金寶湯 (CPB) 2003 Q3 法說會逐字稿

Good morning and thank you for standing by, all participants will be able to listen only until the question-and-answer session of the call. This conference is being recorded. If anyone has any objections, you may disconnect at this time. I would like to introduce your host for today's conference, Sterling R Grace of Campbell Soup. Sir, you may begin.

Good morning, everyone and welcome to Campbell Soup Company's third quarter fiscal 2003 conference call. With us this morning are Bob Schiffner, Senior Vice President and Chief Financial Officer, Larry McWilliams, President North America Soup, Jerry Lord, Vice President and Controller, Brad Schneider, Assistant Controller and also participating today will be Douglas Conant, President and Chief Executive Officer. You should have the press release along with an additional schedule of selected quarterly financial information. These are also posted on our website, www.cambellsoup.com. This conference call will be rebroadcast. It will be accessible approximately two hours after completion and run through midnight May 22.

The rebroadcast number is 1(800)759-6899. You may also listen to the rebroadcast by logging into our website and clicking on the website banner. Our discussion will contain forward-looking statements which reflect the company's current expectations about its future plans and performance. Including statements concerning the impact 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 statement made by the company.

Please refer to the company's most recent Form 10-K and subsequent filings for a further discussion of these risks and uncertainties. The company disclaims any obligation or intent to update the forward-looking statements in order to reflect the events or circumstances after the date of this discussion. This will be our format for the call this morning. First, Jerry Lord will review our third quarter and year to date operating results. Next, Douglas Conant will have a few brief remarks. Then Larry McWilliams are highlight new initiatives for North American Soup. Following Larry's remarks, Larry, Doug, Jerry and Bob Schiffner will be available to answer your questions. Let's begin our session with Jerry Lord.

Good morning everyone. First a few comments about the presentation of our third quarter and nine-month numbers. As of the beginning of fiscal year, the company adopted FAS 142 good will and other intangible assets, eliminating most of its amortization on a prospective 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 Stockpot which was acquired in 1998. Consistent with new regulations all numbers discussed on this call are presented on an as-reported basis. We will quantify in footnotes or commentary those items that had a material impact on performance. Now, before I discuss the results in detail, let's summarize some of the key takeaways.

The momentum of our U.S. soup business showed marked improvement in the third quarter. The U.S. beverage business responded positively to the introduction of VA Splash Smoothies. Pace continued to deliver good growth supported by new product introductions. Both Pepperidge Farm and Arnott's had solid sales performance. Now, let's turn to the detail for the quarter. Sales grew 17% for the quarter to 1.6 billion. Earnings before interest and taxes increased to $235 million from the year ago 190 million. The year ago number included $17 million of goodwill amortization, which has now been eliminated under FAS 142. Let's take a look at the composition of this 17% sales growth for the quarter. Volume and mix rose 6%. Pricing added 2%.

Reduced promotional spending added 2%. Currency added 4%, and acquisitions added 3%. Our worldwide soup shipments increased 9%. Gross margin declined by one-half percentage point due to product mix and added quality upgrades offset by the impact of one-time costs associated with the Australian manufacturing reconfiguration project in the prior year. Total marketing was up 6% with currency and acquisitions accounting for all of the increase. General and administrative expenses increased 46%, or $43 million. Currency and acquisitions accounted for six percentage points of the increase. The increase in base spending was driven by a number of nonrecurring costs including legal expenses related to current litigation, bad debt expense related to the bankruptcy of a major U.S. customer, and investments in information technology and supply chain to improve our executional capabilities.

Research and development expenses increased 35% or $6 million, reflecting increased resources behind quality improvements and innovation initiatives. Net interest expense was $45 million versus 44 million a year ago. The tax rate for the quarter was 32.1%. Net earnings were $129 million versus reported $96 million in the prior year. Prior year's net earnings included $13 million of amortization, and costs of $4 million related to the Australian reconfiguration. Diluted earnings per share was 31 cents versus 23 cents reported a year ago. Reported EPS for last year's third quarter included 3 cents per share of amortization, and 1 cent per share for costs associated with the Australian manufacturing reconfiguration. Now, I'd like to turn briefly to highlight these same numbers for the nine months. Since it gives a more complete picture of how we stand going into the final quarter of the year. Sales grew 6% for the nine months to $5.2 billion.

