金寶湯 (CPB) 2003 Q2 法說會逐字稿

Good morning, and welcome to the Campbell's Soup second quarter earnings teleconference.

Following today's presentation, there will be a formal question and answer session.

At that time, instructions will be given should anyone wish to ask a question.

Until that time, all lines will remain in a listen-only fashion.

At the request of Campbell's Soup, today's conference is being recorded for replay purposes.

Should you object, you may disconnect at this time.

I would now like to turn the meeting over to today's host, Mr. Leonard Griehs (ph).

Sir, you may begin.

Thank you.

Good morning, everyone.

Welcome to Campbell's Soup Company's second quarter fiscal 2003 conference call.

With me this morning are Bob Schiffner, SVP and CFO, Jerry Lord, VP and Controller;

Shelly Shoecraft (ph) and Brad Schneider (ph), Assistant Controller, who will be taking Sally's responsibilities as Sally moves on to a new assignment as Chief Financial Officer for our new Growth Division.

Also participating today in the question and answer session will be Doug Conant, President and Chief Executive Officer.

You should have our press release and our fax sheet, and those will be referred to in the call.

If you do not have the fax sheet, you can get one by calling Cindy Aguiro (ph) in the investor relations department at 856-342-6428.

Our call this morning will last approximately one hour.

If you need to listen on the replay, you can call 1-800-884-1530 approximately two hours after this call is complete.

It will run through midnight, February 17th.

You may also listen by logging on to our Web site, www.campbellsoup.com, and clicking on the Web site banner.

As a matter of policy, our calls are open to all investors and the media.

This discussion will contain forward-looking statements which reflect the company's current expectations about its future plans and performance, including statements concerning the impact on sales and earnings of marketing investments and strategies, new product introductions, and quality improvements.

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 statements made by the company.

Please refer to the company's most recent Form 10-K and subsequent filings for a subsequent discussion of the risks and uncertainties.

The company disclaims any obligation or intent to update the forward-looking statements in order to reflect the events or circumstances after the date of this discussion.

Now, before Jerry Lord gets into the second quarter results, Bob Schiffner, our Chief Financial Officer, has a few introductory remarks - Bob.

Thank you, and good morning, everyone.

Before Jerry takes you through the results, I would like to give you my perspective on our performance this quarter and offer some comments on our comments about the transformation plan begun in fiscal 2002.

First let me talk about soup for this quarter.

Soup shipments in the U.S. for the quarter were up 4% versus a year ago.

We targeted even stronger gains in U.S. soup for the quarter and we got off to a very strong start in November and December.

However, shipments slowed in January.

From a ready-to-serve perspective, we consciously decided not to participate in deep discounting practices which, in the long run, erodes brand equity and our margin dilutive.

Our game plan for ready to serve continues to be one of building consumer value through product innovation and packaging convenience.

We remain highly confident that this strategy is working as both ready to serve soups and broth continue to show positive growth this quarter and year to date on top of strong growth last year.

Soup at Hand, our highly new innovative soup products, got off to a strong start with solid trial and repeat purchases above expectations.

This new product line is proving to be highly incremental by expanding out-of-home usage occasions.

From a condensed perspective, promotional programs were in place this quarter, but execution and resulting lists from these programs fell short of expectations.

Where we've added meaningful consumer value in our vegetable and fun favorites product lines, consumer purchases improved dramatically.

This performance reinforces our decision to significantly upgrade both product and package in our condensed business through our Easy O and Cold Blend initiatives.

These initiatives will be fully executed in fiscal 2004.

Our away-from-home soup business showed growth in the quarter across all soup formats -- canned, frozen, and refrigerated.

In Canada, our business is achieving solid results.

Turning to the balance of the portfolio, in sauces and beverages, Pace Mexican sauces, V8 Juice, and Campbell's Tomato Juice had strong shipments this quarter.

You may recall that the increase in marketing is part of our transformation plan funded advertising for Pace and V8.

This has produced growth for the second year in a row for these high margin businesses.

In biscuit and confectionary, Pepperidge Farm continues to perform well in all segments, and Godiva sales improved this quarter and for the first half.

Initial startup issues surrounding the newly reconfigured Araout's (ph) biscuit plants in Australia have slowed our momentum there, but we have seen recent improvement.

In the past year we have talked to you about the weakness in some of our European businesses.

We have made changes in our portfolio that have impacted sales negatively but should deliver improved earnings in the future.

Specifically, we are discontinuing unprofitable private label business and putting more resources behind our brands.

In the UK, the Home Pride sauce business showed improvement following a weak first quarter.

This year, our European dried soup business has overcome aggressive competition and this quarter achieved good results in Germany and the Nordic region.

From a corporate perspective, we have continued to generate very strong cash flow.

And since we began the transformation plan, we have paid down over $400 million of debt.

Let me conclude by saying that, while we are optimistic about the future, we are not satisfied with the present.

We are encouraged by the progress we have made since we began the process in fiscal 2002.

