金寶湯 (CPB) 2002 Q3 法說會逐字稿

Good morning ladies and gentlemen, and welcome to the third quarter earnings teleconference for Campbell Soup Company At this time participants are in a listen-only mode. At the conclusion of the Company's formal remarks, we will conduct a formal question-and-answer session. At that time, I will provide instructions on how to ask a question. At this time, I would like to introduce the Vice President of Investor Relations for Campbell's Soup Company, Mr. Leonard Gries. Sir, please go ahead.

Thank you, good morning, everyone, and Welcome to Campbell's Soup Company third quarter fiscal 2002 conference call. With me this morning are Bob Schniffner, Senior Vice President and Chief Financial Officer; Jerry Lord, Vice President and Controller; Sally [Shucraft], Assistant Controller, and also participating today will be Doug Conant, President and Chief Executive Officer. You should have with you our press release and fax sheet, which will be referred to in the call. If you do not have the fax sheet, you can receive one by calling Cindy [Aggrero] and the Campbell Investor Relations department at 856-342-6427. Our call this morning will last approximately one hour. If you need to listen on the replay, you may call 1-800-873-5254. Or 1-402-220-4776, approximately two hours after the call is complete. It will run through midnight, May 20th. You may also listen by logging on to our Web site at www.campbellsoup.com and clicking on the Web cast banner. Our 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 a further discussion of these 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. Now, with the discussion of our third quarter performance, here's Jerry Lord.

