金寶湯 (CPB) 2002 Q1 法說會逐字稿

CAMPBELL SOUP QUARTERLY ANALYST CONFERENCE CALL

Good morning ladies and gentlemen, and welcome to the Campbell Soup quarterly analyst conference call. Leading today's meeting is Mr. Leonard Griehs, Vice-President of Investor Relations. As a reminder, today's call is being recorded at the request of Campbell Soup. Should you object, you may disconnect at this time. Sir, you may begin.

Thank you. Good morning everyone and welcome to Campbell Soup company's first quarter fiscal 2002 conference call. With me this morning are Bob Schiffner, Senior Vice-President and Chief Financial Officer, Jerry Lord, Vice-President and Controller, and Sally [_______________], Assistant Controller. You should have with you our press release and the fact sheet, which is attached to that, which will be referred to in this call. If you do not have that fact sheet, you may receive one by calling Cindy Aguero in the Campbell Investor Relations Department at 856-342-6427. Our call this morning will last approximately 1 hour. Should you need to listen on the replay, you may call 1-800-839-5570 approximately 2 hours after the call is complete and will run through midnight of November 19th. You may also listen by logging onto our website www.campbellsoup.com and clicking on the website banner. This discussion will contain forward-looking statements, which reflect the company's current expectations about its future plans and performance including statements concerning marketing, investments, and earnings. These forward-looking statements rely on a number of assumptions and estimates which could be inaccurate and which are subject to risks and uncertainties. Actual results could vary materially from those anticipated or expressed in any forward-looking statement made by the company. Please refer to the company's most recent Form 10-K and subsequent filings for further discussion of the risks and uncertainties. The company disclaims any obligation or intent to update the forward-looking statements in order to reflect the events or circumstances after the date of this discussion. Also as a matter of policy, our conference calls are open to all investors and the media. Now for some brief introductory remarks here is Bob Schiffner, Campbell's Chief Financial Officer.

Thanks Len. Good morning everyone. In July, we announced that we were going to start reporting you our soup performance in a new way. In fact, we told you that we would report consumer purchases in 3 ways. First, by total wet soup; second, by form that is Condensed and Ready To Serve; and third, by behavior that is eating and cooking. Consistent with our desire to make the performance of our soup business more visible to the investment community, we believe this breakdown gives a more complete picture of our progress with consumers and a more accurate view of the overall soup category. However, I think most of you know that since early this fall the data from both IRI and Neilson now omit a big piece of consumer purchases. Specifically, there are several large customers, now including Wal-Mart, that choose not to report purchases through their stores to these information services. We understand the reasons; however, since this portion of consumer purchases has become increasingly significant and dynamic, we believe that data excluding these outlets is less reliable. In some cases it will not give a proper view of retail activity since it can make a difference whether total consumer purchases of a category or brand show up as negative or positive. Therefore, we have decided to alter our course and not to report consumer purchases for our US products, but to report results instead by shipments. I am sure you understand the reason for this shift in communication. I really think this will give you a much better picture of what is going on in our business than if we focused your attention on incomplete data. With that as background, I'll ask Jerry Lord to start our discussion on the first quarter results.

Good morning everyone. It's nice to be here this morning to talk about our start to fiscal 2002. While we still have challenges, we are all pleased with our early progress. First, I have just a few comments about the presentation of our numbers today. In the first quarter, we adopted new accounting standards related to the recognition, measurement, and income statement classification for certain consumer and trade promotional expenses such as coupon redemption costs, cooperative advertising programs, and in store display incentives. In the fourth quarter of last fiscal year, we adopted new guidance on the classification of shipping and handling costs. As a result, the following reclassifications were made to the first quarter fiscal 2001 financial statements. Net sales were reduced by 197 million, cost of product sold was increased by 49 million, and selling, general, and administrative expenses were reduced by 246 million. We have decided against early adoption of FAS 142 relating to goodwill and other intangible assets. We will adopt it as required in the first quarter of fiscal 2003. All percentage comparisons are given before the effect of currency. On the fact sheet, reporting segments show before and after currency effect. Whole numbers also exclude the impact of Arnotts restructuring. The impact this quarter was less than a penny per share. Consistent with our announcement in July, we have changed our reporting segments to reflect the new organization of our business.

