金寶湯 (CPB) 2002 Q4 法說會逐字稿

Good morning. And welcome to the fourth quarter year-end results conference call. All participants will be in a listen-only mode until the question and answer portion of the call. At the request of Campbell Soup, this call is being recorded. If there are any objections, you may disconnect at this time. I would like to introduce your host for today's conference call, Mr. Leonard Griehs. Sir, you may begin when ready.

Good morning, everyone. And welcome to Campbell Soup Company 4th 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 Shucraft, Assistant Controller. Also participating in our question and answer session today will be Doug Conant, President and Chief Executive Officer.

You should have our press release and facts sheet, which we will be referring to in this call. If you do not have the facts sheet, you may receive one by calling Cindy Aggrero in the Campbell Investor Relations department at 856-342-6427.

Our call will last approximately one hour. It will be rebroadcast from approximately two hours after completion until midnight, September 9th, by dialing 1-800-759-1940. There is also being broadcast live over the internet, and will be accessible on replay by going to the Campbell website at www.campbellsoup.com. Our conference calls are open to all interested investors and members of the media.

Our discussion will contain forward-looking statements, which reflect the company's current expectations about its future plans and performance. Including statements concerning the impact of marketing investments, and quality improvements on volume 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 application or intent to update the forward-looking statements in order to reflect the events or circumstances after the date of this discussion.

Now I'll call on Jerry Lord to discuss our operating results.

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. As a result, the following reclassifications were made to the 4th quarter and fiscal 2001 financial statements.

Net sales were reduced by $166 million and $893 million respectively.

Cost of products sold was reduced by $4 million and $14 million respectively.

And SG&A expenses were reduced by $162 million and $879 million respectively.

On the fact sheet, reporting segments show before and after currency effect. All numbers also exclude Arnot's manufacturing reconfiguration of approximately 1 cent this quarter, three cents for the fiscal year, and three cents for fiscal 2001.

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.

First, let me summarize the key take-aways for our fiscal 2002 results. First and foremost, we adhered to our transformation plan initiatives. Specifically, we delivered on our commitment to significantly increase marketing investment. Excluding currency and the impact of the European acquisition, total marketing was up 15%, in excess of $200 million. Much of the marketing increase supported strong gains from products such as Campbell Chunky Soup and Campbell's Select.

During the second half of the year, we also increased trade support behind condensed soups. Although rebounds [INAUDIBLE] second half of the year improved trends, our heavier overall marketing investment had limited impact. However, the real breakthrough elements of marketing the condensed soup business still lie ahead, when we can focus on the technology driven product and package improvements.

And of course we had new product launches, the most important of which was Soup at Hand, whose impact will be felt in fiscal 2003.

The marketing investment drove a 2% increase in volume and mix, despite external challenges from warm weather, and the economic impact post-September 11th.

Worldwide wet soup shipments rose 1%.

Several of our brands had exceptional years. Campbell's Chunky Soups, Campbell's Select Soups, and Swanson broths had excellent volume growth.

Pepperidge Farms showed strength across all lines of the business.

Arnotts continued to gain share in the cookie market in Australia.

We made significant investments in systems and infrastructure, while strengthening our work force at a pace that was purposefully accelerated versus our transformation plan.

We delivered strong productivity gains again this year, and exceeded our goal of $100 million in savings.

We successfully integrated the European acquisition completed in the 4th quarter of fiscal 2001, and began to recover momentum in the acquired businesses, following program cutbacks under prior ownership.

However, our base business in the UK was soft in soup and sauces.

Lower net interest expense was the result of our decision to enter the year heavily weighted in commercial paper. This allowed us to significantly benefit from falling interest rates. This benefit more than offset our increased debt levels related to the European acquisition.

We continued to deliver strong free cash flow, illustrating the cash generating power of our business, and continued emphasis on managing working capital.

Now, let's turn to fourth quarter results. Last year's fourth quarter included approximately 3 cents per share diluted impact from the European acquisition. This year's forth quarter earnings per share, excluding the impact of the Australian reconfiguration, was 14 cents. We are pleased that we had good volume performances across several of our businesses, as we executed new product rollouts and supported major brands.

Sales finished up 5% for the quarter at $1 billion, 223 million dollars, up 3% before currency, and earnings before interest and taxes were $134 million, down 12% before the impact of currency and the Australian restructuring.

Sales growth of 5% for the quarter brakes down as follows.

Volume and mix was up 4%.

Pricing was plus 1%.

Promotions reduced sales by 2%, driven largely by cost associated with new cost product allowances.

Currency added 2%.

Acquisitions had no impact.

Gross margin declined slightly from 44.8% to 44.4%, due mainly to quality improvements and mix in U.S. soup, partially offset by solid productivity performance.

Worldwide wet soup shipments were up 2% for the quarter. U.S. wet soup shipments were up 3% for the quarter, while international wet soup shipments were up 1%.

Total marketing was up 1% before the impact of currency. I'm sorry. Total marketing was up 17% before the impact of currency. This increased marketing includes introductory allowances on new products, and these new introductions were accelerated. The most significant of these was Campbell's Soup At Hand.