However, we still have much to do.

We are still very committed to the transformation plan and believe the initiatives in the plan will lead to rebuilding share owner wealth.

I will now turn it back over to Jerry, who will review in detail our second quarter performance.

Good morning, everyone.

First, a few comments about the presentation of our second quarter and first half numbers.

As of the beginning of this fiscal year, the company adopted FAS 142 goodwill and other tangible assets eliminating most of its amortization on a prospective (ph) basis.

In addition, in the first quarter, the company recognized a one-time non-cash goodwill impairment charge of $31 million after taxes or 8 cents per share related to stock (inaudible) which was acquired in 1988.

FAS 142 does not allow for historical restatement in reported results but for the discussion of performance, and in the fact sheet, we will refer to Q2 and 1st half fiscal 2002 results as if restatement had occurred.

Therefore, for comparative purposes, prior year second quarter earnings were 53 cents as opposed to the reported 49 cents.

The 53 cents excludes 3 cents of goodwill amortization and approximately one cent from charges related to the Australian manufacturing reconfiguration.

Similarly for comparative purposes, prior year first half earnings were 99 cents as opposed to the reported 91 cents.

The 99 cent excludes 6 cents of amortization and approximately 2 cents for charges related to the Australian manufacturing reconfiguration.

Now let's turn to the results for the quarter.

Sales finished up 6% for the quarter, up 2% excluding currency and acquisitions at $1.9 billion.

Earnings before interest and taxes was $385 million, up 3%.

Sales for the quarter breaks down as follows.

Volume mix was up 1%.

Pricing added 2%.

Promotions deducted 1%.

Currency added 2%.

And acquisitions added 2%.

Gross margin rose from 44.7% to 45.0% as productive gains and moderate pricing more than offset inflation and ingredients packing materials and client costs.

Total marketing was up 6%, 2% before the impact of currency and the acquisitions.

Selling and administrative expenses increased 21%, 16% excluding currency and acquisitions, reflecting shelving initiatives in U.S. soup, increased research and development resources behind product innovation, and the ongoing impact of investments in both systems and people to improve our capability to execute.

Our allocated expenses were $29 million versus $33 million a year ago.

Net interest expense was $46 million, up $1 million or 2% versus year ago.

The tax rate for the quarter was 31.9%, down from last year's 33.2%.

Our first half rate of 32.2% is what we expect for the year.

The year over year difference is primarily due to favorable resolution of certain state tax issues.

Diluted earnings per share was 56 cent versus a comparable 53 cents a year ago.

Now let's turn to operating highlights by segment, starting with North America soup and Away from Home.

Sales of $824 million were up 1%.

Operating earnings of $209 million were down 4%, reflecting increased promotional spending, principally behind (inaudible) and the improved vegetable varieties of vegetable soup.

Also increasing spending behind U.S. shelving initiative, product development initiatives and continued development in people and systems to enhance execution capability.

Let's take a closer look at soup volume.

As previously mentioned, U.S. wet soup shipments were up 4% over a weak quarter year ago and down 2% for the first half.

We had some weakness in January that Bob has covered in his remarks.

Aside from that, momentum clearly improved across the quarter as a result of key initiatives.

Shipments of condensed soup for the second quarter declined 3%.

We launched the marketing initiatives behind the improved vegetable varieties and saw a significant change in performance.

Additionally, our line of fun favorites, condensed soups targeted especially for kids, showed marketed improvements with goldfish-shaped noodles.

For the six months, condensed soup declined 9%.

Ready to serve soup shipments rose 4% for the second quarter and 2% for the first half, driven by the launch of Soup at Hand.

Campbell's Chunky Soup had increased shipments in the quarter, reflecting new varieties and the continued successful advertising and tie-in with the NFL.

The ongoing upgrade of Campbell's Select Soups drove growth on this business.

We're very pleased to see this brand maintaining its momentum since we restaged it 18 months ago.

Campbell's Soup at Hand continued its rollout with television advertising and strong promotional programs expanding distribution and driving trial.

Although it is still early, we're enthusiastic about this new platform for soup, which captures out of home consumption opportunities.

Swanson broth shipments were up 20% for the quarter, partially due to later timing of Thanksgiving shipments and a good holiday period.

Shipments for the hearth were up 7%.

Looked at on a cooking and eating basis here is how the shipments ended.

Cooking soups rose 8% for the quarter and rose 2% for the first half.

This increase was driven by Swanson Broth.

Eating soups were up slightly for the quarter but were down 5% for the first half, reflecting declines in condensed eating soups for the first quarter.

Canada reported sales growth versus year ago as all major product lines showed positive volume growth.

Sales for the away from home business in North America were unchanged versus last year, but mix improved significantly, as soup shipments grew double digits while frozen entrees declined.

Now turning to North America sources and beverages.

Sales were approximately even at $318 million versus $319 million last year.

Operating profits rose 20% to $84 million, primarily due to lower manufacturing costs and lower marketing spending relative to leave spending in the second quarter year ago behind the introduction of Prego Pasta Bake Sauce.