Good morning, everyone. First, a few reminders 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 of 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 year, we adopted new guidance on the classification of shipping and handling costs. As a result, the following reclassifications were made to the third quarter and nine months fiscal 2001 financial statements. Net sales were reduced by $168 million and $567 million, respectively. Cost of products sold was increased by $45 million and $150 million, respectively. And SG&A expenses were reduced by $213 million, and $717 million respectively. All percentage comparisons will be given before the effect of currency. On the fact sheet, reporting segments show before and after currency effects. All numbers also exclude the impact of Arnotts manufacturing reconfiguration of approximately one cent per quarter, 3 cents year-to-date. Also, I will remind you that our first quarter 10-Q filed last December contains the restatement of fiscal 2001 by quarter, and an annual restatement of fiscal 2000, for our new reporting segments. Now, let's turn to our results. Sales finished up 8% for the quarter, at $1,317 million. And Earnings Before Interest and Taxes were $196 million, down 17% before the impact of currency and the Australian restructuring. Sales growth of 8% for the quarter breaks down as follows: Volume mix was flat. Pricing was up 1%. Promotions, now included as reductions of net sales, had no impact. Currency had no impact. Acquisitions added 7%. Gross margin declined slightly from 44.1% to 43.4%, due mainly to the continued mix shift in U.S. soup towards ready to serve, and quality improvements on a number of products. Worldwide wet soup shipments were flat for the quarter and up 1% for the nine months. International wet soup shipments were down 3% for the quarter and were up 2% for the nine months year-to-date. U.S. wet soup shipments were up 2% for the quarter, and flat for the nine months. In line with our plans, total marketing was up 5% before the impact of currency and the European acquisition. Our marketing spending year-to-date is up 14%. Including the European acquisition, spending year-to-date is up 20%. Unallocated expenses were up, principally due to higher compensation costs. Net interest expense was $44 million, down $8 million versus a year ago. Higher interest expense due to increased debt levels resulting from our European acquisition last year was more than offset by very favorable short-term rates. The tax rate for the quarter was 34.2%, just above a year ago and consistent with our expectations for the full year. Diluted earnings per share was 24 cents, and including Australian restructuring, was 23 cents, compared to 30 cents a year ago. We are on track to deliver our earnings per share target of $1.30 for the year, excluding Australian restructuring, as we take advantage of short-term interest rate favorability to accelerate certain infrastructure investments, and to offset the impact of lower volumes in some of our businesses. Now let's turn to operating highlights by reporting segment. First, North America Soup and Away From Home. Sales of $516 million were up 1%. Operating earnings of $108 million were down 18%, reflecting increased marketing and infrastructure investments. As previously mentioned, U.S. wet soup shipments were up 2% for the quarter. Let's take a further look at U.S. Soup. Shipments of condensed soup declined 3%, which is an improvement from the rate of decline last quarter. For the nine months condensed soup shipments are 6% below a year ago. Planned quality improvements and increased marketing have not yet substantially impacted the condensed business. And I'll say some more about that shortly. Ready-to-serve soup shipments rose 9% for the quarter, and the same amount for the nine months. New varieties and quality improvements combined with better advertising have all worked well to give us a very successful year in ready-to-serve soups. I'll mention just a few. Improvements on our Campbell Select chicken varieties of soups, along with new Campbell Select Italian Style Wedding soup and improved Campbell Select New England Clam Chowder contributed to volume growth. New Chunky items contributed to strong growth for that brand as well. Swanson broth shipments were down 3% for the quarter, but are running up 3% year-to-date. Lower promotional spending around the Easter holiday and increased competitive spending contributed to the quarter's volume decline. Viewed from a cooking and eating basis, let's look at how soup shipments fared. Please note that this classification combines condensed and ready-to-serve and is categorized by consumer behavior. Cooking soups declined 3% for the quarter. Eating soups were up 3% for the quarter. Now, just a few comments about our going-forward program on condensed. As previously discussed, we are making significant capital investments this year and over the next two fiscal years in our soup plants. We are installing new processing technology that allows us to put more garnish in the soup, cook it for less time, and at lower temperatures. As a result, the products look better and taste better. We have accelerated plans to begin the process of bringing these improved products to market, and by the Fall we should have our key vegetable varieties upgraded. Three of our top 20 condensed soups are in this group, and five of our top 40. We target to have these products on the shelf for next soup season, and we believe consumers will notice a big difference with these improved condensed varieties. However, the major portion of our work for condensed will have to wait for fiscal 2004. That's not to say we won't have other news on condensed next year. We will make tomato soup improvements by December and improvements on two other cream soups that are not related to the new processing technology. Additionally, our new Soup at Hand will debut in the Fall. This ready-to-serve soup, designed for out-of-home consumption, is an important step in addressing portability and convenience as we increase efforts to boost overall soup growth. Now, let's turn briefly to the remaining parts of this reporting segment, which is Away From Home and Canada. Away From Home sales up versus a year ago, led by strong soup sales in chain accounts and in traditional food service outlets. Canada sales were slightly ahead of a year ago, led by soup shipments. Canada is having a strong year on the top line, driven by all businesses, but especially by soup. Now turning to North America sauces and beverages. Sales declined 1% to $276 million, driven by lower volumes and operating profits declined 22% to $56 million. Prego shipments were up slightly due to Prego Pasta Bake cooking sauce, the new sauce that turns dry macaroni into a baked pasta entree without pre-cooking the pasta. However, we have experienced softness in our base Prego sauce business, primarily as a result of aggressive competitive promotions. Pace shipments were up, responding to restored advertising and consumer promotions. Franco American canned pasta shipment showed double digit declines, mainly due to aggressive promotion by competition. Shipments of other prepared foods, including Franco American Gravy, Swanson canned poultry, and Campbell's beans also declined. V-8 Vegetable Juice shipments were up strongly, reflecting positive consumer response to sustained television and print advertising. V-8 Splash shipments were down. As previously mentioned, we have introduced two new lemonades into the market for the important Summer season as we continue to work product mix and distribution. In Latin America, shipments increased significantly off a small base. Now turning to biscuits and confectionary. Sales for the quarter rose 5% to $357 million. Sales were up in all three businesses: Arnotts in Australia, Pepperidge Farm, and Godiva. Earnings rose 5% to 46 million dollars, as volume growth overall was partially offset by lower same-store sales at Godiva. Pepperidge Farm delivered solid sales performance with increased shipments in cookies, crackers, fresh bakery, and frozen bread. The introduction of dessertless cookies and Goldfish sandwich crackers, as well as strong sales of Milano cookies, and distribution gains on single-serve items, were the primary drivers of growth. During the quarter, Goldfish crackers became number-one selling cheese cracker in food, drug, and mass merchandise outlets. New varieties of Farmhouse bread and rolls and the introduction of Pepperidge Farm bagels drove growth in the bakery category. At Arnotts, sales were up strongly, with new rice-based snack products, and premium emporio cookies showing good consumer acceptance. Godiva sales were up for the quarter, reflecting the addition of new stores around the world and strong comparable store sales in Japan. Comparable store sales in North America were still down in the quarter. However, we are seeing some improvements as the business begins to recover from the repercussions of September the 11th. Now, turning to International soup and sauces. Sales were up significantly from $140 million to $222 million, and operating earnings rose from $14 million to $19 million, driven by the European acquisition completed in the fourth quarter of fiscal 2001. Excluding the impact of the acquisition and currency, sales declined 3% and operating earnings declined significantly. The earnings declines reflect increases in infrastructure and marketing investment across most of the portfolio, as well as sales softness in our U.K. business. A chief component of the infrastructure spending was the European rollout of our new global strategic sourcing initiative. This is planned to drive significant cost savings in the future. The recently acquired European dry soup and sauces business continues to meet earnings expectations. Now let's turn to the balance sheet and cash flow. Total debt at quarter end was $3.6 billion, up from $3.1 billion a year ago, but down from $4 billion at the end of fiscal 2001. Free cash flow for the nine months was $717 million, compared to $831 million a year ago, well ahead of our year-to-date expectations. This performance reflects the increased marketing and infrastructure investment, offset by further working capital reductions on top of strong performance a year ago. We are very pleased with this result. Now let's conclude. The first year of our transformation plan has had some challenging and unusual events. But we think we've made good progress in the first year of our plan. Investment behind ready-to-serve soups, V-8 and Pace have had very tangible results, and give us confidence that we have a winning formula for these products. Worldwide wet soup volume is up 1% year-to-date, and U.S. soup volume is flat. However, ready-to-serve soup volume has been strong this year, and in the third quarter condensed declines moderated. We are accelerating plans to bring to market key condensed soups improved by new technology. We're wrapping up our plans for next year, which include some very exciting new programs and products to help drive the second year of our plan. These plans include the launch of new Soup at Hand nationally. There is good momentum in biscuits and confectionary, with Godiva starting to show some recovery. While North America's sauces and beverages had disappointing results this year, we have innovation projects for fiscal 2003 that should improve future performance. We have successfully integrated our European acquisition, and we are now spending our time addressing marketplace and competitive issues. As part of the transformation plan, we announced an increase in capital spending from $200 million to $300 million this year. We are on track to accomplish four key projects, including the Australian plant reconfiguration, the new Pepperidge Farm bakery in Connecticut, the key processing technology improvements in the U.S. soup plants, and new information technology projects that support enhanced capabilities. Not only have we executed all these projects as planned, but we are now estimating that we will be able to accomplish this at a spending level of $280 million, slightly below our original budget of $300 million. Interest expense has been favorable, offsetting the weakness of Godiva, sauces, and beverages, and allowing us to invest in infrastructure capabilities and still keep us on track to deliver $1.30 EPS this fiscal year, excluding the impact of the Australian restructuring. Our cash flow is strong, and we have reduced debt significantly versus year-end fiscal 2001. This concludes my formal discussion. And I'll now turn it back to Len for the question-and-answer session.