We also believe that these segments will give you a better picture of the performance of the key paths of our business. New segments are defined as follows, first, North America Soup and Away From Home, which includes our soup businesses in the US, our total business in Canada and Away From Home. Second, North America Sauces and Beverages which includes V8, V8 Splash, Campbell's Tomato Juice, Prego, Pace, and prepared foods such as Franco-American. Our Mexican and Latin-American businesses are also included in this segment. Third, Biscuits And Confectionary, which includes Pepperidge Farm, Godiva, and Arnotts based in Australia. This segment is essentially unchanged from previous reporting and finally, International Soup and Sauces, which includes our European and Asian soup and sauce businesses. Since we are adopting these new segments as well as new classifications for certain trade promotions and coupon redemption, beginning with this first quarter, you will need to revise your financial models of the company accordingly. It is our intention to provide a restatement of fiscal 2001 by segment, by quarter as well as restatement of fiscal 2000 annual numbers by segments when we file the first quarter 10-Q approximately one month from today. As we announced on October 30th, the first quarter showed stronger than expected shipments of US Soup and Sauce products resulting from positive consumer trends. During the period following September 11th, the company experienced a significant increase in shipments of US soup and sauces. As planned, heavyweight-marketing programs began in early September and continued throughout the quarter.

In October, shipments continued to be higher than a year ago. We ended the quarter with retail inventories at about 3-1/2 weeks, approximately the same level as a year ago. As a result, US wet soup shipments for the quarter increased 6% compared with last year, while worldwide wet soup shipments were up 7%. Now let's turn to the financial results. Sales finished up 9% at 1.7 billion and earnings before interest and taxes was 318 million, down 12%. Sales for the quarter breakdown as follows, base volume mix was up 6%, pricing was up less than 1%, promotions now included as a deduction of net sales, subtracted 2% meaning that promotional spending increased faster than sales, acquisitions added 5%, and currency was a negative 1%. Gross margin declined from 45.9% to 44.0% due mainly to 3 factors. Increased trade promotional spending and increased consumer coupon expenses now treated as a deduction to sales. Secondly, the continued mix shift within US soup towards Ready To Serve and thirdly, the cost of quality improvements across a number of products. As projected on last quarter's conference call, total marketing was up 20% before the impact of currency and the European acquisition. As we accelerated our investment across our entire business portfolio, also as previously discussed, on unallocated expenses were up due to higher incentive compensation accruals versus a year ago.

Net interest expense was $53 million up $1 million versus a year ago. Higher interest expense due to the European acquisition was largely offset by very favorable short-term rates. The tax rate for the quarter was 34.5% essentially the same as last year. This is the rate we are currently forecasting for the full year, diluted earnings per share was ¢42 versus ¢47 a year ago. Now let's turn to operating highlights by segment starting with North America soup and Away From Home, sales of $806 million were up 4%. Operating earnings of 229 million were down 11% reflecting a lower percentage gross margin, and a much higher level of consumer promotion and advertising for US soup. As previously noted, US soup shipments rose 6%. Shipments of Condensed soup were up 1% while Ready to Serve shipments rose 17%. Swanson Broth shipments were 7% higher. Cooking soups and eating soups, which contain a mix of varieties of both Condensed and Ready to Serve rose 4% and 7% respectively. We had higher volume for all 3 Condensed icons chicken noodle, tomato, and Cream up Mushroom. Chunky shipments were higher driven by new varieties Chunky Homestyle Classics. New advertising with popular NFL players and expanded consumer promotions continue to make Chunky a star performer. Campbell's select marketing programs coupled with product improvements drove excellent growth on top of the strong performance last fiscal year.

