金寶湯 (CPB) 2003 Q1 法說會逐字稿

Good morning, and welcome to today's conference call. All lines will be in a listen-only mode until the question and answer session. Instructions will be given to you at that time. Today's conference call is being recorded. If you have any objections, you may disconnect at this time.

Now, I'd like to turn the conference over to your host for today, Mr. Leonard Griehs.

Good morning and welcome to Campbell Soup Company first quarter fiscal 2003 conference call. With us this morning, Bob Schiffner, Senior Vice President, Chief Financial Officer, Jerry Lord, Vice President, Controller, Shelly Shoecraft, Assistant Controller, also participating in our session today will be Doug Conant, President and Chief Executive Officer.

Our press release and fax sheet should have been sent to you earlier this morning, and we will refer to this during the call. If you require one, please call Cindy Aguiro in the Campbell Investor Relations department at 856-342-6427.

Our call this morning will be replayed approximately two hours after it's completed. The replay number is 1-800-839-9325. It will run through midnight November 18th. You may also listen by logging onto our website, www.campbellssoup.com and clicking on the website banner. Our conference calls are open to all interested investors and members of the media.

This discussion will contain forward-looking statements which reflects 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 10K 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, I'll call on Jerry Lord to discuss our first quarter results.

Good morning, everybody.

First, a few comments about the presentation of our first quarter numbers. As of the beginning of this fiscal year, the company adopted FAS-142 and goodwill and other intangible assets, eliminating most of its amortization on a perspective basis. In addition, the company recognized a one-time noncash goodwill impairment charge of $31 million after taxes, or 8 cents per share related to stock op, which was acquired in fiscal 1999. FAS-142 does not allow for historical restatement in reported results, but for the purpose of the discussion of performance and in the fact sheet, we will refer to Q1 fiscal 2002 results as if restatement had occurred. Therefore, for comparative purposes, prior year first quarter earnings were 46 cents per share as opposed to the reported 42 cents. The 46 cents excludes three cents of will goodwill amortization and approximately one cent from charges relating to the Australian manufacturing reconfiguration.

Here are some key take aways from our first quarter results. Total company base volume and mix declined 3% this quarter compared to a 6% growth a year ago when we experienced strong shipment growth in U.S. soup and sources following the events of September 11th. Soup shipments in the U.S. were down 8% versus year ago, due primarily to the strong first-quarter shipments of a year which were up 6%. Worldwide wet soup shipments declined 6% compared to a 7% growth a year ago.

Biscuit and confectionery continued its strong sales trends with the integration of snack foods limited in Australia going well. Soup and source volume weakness in the U.K. and Germany negatively impacted results for Europe.

Now, let's turn to the specifics of our financial results. Sales declined 1% to $1.7 billion compared to a sales growth of 9% in the year-ago period. EBIT was $131 million down 1% versus a year ago.

Sales for the quarter breaks down as follows. Base volume mix was down 3% compared to 6% growth a year ago. Pricing added 1%, promotions subtracted 1%, acquisitions added 1%, and currency added 1%.

Gross margin declined from 44.1% to 43.1% due mainly to lower soup sales and chains in mix across the portfolio. Total marketing was flat before the impact of currency and acquisitions. Unallocated expenses were favorable to year ago primarily due to incentive compensation.

Net interest expense was $45 million, down 8 million versus a year ago, primarily due to lower interest rates. The tax rate for the quarter, which includes the impact of FAS-142, was 32.6% versus a restated 33.8% for last year. The year-over-year difference is primarily due to favorable resolution of certain state tax issues.

Diluted earnings per share was 47 cents versus a comparable 46 cents a year ago, as reported the prior year earnings per share was 42 cents.

Turning now to operating highlights by reporting segment and starting with North America soup and away from home, sales of $746 million were down 7% and operating earnings of $205 million were down 12%. As previously mentioned, U.S. wet soup shipments were down 8%. Shipments of condensed fell 14% while ready-to-serve soups were down 1% and broth declined 6%.

Let's examine some of the factors contributing to this performance. First was the effect of 6% shipment growth last year following the events of September the 11th when strong consumer purchases drove unexpected high customer orders in September and October.

Next, was aggressive competitive activity in the quarter. Progresso continued its 99 cent per can price promotion. In addition, retailers built less inventories in the quarter relative to a year ago.

Looking specifically at the condensed performance, this was also affected by some shifting of consumer advertising and promotional programs to the second quarter relative to a year ago. We expect this shift to deliver greater spending effectiveness when combined with exciting product news and winter weather.

Moving to ready-to-serve soups, despite shipment declines of 1%, we are satisfied with overall performance given the comparisons to extremely strong plus-17% growth a year ago. Campbell's Chunky soup shipments were down versus a very strong quarter a year ago. We expect to see positive shipments for Chunky in the second quarter and for the first half. Campbell's Select was down slightly versus a year ago when shipment growth was extremely strong. Last year, we introduced Italian Style Wedding Soup, which is off to a strong start this year. Campbell's Soup at Hand and our new portable sipping soup got off to a good start.

Looking at our business on a cooking and eating basis, cooking soups declined 5% and eating soups declined 10%. Cooking soups declined due to strong shipments a year ago following the events of September 11, and lower broth shipments due to Thanksgiving coming later this year versus last year. Cream of mushroom soup was flat despite a strong performance a year ago primarily driven by the quality improvement.