Thank you, Jerry. Jessica, I'll ask if you would begin the polling process for questions please.

Thank you, sir. At this time, we're ready to begin the question-and-answer session. If you would like to ask a question, please press star-1 on your touchtone phone. To cancel your question, please press star-2. Once again, that's star-1 to ask a questions and star-2 to cancel. Our first question comes from Mr. Terry Vivins from Bear Sterns.

Good morning, Terry.

Good morning, everyone. Couple of questions. I guess this one might be for Doug. First of all, congratulations on coming in better than expected on the condensed improvements, sequentially. I guess the question is, Doug, is in the second quarter marketing on the condensed line was flat. I know you were up ready to serve there. The 5% marketing struck me as a little bit on the light side. Could you address that, and also help us understand the relative apportionment between condensed and ready-to-serve there?

Terry, thank you for the encouraging words regarding our performance in the third quarter on condensed. Obviously, we are clearly not satisfied with where we are, however, we have a long way to go to get the formula exactly right. But the decline, you're right, the declines did moderate from a 12% decline in the second quarter to 3% in the third quarter. And as we stated at Cagney, we did tactically adjust our spending accordingly. We don't get into the details on spend by segment, but we did address it as we said we would. And we're learning as we we're going. And we'll do better next quarter than this quarter in terms of managing our spending. And it's a continuous improvement process. But we feel like we're headed in the right direction. Do you have anything to add to that, Bob?

Terry, I will say that in fact we did have a stronger condensed marketing program in the third quarter. It was more on the tactical trade promotion side. And we think that that clearly had some impact on moderating condensed declines. And, you know, so we feel good about that. As far as the overall level of marketing spending in the third quarter, that was consistent with our plan. We'll have a much stronger fourth quarter. We expect total marketing to be up in excess of 10% in the fourth quarter. But you know, the 5% was as planned, and, you know, I'll leave it at that.

I would assume that fourth quarter above also you're going to be putting more money into the Soup at Hand, which I understand you'll push pretty hard?

Well, it's really not going to be a really heavy spend in the fourth quarter for Soup at Hand. We're going to start spending aggressively in the first quarter of fiscal year '03.

Okay.

Terry, this is Doug. One other thing. I'm not telling you anything you don't know. But particularly in soup, hey, it's a game of inches here. And we're going to have to -- we're going to grind it out, and tactical spending is an important part of how you compete in soup. And we'll get better at it. But this -- there's a part of this category that just demands good analytical rigor in terms of way you manage your business and good tactical management of your spent. And so we're focused on that, while we also trying to do the breakthrough things like Soup at Hand. We have got to do both those things well. We've got to grind it out, but we also have to have breakthroughs. We think Soup at Hand might be one of those breakthroughs.

Okay. And of course, you do have tough comparisons, as well. Just wanted to ask one more thing, and I'll yield the floor quickly. As you look at the other North American division, the sauces, Prego is up but just by a little bit, with base Prego down. Franco American seems to really run into some tough sledding and still with V-8 Splash, I'm not exactly sure what's going on there. Are you disappointed with the way those kind of secondary brands have responded so far this year?

Well, we're clearly not satisfied. But I'd say we're making important progress. If I look at on a year on year basis, Prego is up behind some innovation and increase spending. We've got to manage the way we spend better in Prego, just like we do in soup. But, fundamentally it's up. We've brought innovation to the category. It's become more competitive and now we've got to be more competitive, and we've got to be smarter and sharper. But -- fundamentally, I think we will be. In terms of beverages, we continue to struggle on the V-8 Splash proposition. But quite honestly, I'm optimistic about our beverage future going forward. I think we have a team in place to manage the beverage business, which is infinitely stronger than the team we had a year ago. We have -- I think we have a solid base, and I think we're going to surprise some people in beverages next year. We're also getting good traction on our spend with V-8 Red, which is where our advertising has been focused for the second half of this year, and you'll see that it's tracking up nicely in terms of consumer take away. In terms of Franco American, that's a tough category for us, and we haven't addressed it adequately, and that does need to be addressed. As, quite frankly, do the other items in that division which typically we don't get to in a discussion like this. Like the gravies and the canned poultries and the beans. So we clearly have work to do, but we've got a team in place to address it. And we'll play through it.

Okay. Thanks very much.

Next question, Jessica?

Yes sir, our next question comes from Mr. John McMillan from Prudential Securities.

Good morning everybody.

Hi, John.

Forgive me if I don't say congratulations, but just in terms of, Doug, you've done probably the budgeting for next year. I don't know if you want to come out with formal guidance and the FAS-142 kind of changes that, but can you update us on your thoughts, what next year might look like?