My personnel favorite, new Italian wedding soup was a big hit in this line during the quarter. Swanson Broth shipments rose as a new pop and pour lid made cooking with broth even more convenient. Campbell's Supper Bakes are a new meal kit leveraging the technology of Campbell's cooking soups made a strong entry into the market. Canada had positive sales growth led by strength across all product lines particularly soup and V8. Away From Home sales were flat a year ago reflecting the impact of softness in the food service industry resulting from the slowing economy and the September 11th attacks. The impact of these events was somewhat offset by growth in frozen soup and distribution gains. Now lets move to North America's sauces and beverages. Sales increased 5% to $313 million and operating profits declined 18% to $59 million. The primary reason for the decline in operating earnings was the planned increase in total marketing support across all lines, including, Franco-American, Pace, and Prego. Prego had an outstanding first quarter as the introduction of Prego pasta bake drove double-digit volume growth. While it is still too early to fully access the potential of Prego pasta bake, we are pleased with its early performance and responsiveness to consumer support. As mentioned in July, we have also restored marketing support to the core Prego business while we are advertising on television for the first time in several years. Pace also reported strong shipment growth, tied to renewed advertising support. V8 and tomato juice each showed shipment gains as we prepare for national television advertising for the first time in a number of years.

V8 Splash declined and continues to be weak. We have planned new initiatives including the introduction of a line of V8 Splash lemonades in single serve for next summer, which are aimed at reversing this negative trend. Franco-American shipments were positive with strong growth in SpaghettiOs as we kicked off an association with public broadcasting as official sponsor of Sesame Street. Latin America was up in both, sales and operating profit. Now, Biscuits and Confectionary, sales for the quarter rose 3% to $379 million, 6% before currency. Earnings declined 13% before currency to 38 million primarily due to two factors. First, planned increases in marketing support across all lines, and second, flat sales for Godiva. Pepperidge Farm had strong shipments for all product lines. Our core cookie business did well in products such as Milano cookies, as did new products such as Dessert Bliss cookies, and Goldfish sandwich crackers. Other new products introduced were single serve packages of both cookies and Goldfish crackers aimed at school lunch consumption. Fresh bakery had an excellent quarter with new varieties such as Farmhouse sourdough bread and three varieties of Farmhouse Rolls. Frozen Texas toast bread expanded nationally supported by higher advertising and two new varieties, tomato and garlic swirl and five cheese. These contributed to sales and share growth. At Ernest, we had another strong quarter driven by value added new products such as Rick's rice chips, "Tim Tam fingers," [_______________] cookies and what Len tells me is his personal favorite Tiny Teddy Dippers.

Additionally, biscuit sales in Indonesia were strong. Godiva sales and earnings have been negatively impacted by the events of September 11th. The retail boutique of the World Trade Center was destroyed and the boutique at the World Financial Center sustained significant damage and remains closed. Sales of duty free stores also were negatively impacted by diminished airport traffic. Worldwide sales were up slightly as we have continued to open new retail outlets around the world. However, same store sales in the US declined significantly with a negative impact on operating margins. We continue to be very positive about the long-term growth prospects for Godiva. Now lets move to International Soup and Sauces. Sales rose to $231 million compared with the 141 million, and operating earnings rose to 23 million from 14 million a year ago. Excluding currency and the European acquisition, sales rose 3% and operating profit declined 14% primarily due to planned higher marketing investments. Day sales in Europe were up versus a year ago, except for UK soup and canned meat. New product launches are off to a solid start with both Home Pride's sizzling cooking sauce in the UK and Liebig daily soup for kids running ahead of plan on distribution. Performance of our new acquisition is in line with our expectations. In Asia Pacific, soup shipments were soft in the quarter; however, we continue to out perform the category in Australia with consumer purchases up 4% on soup. Now lets move to a discussion of the balance sheet.

Net debt was $4.1 billion up from 3 billion a year ago, and leveled with year-end fiscal 2001. This increase is primarily due to borrowing for the acquisition of the dry soup and sauce businesses in Europe. During the quarter, we refinanced $600 million of commercial paper, half with a seven-year note and the balance with a two-year note. Inventories rose versus a year ago primarily due to the acquisition and volume growth. Free cash flow for the quarter was a $122 million compared to 235 million a year ago. This reflects the increased marketing investment and a volume driven increase in working capital during the quarter from the historically low level at fiscal 2001 year-end. Operating working capital at quarter end was actually $21 million lower than a year ago despite a 9% increase in sales due to increased current liabilities. Working capital management continues to be high priority and we are pleased with our first quarter progress. Now let's move to the outlook for the reminder of the year. We are executing the plan that we laid out in July. Clearly, our interest expense for the year is going to be less than our earlier projections, probably in the $210 to $220 million range. However, the results of Godiva and for V8 Splash are likely to offset a significant part of the interest expense reduction on the bottom line. We have much higher marketing investment across the portfolio and we are right on track for the 200 million of additional spending we committed to at the beginning of the year. Both customers and consumers have responded favorably to Campbell's products, our early quality improvements and higher communication level.