Unallocated expenses were up principally due to planed infrastructure spending.

Net interest expense was $44 million, down 10 million versus a year ago.

Total debt is now below last year, now that we have lapped the acquisition of the European culinary brands. The lower lower debt is due to strong cash flow, which we used to pay down short term debt.

Tax rate as reported for the quarter was 34.2%, just below a year ago, and consistent with the full year.

Net earnings was $59 million, and diluted earnings per share was 14 cents, excluding the Australian reconfiguration, compared to 15 cents a year ago. As reported, including the Australian reconfiguration in both years, earnings per share were 13 cents, even with last year.

Now, let's turn to the full year operating highlights.

Sales finished up 6% at 6 billion, 133 million dollars. And earnings before interest and taxes were 1 billion, 4 million, down 17% before the impact of currency and the Australian reconfiguration.

Sales growth of 6% breaks down as follows.

Volume and mix was up 2%.

Pricing was plus 1%.

Promotions reduced sales by 1%.

Currency had no impact.

And acquisitions added 4%.

Gross margin declined from 45.8% to 44.2%, due mainly to mix changes and quality improvements in U.S. soup.

Worldwide wet soup shipments were up 1%, led by a 1% gain in U.S. shipments, and 2% gain in international shipments.

In line with our plans, total marketing was up 15%. Including the European acquisition, marketing was up 20%.

Unallocated expenses were up principally due to planned excellerated infrastructure spending.

Net interest expense was $186 million, down $21 million versus a year ago. Higher interest expense due to increase average debt levels resulting from our European accession last year, was more than offset by a steep decline in short term rates.

The tax rate was 34.2%, the same as last year.

Net earnings were $539 million, excluding the Australian reconfiguration, and diluted EPS was $1.31. Including the Australian reconfiguration, earnings per share for the year was $1.28.

That completes the discussion on fourth quarter and full-year consolidated results. Let's now look at our numbers by reporting segment. Both the fourth quarter and full fiscal year are shown on the fact sheet. I will only discuss here the result and the highlights of the full year. Starting with North America soup and Away From Home.

Sales of 2 billion, 524million dollars were flat with a year ago. Volume and mix was up 1%. Operating earning $624 million were down 19%, reflecting increased marketing and infrastructure investments.

As previously noted, U.S. wet soup shipments were up 1 percent. The underlying trends in ready-to-serve continue to be strong, as the incremental spending outlined in our transformation plan worked well here.

Ready-to-serve soup shipments rose 9%. New varieties and quality improvements, combined with higher 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's Select Chicken varieties of soups, along with new Campbell Select Italian Style Wedding soup, and improved Campbell New England Clam Chowder, contributed to the second year of double digit growth for Campbell's Select.

New Chunky Soup items brought new users to this brand, as Chunky Homestyle Classics, combined with effective brand advertising, drove another year of double-digit growth.

Swanson broth shipments were up 4%, as the new Pop-and-Pull lids and smaller package sizes proved to be a hit with consumers.

Viewed from a cooking and eating basis, cooking soup shipments declined 1%. And eating soups rose 1%.

Shipments of condensed soup declined 5%. Our turnaround strategy for condensed began to pick up steam for the fourth quarter, as we completed the initial phase of installing new processing equipment in the plants that allows more garnish in the soup, and significantly reduces cooking time and temperature.

Those of you who attended our July meeting in Philadelphia experienced the great improvements in condensed vegetable varieties, which began shipping for this soup season. We're optimistic that these will help to improve Campbell's condensed results. But keep in mind that the major portion of quality upgrades for condensed, including both product quality and packaging, and the associated marketing support behind the upgrades, will not show up in the marketplace until next year at this time.

Turning to new soup products, we are very pleased with the rollout of Campbell's Soup At Hand, which started shipping to the trade on June 14th. Soup At Hand is our first real entry into the large, growing on-the-go category, targeting consumers seeking a convenient and efficient alternative to sip on the run. We are pleased to be ahead of our distribution target at this point in the rollout.

Now, let's turn briefly to the remaining parts of this reporting segment, Away From Home and Canada. Strong soup shipments driveway earnings growth in Away From Home. On the top line, soup sales gains were partially offset by weakness in lower margin bakery and frozen entree businesses.

In Canada, retail soup shipments were especially strong. In addition, Pepperidge Farm Canada was also up nicely. Consistent with the U.S., we have increased substantially marketing investments behind the core businesses in Canada, and they have responded.

Now moving to North America sources and beverages. Sales were up 2% to 1 billion, 182 million dollars, driven by Prego Pasta Bake sauce, Pace Mexican sauces, and the performance of our Mexican business.

Operating earnings declined 20% to $236 million, reflecting significantly increased marketing investments.

Volume and mix rose 3%.

Businesses in this reporting segment have responded well to our increased marketing investments, and we are beginning to see better marketing results in key brands.

We introduced Prego Pasta Bake sauce in the fourth quarter of 2001, giving needed differentiation in this competitive category. And that has grown the Prego franchise.

For Pace Mexican sauces, we shifted funds toward consumer support. And this helped drive double-digit sales growth.