Sales gains for Pace, V8 Vegetable Juice and Campbell's Tomato Juice in America were offset by declines on Prego, V8 Splash juice drink, and Prego canned pasta.

Pace shipments grew double digit behind new marketing initiatives based on its southwestern heritage and the launch of Pace Enchilada Sauce.

Those of you attending the lunch in Arizona next week will get an opportunity to experience this southwestern heritage with the Pace Chuckwagon.

Prego was down due to the tough comparisons against consumer marketing of Prego pasta bakes last year.

Now turning to beverages.

V8 Vegetable Juice and Campbell's Tomato Juice had successful growth.

These marketing campaigns supporting the health benefits of V8 are driving growth.

We began shipping V8 Splash smoothies in January, and retail acceptance has been very good.

Advertising support will begin in the third quarter as we enter the beverage season.

Latin America and Mexico both grew sales driven by wet soup.

We are continuing to achieve positive growth throughout the Caribbean markets.

Now turning to biscuits and confectionary.

Sales for the quarter rose 14% to $486 million, 4% before currency and the acquisition of Snack Foods Limited.

Excluding the impact of the Australian manufacturing reconfiguration, earnings rose 5% to $87 million, up 4% excluding currency and the acquisition.

Pepperidge Farm sales increased across all major product segments.

Goldfish cracker shipments were up double digits, primarily driven by the introduction of goldfish colors and promotional display activity for Super Bowl.

Strong consumer demand for Farmhouse breads and distribution gains on bagels and muffins drove growth in bakery, while frozen sales increased on strong demand for frozen breads and pot pies.

Sales at Araouts were even with year ago as supply issues associated with the startup of the newly reconfigured manufacturing network were offset by the introduction of new products.

Additionally, Araout's continues to experience growth in the Indonesian market.

Araout's earnings were favorably impacted by an $8 million gain on the sale of the site of the recently closed Burrwood (ph) facility.

This gain was substantially offset by startup costs at the Hunting Wood plant and severance costs related to the integration of Snack Foods Limited with the Araout's business.

Despite a challenging global specialty retail and luxury environment, Godiva sales grew in the quarter with same-store sales up in both Europe and Asia, partially offset by continued weakness in North America.

Now turning to international soup and sources, sales increased 16% to $290 million.

Excluding the impact of currency and acquisitions, sales were even with last year.

Operating earnings declined 3% to $34 million and declined 14% excluding the impact of currency and the acquisition of Aaron Foods.

The operating earnings decline was driven by higher costs related to strategy development, investments in infrastructure and higher promotional spending.

Sales softness was driven mainly by wet soup volumes declines in the UK and Germany.

UK sources showed positive results compared to steep declines a year ago, as a relaunch of Home Pride canned sources delivered better value to consumers and resulted in improved trends.

In Germany, we have eliminated some unprofitable and low margin private label soup business.

Liebich (ph) soup sales were unchanged for the quarter due to progressive competitive activity.

Dry soup sales improved driven by strong performance in the Nordic region and in Germany, where we saw significant share recovery by (inaudible) driven by innovation following competitive attacks last year.

Wet soup volume in Australia declined in the off-season.

The broth business in Australia has continued to grow and we have maintained our overall wet soup leadership position.

We will continue to target growth through innovation in that market for the upcoming season.

Now turning to the balance sheet and cash flow.

Total debt was $3.6 billion, down from $3.9 billion in October as a result of strong free cash flow.

During the quarter, we repurchased 120,000 shares of stock to offset the impact of dilution options exercised.

Free cash flow for the first half was $380 million compared to $430 million last year, reflecting the seasonal build in working capital from a low level at fiscal 2002 year end for an accelerated capital spending pace driven by the new pep ridge farm bakery in Connecticut.

We continue to project capital spending for the year to be approximately $285 million, up slightly versus 2002.

Consistent with earlier guidance and also reflecting the adoption of FAS 142, we expect the year to come in at approximately $1.47 a share before the cumulative effect of the accounting change.

This compares to $1.44 a share in fiscal 2002, restated for FAS 142 and excluding the costs of the Australian reconfiguration.

We expect earnings per share in the third quarter to be in the range of 25 cents to 27 cents, compared to 27 cents a year ago, restated for FAS 142 and excluding the Australian reconfiguration costs.

Now I will turn the call back to Len.

Terry (ph), will you now conduct the Q-and-A session, please?

At this time we will begin the question and answer portion of the call.

If you would like to ask a question, please press star 1 on your telephone touch pad.

If you are using speaker equipment you may need to pick up the handset prior to pressing star 1.

Should you wish to cancel your question or if your question has been answered, please press star 2.

Star 1 to ask a question and star 2 to cancel your question.

Please stand by.

Questions are queued in the order they are received.

Our first question comes from Terry Bivens of Bear Stearns.

Good morning, Terry.

Good morning.