If this positive trend continues, we could invest in our programs at a higher than planned level in order to enhance our business momentum. In addition, we are continuing to identify opportunities to reshape our infrastructure and build our capabilities to successfully execute our strategies. These are both recurring and nonrecurring and relate to system's new products or innovation. We may take advantage of any better than expected results to fund these opportunities. As we look at these opportunities and risks, we believe it is prudent to keep expectations for earnings per share this year at a $30 excluding the impact of Australian restructuring. For the second quarter, we expect earnings per share to be in the range of ¢48 to ¢52 per share excluding the Australian reconfiguration. This concludes my formal remarks, and I'll now turn the call back to Len for the question and answer session.

Michelle, could you please start the polling, please for questions.

Sure. At this time, we will begin our question and answer session. If you have a question, press '*' '1' on the telephone touch pad. You may need to lift your hands prior to pressing '*' '1'. If at any time you wish to withdraw your questions you may do so by pressing '*' '2'. Once again, that's '*' '1' to ask a question and '*' '2' to withdraw. Our first question comes from John McMillin with Prudential Securities.

Good morning everybody.

Hi! John.

Congratulations on the encouraging start. Len, I think you must set the record for the most consecutive fiscal year started with changing segments.

I think you are right.

You'll have to come out with a changing segment soup. Just in terms of, you're basically saying that retail inventory levels have not risen as your, I guess, people are basically taking away 6% soup. I know there's no way to measure consumer pantry levels of soup. The weather has been a little bit warm across most of the country, and I guess you are hoping for rain, but is there any way to kind of measure or to give some idea internally what you're thinking, you know, real consumption is and to what extent inventory levels just went up after September 11th.

John, we have actually attempted to track pantry loading levels and clearly it is in our best interest to do so and what we have uncovered is that a strong majority of the incremental purchases that were made following the events of September 11th, were actually consumed. So, the increase in our pantry load is in fact minor based on the statistical sample we have evaluated, which clearly is good news to us.

:

You would think more of that would be from the cooking side than the eating side, but okay, if you think so. Thanks a lot.

:

Okay, Michelle, the next question.

Our next question comes from Eric Katzman with Deutsche Bank.

Hi. Good morning. I guess a few questions kind of following up on John's. Is there a way to kind of make some assumptions as to how much of the global soup volume was up 7, was kind of maybe let us say above your expectations due to what's happened globally with air travel and the World Trade Center tragedy.

The 7% overall worldwide growth and 6% US growth were above our expectations for the quarter.

And any sense how much 2-3 points or.

I think Eric that we'll talk to you in September and we talked about the first quarter where we thought shipments would be, you know, we were looking back then I think at, what we talked to you about was a possibly 2% to 3% volume growth, I think that'll sort of worry you, what were the expectations were versus where they came in.

Okay. I guess another question kind of related to the World Trade Center tragedy is that a lot of the companies have seen a weakness in food service post that, and I guess to the extent do you think that the increased consumption at the pantry level is due to people staying at home and that affects your inventories, but if people start traveling again and hopefully, we'll all get back to normal, does that give you any caution as to how much these excess volumes can continue to off of the food at home business?

Eric, let me just, one of the things we did before Bob has to say anything on this. If you look at the code and in fact what Doug said on the release, we talked about that the events around September 11th, created some real unusual circumstances in the US for part of the quarter. While the year has started strongly, we are well positioned moving into the heart of US soup season. It is difficult to determine how shipments will try going forward. We will continue implementing our investment innovation plans, so that's kind of the uncertainty that we sort of try to lay out for you.

