CAMDEN, N.J. — Management and supply chain issues in the Campbell Soup Co.’s Campbell Fresh business unit negatively impacted earnings during the second quarter of fiscal 2017, ended Jan. 29.
|Denise Morrison, president and CEO of Campbell Soup|
“I am not satisfied with our overall sales performance in the quarter,” said Denise Morrison, president and CEO, during a Feb. 17 conference call with financial analysts to discuss the quarterly results. “Organic sales declined 2 percent, with the most prominent declines in Campbell Fresh and V-8 shelf-stable beverages. Additionally, in the Campbell Fresh segment we recorded non-cash impairment charges related to the carrot and carrot ingredient and Garden Fresh Gourmet reporting units.”
The impairment charges totaled $212 million, with $147 million charged to reduce the carrying value of the intangible assets of the company’s Bolthouse Farms carrot and carrot ingredients business, and $65 million against the company’s Garden Fresh business. Both of the businesses make up the Campbell Fresh reporting unit.
As a result, the company’s quarterly net income plunged to $101 million, equal to $0.33 per share on the common stock, against net income of $265 million, or $0.85 per share, during the second quarter of fiscal 2016.
Sales during the quarter fell 1 percent to $1,346 million from $1,382 million during the same time of the previous year.
During the Feb. 17 conference call Morrison offered an in-depth analysis of the challenges that have faced the Campbell Fresh business unit. The challenges facing the Fresh business ranged from leadership issues in the unit, quality issues related to the Bolthouse Farms carrot business, which resulted in a loss of customers, and capacity constraints for the manufacture of some fresh beverages.
“ … We replaced the leadership team and appointed a longtime Campbell executive, Ed Carolan, as the president of C-Fresh in November,” Morrison said. “It’s taking longer than we originally expected to regain carrot customers following last year’s quality and customer service issues and to rebuild capacity following the Protein Plus beverage recall. As a result, we no longer expect C Fresh to grow this fiscal year.”
She added that the company has addressed the carrot quality issues brought on by the drought in California, but the business is now facing new challenges.
“In the current quarter, our carrot business faced additional challenges, again related to the weather,” Morrison said. “In California, rainfall in December and January was significantly higher than normal. This hampered our ability to harvest fields and lowered our yields on the carrots we did harvest. This negatively impacted both sales and earnings in the quarter.”
Quality issues also prompted the company to recall Protein Plus beverages this past year. In the call, Morrison said the company is adding a beverage processing line at its Bakersfield, California, plant that will be operational in April, but management is struggling to identify co-packers who may provide additional capacity.
“We’ve had challenges in finding co-packers that meet our quality standards, but we’ve recently qualified a co-packer and expect to be significantly expanding our capacity by the summer,” she said. “While we’re selling everything we make, we have insufficient capacity to fulfill merchandising demand across the full range of our beverages. Our plan is to relaunch Protein Plus merchandising in the fourth quarter of fiscal 2017, when we expect to have sufficient supply. Due to our continued capacity constraints, we don’t expect our beverage business to return to growth until the fourth quarter.”
In its Garden Fresh business, the Campbell Soup Co. is facing the challenge of adding national scale to a successful regional business.
“When we acquired it in June 2015, Garden Fresh Gourmet was a small operation with approximately $100 million in revenue and very little infrastructure,” Morrison said. “The integration into the Bolthouse Farms fresh platform proved to be challenging. The truth is we expected more, faster, in multiple areas of this business, including financial systems, information technology, and supply-chain integration, as well as increased marketplace distribution.
“Throughout its short history, Garden Fresh Gourmet salsa was largely a Midwestern brand. Our plan called for the rapid distribution expansion of branded salsa beyond the Midwest. However, it became apparent that we did not have the differentiated recipes and taste profiles that would be accepted by consumers in other parts of the country.”
Management now believes they have developed the recipes required to pursue expanded distribution. In January, the company relaunched the brand in new packaging and featuring the regional recipes.
“Today, our ACV (all-commodity volume) distribution of Garden Fresh branded salsa is only 37 percent, so we have a lot of runway to match the 70 percent ACV levels of our other C-Fresh CPG brands,” Morrison said. “We’re optimistic that we can get there with delicious high-quality ingredients, product and packaging innovation, improved marketing and sales support, and expansion into organic and regional flavors.”
The Campbell Soup Co.’s other business units, Americas Simple Meals and Beverages and Global Biscuits and Snacks fared better during the quarter than the Fresh business. Sales for the units were $1,231 million and $680 million, respectively, with the Americas Simple Meals business experiencing an 8 percent rise in operating income of $313 million, and Global Biscuits operating income falling 4 percent to $135 million.
The company’s US soup business grew during the quarter.
“I’m especially pleased with our ready-to-serve brands,” Morrison said. “Sales increased double digits in ready to serve. Chunky continued to lead the way, behind our improved execution and strong integrated marketing that fully leveraged our NFL sponsorship.