Earnings before interest and taxes increased to $950 million from the year ago 856 million. The year ago amount included $51 million of goodwill amortization, which has now been eliminated under FAS 142, and $14 million from the Australian plant reconfiguration. This 6% sales growth year to date reflects the following: Volume and mix increased 1%. Pricing was up 1%. Currency added 2%. And acquisitions added 2%. For the first nine months, worldwide wet soup shipments increased 1%. Gross margin declined slightly by 20 basis points. Total marketing was up 5% with currency and acquisitions accounting for four percentage points of the increase. Net interest expense was $136 million versus 142 million.

The tax rate for the nine months was 32.2%. Diluted earnings per share before the cumulative effect of the accounting change was $1.34 versus $1.14 reported a year ago. Reported earnings per share for last year's first nine months included 10 cents per share for amortization expense, and 2 cents per share for costs associated with the Australian manufacturing reconfiguration. Now, let's move to third quarter operating highlights by reporting segment. For comparative purposes, prior year business results have been adjusted to exclude amortization eliminated under FAS 142. Let's begin with the North America Soup and away from home. Sales of $600 million were up 16%. Operating earnings of $147 million were up 32% reflecting strong soup shipments in the quarter and lower marketing expense versus prior year. Let's take a closer look at those soup shipments. U.S.

wet soup shipments were up 10% over the quarter a year ago and were up 1% for the nine months. U.S. shipments in the quarter were positively impacted by lower trade inventory reductions versus the prior year, and positive consumer take away. The shipment gains in U.S. retail soup were across all formats, Condensed, Ready To Serve and broth. As new products, new shelving initiatives and more extensive consumer promotion helped drive growth. Shipments of Condensed soup for the third quarter rose 2% as the continued advertising of higher quality vegetable soups were supplemented by support for our line of Fun Favorites, Condensed soups targeted especially for kids. Condensed soup shipments for the nine months declined 6%. Ready To Serve soup shipments rose 17% for the third quarter. Chunky and Select both showed strong shipment growth.

Campbell's Soup At Hand continued to enjoy a successful launch year and repeat purchase has been encouraging. As previously announced, we will be expanding this line significantly next fiscal year. Ready To Serve soup shipments for the nine months increased 5%. Swanson broth shipments rose 38% behind Easter holiday promotional activity and the continued success of the cooking with broth marketing campaign. For the nine months, broth shipments increased to 12%. Turning to the breakdown of soup shipments by cooking and eating, we have a good story for the quarter as well. Cooking soups and eating soups were each up 11%. In Canada, soup sales showed strong growth, helped by the regional rollout of new Garden A soups in aseptic packages.. Good growth in Away From Home soup sales was offset by declines in entree and other categories. Now, let's turn to North America sauces and beverages.

Sales were up 7% to $295 million versus 276 million driven by gains in Pace, Campbell's Tomato Juice and Franco-American canned pasta and gravy. Operating earnings declined 3% to $59 million reflecting increased marketing investment primarily behind new product introductions. Pace volume gains were driven by shipment growth in mass merchandises and new Pace Enchilada Sauce which made its debut in core markets. Prego Pasta Sauce shipments declined due to lower sales of Prego Pasta Baked Sauce which was heavily supported last year.. Our total beverage business was up on the strength of Campbell's Tomato Juice and the launch of V8 Splash Smoothies. Latin America and Mexico both grew sales driven by increased soup shipments. Now, let's turn to biscuits and confectionary. Sales for the quarter increased $77 million or 22% to $434 million. Snack Foods limited accounted for 39 million, or 11 percentage points of the sales increase.

Currency contributed five percentage points of the increase. Base business growth accounted for the remaining six percentage points. Operating earnings declined 10% to $38 million, primarily due to increased advertising and promotional spending. Operating earnings in fiscal 2002 included $6 million of costs related to the Australian manufacturing reconfiguration. Fiscal 2003 operating earnings were impacted by $5 million of transitional expenses related to the planned closure of the Pepperidge Farm bakery in Norwalk, Connecticut. In the first quarter of fiscal 2002, we announced a $72 million investment to build a new bakery in Bloomfield, Connecticut. We expect that bakery to be completed in the first quarter of fiscal 2004. Pepperidge Farm volume rose driven by strong consumer demand in all major categories, including Goldfish Crackers, distinctive and chocolate chunk cookies, fresh bread and frozen bread and potpies. Pepperidge Farm bagels and Pepperidge Farm muffins expanded distribution as well.