All right. Eric, let me just add to that. We are being very cautious in terms of forecasting the future simply because we believe these are absolutely a unique set of events and there is no history that in fact might support what impact this is going to have on our business going forward. Consequently, we have in our second quarter forecast, we are actually forecasting relatively flat soup volumes simply because we had a very strong quarter last year and were in fact identifying the uncertainty going forward, so that's where we stand on that. I wish I had a fortuneteller here, who might tell me what will happen, but we are basically flying somewhat in the dark at this point.

Fair enough and then the last question, I know that you had mentioned at one point that, I guess, the news coverage and other events had not allowed you to necessarily advertise at certain times when you had hoped and yet your marketing spending was up 20%, I guess, the question is did you make up for that period where you were not able to later in the quarter, would that number have been even higher and did that add anything to the bottom line.

We have for the most part made up that advertising in the quarter, so that is not a source of any favorability relative to our plans.

Okay. Thank-you.

I was just going to say, if you think about, the television advertising is only one element of our program and a lot of programs still continued. It is really only on the television we were off for that 1-week, so.

Okay. Michelle, next question.

Thank-you. Our next question comes from Terry Bivens with Bear Stearns.

Good morning everyone.

Hi Terry.

With regard to, I guess my question kind of follows on here, it just seems as though you are doing much better than you might have expected as, like all of us are aware, the weather has not cooperated as we move in to November yet, you do have some tough comps with last year and you are missing some Godiva earnings presumably that we are in a lot of our models. Is it fair to say as we look out that you are going to substantially, if indeed, you're going to stay with 130 kind of performance? Is it fair to assume that you're going to be able to substantially accelerate all of your programs this year or we're going to see, for example, marketing up more than the 20%?

Terry, I think that it's safe to say that if the soup business continues to perform well, it is certainly our desire to spend back against that business to maintain and enhance our momentum going forward and I think that that is clearly speculative of what I'm saying, but again, our intent is that if we have a good thing going here, let's take advantage of it going forward.

Okay. Well, to use the technical financial term, I guess, I'm just wondering if a little bit of sandbagging is going on here in terms of the yearly performance?

Terry, I think there's nothing wrong with being conservative in our estimates. Bob talked about the uncertainties going forward and we put that out in the press release, and I think it's just prudent for us to maintain that posture and remember that the 20% you mentioned, we actually said marketing is up 15% for the year that 200 million is a 15% increase. The 20% was in the first quarter.

Okay. Okay, so then is it possible that the marketing might be up more than that 15? Is that a possibility?

Yes. This is Bob.

Okay and just one more thing. I'd love to try out those Tiny Teddy Dippers or whatever that be, so keeping in mind

Go to Australia, do it together.

Keeping in mind on the mailing list.

You are one of them.

Okay. Thank-you.

Thank-you.

Michelle, next question.

Our next question comes from Andrew Lazar with Lehman Brothers.

Good morning.

Hi Andrew.

Hey Bob, I know that in each of the last couple of years in the fall some of the leading biscuit players have used that as an opportunity at least for the past few years to modestly, but raise pricing a little bit here and there, at least thus far have you seen anything terms of industry wide out in the field that would suggest there have been any changes in that arena in pricing?

Andrew, we have not.

Okay and then with respect to the International Soup business if I look at the margin of structure there year-over-year, it's roughly unchanged. Even though, you've got obviously a much different business mix now with the European acquisition. Going forward, I'm just trying to get a sense of what change did you see to that margin given you're going to ramping up advertising and marketing quite a bit, is there a chance we'll see that dip a little bit but then actually move well ahead of the sort of 10% level, is that now or what's your feeling on what margin that business can kind of attain on a more sort of normalized basis going forward?

My sense is that we will not see significant on our changes in that margin going forward. We may very well spend more against those businesses, but in fact my sense is we'll offset that through productivity and other operational opportunities we'll have in those regions.

Okay and I think you did mention in the prepared remarks that you are pretty happy with the way the performance thus far of the acquired business is coming in?

Yes. It's on plan.

All right. Thanks very much.

You're welcome.

Michelle, next question.

Our next question comes from John O'Neil with UBS Warburg.

Good morning everyone.

Hi! John.

I wonder if you could give a little more color on the international operations if total volumes were up more than 7%, where were some of the strengths and some of the weaknesses?

First of all you need to extract the impact of the acquisition.