In the ready to serve segment, I'm not sure if I missed this, how did ready to serve do, excluding the Soup at Hand shipments?

Do we have that number?

Terry, we don't break it down that far.

They're included in there.

However, we did comment -- Terry, this is Doug -- for the quarter, we did comment Select was up and Chunky was up in the quarter as well as getting the incremental impact of Soup at Hand.

So that we have stated.

I guess my biggest question is the January slowdown.

I mean, I understand why you would forego the deep discounting.

Could you give us more color on that?

Anecdotally, a lot of us noticed Progresso just seems to be promoting the wheels off the business.

Is that what kind of blunted the second quarter with the expectations?

Could you give us little more color on that?

Sure, Terry.

This is Doug again.

I think we have to look at this within the context of the total RTS segment.

We will get to the January numbers quickly.

But basically, the way we're viewing it is we're viewing it as though we're making very strong headway in the RTS segment over the last six quarters of the transformation plan.

As we have released separately, last year in RTS, we grew the select business 18%, we grew the chunky business 14%.

And as we stated, we have shown good growth on this quarter with select and chunky on top of good growth last year.

On top of that, we have layered in growth with Soup at Hand, which is creating some out-of-home incremental usage indications.

At the same time, you have Progresso, who showed little or no growth last year and who we expected to come back and reclaim some of the momentum they lost last year.

In fact, they're doing that.

But over the six quarters of the transformation plan we have expanded our lead in ready to serve over Progresso.

I think the challenge for us, as we look forward, is how do we expand that lead further over the next six quarters of the transformation plan and we will get at that in more detail in -- at CGNE next week.

Overall, we feel very good about our position versus Progresso.

Progresso had a successful January.

We had a solid quarter and we have a lot of optimism about our product going forward on ready to serve.

So they had a good January and they're lapping relatively weak comps from a year ago.

Just on condensed, minus 3 versus minus 13 last year, that has to be disappointing to you, isn't it?

As Bob got into, from the condensed perspective we had promotional programs in place this quarter, which quite frankly a year ago we did not have them in place.

Execution of those programs and the lifts from the programs fell short of our expectations.

We did see that where we added value with our vegetable cluster and with fun favorites, we did get traction.

And that leads us to believe that we need to do a major innovation across the entire line to get the kind of contraction with the consumer that we want to get.

But we did get execution lists that fell short of our expectations in January.

To be clear, I'm not -- well, I'm not going to get into the specifics of retail execution but I would sum it up this way.

As I mentioned, last year in the second quarter, we did not have sufficient spending in place against our condensed business.

We recalibrated in the balance of last year and our results improved.

This year we had the spending at the right level but we simply executed our -- while we executed our strategy well on condensed in November and December, we didn't execute it nearly as well as we should have in January.

The quality of the retail support was just not up to our expectations and we're going to take actions as we did last year, to remedy this situation as we go forward.

So the program was working nicely in November/December and it did not get the traction we expected in January and we have to address that.

Okay, thank you and we will see you next week.

Thank you, Terry.

Next question?

Next question is Bill Leach of Banc of America Securities.

Welcome back, Len.

I was just wondering about the second half guidance -- if you add back the goodwill, you're basically forecasting slightly lower EPS in the April quarter, and essentially flat earnings in the July quarter, even though last year's results are nothing to write home about and it seems like the weather should be favorable, at least in the April quarter.

I was just wondering when do we expect to see the company growing again?

When you took down the earnings a year ago, the promise was you would grow from the reduced base, but it seems we're stuck here.

Bill, this is Bob Schiffner.

We are forecasting growth, okay? 147 over 144 is growth.

We in fact stand behind that.

The timing of the quarters, I really believe, is your issue.

And again, there are a lot of factors that are associated with that, and part of it is the timing of our marketing spend, which, as you know, in our industry, could lead to pretty significant swings.

So, again, you know, we believe we are growing.

That was our promise to the Street.

And, you know, we are in fact looking forward to continuing that next year.

Just to build on that, Bill -- this is Doug -- we are putting in place all the plants -- all the plans necessary to honor our commitment we have already made for 2004.

So that does require continued investment in preparing ourselves with all of the innovation requirements that we have committed to in the second half of this year.

But we're going to stand by our commitment on overall earnings growth for the year.

Doug, aren't you frankly disappointed with the volume trends given the extremely favorable weather year to year?

You have the coldest winter this year versus the warmest last year and your volume is down 6% from the last quarter, so to be up 4% doesn't seem like much progress.

Going back to what I said earlier, I'm satisfied with our RTS.

And quite frankly, the January performance of condensed was not up to my expectations.

That has to be addressed.

That will be addressed.

It's an executional issue.

This year we had plans in place.

We didn't execute well against them and we're addressing that.

We had expected stronger performance in January than we have received.

Okay, see you in Arizona.

Thanks.

Next question, Terry?.

Next question is from John McMillin of Prudential Securities.