In July, we discussed in detail our new processing technology for condensed eating soup, which we refer to as called bland. The primary benefit of this process is that we can put more garnish in the soup while also improving the appearance, flavor and taste of condensed soups to a shorter cooking time at lower temperatures. The entire vegetable cluster of condensed was upgraded for the soup season and marketing behind this quality improvement will commence in December. This is the first step towards the strategic revitalization of the condensed soup business.

Canada soup shipments were even with a very strong year ago, while V8 vegetable juice showed solid gains. Campbell Away From Home grew soup sales across all forms driven by broaden distribution of frozen soups and strong growth in refrigerated soups.

Now turning to North America sources and beverages. Sales decreased 2% to $307 million, and operating margins increased 20% to $77 million. Sales were up 5% in the year-ago period, driven by strong growth across the portfolio following September 11th. And the launch of Prego Pasta Bake Sauce. Prego Pasta Sauce declined in the quarter due to the comparison with the successful launch last year of Prego Pasta Bake Sauce.

Late in the quarter, Prego Spaghetti Sauce began new comparative advertising that we believe will drive improved trends. Paste continued its strong marketplace performance. V8 Vegetable Juice grew shipments as new advertising continued to promote its health benefits.

During the quarter, lemon twist V8 began to sell in and should strengthen second-half performance during the important beverage season. V8 Splash Juice Drink shipments declined primarily due to distribution losses on a septic packs and weaker club store sales. V8 Splash Lemonades got off to a good start. We began the sell-in of new V8 Smoothies, a soy-based blend that appeals to a wide range of beverage consumers. This product will begin to ship in January.

Finally, on beverages, we've created a single-serve beverage unit to more effectively address distribution opportunities and to help identify and drive growth outside of the traditional retail channel.

Franco American can pasta had significant declines as the category showed weakness during the quarter relative to strong growth post-9/11 last year. Franco American gravy declined due to the timing of the Thanksgiving holiday. Latin America sales were up behind the launch of new Mexican soups and expanded distribution of V8 Splash.

Now, turning to biscuits and confectionery. Sales for the quarter rose 8% to $410 million, 2% before currency and the Snack Foods limited acquisition in Australia. Earnings rose 5% to $43 million with solid sales growth in all three businesses, Pepperidge Farm, Godiva and Onyx. Pepperidge Farm grew shipments as crackers, cookies and fresh bread sales increased. During the quarter, we introduced a new variety of multicolored Goldfish crackers called Goldfish Colors, and overall Goldfish sales grew double digits. Strong consumer demand and increased distribution continued for fresh bread.

In the frozen segment, higher sales of Texas Toast bread and layer cakes were offset by declines in frozen potpies. In Australia, sales were up driven by the acquisition of Snack Food limited, which was acquired during the quarter.

Snack Foods Limited has annual sales of approximately $125 million U.S. dollars and is a leader in the Australia salty snack category. Unox sales, excluding the acquisition, rose on good sales from kettle chips, tin cans and continued growth in Indonesia. Godiva worldwide sales were up modestly versus year ago, primarily due to new store openings in North America and Japan and strong performance in Europe. The wheat specialty retail environment in the U.S. and lower tourism worldwide continues to impact Godiva growth.

Now turning to international soups and sources. Sales increased 5% to $242 million, but declined 3% before currency and the acquisition of Aaron Foods in Ireland, which closed during the first quarter. Operating profits were down 10% to $26 million and down 18% before currency and the acquisition. The earnings decline is the result of severance costs related to the closure of a dry soup plant in Ireland and costs related to a strategic procurement initiative in Europe. Weakness in condensed soup and Homepride sources in the U.K. and soft wet soup sales in Germany offset strong wet soup sales gains in France and Belgium. We are taking steps to address the recent weakness in Homepride in the U.K., and we look for improved performance there. The condensed soup decline in the U.K. was driven by fewer promotions as we reposition our trade spending for better effectiveness.

First quarter performance for our European dry soup business was positive with good gains in Sweden, Belgium and France, partially offset by lower sales in the U.K. We remain optimistic about the potential across these businesses as we develop solid product and marketing programs.

In Asia-Pacific, soup shipments were negatively impacted by a warm winter in Australia and a higher level of competitive activity. Additionally, the closure of the ports on the west coast in the U.S. negatively impacted soup shipments to Asia.

Now, turning to the balance sheet. Total debt was $3.9 billion, up to $3.6 billion at year end, primarily as a result of completing the snack foods and Aaron Foods acquisitions during the first quarter, and down from $4.1 billion at the end of the first quarter last year. Free cash flow for the quarter was $33 million compared to $122 million in last year's first quarter. The seasonal working capital build in the first quarter was larger than a year ago, reflecting the low levels of working capital we achieved at the end of fiscal 2002. Despite the larger increase in working capital, absolute levels of operating working capital are significantly lower than a year ago.

Capital spending pace was accelerated versus a year ago as we spent against the new Pepperidge Farm bakery and the soup quality projects. We continue to project capital spending for the year to be approximately $285 million, up slightly versus 2002.