The short answer is no, John. A little elaboration on it would be that we are in fact in the midst of the budgeting process right now, and so I wouldn't have a complete answer for you anyway. But I think our --well, I know our guidance really remains the same. We will grow next year. And the issue is how much. And we're just working through the details of it. We've got a couple of interesting things going on. We're lapping an unusual Winter last year, and we're lapping 9/11, and it just makes it unusually tricky to manage your way through that. So that's what we're dealing with, and we can provide more guidance at a later date.

Yeah. John, let me say that our intention will be to give you some guidance at the time we release full-year '02 financial results.

Okay.

Just follow-up John, on the 142, we can give you some guidance.

You know, on the 142, I think -- in the last conference call, we offered up a 10 cent impact. It's actually going to be a little bit more than that because of the acquisition of goodwill. And we are now forecasting about a 13 cent differential.

And then when you talk about growth it's incremental for that benefit?

Yes.

Okay. And Jerry, can you give us the impact to operating earnings of the acquisition last year? You gave some kind of number of up 17, excluding currency. But what operating income would have been down, excluding the acquisition?

I don't think we're necessarily wanting to go into that detail. One of the reasons is that the business is now fully integrated into our base. So in the early months when we were still working through transition services and we could really pinpoint what was the earnings from the acquisition, then it was reasonable to talk about it. But now that it's fully integrated and we have costs shared and allocated between the two, I think it really becomes a dangerous place to go. So we don't really want to share where we think that is.

Okay. But you used a number of down 17 -- I calculate operating income down about 15% reported, and you're talking about a number down 17%. That's just the impact of currency, the negative impact of currency?

Yes, that's the difference.

And --

You're looking at the fax sheet?

I just want to make sure that we're --

No, I was just listening to your words earlier on. I can work it out with Len -- I can work it out with Len afterwards. The cold filtered technology, Doug or Bob, you were planning to roll this out over three years. There's now an intent, I guess, to roll it out over one year. Is that correct?

John, our plans haven't changed, fundamentally. The full -- and it's more than -- it's a series of technologies which have been -- have been given a handle of cold blend technology, but it's a series of technologies that bundle together, we think, create a unique competitive advantage for us. But cold blend is certainly part of that. Our plan was to be fully operational with that on condensed soup and fiscal year 2004, and we will be. We are trying to pull some of that into fiscal year 2003. And we're trying to move as quickly as humanly possible there. But it's -- and we are making good progress. We're addressing -- we're going to be creating upgraded soups that account for about 20% of our condensed soup declines. So it's meaningful. But there's another 80% of our condensed soup issues that aren't going to be addressed until fiscal year 2004. The other part of that -- while we would be getting the formulation work done this year, the easy-open can features are not anticipated until fiscal year 2004, so even the benefit upgrades we have coming to market, which have tested extremely well, won't have the full bundle of benefits until fiscal year 2004.

Now, I understand this Soup at Hand is basically the same thing as the Soup the Sip we've already seen. Is that wrong?

No, we have an enhanced name for it. It's been -- we've showcased it before. We've done some tweaking of the concept, while we were in test market this past year. We had learnings from test market that influenced the product modestly, but essentially it's a similar product proposition to what we've shown you before.

Yeah, what you got at Cagney, John, when we passed those out, I mean it just really -- the name of the product going to market is different than what you had there. But that's the product, yes.

Thanks a lot. Thanks for everything.

Okay, John. Next question, Jessica?

Our next question comes from David Nelson from Credit Suisse First Boston.

Good morning.

Hi, David.

Do you think you benefited in soup from some of the disarray we seem to be seeing at Progresso in the last quarter?

Well, I hope so. And I hope it continues.

David, I'm sorry, David, this is Doug.

Yeah.

I think we -- first and foremost, really talking about ready-to-serve soup when we talk about competing with Progresso. And I think it's a combination of a real step-up in our marketing activities on ready-to-serve, and I think we would have grown anyway at a substantial rate, and I think we will continue to grow. Clearly, there was a little disarray acknowledged by General Mills during the transition. We might have benefited from that modestly. They're strengthening right now. They're starting to show signs of vitality. So we might have benefited. We have yet to see whether Progresso will be able to compete with our higher level of competitive profile. They've never had a compete with us at the level we're now competing at. So we just have to wait and see.

On the promotion you're putting behind the soup, it seems the last quarter most all of it was behind condensed and the prior quarter behind ready-to-serve. Do you anticipate that kind of, all one way, all toward one then all toward another going forward? And also, overall do you think it will have to go up as Progresso comes on?

I think we're going to have to manage the spending mix. I think we have a good, solid spending profile now, and we're just going to have to manage the mix carefully. We have the pendulum swinging here as we're learning as we're going. And I think we'll find the right balance, and we'll have to adjust that balance based on the competitive ferocity we encounter in each segment. The -- we feel good. RTS business was up 9% in the quarter, and we were -- with moderated spending, given a certain competitive profile in RTS, and we were able to moderate the decline in condensed. But we have to manage that. So you will see some movement. I don't think you will see it as profound as you might have seen from the second quarter to the third quarter. Also, again, this is a very unusual soup season that we just came off of, between our relaunch in the unusual weather conditions, and the sale of -- the ownership change on Progresso. This has been a very unusual soup season. So, it's hard to draw any conclusions from -- in my opinion, from what's happened here.

Let me just ask you more broadly, are you -- what level of trade are you seeing out there? Are you seeing a real acceleration that some others are talking about?

David, this is Bob SCHNIFFNER. We're not seeing any significant trade deloading.