Bob, just as a comment, this is anemic growth, and the promise coming into this was 8%, Doug, you know, and I assume when you're saying you're going to honor up to your commitments for fiscal 2004, you're talking about 8%; that right?

I'm not sure what you mean by you will honor your commitment?

I'm talking about honoring our commitment to get our top line growing and get our share performance in line with our long-term expectations.

We're going to do whatever it takes to get that equation right.

And we will get into guidance for next year when it's appropriate.

So basically this 8% number that you threw out July 2 years ago is just a longer term goal that you hope to get to?

I think that's a reasonable assessment.

As you know, the world's changed in the food industry, and we're recalibrating ourselves just like everybody else in the industry is.

When it's appropriate for us to give guidance when we have a good handle on it, we will provide it.

But I think it certainly is a long-term goal.

And as far as the R&D effort, you talked about a major innovation across the condensed line.

I guess January is not the -- or February is not the time to be unveiling new products, but can you talk -- and I don't mean to preempt what you will say next week at CGNE, but are you pleased with the pipeline and what is coming next year?

I don't mind you spending money and have having lower growth if there's more suture at hand initiatives and things of that nature.

Are you pleased with the pipeline?

John, I'm very pleased with the pipeline.

We will discuss it in Arizona.

But as you know, it takes time to build those pipelines up.

We're into the sixth quarter of the plan.

We have now rebuilt the pipeline.

Over the next social six months, you're going to see the first real benefit of all of that work, and an entirely new wave of activity that will be coming to market.

And we will talk a little about that next week.

Great, thank you.

Next question comes from Andrew Lazar of Lehman Brothers.

Good morning.

Hello, Andrew.

Two things.

One, you talked about the execution didn't match your expectations partly in this quarter.

And I want to go back to the work you've done on the shelf sets and being in the stores more often and the high volume stores.

I thought that was in large part to get much better, I guess consistent execution at retail.

I'm trying to get a better sense of what exactly fell short on the execution side?

Andrew, this is Doug again.

We had targeted to be in -- to upgrade the shelf sets on 13,000 stores at the end of the December.

We have been in those 13,000 stores and each shelf reset has six components to it.

We have addressed anywhere from one to all six of those things.

And it's a continuous improvement exercise that's going to be going forward.

I don't feel that we're fully up to where we need to be in terms of the complete shelf set but we have made excellent progress.

And where we've gotten all six of the elements into the marketplace, we have seen appreciable improvement.

But it is a continuous improvement exercise.

We have done what we said we would do on that front.

When I talk about the retail expectations, it's not only around the shelf settles, but it's also around our merchandising, both in terms of the quality of the merchandising and the level of the merchandising in condensed.

And in that case, January in particular was not up to our expectations on either front.

We did have good momentum if you dig into the condensed numbers, which I'm sure you have.

We had good momentum building in November and December.

The issue is an executional one in January.

Okay, and just a second thing.

You have mentioned it, I think, several times, that just the overall pricing structure, I think, in soup is one that -- you know, in terms of the way value is transferred to either the retailer or the consumer is a very complex one.

And I was hoping, regardless of no comments in terms of pricing but just, can you discuss why or what makes the pricing structures that stands on soup, particularly condensed so complex with respect to the retailer and the consumer?

Well, I think the challenge is, we have multiple varieties.

And we do have multiple price points.

I think there's an opportunity for us positive partner with our customers to simplify that.

Quite frankly, we're working on that right now.

But the -- I think it's really driven off the variety that we have in the section.

And any time you have that kind of variety, you're going to have some potential consumer confusion.

There are ways that can be remedied and they will be addressed.

Okay, thanks very much.

Thanks Andrew.

Next question, Terry?

Next question comes from Jaine Mehring (ph) from Salomon Smith Barney.

This is reiterating what has been said but I feel we need to get back to it, just the fact we're all freezing our butts off here plus the weak comp plus some sort of successful pipeline fill or initial acceptance on soup at hand should really, I think, have gotten you to more volume than you have.

And I know you're saying January was disappointing.

But even so, I mean, if I read your press release right, it sounds like you probably plowed something like $30 million incremental into marketing and promotion, which is a big number, and yet where is the pay back on that?

And I know you said execution, you know, crapped out in January.

Even so, prior to that, it seems like there should have been more lift, especially when I think the margins in your first quarter looked rosier than one would have thought.

So there's just this missing sort of profitability that I can't quite explain and I still don't feel I can grasp what you're saying.

Jane, this is Doug.

I have to -- I'd have to say that the quarter unfolded as we expected it to unfold with the exception of our execution in January around the trade promotion that I've already talked about and shelf execution.

The incremental spend that we did have was heavily waited on soup at hand, as we launched that product, and it's bearing fruit.

The challenge for us is to -- the same challenge we have had for the last six quarters is to get condensed back on solid footing, and we have got to manage that tactically (ph) throughout this year and we have to ensure that the trends meaningfully moderate or stabilize next year.

We're still headed in the same direction.

But, Doug, can I interrupt?

Yes.