In connection with the adoption of FAS-142, a $48 million pretax goodwill write-down was recognized related to the stock pot business. This is $31 million after tax or 8 cents a share. Consistent with earlier guidance and also reflecting the adoption of FAS-142, and minimal delusion for the two acquisitions made in the first quarter, we expect the year to come in at approximately $1.47 per share. This compares to $1.44 per share in fiscal 2002, which has been restated for FAS-142 and excludes the cost of the Australian reconfiguration. We expect earnings per share in the second quarter to be in the range of 53 cents to 55 cents, compared to 53 cents a year ago, restated for FAS-142, and excluding the Australian reconfiguration costs.

This concludes my prepared remarks, and now I'll turn the meeting back to Len.

Thank you, Jerry. Can we now begin the question and answer period, please?

Thank you, sir. If you would like to ask a question, please press star 1 on your touch-tone phone. If you are using speaker equipment today, you may need to lift your handset prior to pressing star 1. If you would like to cancel your question at any time, please press star 2. Once again, that is star 1 to ask a question.

Sir, our first question comes from Jean Marine with Smith Barney.

Hi, good morning.

Good morning.

A couple questions on the -- I was actually surprised that given how weak the volumes were in soup that your margins held as well as they did, you know, because I would have thought slower through-put would have been hard to offset. Was there anything else in there, especially since you said, I think mix was negative, that would you point to?

I know you're still shooting for a certain amount of cost savings and things. Could you illuminate a little?

Yeah, Jane, we have continued to track and manage the cost side, obviously very strongly. And we, in fact, did that this quarter, and, you know, we will, in fact, continue to do that going forward.

All right. So, is the implication, though, you know, volumes actually improved that there is more leverage than -- than sort of meets the eye at this point?

Well --

or would you just sort of be spending all that back?

I don't think there's any question about the operating leverage that, in fact, we have in our U.S. soup business. You know, we've been very vocal about that historically, and clearly volume increases in that part of our business will be, in fact, very dramatic, I think, in terms of what is dropped ultimately to the bottom line.

Now, marketing, you said, was flat was that overall for the company in the quarter?

Yes, it was.

And so, what is your guidance now for full-year?

I haven't looked back in my notes. I can't remember what your original guidance was for the first quarter.

We are still forecasting marketing to be the same level to sales, as, in fact, we stated when, in fact, we gave you a science on the year in September.

Same level to -- Same level to sales, percent of sales.

Stable year over year?

That's correct.

For the whole company?

That's correct.

Okay. And then, could you, Jerry, could you repeat what you said about working capital?

I know you said the capital was seasonally, it was higher, you had gotten too low. I wasn't sure what you said, operating capital was better -- I missed that --

Okay. I'll repeat the words and then elaborate a little bit.

What we said was that the seasonal working capital build in the first quarter was larger than a year ago reflecting the low levels of working capital we achieved at the end of fiscal 2002. So we drove working capital to pretty low levels at the end of July relative to the previous July.

Right.

And working capital is now covered closer to its normal seasonal levels against the lower base, you have a larger increase in the quarter than we had a year ago.

Right. But you're saying that free cash flow this year of which, you know, working capital is a -- is a component, you said was --

Yeah.

Down a lot year over year?

Let me just explain the impact relative to cash flow. We started the year off with a very, very low level of working capital to historical levels, okay?

We have grown that back level which is still below historical levels. However, the growth from point A to point B was relatively large, okay?

That change has impacted the amount of free cash flow that we generated in the first quarter. But the point here is, we're still managing this company with operating working capital levels well under historical levels, and it's still -- it still remains an extremely important area in terms of our, you know, individual management attention.

Since you have sort of an abbreviated balance sheet in the press release, what was the -- was there any one area in particular that was a big swing?

In working capital?

Swing in working capital in terms of the increase?

Yeah.

Yes. Inventories increased more dramatically, and it's obvious, I think, what the reason for that was, is that we had a much weaker quarter. As you know, in fact, we build inventories heading into the soup season, so, in fact, we end the quarter with slightly higher inventories than in fact, what we had expected.

However, a major offset to that, we have done a really solid job managing our accounts receivable and, in fact, we've improved our overall DSO relative to our worldwide numbers.

So, again, there were some pluses and minuses when, in fact, you look at the overall change of working capital.

Sorry, just to wrap up on this plan, your free cash flow, 33 million this quarter versus 122 in the year ago, how much of that difference was working capital and how much was other items.

Most of it -- most of it was the change in working capital.

Okay. All right. This time later I'll follow up with Doug on condensed.

Okay.

Next question?

Thank you, sir. Our next question comes from David Adelman with Morgan Stanley.

Hi, good morning, everyone.

Hi, David.

The comment, Jerry, you made about a lower soup bill or trade bills by your customers, what do you think that reflects?

Is that reflective of lower expectations by them about soup consumption this season?

Is it a reflection just of secular movement toward lower trade inventory levels, or is it something else?

David, we believe that it's part of the secular movement toward lower inventories. This is something that, you know, we've been seeing, frankly, for a while. You know, clearly looking back over the last 12 months, we, you know, we've seen a consistent trend toward lower inventories, and it continued this quarter, and, you know, this is -- I think it's consistent with, in fact, what you're hearing from a lot of other branded food manufacturing companies.

