher-than-anticipated escalation of transportation and logistics costs added pressure to the company’s bottom line.
“…It’s a very challenging environment out there today,” Mr. DiSilvestro said. “It’s a competitive retailer market, and we’re all mindful of that. That being said, it would certainly be our intention that, over time, productivity and pricing will offset cost inflation. The challenge is the timing.”
Campbell’s Americas Simple Meals and Beverages business unit sales fell 2% to $1,010 million and operating earnings fell 3% to $217 million. The Global Biscuits and Snacks business saw sales rise 1% to $862 million and operating earnings rise 23% to $123 million due to the impact of the recently acquired Snyder’s-Lance snack business.
“Excluding the benefit of the acquisition and favorable currency translation, organic sales increased 1%, driven by gains in Pepperidge Farm Snacks, reflecting continued growth in Goldfish crackers as well as in cookies, driven by gains in Farmhouse and Milano,” Mr. DiSilvestro said of the Global Biscuits and Snacks business. “Segment operating earnings increased 23% to $123 million, primarily driven by the benefit of the Snyder's-Lance acquisition. Excluding the impact of the acquisition, segment earnings grew modestly.”
The weak overall quarterly results prompted the company to lower its full-year guidance. Management expects full-year sales to rise 10% to 11% compared with fiscal 2017 sales of $7,890 million. Adjusted earnings before interest and taxes are expected to fall 6% to 8% compared to the previous year when adjusted EBIT was $1,492 million, and adjusted earnings per share are forecast to fall 5% to 6% to a range of $2.85 to $2.90 per share.
Mr. DiSilvestro added that Campbell Soup’s 2019 fiscal outlook will be affected by issues uncovered following the acquisition of Snyder’s-Lance.
“Our initial work has confirmed the cost and synergy opportunity, and our long-term financial expectations for this business, including the 2021 e.p.s. accretion, have not changed,” he said. “That being said, there are several issues we have uncovered, which will impact fiscal 2019.
“These include a higher-than-expected trade rate, as the company’s plan for price realization did not materialize; the impact of higher freight and transportation costs that we’re all experiencing; and from higher-than-anticipated costs associated with the relocation and start-up of nut-production equipment. While we believe these issues are addressable, we now expect the Snyder’s-Lance acquisition will be modestly dilutive to our 2019 adjusted earnings per share.”