Campbell Soup Q3 Earnings Conference

Campbell Soup

on Monday reported its third quarter earnings. Shares of the company are down 2.35 percent or $1.06 per share to $44.06. Below are some key takeaways from the company's conference call. Denise Morrison, President and CEO · Our sales results for the quarter were mixed. Sales in U.S. Simple Meals grew 7%, powered by strong topline performance in our Sauce business. Plum Organics added 4 points to our sales growth in Simple Meal's. Bolthouse Farms delivered 6% topline growth over the prior year. · Biscuit sales in Asia-Pacific grew driven by double-digit growth in Indonesia. However, we did not grow our U.S. Soup business and experienced sales declines in U.S. Beverages, Pepperidge Farm and our business in Australia. Overall, organic net sales grew 1%, which was 1% below our expectations, and I'm disappointed that we failed to deliver the sales growth that we anticipated in the third quarter. · We believe this is in part a reflection of the persistence of an exceptionally challenging consumer environment. As many others in the industry have noted, consumers are suffering from continuing underemployment, reductions in the SNAP program and rising home, fuel and healthcare costs. · In combination, these factors are significantly affecting purchasing behavior, pressuring the performance of a number of our key customers and constraining growth across the industry, particularly in center store categories. · Our adjusted EBIT increased 12% in the third quarter, reflecting lower administrative expenses, including lower incentive compensation costs and our cost reduction efforts. · This was more than sufficient to offset the impact of a reduced gross margin percentage and deliver positive EBIT performance. Following our strong results in the second quarter, we reaffirmed our external guidance for the fiscal year, which called for sales growth of 4% to 5%, adjusted EBIT growth of 4% to 6% and adjusted EPS growth of 2% to 4%. · As we communicated at the time, achieving this level of performance was predicated on improving our marketplace performance relative to the first half. Unfortunately, our performance in U.S. Soup did not improve in Q3 and sales at Pepperidge Farm were below expectations. · Consequently, we are lowering our sales guidance for the full year to 3% growth. We are maintaining our previous full-year guidance on earnings, however, we are refining our estimates to the low end of the 4% to 6% range for adjusted EBIT growth and the low end of the 2% to 4% range for adjusted EPS growth. · Let me offer some perspective on our performance in the quarter. Sales in U.S. Soup were comparable to the strong year-ago quarter when sales increased by 14%. Within Soup, Broth sales grew 14% but Condensed Soup and RTS Soup posted declines. · Campbell's Skillet Sauces and new Slow Cooker Sauces in pouch packaging have now achieved 76% ACV distribution with 60% of retailers giving this new segment a dedicated section in the store. Sales continue to build as expected for those products. · Pepperidge Farm Cookies had a weaker than expected performance also wrapping a strong year-ago quarter. Pepperidge Farm Bakery grew as we maintained our shelf space and increase sales of sandwich rolls and buns. It is evident that we have held our own despite the reentry of Hostess in the marketplace. Internationally, we continue to deliver double-digit growth in Indonesia. · Bolthouse Farms is on track to deliver the second half growth that we expected. Third quarter sales of premium refrigerated beverages and salad dressings grew double digits. Bolthouse Farms is launching its spring innovation suite of 47 new products ranging from new stone fruit and root vegetable juices to delicious Greek yogurt salad dressings. · Our acquisition of Plum Organics enabled us to enter the fast-growing organic segment of the U.S. baby food category. In the second half, we expected Plum to show improvement with the full product range back in supply, expanding distribution and introducing several new products. It has done so. · We continue to believe that Plum is a well-positioned, on-trend brand that is an excellent fit with our $1 billion portfolio of foods that appeal to children. Before I turn the call over to Anthony, I want to share a few final observations about the third quarter and our strategy. · We said in the second quarter that we expected gross margin in the second half to be flat. However, in the third quarter, our gross margin was negatively impacted by lower sales volume, because our trade spending did not result in the expected sales increases. Finally, our continuing focus on disciplined cost management is making a difference on the bottom line, as we delivered third quarter earnings growth in a very competitive environment. · To sum up, we are making no excuses for our disappointing sales. We own the results. Our third quarter sales did not meet our expectations or yours, but our team remains resolutely focused on executing our dual mandate to