V-8 vegetable juice had a strong year, as investment in TV advertising, for the first time in three years, drove sales groat.

However, we were disappointed in the performance of Franco American canned pasta, and V-8 Splash. And we are working to reinvigorate those businesses.

Now moving to biscuits and confectionary. Sales rose 4% to 1 billion, 507 million dollars, up 5% before the impact of currency. Sales were up in all three businesses, Arnotts in Australia, Pepperidge Farm, and Godiva.

Operating earnings declined 8% to $195 million.

Volume and mix rose 4%.

We are pleased with this performance, given the difficult environment for Godiva, whose sales were up slightly.

New-store sales were offset by lower same-store sales in a weak North American retail environment.

Godiva's Asian business continues to post strong sales gains.

Pepperidge Farm delivered good sales performance primarily gue to new projects, and increased distribution. The introductions of Desert Bliss cookies Goldfish Sandwich Crackers, as well as strong sales of Milano cookies, were the primary drivers of growth for the biscuit business.

Bakery sales also increased primarily due to new varieties and increased distribution of Farm House bread and rolls, and the introduction of Pepperidge Farm bagels. New varieties of Pepperidge Farm Texas Toast frozen garlic bread drove strong sales results in that category as well.

Sales also rose at Arnots, as value added products in the snack foods category, such as Rick's Rice Chips and Kettle Chips helped drive results. Kenkam biscuit sales were up significantly in both Australia and Indonesia.

Now, moving to international soup and sauces. Sales rose from $632 million to $920 million this year. Excluding the impact of acquisitions and currency, sales declined 1%, despite a strong fourth quarter.

On a reported basis, operating earnings increased $41 million to $92 million. Excluding the impact of currency and the European acquisition, operating earnings declined due to significantly increased marketing spending across the portfolio.

It is important to note that Europe is a work in progress. We have yet to develop strong momentum in this highly-competitive market. However, we have significantly improved our position now that we have integrated our dry soup acquisition, and realigned the management structure. We understand the issues we face, and we will now address them in a more focused and aggressive fashion.

In fiscal 2002, weakness in the UK in both soup and sauces offset gains in soup sales in Belgium and France.

Wet soup share in Australia continued to rise as new product launches under the Country Ladle Chunky and Delish brands proved successful. Campbell's Real Stock broth sales were also up significantly.

Now, turning to the balance sheet and cash flow statement. First, let's make a note of share owner's equity, where we had some notable changes.

Share owners equity on July 28th, 2002, was a negative $114 million, versus a negative $247 million a year ago. It was a positive $18 million at the end of the third quarter. The change in the fourth quarter is driven by a technical accounting reclassification related to the pension accounts of the company. Let me explain briefly.

Following the stock market declines in June and July, the fair market value of assets in the company's principal U.S. pension fund, which has no direct investment in Campbell's stock, fell below the future pension liability, as measured by the accumulated benefit obligation.

The accounting rules require that when this happens, any related pension asset generated by a previously overfunded situation, be reclassified to equity. The impact of this reclassification was approximately $200 million after tax. This is a noncash entry. That does not indicate any immediate change in funding requirements, and does not impact operating results in fiscal 2002.

However, the lower fair market value of assets, combined with revised accounting assumptions, will lead to significantly higher pension expense, beginning in fiscal 2003.

Turning to other elements of the balance sheet, total debt was $3.6 billion at year end, down from $4 billion a year ago. You will recall that borrowing for the European acquisition, which closed in May 2001, impacted last year-end's debt level.

Capital spending of $269 million was lower than our last projection, but the good news is that we have accomplished our planned investments laid out in the transformation plan. Of particular note, we have essentially completed the manufacturing reconfiguration of our Australian biscuit business, and we have made a major start on the construction of a new Pepperidge Farm bakery in Bloomfield, Connecticut. We have also made significant strides in equipping our U.S. heat processing plants for technology-driven process and quality improvements, for both condensed and ready to serve soups. However, there is more work to do that will mostly take place in the 4th quarter of fiscal 2003.

Free cash flow was $748 million. While this is down from last year's robust $906 million, due to marketing investment and increased capital spending, it is still above our expectations going into the year, and at 12% of sales, it is well above the level of many other food companies.

That concludes my formal remarks. Before we take your questions, Bob Schiffner has some comments relating to fiscal 2003.

Thanks, Jerry. I'd like to wrap up our formal comments this morning by reviewing in some detail the guidance we issued in the press release this morning. Please note, all of my references and comments exclude the earnings per share impact we get from the two acquisitions which we recently announced.

We have completed the first year of a multiyear transformation effort, with clear progress in many areas. In fiscal '02, we built the foundation that will enable us to confidently move into the next phase of our transformation plan. In fiscal '03, our highest priority remains the revitalization of U.S. soup. Specifically pursuing the stabilization of the condensed business, and maintaining the growth of RTS. We also expect strong results in biscuit and confectionary, and we expect to begin to develop our European business more effectively.

In the U.S., there are several things to keep in mind as we go into fiscal year '03. Firstly, we are comparing against an unusual year in fiscal '02. During the first half we had a boost in soup sales following after September 11th, which positively impacted quarter 1 results, followed by a warm winter, that offset the strong start.