Okay. Maybe one more. You took 1% in pricing. Where was that? Where are you getting pricing?

It's really the net effect of improved sales realization, including pricing. So -- in some cases, it's small pricing in Pepperidge and Arnotts, in other cases we have fewer allowance payments, fewer damage claims it. It all comes through on that line. No significant pricing on the North American businesses.

Fantastic. Thank you.

Okay.

Thanks, David.

Next question, Jessica?

Our next question from Mr. Bill Leech of Bank of America Securities.

Good morning.

Hi, Bill.

I was wondering if you all could you talk about Private Label? There was a period you seemed you were stunting Private Label's growth, but recently it seems to have come back with a vengeance, particularly in ready-to-serve where the last [IRI] showed volume over 20% for the three months and ready-to-serve Private Label. Could you talk about what you're doing to combat that?

Bill, Private Label is clearly a challenge that we are going to have to take on. And we have been focused on getting our house in order, competing with Progresso, and creating some competitive insulation versus the balance of the marketplace. We think we're on a path to do that. We are going to have to deal more competitively with Private Label. It is going to grow to its natural level. And it's something we're going to have to address. The condensed piece is one that we're addressing head-on with our benefit upgrade program and our differentiation program. And we're going to have to have similar programs on RTS over time, and we have those in the pipeline for activity in '05 -- excuse me -- in '03, '04, and '05.

Bill, I think you do see whenever you have a category that's been growing the way this has been growing, that, you know, you're going to see a lot more activity coming from not just other branded manufacturers but the Private Label, as well. There's been, you know, there's fairly aggressive activity in that area. So, it's part of that whole formula of how you have to go after an entire category.

Doug, do you continue to be satisfied with your price versus Private Label?

Well, I'd love to have a smaller price cap. If there's anything you can do to help us out. It's obviously always challenging when you're number-one competitor is your customer. And we are satisfied with our price gaps. Our RTS business is up a solid 9%. And so we think we can continue to grow our business with the right price value proposition. We think we're close to that in RTS. We have to make sure we maintain that as we have a bigger competitor profile exhibited in Private Label. So, we're comfortable with it. We always like it see it improve, but this is a game we can play and we can win.

Okay. Just lastly, as you think about 2003, you said you expected to have growth, and just [conceptually] your sales are still basically flat and it seems like you're going to have to raise spending again next year. Why should we expect any material earnings growth next year, excluding FAS 142?

Well, I think there's a few things there. Number one is that I think we've learned a lot about our spend this year, and we think we can improve the productivity of that spend next year. I think second of all, we are working very hard on cost reduction in this business. We have a number of initiatives which we've invested considerably in this year, which we think will harvest some productivity savings next year. And, you know, I think those are probably the two significant reasons why we think we can grow the bottom line next year.

And just to build on that a bit, we are lapping a challenging year this year, between the challenging weather conditions, the challenging 9/11 impact on Godiva. We think we can recover from those things, and we're putting in plans -- we're putting plans in place to do that, which should give us solid top-line performance as well. And with our market structure that's going to help.

Okay. Thanks.

Next question, Jessica.

Our next question comes from Mr. Eric Catsman from Deutche Bank.

Hi, good morning, everybody.

Hi, Eric.

Few questions. I guess as a food analyst, we don't normally talk too much about technology. So, I guess to what extent is this technology that you're putting in to thwart Private Label or anybody else in condensed? To what extent is that, proprietary? Do you have a lead time in terms of the new technology you're putting into the plants? And talk about how much leeway that will give you or advantage versus private label, and I'll follow up.

Eric, this is Doug. We're very confident that no one in the world has access to technology and thermal technology and in soup technology like the Campbell Soup Company, and we think that's a very leveragable proposition. Around the world, we are in every form of soup in an in-depth way, whether it's aseptic in boxes, pouches, bottles or all the other thermal processing technologies. We are leveraging that really for the first time as a global entity. And we are going to be introducing, over time, a series of technologies that are going to allow us to, we believe, have sustainable competitive advantage in thermal processing of soup here in the U.S. The first series of those are focused on condensed. And it's more than the cold-blend technology. It is a bundle of technologies around a series of processing steps that we're not going to get into. But put together, it gives us something that we don't believe can be duplicated. Not only that, but -- and we haven't discussed that a great length yet, but behind this round of technology we're bringing to bear against condensed, we have a series of other technologies which will give us further competitive insulation into '05, '06 and '07. So, this is an area where we just have to win. And so we're very comfortable with our capabilities here and our ability to differentiate ourselves.

Has that technology when you test marketed it with consumers and taste profiles given you like an 80-20, you know, win versus the competition? Can you share with us like how dramatic this technology appears to be in lifting consumer spending habits?

We have tested it, and we have very encouraging test results. But -- and they're profound wins. However, it's just the beginning. We're going to layer on other activities on top of that that are going to keep that improvement process going so that the measure of our success, over time, is going to be how we layer on the technology advances to win over the long-term. But in the near-term, I can tell you even the products we're bringing to market next year are significantly preferred products versus both current and Private Label, and other branded. So, we're definitely on the right track, and much more to come.

Okay. That's helpful. Thank you. And Bob, in terms of next year, obviously, it's more or less our job to predict your sales and stuff. But could you at least give us some kind of guidance on, you know, should interest expense continue to decline, is your tax rate going to drop? Just a few things below the line to kind of help us out, because we have to come up with the numbers before you release results in September.