strengthen our core business and expand into higher growth spaces. We have no illusions about the challenges that we're facing in a tough environment. · We are not alone in that regard, which is why we're also focused on driving growth through four bold moves; delivering breakthrough innovation, building our presence in packaged-fresh foods, increasing availability in faster growing channels and expanding in developing markets. We believe that we have the right long-term strategy to deliver sustainable, profitable net sales growth and build shareholder value. · We've come far since our journey began in 2011, and I look forward to sharing more details about the next steps on our strategic path at Campbell's Investor Day on July 22. Anthony DiSilvestro, new Chief Financial Officer · Before getting into the details, I wanted to give some perspective on our results and guidance. As you will see the shape of our P&L reflects a shift within our marketing programs. While total marketing, which includes advertising, consumer and trade, is up for both the quarter and the year, we have redeployed funds from A&C to support increased trade promotions. This is reflected on the P&L as a lower gross margin percentage with an offset in lower A&C expense, which we report in our marketing and selling line. · The second item I want to highlight is the significant reduction in our administrative expenses. Because our fiscal 2014 results are below our expectations, we are accruing incentive compensation below targeted levels. Lower pension expense and the savings from our recent restructuring initiatives are also contributing to this decline in administrative costs. Lastly, we are reducing our guidance for sales growth. · As Denise mentioned, in our U.S. Soup business we increased our promotional activity, however, we did not realize the anticipated volume lift. Additionally, in Pepperidge Farm, our volumes have been impacted by increased competitive activity in the snacks category, and in response we have also increased our promotional spending. As a result of these two issues, we are lowering our expectations for full-year sales growth to approximately 3%. Third Quarter Results · Now, I will review our results. I will start with our third quarter results and segment highlights, followed by a brief look at our year-to-date results and then wrap up with our full-year guidance. As Jennifer mentioned, my discussion of results will exclude items impacting comparability. For the third quarter, we reported net sales from continuing operations of $1.97 billion, comparable to the year-ago quarter. As Denise mentioned, we were disappointed with our sales in the quarter as U.S. Soup and Pepperidge Farm sales were below our expectations. · Our sales results include a 2-point contribution from our Kelsen and Plum Organics acquisitions. Excluding acquisitions and the negative impact of currency, organic net sales increased by 1% driven by gains in our U.S. Simple Meals and our Bolthouse and Foodservice segments, partly offset by declines in International Simple Meals and Beverages and in U.S. Beverages. The organic sales increase was on top of last year's 4% gain. · Adjusted EBIT increased 12% to $310 million. The increase was driven by lower administrative expenses. Lower marketing expenses offset the lower gross margin percentage, which reflected higher promotional spending. Adjusted earnings per share were $0.62, a 7% increase versus the prior year, reflecting the EBIT growth, partly offset by a higher tax rate. · The next slide shows the composition of our sales performance. The organic sales increase of 1% reflects two points of favorable volume mix and two points of growth from higher selling prices, partly offset by three points from increased promotional spending. Unfavorable currency had a 2-point impact due to the Australian and Canadian dollars weakening against the U.S. dollar while acquisitions added two points. · The favorable volume mix is driven by our U.S. Simple Meals and our Bolthouse and Foodservice segments. The pricing gains were primarily related to our list price increases on U.S. Condensed Soup and in our Global Baking and Snacking segment. · The promotional spending variance was primarily related to higher rates of spending in Global Baking and Snacking and U.S. Simple Meals. Our adjusted gross margin percentage declined by 1.8 points to 35.2%. Of the decline, 1.2 points came from the base business and 60 basis points was the impact of acquisitions. Excluding acquisitions, the decline in gross margin was primarily due to higher promotional spending, increased supply chain costs and cost inflation, partly offset by productivity improvements and higher selling prices. · Our margin performance was below our expectations, reflecting the lower than projected sales lift from promotional spending and increased supply chain costs. In North America, cold weather was a key cost driver as it disrupted the distribution and warehousing network, as well as impacting our planned performance.