Secondly, every 6th fiscal year we have a 53 week year. And fiscal '03 is one of those. Given that 53rd week falls at the end of July, it normally adds about 1 percentage point to top and bottom line growth.

With these things in mind, let me give you a deeper look at our fiscal year '03 earnings guidance.

We expect reported sales growth to be approximately 3%.

We expect to achieve positive volume growth for U.S. soup, and we expect to see continued strength from Pepperidge Farm and our Asia Pacific business.

We also expect improved Godiva same-store sales growth.

We plan to also increase our marketing spending in line with our sales increase.

Capital spending will be approximately $285 million. Major projects include the new Pepperidge Farm bakery, and continued improvements to our plants, as we continue the installation of our cold-blend technology for condensed soups.

As Jerry alluded to, a significant and unexpected impact on '03 results will be higher pension expense, as a result of lower asset value, and assumed investment returns. Increased pension expense will deduct between 3 and 4 cents per share from EPS growth in fiscal '03. Assuming that interest rates will begin to rise in the back half of fiscal '03, we expect interest expense to be approximate about $200 million.

Tax rate should remain approximately the same.

We will adopt FAS-142 in the first quarter of fiscal year '03. We project that this will add 12 to 13 cents per share to EPS for the fiscal year.

Excluding this 12 to 13% impact, but including the higher pension expense, we expect EPS to be approximately $1.35. EPS in the first quarter is expected to be even with year ago, before the quarterly impact of FAS-142, because of last year's strong September-October shipments.

This concludes my comments, so I'll now turn it back over to Len for the question-and-answer session.

Okay. Amanda, if you would begin the instructions and polling for questions, please.

Thank you. At this time, if you'd like to ask a question, you may press star 1. You will be announced prior to asking your question. To withdraw a question, you may press star 2. Once again, if you would like to ask a question, please press star 1 now.

Our first question comes from David Nelson from Credit Suisse Boston.

Good morning.

Good morning, David.

I thought heard Jerry reference to the -- you know, talking about the heavier marketing spending limited success. And you did talk in your July meeting about new insights you were gaining from marketing research. Could you talk about how you might improve your efficiency of marketing spending, please?

Okay, Bob?

Specifically, Jerry was alluding to the impact on the condensed business. And basically, we saw improved response to more trade promotion spending on that brand in the second half, and our plans for '03 continue -- will continue to address that area as well. As, in fact, we learn more and more in that area.

As we had told you a while ago, we have invested a significant sum of money in terms of improving our analysis of trade promotion spending. And clearly we expect that to help us in '03, specifically in condensed soup, and also in other parts of the business.

If I could ask one follow-up on the trade spending issue. I think in Q3, it went virtually or almost entirely toward condensed, whereas in Q2, it went almost entirely toward ready to serve. Was there better balance in the forth quarter?

Specifically, we grew spending in both areas in the fourth quarter. But in terms of better balance, our growth in condensed spending was higher in the fourth quarter than it was in, I believe, the other three quarters. So in that respect, there was more balance.

David, this is Doug Conant.

Good morning.

Good morning. We are getting a better balancing act here. We're gaining insights, by customer and also boy segment, in terms of how do we balance the spend to get the biggest bang for our buck in soup. We are finding that, as Bob alluded to, condensed is a little more responsive, promotionally. And the RTS segment is a little more responsive in terms of advertising, and more consumer-driven vehicles. And we're finding the right balances there.

We're all finding the right timing balances. When do we promote RTS? When do we promote condensed? We're getting the cycles better, the pricing better, and the balance between trade and consumer better. I think you're going to see a significantly more productive plan. I know you'll see a more significantly productive plan in '03.

Great. Thank you.

Thanks. Next question, Amanda?

Our next question comes from Anne Gerkin from Davenport.

Hi Anne.

Good morning. I was wondering if you could just update me on where you are in terms of restocking shelves?

Anne, this is Doug Conant again. We're making great progress there. We're on target to be resetting about 13,000 stores this year. In terms of the optimal shelf set from a consumer perspective, partnering with each customer, to make sure the shelf set is the way they desire it for their store and their strategy. And we're right on track with the progress we committed to and discussed in our July analyst meeting.

Okay. And then in terms of sales, projected sales for Soup At Hand, are they going to be a little ahead of what you're looking for for '03?

Well, we continue to talk about that, but the proof is in the pudding. And so far, all we can talk about is the fact that we have good distribution momentum. In earlier discussions, we've talked about this being a $50 million business or more, and we continue to stand by those comments.

Okay, great. Thanks very much.

Okay. Next question, Amanda?

Our next question comes from Bill Leech from Banc of America.

Good morning, Bill.

Good morning. I was just wondering. Looking at the most recent IRI, there seems to be a big descrepency between what they're saying and what you're saying in terms of your soup shipments. I know IRI's not perfect, but in the latest three weeks, it looks like there's about a nine percentage point discrepancy. Do you think that reflects overstocking by the trade again?

Not at all.

Not at all.

I'm quiet confident that that's not the case. We have our inventories well in balance. We have over 50% of our volume on continuous replenishment. We have a handle on it. I don't have an issue. And of course, IRI doesn't cover all the customers. either.