I mean, you are -- at this point, after all of this stepping down of the earnings bar, most of which preceded you, you're basically asking shareholders to entrust you with their funds, and it just feels like in one of the single most important months of your year, you know, halfway through this plan, 18 months into your tenure, to sort of have the execution mysteriously slip away from you is not really excusable.

Know you said you're disappointed but I don't hear a sense of urgency.

Believe me, there's a sense of urgency.

The observation would be that we hit -- we did deliver the earnings we committed to and we did get 4% sales growth, and it did fall short of our expectations, and that issue has to be remedied.

But we managed our way around it in a quality way and delivered our earnings commitment.

And I appreciate that you have done two quarters in a row slightly better but you also had significant wind at your back that was not there when you know set that guidance.

Now going into the third quarter -- I mean I have to work very, very hard and make some really very cautious assumptions about segment profit to look at a scenario where you would be flat down in the third quarter and I'm not quite sure -- are you going to do higher reinvestment and why would you spend funds until you know absolutely that you're going to get a good return on that?

Otherwise I can't explain why you would have such a clamp down view of that third quarter?

Jane, this is Bob Schiffner.

Let me just give you some background on the segments, okay?

I think it's -- you know, I think one can read in too much to this segment profitability.

Let me say that, in fact, both our North American soups and international soups and sauce businesses are both being impacted by levels of what I call strategic spending that are within those numbers, okay, behind not only R&D, okay, but behind certain strategic initiatives.

And in fact we are spending money and in fact working on in terms of optimizing future strategy as well as our ability to execute in the future.

So ...

Is strategic initiatives a code word for acquisitions?

No, it's not a code word for acquisitions, and I don't think you can look at the profit performance of those segments, given that type of spending that is inside those numbers and make any fortuitous concepts about future earnings.

So again, the way that the segments have broken this year are very, very consistent with our internal planning models.

So we are very, very satisfied with our segments that were accomplishing the strategies that in fact we need to do, and it's very likely in fact that you will see a different earnings prospects for those segments next year.

Except -- and I will yield after this, but sort of what John McMillin said it's one thing to have a vision but why spend the money if you're still struggling with your execution, wait until you know that this money is going to go for a good purpose.

I mean that's really -- it's not that I'm saying you shouldn't be spending it and trying to write your business but it feels like you're squandering resources until you know you can spend this money properly.

Jane, let me add in fact one of the issues overlying all of the numbers this year was a conscious effort by us to modify our trade-spending strategy for the year.

As you know, we came off a year where we had some pretty heavy discounting being done on a promotional side.

This year we have cleaned that up considerably.

Now, unfortunately when you do things like that, your incremental volume is always impacted.

You know, at the end of the day, we have probably given us some -- given up some profitable opportunities but on the other hand, we have walked away from a tremendous number of unprofitable opportunities.

You can see that our gross margins this quarter are slightly up.

Okay, that's a direct impact of changing our overall promotional strategy.

And we feel actually very, very good about where we are poised this year relative to next year.

Because a lot of that excess has been taken out of our P&L and out of our system.

So, you know, that's a major, major positive for us relative to our performance so far this year.

And Jane, I'm just going to build on what Bob said.

The trade promotion piece is an important part of it.

Also we're putting in place all the pieces we need to put in place to deliver substantially improved performance in 2004, that's both against ready to serve and condensed and we're not going to compromise on those commitments.

We have gone through and further validated the strength of those ideas and the power of those ideas in our pipeline.

And we are going to continue to fully develop them in the back half of this year and as we have in the second quarter, so we're in a position to recognize the full impact of what we've been talking about the last six quarters.

And that's the focus.

We're going to continue to spend against it because we believe in it.

We have cleaned up this company in a myriad of ways.

We're on solid footing here.

And we are organizing ourselves to go through and deliver at a higher growth level in a more consistent manner.

And we feel very good about it.

And we recognize we have to prove it in the marketplace but we feel very good about it.

Okay.

We will follow up in CGNE (ph).

Thank you.

Our next question comes from Chris Collins (ph) of JP Morgan.

Could you provide a little more color on the growth disparity between the vegetable on condensed and non-vegetable so we can understand the impact you're getting from the product improvement?

We don't -- Chris, this is Doug, we don't get into the details of the segment, but I think in spirit, it had been declining at a double digit rate and we have significantly changed those trends since we've started the advertising and promotion program.

The other beneficiary that we have talked about in here is for the first time in two years, we added some new items to our fun favorites items which is targeted at kids, and we added two items, and that segment is actually growing nicely since that launch.

So in the two places where we've had some upgrades, we do have progress.

And it's silver lining in a challenging quarter but we do have progress there.

And then just secondly, do you expect any competitive differences with the private label business being held by Del Monte versus Hines and has there been anything in the marketplace to suggest that business will be operated differently?

No, at this point we're just going to assume we have to be in the business of ferociously competing and we will.

We're committed to having differentiated products, superior products in superior packages with superior marketing efforts and that's the whole focus of our transformation efforts on the condensed business as we exit this year and go into next year.