Does that include the acquisition?

Yeah. Your question is on soup shipments?

International excluding acquisition.

Where we have worldwide soup shipments of 7% including the US at 6%. So this is basically driven by strength in Canada where we had double-digit increases in the quarter, very strong quarter from consumer take away and shipment perspective, and Europe, Europe was fine in terms of soup shipments, moderate growth, and as I think we said in the prepared remarks in Asia-Pacific, soup shipments were down slightly, but we did continue to gain ground in the marketplace in Australia.

What was worldwide excluding the acquisition?

Worldwide excluding the acquisition is +11. Now, the acquisition is not included in the +7, I have not understood your question.

The 7% is the wet soup volume figure.

That's it. Okay.

The gross margin compression due to the marketing spending, since you are obviously increasing marketing pretty aggressively through the rest of the year, should we expect revenues to grow less than volumes and to see gross margin compression in the next couple of quarters as you establish kind of a new base?

First of all, I mean, as we look at the total increase in marketing the +15% of the 200 million that's driven by consumer marketing, advertising, and consumer marketing and less driven by a trade promotion. Our promotional spending, which there are two components to about net sales coupon redemptions and tried promotion were heavily frontloaded particularly because of the new product introductions of Campbell Supper Bakes and Prego Pasta Bake. So we don't expect going forward to have the same level of negative impact on the sales growth from promotional spending. It's going to be more in line. It maybe a notch higher than set volume growth, but it is going to be much more in line than in the first quarter.

Great and lastly, could you break out inventory and receivables in [_______________]?

Total receivables 697 million compared to 609 million a year ago. Total inventories 652 million compared to 595 million a year ago.

Thank-you.

Okay Michelle next question.

Thank-you. Our next question comes from Romitha Mally with Goldman Sachs.

Romitha good morning.

Good morning.

Good morning.

In terms of all the initiatives that we heard, they were going to be put in place that you are talking about in July, how much has been put in motion now?

Not very much at all, most of the bigger quality initiatives we have talked about in July do require a fairly substantial amount of capital spending. So most of those will come into be seen in the marketplace roughly at the tail end of our '03 fiscal year. So we're still fairly long way from seeing those in the marketplace.

And you talked about some product quality

Just to say that Gerry Lord has got some additional on that.

If you recall what we lead out in July was a 3-year plan and the elements that Bob was talking about are they longer term elements? We are very much in line with what we are expected to be after one quarter, but it is a 3-year plan, therefore, there's lots more to come.

Sure. I think I heard a little bit about product quality improvement on the select line?

Yes.

Correct.

Was that the only line where there was product quality improvement in the quarter?

No we've had improvements in the Chunky line as well as some Condensed improvements as well. So it's been smaller improvements across the line, several soup line.

And then in terms of capex for the quarter? What was that?

Capital spending was about $24 million roughly in line with the first quarter a year ago. This is not a quarter where we ever had heavy capital spending. Most of our capital spending is in the backup when we have plant shutdowns.

And in terms of Godiva, I can see how same store sales are going to be down probably more substantial in the second quarter given the holiday, are you also planning a slowdown in the store openings?

Right now, no. We're still proceeding according to plan.

Okay. Thanks.

You're welcome.

Michelle next question.

Thank-you. Our next question comes from Jane Merring with Salomon Smith Barney.

Thanks, good morning everyone.

Hi Jane.

The fact that your Ready To Serve volumes were up I think 17% and your Condensed volumes were up 1%, how does that make you feel?

It makes us feel very good.

You mean why I am feeling on Condensed, right?

Yes. Yes I know it very well.

So, you know where I am driving at? Is 1% really satisfactory in this range or would you like to see it accelerate somewhat? And how did some of the marketing spend breakdown against those different forms?

f

We feel the performance is very satisfactory.

Okay.

Jane we are not going to breakdown against the various pieces of businesses to marketing spending.

Okay.

I mean the bulk that comes with soup. I think important for you to got to remember that we are seeing positive trend in Condensed which is good. That's really stabilizing Condensed was what we talked about. So there's only one quarter. So the challenges you do it annually. So we are putting in a perspective from that standpoint.