Right. But it [INAUDIBLE] the last [INAUDIBLE] your soup volume down six, and you're saying it's up --

What was the closing date you've got on that number that you've got there, Bill?

August 11th.

Okay.

That would pretty much include your fourth quarter.

Yeah, and that's why we're reporting shipments because it's more accurate.

I mean, we in fact, told you, I believe, in the second quarter that we were not going to talk consumption anymore, because we absolutely have no confidence in the fact those numbers really depict what's going on in the total U.S. market.

Could I ask you also about private label? Private label seems to continue to gain market share pretty rapidly. What are you specifically going to do to address that?

Well, there's a long answer and short answer. The short answer is the success for us is going to be all around value addition, particularly in condensed. And we have to get condensed to a point where we have a fundamental point of difference versus private label. And quite frankly, that's going to be easing into the market this year, and not fully into the market next year.

The value addition formula we have on RTS is allowing us to out perform private label. And we expect to be able to continue to do that. So the secret will be to get the condensed value value addition formula right. It's going to take another year.

Does that mean more promotions?

That means better balance in our spending.

Okay. Thank you.

Thanks. Next question, Amanda?

Our next question comes from Terry Vivins from Bear Stearns.

Good morning, everyone.

Hi Terry.

Just a question on the '03 guidance. Did I understand you correctly, Bob, to say your marketing is only going to be up 3% next year?

That's rough and dirty. Yes, we said that it would grow in line with sales.

Oh. Well, here's what I'm thinking. If sales are up 3, I guess if you back out the pension expense, you're looking at about 6% growth on the bottom line. It would appear to me that, you know, with some of the marketing that you're going to have to spend, and with what would appear to be, you know, pretty challenging gross margin trends, I'm just wondering kind of how you get from that 3 on the top line down to 6 on the bottom line?

Well, again, pension expense is there. And it's real. So basically, you know, with top and bottom line growing relatively the same, we are -- we're holding margins, you know, for the most part throughout the P&L. And clearly, the way to get there, you know, one of the major reasons we're in fact able to do that is we have a very strong productivity program in place again for next year, where we'll generate well in excess of $100 million in productivity.

So again, we have been clear about this all along that part of getting to where we want to get will require an ongoing strong productivity program. And we are -- we in fact met that goal last year. And the fact that we intend to meet it for fiscal '03 as well.

So you think gross margins will be up in '03 versus last year?

No. I'm not saying up. They'll be stable.

Okay. And I know it's tough for you to answer questions about the disposition of the [INAUDIBLE], so I'll just ask merrily, is there an orphan [INAUDIBLE] in Camden? [laughter]

That's just a rhetorical question on your part there, Terry.

Just trying to keep things lively. Thank you.

[laughter] Okay. Amanda, next question?

Our next question comes from David Almen from Morgan Stanley.

Good morning, everyone.

Hi David.

Hi David.

Hi David.

As a starting point, the extra week, doesn't the extra week add closer to 2% for the top line than 1%?

No. Because it's July. And as you know, in July, we don't sell a tremendous amount of soup in July. So it has an impact of more like 1% rather than 2%.

Okay. Secondly, can you give us the shipments in the fourth quarter in the U.S. for condensed and Ready To Serve? That wasn't in the release.

Shipments were up in the fourth quarter. Roughly overall, condensed was down 2% and Ready To Serve was up 12%.

Okay. And the fact that you're planning on increasing marketing in '03 in line with sales, does that indicate that you feel like broadly across the portfolio you're marketing currently at competitive levels?

Yes.

Okay. And then lastly, on the pension expense. Is that a one-time catchup, or is that sort of an ongoing higher cost you're going to incur going forward?

Yeah. It's going to be an ongoing cost we're going to incur. And again, that assumes that investment returns, you know, obviously come down over time, you know, as they have recently. Obviously not as bad as they have been recently. But in fact, there, you know, will be no longer an expectation that will generate total pension returns in excess of 10%.

And will that cost -- is that incurred at the divisional levels as we see it, or at the corporate expense level, or at both?

Some is kept in corporate, because some of it pertains to corporate employees, but a lot of it is pushed down to the operating companies.

Okay.

Specifically, the U.S. operating companies.

Right.

And David, just to be clear, this difference that we had in last year, this year is because we're incurring this one time -- it's an ongoing expense, but you're not going to get that big jump again, unless you get the big asset drops again. So just to clarify, it's an ongoing expense. And the reason we pointed it out is because we went from last year to this year with that.

Right. Okay. I follow you. Thank you very much.

Okay. Thanks.

Next question, Amanda.

Next question comes from Lisa O'Malley from Goldman Sachs.

Good morning. Just a follow-up on the pensions. What did you reduce your return on plan assets to?

Last year, we assumed 10%. We're taking it down to 9.5% this year.

And then just another follow-up on the private label, because when I look at the data, it looks like it's not only the soup category, it looks like it's across many of your categories. Are you seeing consumers trading down because of the weak economy?