Okay, and then lastly, I was wondering if you could give a couple of updates on distribution initiatives that I think you had both on single serve within the beverage unit and also if there was any update on what you have been doing with some of the DSD routes on the pep ridge business.

In single serve, we have formed a unit that we talked about separately, single serve beverage unit that is now getting up and running.

And we're in the process of putting together plants -- plans for the balance of this year and next year to aggressively expand our single-serve distribution so that is coming together reasonably well.

And that -- go ahead, Bob.

Chris, I have got some information on the Pepperidge Farm distribution test.

This is in fact moving our fresh bakery products into west.

It's a joint venture with IBC, and we've just rolled into a second test starting at the end of January and we're now into the Utah, Idaho and Montana region with approximately 10 new pressure bakery products.

So, again, that opportunity continues to build and, you know, we look forward to seeing how the next round of testing goes.

Okay, thank you.

You're welcome.

Next question, Terry?

Our next question comes from Mark Hallowell (ph) of Spectrum Advisors.

Hi.

This is a treat.

I always thought the soup business would be a little easier.

I hear about fortuitous strategies.

Can you put it in laymen's terms how this cold blend technology, where you are with that and how that affects the future of condensed soups?

Sure, in 25 words or less.

In English, too.

Boy, yeah, that's a challenge.

The cold blend technology allows us to ...

I understand what it is.

So you understand what it is?

Yeah.

It has been flowed into our vegetable soup line.

It will be more fully flowed into our entire condensed line as we move into next year.

And that, combined with our conversion to easy-open packaging, which is also on target for next year is going to create an opportunity for us to have superior products in superior packages at retail as we go into next soup season.

We expect a combination of those two things plus some other things, some of which I will talk about at CGNE to help us significantly moderate the trends we're seeing in condensed soup.

All the testing we have done, all the consumer testing we have done and all of the profiling of this complete opportunity that we've done with our customers puts us in a position to believe that in fact is the case.

And that is your answer, then, to those who are making the argument that the condensed soup business margin structure is bound to decline; that a fair statement that that is the principle answer to that statement?

In other words, this will enable you to -- this technology will not impair your margins but will enable you to have the product differentiation that enables you to keep the margin structure in place?

I think our challenge -- again, we have talked about this on numerous times going forward; that we have got to manage the total margin of our soup business, not necessarily maximize margins in one area or another.

And that's how, in fact, we will continue to manage this business.

We have been on record as saying that it is likely that our margins will continue to decline probably through 2004, and we haven't changed the public comment on that.

Again, this is due to the fact that we are adding a lot of consumer benefits to our cost of products sold and again the expectation is that that is going to reinvigorate the top line and we will in fact be able to leverage our (inaudible) to offset some of that cost increase.

I can understand that.

Thanks a lot.

Next question, Terry?

Our next question comes from David Nelson of CS First Boston.

Good morning.

Hi, David.

A question on your advertising effectiveness and I recall from the last call you were shifting the timing of that from Q1 to Q2 and that you took on Doug about these execution issues.

What measures are you looking at regarding your advertising effectiveness to give you comfort there, please?

The advertising execution -- we think there's room for improvement in terms of our overall spending productivity.

That goes beyond -- we continue to optimize that.

And it's a learn-as-you-go process while you're continually rebalancing your spending, just like any other business I've been on.

In our case, we feel like we have demonstrated we have effective programs against both Chunky and against Soup at Hand and we have seen initial traction with our advertising against condensed on the new improved products.

The select advertising is something we're in the process of revisiting.

Across the broader portfolio we're getting traction with the advertising on V8 and Pace where, as you know, those two large profitable brands were undermarketed for years.

We have restored spending and optimized it and it's driving good top line growth for us.

So it's a mixed bag, David, but overall I feel like we're on the right track.

But it's learn as you go.

Thank you.

I appreciate your openness on these issues.

Next question, Terry.

Next question comes from John McMillin.

Just to get into some January data, because the Neilsens came yesterday, and I know anyway exclude Wal-Mart and they don't measure, you know -- but it does show how you're doing some 80% of accounts, Doug.

I'm just trying to estimate -- soup is a little different than mayonnaise and potato chips.

People are holding inventory.

Clearly your consumption, which is difficult to measure -- clearly your consumption was not down to this level in January and people were working out inventories.

Can you just shed some light on what your February -- whether some of these problems in January continued into February or whether or not in fact because consumption was better in these shipments in January you're getting better February trends.

Do you see my point?

Absolutely.

John, first I'm going to step back for a minute.

We talked about this with the larger group in July.

We have migrated to a trade strategy that was going to more continuity and less deep discounting.

And what that strategy has enabled us to do is provide stronger support over more weeks of the year.

And I think you will see that in the back half.

And we see a solid February.

We see a solid quarter.

And we see a solid back half.

So we're comfortable with it.

Your lack of efficiency in January might not have impacted consumption as much?