Just a little technical question, the volume of soup that is actually related to the product that goes into the supper bakes and those products? Is that also counted in the overall volume numbers you are giving or is that separate?

No it is not included.

Okay, thanks.

Okay.

Okay, next question Michelle.

Our next question comes from Art Cecil with T. Rowe Price .

Good morning, somebody earlier mentioned that he would like to have fortuneteller with respect to ..

I did.

With respect to volume I think for the second quarter regarding domestic soup and I would suggest a partial fortune teller might be the latest 4 week shipments or the shipments in the month of October or is that something on that order, would it be reasonable to say that the volume from that prospective last 4 weeks over the month of October might be running up to 2% to 3% that you had originally planned before September 11th or are we still at a higher rate than that.

No way get in the specific months, once you say that we're very encouraged by the October sales that's why we got the momentum in the business continued beyond September and that's why the issue of the pantry or people using the product appears to be there so it's very positive.

Well, I think the comment was made within the ¢48 to ¢52 earnings estimate that you are projecting for the second quarter was an assumption that soup shipment would be flat.

That's correct.

Oh! Getting back to the sandbagging comment, it seems to me that if your soup volume is running comfortably about 2% to 3% and you are forecasting flat for ¢48 or ¢52 sort of disconnect.

Yeah, we had a very strong second quarter in fiscal year 2001, and we are now coming up against that. Again Leonard commented on October shipments so obviously our quarter starts with November and we are still, I hear you, your point is clearly well taken, but at this point we prefer to look at things probably somewhat conservatively.

Art, if you look at last year actually the second quarter last year volume was up 6% and the year before that was up 13%, so we have two really strong tough comparisons and that's why I think you just have to be a little bit more conservative. Hi Gerry do you have anything to add to that.

No, I just have the same.

I think that summarizes.

Once again that's '*' '1' to ask a question. Our next question is from Erica Long with JP Morgan.

Hi, and congratulations also on driving the topline. I guess my question is. It's sounds wonderful when take a look at the volume both on a takeaway and on a shipment basis, but if you go back and you look at the operating income line for each of the different segment you are talking about down double-digit and I know this was anticipated and you are doing a lot of stuff that needed to be done and should have been done over the past several years, but as we look forward is a 15% annual operating margin something that the company thinks is realistic going forward or it there an effort to get that several points higher than that over the long-term?

I think there will be an effort to get it higher. I am not so sure we are talking about 200 basis points higher though clearly, we will continue to take a look at our productivity. We will try to drive that very strongly through this organization and clearly our expectation is that our margins will be higher, but I am not so sure we will ever see them at the point that they were historically.

Yeah, Gerald Lord has some addition to that.

I think you maybe picking up the wrong number. Our EBIT margin in the quarter was 18.4%.

Yeah, I am talking about a more annualized.

Are you talking about gross margins.

No I am looking at an annualized number there because wouldn't this be a very strong quarter for you.

First quarter, yeah talk from an operating margin standpoint, so you are talking about annual margin.

Exactly.

I got you.

I guess also with regards to the reconfiguration that's taking place in Australia, my understanding was that the bulk of cost that you had targeted for 2002, would come in the first quarter and it sound like that was a little bit light in the quarter, has some of that been pushed back in to the second quarter?

No the timing is exactly as we had laid it out, which is be basically said during the course of '02, we would continue to take these accelerated depreciation charges as required and what the other element most of the severance charges we got behind is in fiscal 2001, that will be some relatively minus severance charges yet to come, but it's going to be fairly evenly spread across the year. There won't be any big quarters as far as we can tell.

Okay, and then finally on capex to remit this question, is the capex outlook for the year sale 300 million.

Yes that's correct.

Great. Thank you very much.

You welcome.

Okay, Michelle.

Thank you, we have a followup question from Art Cecil with T. Rowe Price.

Hi, I am sorry.

Did we lose you.

No you turned the switch off before I got my call.

All right, we will send you some soup for that.

The 20% increase in marketing spending in the first quarter does that include the higher promotional numbers that seem to be deductions from sales one?

Yes it does.

Okay, how much did marketing increase that shown in the SG&A line, did that also increased about 20% or maybe the half.

Yes it did.