Lisa, this is Doug Conant. We're not seeing it dramatically changing the landscaping in most of our categories. There's some edging up of private label. But if there's any behavior related to the economy, it's modest.

Thank you.

Okay. Next question Amanda.

Our next question comes from Eric Casmith from Deutsche Banc.

Hi. Good morning, everyone.

Hi Eric.

I have a few questions. First, Doug, do you care to comment on, kind of I guess what you're looking for in an outsider to run the soup business? I mean, it seems to me that whosever been there really hasn't had the tools to work with. It was almost kind of a position, almost -- if this cold-filter technology is going to do what it's going to do, then without it, anybody who is in there is almost doomed to failure. So, you know, kind of who is your next -- who's the next person to run that business?

And then I have a few follow-ups.

Okay. First of all, I'm not going to conduct the job search over the conference call here, if you don't mind. But I will make a few comments.

First of all, we don't have an individual running a soup company. We have a company managing the soup category, and we have a lot of talented people in this company who are running it. And it's not dependent on one particular individual.

Number two, the challenge we have here is to start to put points on the board and to maximize share in our value. And one of the ways we're going to do that is by putting the best imaginable team on the field, and that's what this is all about.

In terms of whoever the candidate is for the job, they will have the tools required to do the job. That's a commitment the Board has made to the company, and that I've made to the company, and that we've made to you. We said we're going to put the resources in place to win the war. And whatever the candidate is will have the resources necessary to win.

Okay. And then can you comment, Bob, on the, I guess the scale now, or the size in terms of either volume or dollars, the difference between condensed versus Ready To Serve? Because I guess it was around, you know, 60 percent plus condensed, but with Ready To Serve growing so much, it's got to be changing pretty rapidly. Can you talk about that?

Condensed is still, you know, the much larger segment of the business. And, you know, rough and dirty -- and again, you know, I'm rounding. Condensed is -- is roughly 1 1/2 times the size of RTS.

Okay. And that's both on a -- I mean, that's -- are you talking volume or dollars?

Speaking in terms of dollars. You know, which I think is the -- you know, is the best measurement.

Okay. And then last, just as kind of a follow-up on the pension expense. You know, most of the companies, you know, we haven't had to deal with this. I guess you're kind of the first one to come out and say that you have a problem in terms of how much this is going to run you. But is a drop of only 50 basis points in your return assumptions sufficient? Or sufficiently, I should say, sufficiently cautious? I mean, it seems that, you know, what -- I guess long-term returns in the stock market are normally 7% to 8%. So is 9.5% sufficiently, you know again, sufficiently cautious?

Eric, that's a very good question. And clearly, we've had a lot of internal conversations on that issue. Again, we've, you know, we've reacted to -- you know, to the craziness around the June and July performance. And I think, again, the tendency is, in fact, to overreact to that. You know, it's a number that, in fact, we will continue to keep our eyes on.

But again, when you look at that historically, you know, at 10-year periods, 9 1/2 is still a very justifiable number. And, you know, but in fact, we will evaluate that. We're clearly keeping strong track of our pension returns. And should the number need adjusting down in the future, we, in fact, will do that. But I think right now, we feel very confident that, in fact, it's, you know, it's a reasonable number in light of our historical performance.

Okay. And then last quick follow-up. Is there any, I guess, seasonality to the goodwill amortization at back? Meaning, you know, is second and third quarter going to receive more of the 12 to 13 cents than it would otherwise?

No. There's no seasonality. It's pretty much a straight-line idea.

Okay. Thank you.

Thanks. Next question, Amanda.

Our next question comes from Andrew Lazare from Lehman Brothers.

Good morning.

Hi, Andrew.

You've talked about putting more focus on the trade side to condensed. And I realize these are small quarters seasonally. And you don't have the technology. It's just starting to roll out. But I guess, is there something else at work here that has not allowed some of that additional trade spending to translate into at least somewhat better volume trends on condensed? Even though I know it's just trade, but you would normally think you would get a, kind of a near term, you know, sort of improvement from that.

Do you get a sense -- I mean, is the trade perhaps keeping more of that spread for themselves? There's not as much of it getting to the ultimate consumer? Or is it really just that you don't have the newer, higher-quality product out there, and it's obviously coming out now? You kind of see where I'm going with this?

Andrew, this is Doug Conant. It's a very good question. If you go back to last year, we actually did have good performance on condensed trade. And I think it was probably related, even though we didn't have the product proposition right, we had favorable weather conditions. And we were able to leverage the merchandising in the favorable the weather conditions to to get better take away on condensed. This year, we don't have the product right, we didn't have the favorable weather conditions, and it was too much of a hurdle for us to overcome.

The other thing that's going on here is the spread between RTS and condensed shelf pricing. And what we find is, when we create -- when there's a high compression there, and RTS is promoted very aggressively, it will also damped condensed take away as well. So we've got to carefully watch how we manage -- how we compete in RTS, and its impact on condensed as well. We had a lot of learning on that this year that we're leveraging in this fall.

Great. Okay. Thanks a lot.

Okay. Next question, Amanda.

Our next question comes from Leonard Cheetlebom from Merrill Lynch.

Well, Leonard. This is Leonard here. How are you? [laughter]

Well there ya go. Shows it pays to get up early in the morning.