So, again, we're -- we're, in fact, saying that, you know, we've seen the trend as well.

Okay. And could you step back from the seasonal and 9/11-related issues year over year an just assess the state of the soup business today?

I recognize that a lot of the initiatives are still to come, but the shipments are down versus two years ago.

David, this is Doug. I was waiting for that question.

First of all, obviously, we're disappointed in the first quarter results. I think we've consistently counseled you all that this was going to be a challenging quarter, so we weren't completely surprised by it.

The simplest way to do it, for me, is to look at our key RTS, ready-to-serve brand, and see how we feel about their brands relative to their competitive posture, let's say versus Progresso, and if I look at RTS first, basically for the quarter, we're virtually flat on Chunky and Select, and if I look at it versus two years ago, we're up in the double digits. If I look at it versus three years a, we're up substantially more. So I feel good about the RTS portfolio, and we're just -- very unusual quarter a year ago when we were up 17%.

The broth piece, I can also look at and say there's some timing chains verse Thanksgiving and even on broth, with the timing changes on Thanksgiving versus two to three years ago, this quarter versus two years ago, or three years ago, broth is very solid as well. That all roads lead me back to the same conversation around condensed soup. And condensed soup, obviously, is the challenge, and what this continues to show, the kinds of trends we're seeing now, is if we don't do any -- if we don't do something substantial to change the price proposition, we'll continue to see erosion of this part of the portfolio, which is why we said we have to innovate around product and packaging and why we said it has to be a fully integrated effort. That is what we continue to drive for. All of our consumer testing tells us if we can upgrade the product and upgrade the package, we can maintain a competitive position. Nothing's changed in that regard. The only thing that's changed is that we're -- I think everyone's more clearly just seeing now more than ever before that the -- that if we don't do that, we're terribly vulnerable.

So, we're moving forward on that front. We have confidence in it. The first benefit upgrades starts to meaningfully flow in the market in the second quarter. I think over the balance of this year, you'll see a substantially improved trend on condensed, and as we go into the first quarter of next year, when we get the full impact of all the benefit upgrades and all the packaging upgrades in place, with the marketing, we're very comfortable with our proposition of targeting to stabilize condensed, but not until then, and in the meantime, we have to manage the portfolio very smartly. We have to manage costs very smartly, so that we don't let this thing spiral out of control, and we'll do that.

I guess if I had one clear thing to talk about on soup, I'd talk about the innovation program we've got going, to -- part of fixing condensed is stabilizing condensed, but that won't take us to the promised land. We clearly have to innovate, and I'm encouraged to see that the innovation we did around Supper Bakes last year is maintaining its momentum this year, and we're very excited about our Soup at Hand proposition. We finally listened to Jane Marching and we've gone convenient, and we're getting terrific traction in the marketplace. In my opinion, we're going to sell all that we can make this year, and it's a terrific platform for further growth.

So I look at our current RTS portfolio, I feel like -- I feel it's solid and well positioned and very competitive, and by the way, if you look at our RTS portfolio versus Progresso's, versus two years ago, three years okay, you'll see that Chunky and Select are outperforming Progresso, so I feel good about RTS, condensed a challenge and until we get the approach up and running, we'll have to slog through it, and then I'm encouraged by the innovation that we going and more to come.

I guess across the whole portfolio, we also have an important shelving initiative that we have tested and tested again with customers, that shows that if we make this area easier to shop, we are going to get lift for the category, and the category's going to be driven by its success with private label and with our brand. We're on track to get 13,000 stores up and running with this new approach by the end of December. It's just starting to hit. The biggest impact was felt in October. We're seeing getting traction in November, and we expect to be fully operational in December. So we've got the shelving coming together. We've got product portfolio strategies coming together. But unfortunately, as we've said before, this is a long-term fix and it will take us until next fiscal year to get all the pieces coming together and fully functional.

Thank you, Doug.

Jesse, next question.

Thank you, sir. Our next question comes from Harry Bizens with Bear Stearns.

Harry.

Well, I guess that evens out the [INAUDIBLE].

Hi, Harry.

Good morning, everyone.

Back on the condensed, obviously this is the second year of a three-year plan. You do face some pretty easy comparisons. As I'm looked at condensed, you're up against minus 13 in January, minus 3 in April. Now, given the fact that, you know, we are going to start advertising heavily here on the improved line, presumably in December, what kind of condensed performance are you looking at this year?

Do you think this year we can reach stablization, or is that more a year three go?

Well, you know, the -- Terry, this is Doug. The optimist in me says that that is achievable, but we can't plan on that basis. We have to be realistic here. And we're managing it -- we're targeting to stabilize but we're managing it with the expectation it will be a tough challenge until we get all of the marketing pieces coming together, which isn't until next fiscal year. But given that we do have some easy comps in a few key months, we think maybe there's some upside there, but we'll wait and see on that. We've got to be practical.

Okay. But the target is zero this year, you obviously hope to do a bit better --

We hope to be better. That's the aspiration, but that's not the target. The target is substantial improvement versus where we've been.