Let me just say in fact we don't expect our interest expense to decline, because I think at some point if you look out at the interest rate future curves, the trend is definitely for increasing short-term rates. So, I think that would be too much to ask for absolute dollars of interest expense to go down next year. As far as the tax rate is concerned, my expectation now is that our tax rate will be approximately the same as it is this year. And you know, that's give or take a few basis points.

Okay. All right. Thank you very much.

Okay.

Next question, Jessica?

Yes, sir. Our next question comes from Mr. Leonard [Cheetlebomb] of Merrill Lynch.

Hey, Len.

Good morning. Doug, when you came in to Campbell and looked at it, I've got to suspect you had an idea in your mind as to how much advertising it would take to really get the soup area moving, et cetera. Can you give us kind of what the guidelines are? I mean, is it going to take an extra three, 400 million dollars over the next couple years, or is it going to be a multiple of that? You can give us some idea of what you think it's going to take to get this moving in the right direction? And what kind of a return on that investment would you expect?

Well, Len, I think the -- our going-forward posture is that we're in the right range on spent. We think there's enormous productivity opportunities here. And the key for us to really uncork the potential here is to get -- to not only get the media -- the advertising and consumer spent right, but it's also to get the trade spent right and the -- make that more effective, but importantly to get the innovation funnel going so that we have a more strongly differentiated portfolio of products. And so, I think the whole -- within the context of the whole mix we're managing, the spend is in the right vicinity. We just have to improve the productivity of it. And we have to leverage it with better differentiation of our products and services.

Let me just try to ask the question just a little differently. I think the new product innovations and what's come out of the R&D labs in the past has been good on short shot basis, and you're looking obviously at a longer product stream now than ever before, and that you should be commended for. But at the end of the day, we still have to get the consumer to put their hand around a can of soup and put it in the shopping basket, and you've got to drive that through spend. And it seems to me to wallow in percentages is one thing, but I'd like to get some kind of a feel here as to what the absolute dollar amount needs, whether it's been underspent in the past I don't care. I'm just trying to figure out, are we going to be spending over the next three years, again an extra 500, 750 million bucks, and should that drive -- should we get a one-for-one return on that beginning in year two or three, as we try and reinvigorate the consumer spending pattern? There's got to be some linkage here, and I'm trying to find it.

Well, I don't know that I'm going to have a satisfactory answer for you. We've done a lot of modeling of the -- hypothetical modeling of what is the right spend mix? Believe me, we went through all those gyrations when we did the transformation plan. And I come back to thinking that we have, in my opinion, the right general range on advertising consumer and trade. The mix may shift, but we have enough spend there to be competitive. Where we spent the money, we're getting good return. As I shared at Cagney, the bulk of the spend was against -- in soup was against ready-to-serve soups, and we feel good about the spend there. We feel good about the return on the spend. We're spending -- the other increases in spending were against Prego, which is up, were against Pace, which is up, were against V-8 Red, that's up. Was against the Pepperidge Farm portfolio, all four major categories in Pepperidge Farm are responding. We have to do a better job of managing the spend. But I think in total, we've got the right range.

Okay. Fine. One last question. When we start to go into the Summer Solstice here, rest period, are you looking at this as a time to start to work product in, or are you just going to bunch it in this the fourth quarter of the year?

I hope you're not implying -- if you think we're getting any rest right now, Len --! [ laughter ]

Let me rephrase the question, as you are getting ready to load, prepare, in the fourth quarter, should we start looking for newer products hitting the market now, or is it going be just like a blitz in the fourth quarter-- in the September to December period?

We have a planned flow and a product. I don't think you're going to see any -- you're not going to see any major flow in the fourth quarter. We're being very planful with this. We're not trying to build any inventories at any peak times. We're trying to dial into the planning windows of our major customers. And so you're going to see a very planful flow as opposed to maybe some of the behavior you might have seen in the past.

Thank you very much.

Okay, Jessica, next question.

Yes, sir. Our next question comes from John O'Neil from UBS Warburg.

Good morning, everyone.

Hey, John.

You gave us increases in marketing for the quarter and the year for the overall company. Can you give us the percentage change for the soup business, North American soup business?

John, we don't really talk about it individually by those -- by product categories.

It's kind of a big product category.

Well, it is. I know. And believe me, soup spending was up.

Yeah.

It was up more than the 5%.

It was up more in the average in both cases? Is that fair to assume?

Oh, yeah. Right. Specifically, no. We don't want to get into percentages.

I Understand. As far as the initiatives that are being accelerated on the condensed line for next year, what portion of the condensed line will have the new technology or product improvements?

I'm sorry, John?

What portion of the condensed line will have the new product improvements in fiscal '03?

It's about -- John, it's about one-third of the other eating line, which is about roughly a quarter of the condensed line. So it's a third of a quarter.

I'll have to bring my calculator out.

So I think one 12th.

It's like 10% for next year. It's an important 10%, in that it's 10% of the business, but about 20% of the decline, the areas where we have declined. So, it's an important measure, but it's not enough to say we're going to fundamentally change the profile.

Right. And then, how big a brand do you think the Soup at Hand can become? What does your testing and modeling suggest?

Our modeling is very -- our testing and modeling are very encouraging. But in my opinion, this is going to be a product that could, over time, grow significantly where our modeling has it. We're not going getting into forecasting the volume. But in my opinion, we're going to sell all we can make this year.