I just have a -- first of all, I would just like to echo, I think it was Eric's question. I think it was a return objective on a pension plan, I think 9 1/2 is, you know, is -- I don't represent your best thinking, but it just seems like not enough of an adjustment. But I guess that's just to get it on the record.

Len, just remember that there's two pieces of this. And the spread between the return you're assuming on your assets and the obligation is more important than the absolute number of either. And I think you work with the actuaries. And I think we feel it's very reasonable at this point.

Well defended. Does the negative equity, Bob, have any implication for any of your debt covenance, even though it's a technical drop?

No, Len. As you know, we've operated with negative equity before. So, you know, it's territory that in fact, we're familiar with. And no, it will not have -- it has no impact at all on any of our debt covenance.

Thank you. If we take a look at your marketing plans in terms of SKU [INAUDIBLE] rollout of new product as we get into '03. Could you tell us, kind of put in perspective how many new SKUs you're intending to put out, and what that does for the total SKU's that are on the shelf now? Do you have that information?

Len, this is Doug. It would not be productive for us to get into that exercise on the call. I think we can have possibly some follow-up on that.

Okay. Now, Doug, you had -- as I listened to the presentation there, I kept getting the growing feeling that we were starting to get the pieces in place in some pretty big leaps here. Are you satisfied with the progress? And if not, where do you think you may be behind or where do you think you may be ahead? And when does this all start to come together from your perspective? Is '04 going to be the year? Or is it going to be maybe one year after that? You're talking about learning to restock the shelves, and working with your retailers. 13,000 I think you said. Is this the year we put the final pieces together?

And then I have one final question on earnings.

Len, this is clearly a work in progress here. I feel very good about the progress we've made. I think we kept the integrity of our transformation plan, in terms of all the activities we committed to do. I believe we did them, and we delivered the bottom-line results in a very unusual year.

As we look forward, we know we're going to do better this year than we did last year. And we know we're going to do even better in '04 than we're gonna do in '03. We feel very good about the momentum we're building, and the foundation we're putting in place.

I think as we exit '04, we should be up and running as a company. We should have the business propositions in line, and we should have the organization in line.

But, you know, this may sound a little colloquial, but you just can't talk your way out of something you behaved your way on into. We're working through this. And it's a long-term fix. And the end is in sight.

But I think the reality is, until we can get the product portfolio right in soup, which is '04, we can't feel good that we've made all the progress we've committed to make. But it's always been a three-year transformation plan. And we stand by that.

Thank you. Now, one final question. $1.35 is related to 12 cents, correct?

No. It excludes the 12 cents.

It excludes it?

That's correct.

We have, on a reported basis then, $1.47, instead of $1.35, is that your guidance?

$1.47 to $1.48. That's correct.

Thank you.

Okay. Amanda, next question.

Our next question comes from Mitch [Primiaria] from Montgomery Scott.

Hi Mitch.

Hello, good morning. Do you -- just getting back to pension again. Is it evenly distributed throughout the year, or is there some sort of first-quarter catchup? How do you --

No. It's evenly distributed.

Okay. And what percentage of the -- I don't know if you answered this. But -- of the 3 or 4 cents, what amounts to sort of catching up from '02? Or from prior --

You know, it's not really a catchup of '02. Okay? There are assumptions which we reevaluate every year, which determines the amount of pension expense. Clearly, there are three basic inputs that will affect it.

One is the overall level of your asset base. And in our case, obviously that is well below what it was the previous year, because of the negative investment returns.

Okay. The second thing is the expected returns that you will deliver against those assets. And as I said, we've reevaluated that, and have taken that assumption down.

And then the last assumption is the discount rate you use in coming up with the present value of your pension liabilities. And we will, in fact, bring that number down as well.

So those three factors rolled together will ultimately determine the amount of pension expense that you need to book in the year.

So all of those factors played a role, Mitch.

Okay. Of the 3% sales growth, can you sort of break that out? Is it going to be sort of an evenly distributed number across all of your divisions? Or do you expect, you know, biscuit and confectionery to have an above-average year? Can you talk about that a little bit?

Mitch, we normally don't dive that deep. Let me say that, you know, we expect growth in most places. I will say that Europe remains a challenge. So I would expect probably lower growth there as opposed to other outparts of the portfolio.

Well, that leads me to that next question, [INAUDIBLE] Europe. Can you talk a little more about Europe in depth? What actually is the challenge that you're facing here?

Well, specifically, you know, we feel very satisfied with the way that the acquisition has gone, relative to Unilever. So our issues in Europe at this point are related to what we refer to as our base business. And specifically, it is, you know, it is associated with our UK business, and -- of which a big piece of that is, in fact, around our so-called nonbranded, or private label business, which we're -- you know, working on feverishly to see whether or not we can improve the overall level of profitability in that business.

Second of all, we have also had sluggish sales in the UK on our branded business, specifically our wet soup and sauce business. And clearly some of those issues are in fact category related. But we feel that our overall marketing program can be strengthened. So that's -- that will, in fact, become a focus for '03 as we said in the, you know, in the words.