Okay. As you referred to the price value equation, which I think is very important here, obviously you're making the commitment to drive the value part of that but as we go further in this year, and particularly with Progresso now selling at 99 cents a can, which makes it very tough on condensed. Harry, we never say never, and we are going to use all the tools in our tool box. Do your plans include any provisions for maybe a price cut on condensed?

Harry, we never say never and we are going to use all the tools in our toolbox. And if we ever get to a point where we feel we have to be more price competitive on a particular item, we will be. Right now, that is not part of the strategy we've articulated, so we're going to go forward independently. I feel good about where we -- the way we have competed versus Progresso over a two-year or a three-year basis, to get to this first quarter, and so I think we can weather the storm here. But obviously, if things change, then we'll change our tactics.

Okay, and just one last thing. I was a little bit surprised to see marketing come in flat this period given the kind of year we're looking at. Wouldn't you expect in the second quarter marketing to sales to increase on a proportionate basis?

Shouldn't, particularly given the advertising, I don't know how much of that you absorbed in October, but, you know, shouldn't we see a much stronger increase in marketing relative to sales in January?

Yeah, Terry, you will see a much stronger marketing program in the second quarter.

Yeah.

So, you know, we confirm your question.

Okay. Okay, thank you very much.

Okay.

Next question, Jesse?

Your next question comes from Bill Leach with Banc of America Securities.

Good morning, everyone.

Hi, Bill.

I have a couple of specific questions. Your SG&A was down about 10% year-to-year and corporate expense was down about 35%.

What was in that?

Is that just cost cutting?

No, the culprit expense reduction was driven by compensation expense comparisons, but it also included -- we had some one-time strategic corporate projects a year ago that are behind us.

Bill, this is Doug. When we were -- when we were trying to get our footing here at the company, we took a comprehensive look at the business through the better part of the first quarter of last year with significant consulting help, and we're lapping some of that.

Normally your corporate charge has been $30, $35 million per quarter, and this quarter it was $20 million. What should we model going forward?

It's going to be on average between the 20 and 30 levels. Maybe in the middle.

Okay. What about the drop in SG&A?

Is that the same thing?

Bill, I think some of that is, as Doug said, lapping one-time costs of a year ago, and I also think there's some timing associated with that, and then thirdly, again, is the -- is, you know, the concept of us managing, you know, this largely discretionary area pretty progressively as a company. So there's a number of things playing out there.

And, Jerry, what do you think the tax rate will be for a full year?

The tax rate we booked for the first quarter is our current estimate for the year.

The 32-6?

Yes.

That's one percentage point below what you were saying before, isn't it?

That's about right. That's correct.

But you're not changing your EPS guidance?

We're not changing our EPS guidance, that's correct.

And in terms of your outlook for the second quarter and the balance of the year, can you give us a rough idea what soup volumes you're projecting to give these earnings forecasts?

I'm not going to go in detail there, but clearly we expect them to be improved and, again, we're going to leverage, as Doug said, easier quarterly comparisons as well as strong marketing programs.

But you can't give us a number?

No.

Okay, last question I have, Doug, can you comment on private label?

Last time I saw, private label was up to 17% of category volume, and just a couple years ago, it was 7%, 8%. What are your plans to be more competitive versus private label?

Good question, Bill.

First of all, you know, and we've all done this before, we look at private label in a host of categories. We tend to see it reaching that 20% level, and I think the first thing you're observing is that the private label kind of soup numbers are coming up to what I would call in a ballpark way comparable levels of other categories, and we're not surprised by that.

The key -- the key for us to compete with condensed soup versus private label is to be completely differentiated in a way that's consumer visible, which is why we're going to the product upgrade, but also, quite frankly, why we're going to the packaging upgrade with the easy-open cans. We have to have a product proposition that is completely differentiated.

And right now, the level of differentiation versus private label is just insufficient. Everything we've seen says that if we can create the differentiation that we're talking about with product and package, we can hold our own versus private label and basically private label will find its own threshold around the 20 -- you know, 15% to 20% levels, and so, the key is differentiate product and package and to leverage the Campbell equity in intelligent marketing propositions.

You don't think the market is sending you a signal about pricing differential?

Well, I don't think -- I'd be interested if somebody could show me someone who can win the price game versus with your competition being your customer. That is a challenging proposition. If we ever get there, we'll endeavor to tackle it. Everything we've seen says we can innovate to a level that will be difficult if not impossible to match, and we're going to go that road first.

Okay, thank you.

Next question, Jesse?

Thank you. Our next question comes from John McMillan with Prudential Securities.

Good morning, everybody.

Hi, John.

Just a follow-on to Bill Leach's question. The tax rate guidance was given in January. Bob, what specifically happened between -- I'm sorry, between September, when you gave the tax rate guidance, and now to lower the tax rate so much?

John, we have some favorable state tax audits come to pass.

And the earlier guidance was pre-FAS-142.

Does FAS-142 add to the lower rate?

It lowered the rate.

Seven to eight-tenths.

But wasn't that in your guidance in September?

Our guidance was always before FAS-142, John. I think we -- if you look back, I think you would -- you would see we specifically said that.

Okay.

Obviously, you expect the tax rate to drop given the fact that, you know, your EBT has increased relative to the lower amortization.

Okay. But it's dropped two points here from --

Right. Part of it is due to FAS-142, and part of it is due to the fact that we've had some very favorable state tax audits. Come our way.