I guess I'm trying to get ...

Well, in January what you will see is our base was up and our incremental was down.

But the base was moving up.

Where we lost it was on the incremental, and that's something that I think we're going to see stronger incremental performances as we go through the balance of the year.

Because if you look at just the January numbers, and I know four-week -- we're probably wasting time talking about four-week period but private label was down ...

John, the crux of the issue is, as we tried to move to what we believe are more profitable price points not only for us but for the customers, they chose to promote private label and Progresso and the category did not grow.

The lesson here is that they need Campbell's to broaden category growth.

And we learned that lesson but so did they.

And we think there's an opportunity for us to partner more effectively and grow the category more in the back half.

You will see it really wasn't a January phenomena because the category grow and year to date the category is growing.

But if a retailer were on this line, would it be fair if he said, but, Doug, you have to sell snow shovels when there's snow on the ground.

To some extent you have to sell condensed soup in January and maybe the knob should have been turned up a little more?

That could easily be a perspective.

Our perspective is, in the work we did, we went on condensed, for example, we were targeting two for a dollar features.

We know if we had gotten that in full distribution, we believe the category would have grown more and we could have contributed to that growth.

The customers chose to do something else.

And we're all learning together on this.

This is not us versus our customers.

We're all in this together and we think we can optimize it in the back half.

You're right, about four weeks does not a year make, even though ...

This is an important four weeks.

There's no doubt about it.

Thanks a lot.

Next question comes from Mitch Pinheiro (ph), Janney Montgomery Scott.

I wonder if you could quantify the take away or however you can on your new vegetable cluster since you introduced that and how did that do?

I mean you're very encouraged, but can you quantify?

Mitch, it's really too early to tell.

I can give maybe a little more color to it.

We started advertising that in December.

And we have marketing activity planned at a meaningful level for the next few months of the soup season.

What can I tell you is, we've appreciate belief changed the trend, and it is getting stronger every week.

So, you know, by the time the year ends and we have had a chance to really see six months in the marketplace, we will be in a better position to answer it.

It's just too soon to tell.

So I mean obviously it's like that is your first sort of foray in Cold Blend.

So that something that you would expect the entire condensed line or where you will make your changes to see that appreciable improvement.

Mitch, it's part of it but it's only part of it.

The easy-open lids that we're moving to, all the evidence points drive incremental volume.

When we converted our select and chunky businesses to easy open end, we got a 5% incremental lift.

When we converted our broth to (inaudible), more convenient open, we got a 4% incremental lift.

Across the lines that we -- across all the lines that we implemented those changes on.

So it's the cold blend plus the packaging change plus some new marketing efforts that are well under way that we expect are going to significantly moderate the trends in condensed as we go into next year.

Okay.

How about -- how about -- could you quantify at all what -- how much the operating profit decline was in the North American soup was attributed to sort of structural spending as opposed to promotional marketing activity?

Mitch, we're not getting into that level of detail but I will tell you there was meaningful, what Bob called, strategic spending as we are gearing up to execute the transformation plan.

Does that make the difference between an operating loss and a profit?

I mean, is it that type of meaningful?

Mitch, we're not going to get into that level of detail.

Okay.

What about -- last question, not belaboring your execution issues, but is this something where you couldn't get in the stores, not enough manpower, the retailers were resisting a little from a timing point of view?

Absolutely not.

We were in -- we were able to get into the stores and actually -- we have -- we have significantly strengthened our relationships with our retailers.

This was all around our ability to execute in one month where the level of execution in January was not where it needed to be.

It was there in November.

It was there in December.

It was not there in January.

It will be back again in February and March.

Last question, so what are you hearing from your customers regarding your '04 plans?

What is the feedback?

I will convey more of that at CGNE but there's great optimism around what we have going forward.

Fair enough.

Thank you.

Terry, we're only going to be able to take one more question and then conclude.

Our last question comes from David Adelman (ph) of Morgan Stanley.

Good afternoon, everyone.

Hi, David.

I wanted to ask you a couple of questions about Progresso.

First, with the General Mills sales force behind that brand, did they have a visible increase their merchandising presence year over year?

No.

Secondly, what is your strategy going to be if they remain with their current strategy with the price goings they have in place this winter and next winter and going forward?

DC David, we're going to touch more on that specifically when I get to CGNE.

But we intend to compete and win in ready to serve.

And we are right now and we will over time.

And we will compete with whoever is there, whether it's private label or Progresso, we will compete and win.

As I said, over the last six quarters we have expanded our lead in ready to serve and Progresso and we have expanded and are ready to go forward and I'm comfortable with those plans.

Can you give us a sense on Soup at Hand, what dollar sales that may be annualizing back?

David, the only way to tell you, when we first talked about this in July last year we said we believe it could be a more than $70 million business annually.

At this point it's too preliminary to say anything more than that.

Okay.

Thank you.

Thank you, everyone, for your attention today.

I will be in my office, 856-3428 for any follow-up questions.

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