And you had nice sales and profit growth in the biscuits and confectionary division. Do you expect that to continue into the fourth quarter of next year?

John, we think our innovation funnel there is strong. So, we would expect continued solid performance from that group of businesses. And obviously, the big question mark is Godiva, in terms of how quickly that business will return. We've seen some pretty positive developments recently, but time will tell.

John, just building on that, Pepperidge Farm and Arnotts have very solid activities that should maintain their momentum going through next year. Both on the innovation front, but also on the distribution front. We're being more aggressive on the single-serve product lines, both in Arnotts and in Pepperidge Farm, and that's showing us good incremental volume potential, and we're also starting to crack the code in terms of being able to broaden our distribution profile in Pepperidge Farm here in the United States, which gives us some upside there, as well.

Great. Thank you.

Next question, Jessica?

Yes, sir, our next question comes from Jane [Maring] from Salomon Smith Barney.

You sound French today, Jane.

Wee, I am! It's "Ma-ring." Boy, I'm so thrown off from that. I have a couple questions. First of all, could you drill down a little more from what is going on in the U.K. and what you're doing about it? That's first of all.

Jane, this is Bob. Our issues there are primarily involved with the base Campbell's and Home Pride businesses in the U.K. We are, you know, we've had some category issues that obviously we feel somewhat responsible for because, you know, in most cases we have significant shares of those categories, and again, you know, we believe the -- you know, the fix is, in fact, related to innovation as well as good, solid, consistent marketing strategies. And we're hard at work to, you know, to revive those businesses.

Is it a issue mainly with your branded competitors, with private label, or any kind of changes at the retailers?

Jane, this is Doug.

Hi, Doug.

Just to build on that. We do have -- there are -- our customers are challenging in the U.K. You know that. There's a real trend towards chilled foods there, which has affected our -- some of our sauce businesses. There's also, it's also a very competitive marketplace. Our biggest challenge is to get back on our game, however. The last year, we were focused -- we doubled the size of our U.K. business overnight with the Unilever -- with the acquisition of Unilever Culinary Brands. And we've stressed our system significantly as we try to integrate that business. And in my opinion, that integration caused us to -- the challenge of that integration caused us to take our eye off the ball in terms of managing our base business.

Hmm. Where have we heard this before?

So we continue to -- fortunately, it's in the U.K.

Right.

And not here on U.S. Soup. But it's an area that we're going to just have to manage the balance better.

Jane, this is Bob again. Let me add one other item there. We also have a Private Labels soup business in the U.K. And, you know, that business does absorb some planned overhead. And it's proven to be a pretty volatile business for us. And so, in fact, one of the things that in fact we are also in the process of looking at is how we in fact manage that business going forward. So, that's another item that, in fact, we're taking a hard look at.

Like you would consider seeding that business altogether?

No. Not -- you know, I won't comment on all the alternatives we're in fact looking at.

Okay. Second question, have you decided how you're going to price the upgraded condensed product yet? And if so, can you share that with us?

We -- everything we've announced to date is we're maintaining our price profile, and that's the point of view we're going to continue to maintain.

Okay. And then on a broader issue, Doug, how do you feel about the overall portfolio right now of the Company? I mean, notwithstanding some of the things that you have to fix. But is it broad enough both in terms of category, mix of businesses, and geographically, you know, or as you get towards the end of your three-year plan, do you think the focus becomes more on portfolio changes?

As I stated before, I'm very comfortable with the portfolio we have. I think we've got an adequate range of products that all work together, and I think we have adequate geographic coverage. Of course, we're always looking at opportunities to upgrade that profile. One of the benefits we did have when we came in here was the portfolio was -- had been really streamlined nicely by prior management. And so what we're working with today, we're comfortable with going forward. However, we're always looking to improve it. We have a fundamental philosophy around our portfolio and how we're going to manage it going forward, and that's "staying close to home will take you a long way." The concept being that we're comfortable with our going to fees and we'll stay there. We don't expect any breakthroughs into new geography in the future, and we're comfortable with our general categories and our adjacent categories where we can leverage our skills, assets and capabilities to compete. So that having been said, we are actively looking at a variety of options to strengthen the portfolio, globally.

Okay. Can share those options?

I think it's a little preliminary for that.

It's a little early. But we're active.

Okay. Thank you.

Jessica, how many more questions do we have in queue?

Three.

Okay. Let's take those and then we're going to have to wrap up.

Thank you. Our next question comes from Mitch [Feraro] from Janney Montgomery Scott.

Good morning.

Hi, Mitch.

Couple things. First, are there or could you address any execution risks in these processed changes you're making in the condensed segment? And obviously you're not going all at once, but seems like next year you have to shut down plants and install equipment and make sure it's all running. Is there anything that we should worry about?

No, we have -- Mitch, this is Doug. We have a very competent supply chain operation that works well with our R&D group on thermal process technology. We know exactly what we need to do. We know how to do it. We have a plan to do it. And so we see no issues on that front. MITCH [FERARO] Did it have -- did that play into the fact that you're spacing that out over two years? Or is that a --

Absolutely. We did not overcommit to a plan that we couldn't execute. So, we've developed a plan which is manageable in terms of our ability to execute it. The return profile and the spending profile.

Okay. What about -- just one last question; in your biscuit and confectionary segment, you don't specifically talk about profitability in the three groups, but you said sales were up in each group. How about profits in each group?