And just this specific response to Progresso's promotion, I know you're the one with the 65 share, you don't necessarily have to be responding to every promotion, but to the extent Progresso was so aggressive and, I guess, remains that, specifically what -- have you altered your plan in response to this move at all?

John, this is Doug, and the answer is really, no. We have set up -- we knew we were lapping an unusual quarter a year ago, and our program is really loaded for the second and third quarters, and it will come to pass. It's already starting to show up, I think, when you get into the weekly data. And for the weekly consumption data, and I think you can see as our programs start to get to get traction, you know, if you look at the weekly consumption data, you'll see Progresso slowing down. So we're just going to play the hand we have, and we feel comfortable that we can compete with it.

Okay. Hopefully you think this is a fair question, but, you know, in July of 2001, you laid out some specific targets in your transformation plan. You said you were fully on track a year later, just read the annual report, it talks about working the plan, and maybe we're too all bottom-line, short-term oriented but the plan specifically said 8% earnings growth beginning in 2003. I guess I just don't understand how you can say you're fully delivering when, you know, you're not.

John, I think, whether it's a fair question or not, it's a good question. My sense is this is a slower build than we had hoped it would be. We got off to a rocky start and an unusual year last year. We launched our formation plan into the teeth of 9/11 and then had a warm winter and had a lot of start-up challenges, and that's all water under the bridge and that's all behind us.

We played through it, delivered our EPS target. We have given EPS guidance this year. We're saying we're going to deliver that target. We wish it was more. Perhaps there's some upside to it once we get traction in the marketplace. We continue to believe that if we launch -- we launched in July 2001, a 12-quarter plan, we're in quarter five. We feel like the worst is behind us, the best is in front of us, and we know we need to deliver substantially improved performance over the last seven quarters of this plan, and we will, you know?

Yeah.

And I wish we could do it faster, but this is a major turn-around, and we delivered our number last year, albeit in a way with not the kind of quality we aspired to, but we delivered it. We will deliver our number this year, and it will be improved versus last year on both top line and bottom line, and we will -- we'll have a terrific 2004, because it will all come together, and I'm more confident now, quite frankly, than ever before. And you'll see these things starting to materialize in the second quarter, and then by the time we get to Cagney, you'll see a soup company with a lot of excite many, a lot of potential, and potential you can see, feel, and touch.

Okay, thanks a lot.

Next question, Jesse.

Our next question comes from Mitch Anerowitz with James Montgomery & Scott.

Good morning.

Hey, Mitch.

Where do you stand with resetting the store shelves?

Mitch, this is Doug. We had a target for the soup season, our brief setting 13,000 stores. There were six pieces of the shelf sets, most of which had to do with getting parts of the shelf reset, like the RTS second or the condensed section, getting -- and getting private labels set properly. We will have five of the six key parts of the shelf reset in 13,000 stores by the end of December.

The one place where it's taking longer is getting the signage that we profiled at our July meeting. The signage is up in approximately 6 thou stores. We're targeting to get it in 14,000 to 15,000 stores. The balance of the stores where it's not yet being scheduled to be set up by December 31st, all those chains are testing the idea in meaningful sets of stores before they've been willing to go to the signage. But everything else will be reset by the end of December.

What is the -- what are the -- what are the results of these tests? -- where you've had the --

Well, the results -- we're seeing this is a major reset for a customer, so a customer wouldn't do it unless they saw the upside to the proposition. And what they've seen is that the category will grow incrementally, independent of anything else, in excess of at least 2%, and they've seen that the growth is driven by Campbell and private label because those two sections are the -- are much easier to shop in the new configuration. And so, that's what they've seen. That's why they're changing, and it will be fully operational as we get into January, and it really didn't start to flow in in a big way until October.

How about, just going to the smaller [INAUDIBLE] Splash system seems to -- I don't know, [INAUDIBLE] and other juice -- what are the plans there with Splash?

Is that something that you need to, you know, find a distribution partner for?

Where do you stand there?

Well, continue to look at our all of our strategic options to get the Splash business to a higher volume. Even where it is at now, it's still one of the top 10 products launched in the last decade in terms of the kinds of sales volume it's maintained. But albeit, it's way down from where it was and we need to address it.

We have created a business unit to focus on getting single-serve established across a broad range of channels, and we believe that now that we're focused internally to make that happen, we have an opportunity to advance it. Additionally, we have the V8 Smoothie proposition, is some much-needed innovation to that part of the V8 franchise, and the customer response been very enthusiastic, and that starts shipping in January, so we think we'll bring some new news to the V8 category, which will help V8 base and V8 Splash.

Is V8, is that also a fiscal '04 kind of story there?

Well, we expect V8 performing well now, and the beverage numbers on consumption are hanging -- are doing reasonably well, and we expect V8 to have a solid year this year.

And one more, what about this confectionery -- I thought you'd have some better operating leverage with this volume approach in that area. But what was the reason for not seeing that this quarter?

Well, the issue -- the issue we continue to challenge is the Godiva franchises recovering versus 9/11, but we still have a weak economy which is affecting, you know, the entire retail sector.

How about on Pepperidge Farms?