Okay, and is merchandizing spending included in that 20%.

We see merchandizing mean like..

In store work.

Yes, it is.

Okay, then finally now this will be my last one. It just seems to me that with the increased investment that you are making behind marketing that you almost have a strong sense of where you stand with respect to takeaway and market share versus your competitors even though Wal-Mart officially absent and you don't want to give us a misleading numbers, but can you talk all about what you see from the internal work you are doing regarding your share and so forth.

Well we are making progress, I think that's the best way to summarize it.

Okay, so you are headed in the right direction.

That's correct.

Compared to the direction, we are seeing for the last couple of years.

That's correct.

Okay. Thank-you.

You are welcome.

Okay, Michelle do we have any other question on the line.

Yes we do. Our next question is from Sarah Durkin with Lehman Brothers.

Hi, good morning.

Hi.

I was wondering what was the total depreciation and amortization for the quarter.

Total depreciation and amortization was 69 million excluding the Australian charges, 73 million including the Australian charges.

Okay and did you buyback any stock during the quarter.

No, we do not.

Okay. Thank you very much.

You're welcome.

Okay, Michelle next question.

Next question is from John McMillin from Prudential Securities.

Bob, I was taken a back by just size of this $197 million retail promotion number. I guess other companies will have to start to unveil these numbers I just given a 70 share, almost I am just, it is amazing how much you have to pay against distribution. Can you just go through the math in terms of the $48 million increase in cost of goods sold represents, what I mean the 246 deduction in SG&A, I think I understand but why would that help cost of good sold?

Well, we remember we had 3 accounting restatements since the first quarter a year ago. We had shipping and handling in the fourth quarter and then we had the promotional expenses the two standards effecting promotional expenses, which we adopted in the first quarter so there is a number of things going on. I mean I don't think we can break out every element for you, but cost of product sold shipping and handling cost for us used to be a deduction to net sales and are now included in cost of product sold.

Okay, I got it.

Out of that...

That's probably most of the charges ..

Lots of pieces moving here.

But, conceptually Bob $200 million to get distribution for company that has kind of control of the market and I know you are in some another businesses and now you are spending more in this level. What..

Let me just say that in fact that number is really a much broader trade promotion number than you are expecting it to be so its much more than merchandizing, which is your term it basically includes almost our entire trade promotion spending number plus it also includes coupon redemption expense, which I might add is appreciably this year since clearly we have emphasized both advertising as well as consumer promotion, which I think Jerry Lord spoke about previously. So when you take those factors into account I think that pretty much explains the magnitude of the number.

Thanks and I know you don't want to predict other food company's numbers, but when we see other food companies make these adjustments will it be as high as this 10% of sales number.

I would expect that they will be John.

Okay, thanks a lot.

You are welcome.

Just a followup on that we had disclosed in our year-end and earlier quarterly filings that we expected the impact to be standard changes to be about 12% to 13% on net sales.

And John, we have seen other companies that have adopted that earlier, have adjustments as high as 15%, so we think we are in the ballpark.

It's offside.

Yeah, I am sure I probably read it, but I missed it.

Okay thanks.

You welcome. Leonard, I think we have time for one more question.

Our final question comes from Erica Long with JP Morgan.

Thanks actually if I could sneak two in there that would be great.

You Erica will take two.

Thank-you. The first one is can you give us any update on beverage distribution and any help that Larry McWilliams has been able to provide and then second, just a quickly following on John's question is the coupon redemption rate up or the number of coupons offered by you all.

Let me take the second one because that's easiest. The number of our coupons that we are offering are up.

Okay.

Okay, and as far as the beverage issue is concerned I will tell you that is a very high strategic priority in Campbell's and Larry McWilliams is hard at work as well as number of our people on Doug staff including myself. So that's where we stand on that. Also I might add that we have a new leader of our North America Sauces and Beverage business, Jim Goldman and he clearly has added to top to his list as well so I hope that puts that issue into some perspective for you.

Great. Thank-you.

You are welcome.

Okay, we are going to conclude our call now. I thank everyone for joining us this morning and our next company presentation actually will be at [_______________] Conference. Thank you very much.

Thank-you.

Thank you all for participating in today's teleconference and have a good day.