Well, you're right, we don't get into the group profitability. I mean, the individual unit profitability. But what I would say is all of our operations are in line with our expectations.

That's up?

In total, that's up.

You know, Mitch, we've been pretty clear about the Godiva business. And clearly, that's a pretty fixed-cost business. So when you're top line gets, you know, gets hit a little bit, clearly that has repercussions on the bottom line.

Absolutely. I'm sorry, Mitch. My response was more along the biscuit side of that equation. Godiva we've been very clear.

Right. And just one last detail -- Bob, I think you mentioned it in the terms of cap-x. The new bakery in Hartford, you just broke ground on it, I believe.

That's correct.

So only a small portion of the 72 million will be in this year, is that correct?

About a third.

About a third?

Roughly.

Okay, and two-thirds next year.

That's correct.

Okay. Thank you.

Okay.

Next question, Jessica.

Thank you. Our next question from Andrew Lazare from Lehman Brothers.

Good morning. Just briefly, how will you -- can you give us a little more sense on how you will sort of market and merchandise -- let's say this [vegetable cluster] as it comes to market -- in other words, will you package it differently? How will you call attention to it more aggressively aside from just spending more in marketing? Will it be shelved differently? And how will some the sales force initiatives you've been doing perhaps help that process?

This is Doug again, sorry. There are several initiatives that are going to help us call attention to it. Certainly we'll be doing it through advertising and packaging in terms of the label. But also we have a major shelving initiative we're in the process of unveiling, really leveraging our superior understanding of the soup category that is -- that will be resetting a significant share of the shelves in this country this Fall, as we try to help the -- our customers improve category profitability. As we do that, products that are differentiated and have news will be more prominent. So there's a major shelving initiative going on, as well as the advertising promotion and packaging.

You've been working on that initiative for a while, right?

Well, we've been developing.

Developing, right.

We've been developing it over the past year, and we've taken it to our customers in the past four months, and there's been -- it's resonated with them and we're very optimistic about it.

That's helpful. Thank you.

Our last question, Jessica?

Yes, sir. And that's from Art Cecil from T. Roe Price.

Good morning.

Good morning, Art.

I was just wondering if you all feel it might be reasonable for analysts to look at the experience that you have in '03, with the upgraded technologies soup products as a window on what to expect for that overall program, as it unfolds in '04 and beyond.

Art, yeah, I think we'll -- as we get a little later into the year, we'll look at the possibility of being able to show you what some of that looks like.

Well, I mean, as you have results in fiscal '03 with this 10% of the line, and to the extent that it shows an [overlapping speakers] --

I see, yes.

I'm wondering if that can be used as a way to forecast how well this whole program --[overlapping speakers]--

Art, sorry. This is Doug. What we're pulling forward is going to be the execution around what we call our "vegetable cluster."

Right.

And it's a small percentage. The package will not be fully differentiated in terms of the easy-open can feature. And we won't get the synergistic effect of the entire line changing. It will be a point of encouragement, but it won't be -- I don't think it will be an adequate data point for forecasting the performance of the line. I think it will be suboptimal.

Okay.

Everything we've looked at in the past, and you know this, whenever we've had benefit upgrades around any item off our line, we've seen very good responsiveness from the consumer.

Right.

And we expect that from this line, but we don't -- it's going to be -- it's not enough of the change and not enough of the line to be able to read it.

Okay. Thank you. Secondly, as far as the capital spending guidance for '02, it looks like it's down about $20 million from what we had before. Does that suggest at all that the '03 capital spending numbers are going to be further below expected earlier, as well?

Art, we're in fact right in the middle of our planning for '03, so, you know, I'd be premature in offering any point of view on that.

I would say, we feel good we can operate within the range that we have. And it's just a question of can we tighten it? If we can, we will. But it's premature to make the call.

Thank you.

And we're doing all the projects, Art. I mean it's just a matter of being able to deliver them under what our budget was.

Finally, Doug, you mentioned early on in the Q&A with respect to the Franco American business, I guess, including gravy and beans and so forth, you talked about these are products, tough category, and they need to be addressed. I'm sort of curious, because it seems like a lot of companies today are increasingly moving away from what they call their minor brands, reducing their SKU exposure, and even recognizing that prior management has done a lot of that for Campbell, I'm just curious, how you -- what you might have been referring to when you used the term "needs to be addressed."

Well, Art, let me elaborate on that a little further for you. When I arrived back in January of last year, we had a North American operation that managed soup, food, beverages, everything, in North America. Very early on, we identified that one of the adverse impacts under that system was that the non-soup businesses were not being adequately addressed. And we shared that with you at the transformation plan in July. We -- and by September, we had broken those two business units fully apart and we staffed what we -- the sauce and beverage area that we now report on. And we have the most significant management focus on those businesses that we've had in the last decade. The focus there, obviously, was on Prego, Pace, and beverages first if foremost. And we're addressing all those areas, and we are now getting our arms fully around the Franco American and the other line -- other items.

Okay.

And so it's -- we're just getting there now. I will tell you it's an important part of that portfolio. It is profitable and it is growable, but it does require attention that it's just now getting.

Okay. So, you meant needs to be addressed operationally, rather than strategically.

Absolutely.

Okay. Well, thank you very much.

Okay. Jessica I think that's going to be all, we have time for today. I want to thank everyone for joining us this morning on the conference call. And if you have any follow-up questions, please give me a call at 856-342-6428.

That concludes today's teleconference. You may disconnect at this time.