Did you have higher margins in Pepperidge Farms --

Pepperidge Farm margins are actually up. We do have some start-up activity associated with the new bakery we're building, but Pepperidge Farm margins are solid.

Actually, one more thing, could I for modeling purposes just assume the same type of distribution of FAS-142 adjustments than last year's quarters to make them comparable?

Mitch, let's cover that offline. I can give you the breakdown by quarter.

Okay, thank you.

Okay.

Next question, Jesse.

Thank you, sir. The next question comes from David Nelson with CSFB.

Good morning.

Hey, David.

Good morning.

A couple years ago, I think it was pre-Doug and team, I thought I recalled Campbell holding back on marketing until the second quarter when things were colder, but it didn't work out well, and the reason given was consumers had already stocked their pantries. Is there any concern here about that with the little later scheduled marketing program?

David, this is Doug. We've taken a close look at the pantry bill, and we don't feel the pantry -- there's any problem in terms of pantry activity as we go into the second quarter. We've lined all of our activity up to be in the heart of the season this year, and we think over the next two quarters that's going to prove itself to be the right strategy.

There is no pantry issue at this point. Okay. Is there any update for us on the search for a new head of soup?

The search continues. But I will say this. We have a company focused on soup, not just an individual, and I feel very good about the team that's managing it. We also have learned McWilliams, who was our Chief Customer Officer, still is, but he's taken over the oversight responsibilities for North America soups. He's intimately familiar with what was going on in the soup franchise from his sales responsibility, an he's demonstrated the capacity to provide the leadership we need as we go into this season. Very pleased with the contributions he's making.

As you may recall, he was Senior Vice President/General Manager of Minute Maid before he came here and he has good credentials to lead the soup business for us.

Great. Thank you.

Next question, Jesse

Thank you. Next one from Andrew Lezard from Lehman Brothers.

Good morning.

Hi, Andrew.

One or two quick ones. You had mentioned in the opening remarks around changes in mix impacting the margins. I wonder if you could throw a little more color on that?

Well, clearly, you know, there is a mix away from condensed.

Okay. So the condensed from ready to serve differential?

Right.

Okay.

And I think that's primarily the -- you know, the biggest mix issue.

Okay. And then, with respect to just a little more comment on pricing, I think as Doug termed it, you'd certainly, you know, take a realistic approach and use all the tools in the tool box and what have you, it just seemed like that was -- tell me if I'm reading this wrong -- that's a somewhat more of an open and/or realistic approach to maybe use pricing in combination with all the broader innovation you're doing to get to a better price value equation. It seems like that's a more open attitude towards it than maybe you had talked about previously.

Andrew, I think we're not going to really get into the specifics on pricing. That's an area we don't really want to get into. I think you'll have to read into it what you want to, but we won't comment specifically on any kind of pricing action.

Okay. And then the last thing is in terms of innovation beyond what you've talked about, I think obviously in '04, a lot of the new higher-quality product will be out there in full force and all that, and I know you have a longer term pipeline beyond that, while there may not be specifics can you talk about, are there other conceptual things you can talk about, where you go from there once the initial packaging and quality upgrades are done?

I think that's incumbent upon us to bring that forward to the marketplace and we're going to do that when we get to keg. We're in the process of trying -- of making sure our strategic plans are nailed down and we'll be ready.

Okay, thanks very much.

Next question, Jesse.

Thank you, sir. Our next question comes from Leonard Titleman with Merrill Lynch.

That was better than I could have hoped for.

You're not Lanard.

Not yet anyway. Doug, I'd like a little bit -- you answered the question, I think, on the reset, but how this is going to be set up to brand Campbell and shop private label easier. Are we talking about increase in linear feet or how is that going to work?

Len, basically what's happened, if you think about it, it's really basically in the same -- we would like more square footage in some accounts and we're getting it, but if you think the way private label has evolved, originally when private label started, there were just a few SKUs, a low-share player, and those SKUs were checkerboard placed next to the high-volume SKU that we had.

Right.

Now, they've created enough critical mass in private label, and they have enough of a following where it's easier for somebody to shop if they create a brand block around private label. So it's now big enough where it makes sense to be shelved as its own brand. And where we see them doing that now, they are seeing increased lift from private label. By pulling it out of our set, it also makes our set easier to shop, and our set also benefits.

So that's what you're seeing. You're seeing this moving from this checkerboard approach to a brand block approach now that private label is big enough to warrant its own brand block.

Okay. I think we've beaten the price thing to death, but in other sets like this, obvious it points out the price difference across all product line. In the varieties, and I don't know if that puts pressure or not on your prices, but I guess we'll wait to see.

Second thing I'd like to ask about is on the pension plan. You've now switched to a positive shareholders equity. I presume all the adjustments are over. Are you going to prefund anything into the pension fund in '03?

Len, it is -- it is very doubtful that, in fact, we'll actually cash fund the pension plan in '03. You know, there's a possibility of us funding a little bit in '04 and, frankly, the way it looks right now is that we'll have to make a -- a cash contribution in '05.

Okay. You're budgeting no need for cash contribution --

in '03.

In '04?

No, '03. I said in '04, we're still taking a look at it, and, again, boy never say never about '04, but right now, it looks specifically like we'll have to make one in '05.