And Mitch, this is Doug Conant. Viewed another way, we feel we have a solid proposition in France, in Germany, in Scandinavia. So we feel -- and Belgium. So we feel relatively good about the growth prospects of those businesses, both on the base and with the acquisitions.

In the U.K., about two-thirds of the business is the acquisition. And we've actually met expectations with that. The other third is the base business, and we have to address the issues Bob raised. But they're manageable issues. And the total risk coming out of Europe to our plan is very manageable. So I feel very good about the risk management profile.

The second thing I'd say is, we have put some of our best and brightest in place to help run our entire international operation. John Doumani has been installed to run international. He has excellent European business experience, albeit beyond Campbell with Johnson and Johnson. He actually ran UK sales with Johnson and Johnson for four years, so he understands the UK well.

We've also installed the gentleman, Brian Mersky, who ran Canada for us, and did that exceptionally well for the last three years, to run Europe, and with specific oversight over the UK.

So we've got a very good team in place. We've got the acquisition behind us. We can focus more on the base business. We know where the issues are. UK, nonbranded, a few branded spots. It's a manageable risk profile. And I think we're gonna have this well in hand as we exit next year.

How big is Europe - is UK, relative to all of Europe, and all of international.

About half.

UK is half?

Yeah, roughly.

And of all the -- of the way you report international, is it -- what percentage of that?

Now, you're making us work here.

You can get back to me.

It's slightly less than the overall international soup and sauces, because obviously we add in Asia Pacific soup and sauces on top of that number. So it is, you know. I venture to say it's probably 30 to 40%.

I think that's about right, Mitch. I'll get back to you on that to confirm that.

Okay. Lastly -- last thing is, with your overall 3% sales growth. Do you have -- is there some sort of assumption you've made about the overall category growth in soup in the U.S.?

Clearly there are assumptions one makes about the category. Obviously we feel we're the category. So, you know, those assumptions are, you know, are very dependent upon our activities. But at this point we're not going to get into that specifically.

Okay. Thank you very much.

Okay.

Mitch, just a follow-up, the UK is approximately 40%.

Of international.

Yeah.

Okay. Thank you very much.

Amanda, how many questions do we have in queue?

We have three remaining.

Okay. We'll take those three, and then we'll have to stop.

Okay. Our next question comes from Jane Melding from Salomon Smith Barney.

Hi, Jane.

Hi, Len. Hi everyone.

Hi Jane.

Hi Bob. Hi Doug. On the 3% reported sales goals for '03, I just want to delve into that a little more. That is including the 1% increment from the extra week?

Yes, it is.

Okay. So if I strip that out and go apples to apples, you're looking for about 2% sales growth on a year lapping all in about 2% volume mix? And, you know, given that your -- it sounds like, you know, the condensed business, which is in the U.S., which is 1 1/2 times the Ready To Serve business, you would hope we go from being down 5 in volume to being let's say flatish, stabilized? Why isn't that a bigger number? Is the promotional offset bigger?

Yes. You hit it.

Okay. How much do you think promotion all in will be a negative adjustment to net sales?

We're not going -- Jane, that's diving extremely deep. I -- you know, I would just leave it at yes, promotion will have an impact in terms of, you know, impacting our net sales next year.

Okay. And so, just to reconcile again. When you're talking about marketing trend being up 3%, you're referring specifically -- that's the number that's in the cost side of the P&L. That is not inclusive of promotional spending as well?

Both numbers, if you look at it just below the line, you know, it's roughly, you know, 3 to 4%. And if you, in fact, look at it with the above-the-line added in as well, it's roughly in the same area.

Okay. Just quickly switching gears. On the international, even though you talk about having these issues to deal with. Yet in the quarter, actually, your international profit was up sequentially from the third quarter. Obviously it's going to be up year over year because of the timing on the acquisition. But it was up in a period seasonally that I wouldn't expect it necessarily to be up. So, things actually didn't look that bad from a profit standpoint in the quarter, international.

Well, we're gaining, broadly speaking, Jane, this is Doug. We're gaining a little momentum here. We have been through the major push on the integration piece, which was in the first half of this past year, which -- I mean, we were doubling the size and it was taking some time. We started taking remedial actions against some of the base business issues. And I think we're starting to see a little traction there. So it's -- it's a little light at the end of the tunnel in terms of getting the base business back on track, although we have a long way to go.

All right. Thank you.

Okay.

Okay. Next question, Amanda?

We have a follow-up question from David Nelson.

Good morning. Your discount rate was 7 1/4. What did you lower that to please?

7.

7. Thank you.

Okay.

Thanks. Last question, then.

Our final question comes from [Molambo Filio] from Mitsu Corporate Bank.

Good morning.

Good morning.

I would like to ask a question on equity. If it was an issue with debt covenance, what would you do different to address it?

Well, it's not an issue so again, you know, I'm -- you know, I wouldn't speculate on that.

Okay. Thank you.

Okay. Thank you. Amanda, I think that's going to conclude our call. So, thank you everyone, for being on this morning. If you need follow-up questions, you can call me at 856-342-6428. Thank you.

Thank you. This concludes today's conference call. All lines may disconnect.