Okay, I appreciate it. Thank you very kindly.

Okay.

Jesse, next question.

Thank you, sir. Our next question comes from Forrest Temple with Flyline Partners.

Hi, guys. I wanted to -- maybe I missed part of this earlier, but I wanted to see what your thoughts were when you said when Bill was talking about the drop in SG&A, the drop in costs, you talked quite a bit about things you mentioned compensation, were there self issues where you all did not have incentive compensation because certain levels weren't hit, or was it an overall that executive management take a cut?

Where's the compensation coming down from?

If I can just pick up on -- because we didn't actually discuss SG&A in the prepared remarks, and I think the SG&A comment from Bill is coming from as reported statement of earnings attached to the press release where we show SG&A down from 444 to 404. That selling general includes marketing expense, and one of the primary drivers of the reduction is the fact that we are no longer amortizing goodwill. The amortization is in the base in that number, and that's $17 million.

So I don't think the SG&A movement itself is as significant as Bill might have been reading it. Because of marketing in that line as well, and if you took out marketing expense, below the line, and the amortization, the SG&A movement is not that great.

Well, what about the compensation, though?

You guys did mention on the call on compensation. What were the movements on compensation specifically?

Of the unallocated expense reduction we --

You mean qualitatively?

Yeah, if you guys can give us some more color in terms of one of the reasons why expenses were down so much, you mentioned were compensation, and I want to know where.

Basically, we have moved slightly away from stock-based compensation for this year, more into cash incentive compensation, and that has moved some expenses around the P&L, so there's a slight favorable impact on the SG&A. Overall levels of incentive compensation have not changed meaningfully. And that's primarily -- it's more of a technical explanation, but that's -- that's the explanation.

I also, again, just want to leave the thought that when we look at SG&A and the fact that we don't report that specifically in our quarterly earnings, but, in fact, that is well under control. It's basically flat quarter to quarter, and, again, I think it is signifying the fact that, you know, it specifically is an area that we do spend a lot of management focus on.

Okay. So instead of -- instead of doing shares where you guys are doing more on the cash basis, and that moves it somewhere else than your income statement?

That's correct.

And where should I look for it now? Is it now just across --

It's on -- it's on every line that basically has people associated with it.

Okay, I'll follow up with you offline.

Jesse, how many more questions do we have on the line?

Sir, we have two follow-up questions.

Okay, we'll take those and then we'll stop.

Next from Jane with Smith Barney.

Hey, Doug, thanks for the plug. Can I apply for the soup job?

I already did, Jane.

You got to get right behind Len, Jane.

Or Lanard.

Okay, on pricing, when you were asked about condensed pricing and you said never say never, boy want you to say never on that, because I guess I'm having a hard time understanding why -- let's just talk theoretically --

I'm just going to cut in. I really can't -- we're not going to explore the pricing proposition. I think my comment, I would suggest you are reading more into that than may be there. We consider all of our options all the time, and that's as far as we're going to go on the pricing discussion.

Well, that shut me up.

Well, just --

That's my direct --

And Len waving a baseball bat by me right now.

Okey-dokey. All right, well, we'll see you --

All right. I'm sorry. Thanks.

Okay, next question, Jesse

And our last question comes from John McMillan with Prudential Securities.

You won't try to shut me up, are you?

John, boy never do that.

My wife finds it difficult --

There are certain things we just can't talk about and pricing is one --

Yeah, I guess I want some comment to the stock, Doug. Because the stock up until today has just been so weak, and I guess without any share buy-backs and so forth, you know, all can you do is kind of watch it. But at the same time, from a personal standpoint, have you been frustrated?

And then, just kind of a second point, maybe you can't talk about it, but your stock is underperformed other food stocks that have been involved in consolidations, so forth. To the extent I always hear this working the plan and the plan and the plan, you know, how do you feel about consolidation longer term and what you're seeing industry-wide in terms of companies merging together, how it's working to create shareholder value and power?

Particularly in a retail world where all these supermarket stocks are getting annihilated, and you just get the feeling it will get tougher.

John, that's your assessment, I respect your assessment. It is a tough marketplace. All I can say is the plan we're working, we feel it's going to create shareholder value over time and it's a superior option. If someone presents a better option to us, I guess we have to consider it. But we have yet to see it. We feel very good about the plan we've got.

You're right, it's a very tough environment out there. The peer companies are struggling to create top-line growth. Interestingly, we did an analysis looking at the S&P food group, in terms of organic growth, and despite the challenging year we had last year, we were the fastest going diversified food company last year in terms of sales growth.

So it is a challenging proposition, and we've got to play through it, and we will, but we're comfortable with the direction we've had. I can't speculate on what else is going on.

Are you including acquisitions in --

No. No.

Okay, well, I'd love to see that, Bob, if you want to -- if you want to pass it on. Obviously, I think Kraft probably did a little bit better but --

Well, yeah, they're not -- we'll -- we'll follow up with you. There's an S&P food group we track, our organic performance relative to theirs --

But consolidation is not in the plan?

Consolidation is definitely not in the plan.

Okay, thank you.

Okay, thanks, everyone, for joining us this morning. If you have follow-up questions, you can call me at 856-342-6428. Good afternoon.

Thank you for join today's conference call, and have a nice day.