Arnott sales expanded on growth in core cookie lines and the addition of Snack Foods Limited. Godiva sales grew driven by stronger sales in Asia and significant growth in catalog and Internet sales. Now let's turn to international soup and sauces. Sales increased 22% to $271 million. This increase was driven by a favorable currency translation impact of 17 percentage points, a 3 percentage point benefit from acquisitions and base growth of two percentage points points. Operating earnings increased 42% to $37 million. The increase was driven by improved gross margin reflecting good growth in the higher margin dry soup business in Europe, lower marketing spending and favorable currency translation. In Australia and the Asian region soup shipments were up double digits reflecting strong consumer takeaway. Now, let's turn to the balance sheet and cash flow performance. Total debt at quarter end was $3.5 billion, down from $3.6 billion at the end of the second quarter as a result of solid cash flow from operations.

During the quarter, we repurchased 432,000 shares of stock, for approximately $9 million, to offset the impact of dilution from options exercised. Cash flow from operations for the nine months was $706 million compared with $829 million last year, reflecting a greater increase in working capital compared to the prior year. Capital expenditures were $158 million this year, to date, versus 111 million -- I'm sorry, versus 112 million last year, primarily due to the Pepperidge Farm bakery. We continue to project capital spending for the year to be approximately $285 million, up slightly versus 2002. Because of our strong performance, and the continued positive impact of currency translation versus year ago, we are raising our forecast for fiscal 2003 earnings per share to a range of $1.49 to $1.51 from the previous guidance of $1.47 before the impact of the accounting change. We will provide earnings guidance for next fiscal year when we announce our final 2003 results in September. That concludes my remarks. Now, here is Douglas Conant.

Thank you, Jerry and good morning everyone. I want to take just a few minutes to share my perspective on three points related to our most important strategic priority, revitalizing our U.S. soup business. First as Jerry reported, we delivered a solid performance in the third quarter. As you will recall in our second quarter call, I said that we expected to deliver a solid second half with an improved top-line performance profile. We're doing just that. The investments we've made and continue to make in quality and convenience are clearly beginning to pay off and our marketing productivity as expected is improving. That leads me to my second point. As we look to fiscal 2004, I believe we're well-positioned to continue to improve our top-line performance.

I have said consistently beginning with the launch of our transformation plan back in July of 2001, that the majority of our investments in quality, new products and new packaging would become most evident in the third year of our transformation plan, which is fiscal 2004. For the better part of the past two years, we have invested heavily in consumer research to build a formidable consumer-driven soup proposition and we have systematically built all the capabilities required to deliver that proposition in a competitively advantaged way. In February, at the most recent Cagney conference, I said that we believe this next fiscal year will be a breakthrough year for top-line growth in our U.S. soup business, setting the stage for improved sustainable growth over time. I want to reaffirm that view today.

In just a moment, Larry McWilliams, president of North America Soup, will amplify on these points, as he takes you through highlights of our upcoming U.S. soup initiatives that were covered in our separate press release issued earlier this morning. This leads me to my third and final point: As most of you know, for most of this fiscal year, Larry has been fighting oversight over our North America Soup division in addition to his regular duties as our Chief Global Customer Officer. During this time, we've made significant progress in strengthening our partnerships with our customer base and in advancing our U.S. soup proposition. In recognition of that progress, and with an eye on ensuring executional excellence, we recently promoted Larry to be president of our North America Soup operation with the mandate to bring our plans for U.S. soup to life in the marketplace.

In addition, we brought into our company, another outstanding food industry executive, Denise Morrison as President of Global Sales to help us continue to focus on advancing our customer relationships. To sum up, my perspective on U.S. soup, I believe we now have the plans, the capabilities and the people to drive significantly improved top-line performance. And I would add that beyond U.S. soup, we're making similar progress in many of our other key businesses. As you can see from today's results. We will discuss that progress more fully in future meetings. Now, before we move into Q&A, I'll turn it over to Larry to take you through the highlights of our U.S. soup plans for next fiscal year.

Thanks, Doug and good morning everyone. First I'd like to talk about our soup strategy and what we are trying to accomplish. Our first strategic priority is to revitalize U.S. soup. We are focussed on growing the entire soup category along with our own soup portfolio. For the past three years, the soup category has been growing in dollars. We have been working to accelerate that growth by being better connected with our customers and more attuned to our consumers. Our efforts in soup are focussed more than ever on delivering against the six key consumer benefit areas for food products. Taste, value, nutrition, convenience, variety, and quality.

For example, in the last year, we have made improvements in our Condensed vegetable soups and have improved the blendability of our cream soups and we have introduced Soup At Hand. Next year we will build further on this strategy with some very exciting new consumer propositions. We have spent the last 18 months conducting extensive consumer research unprecedented in the history our company. We've looked at when, how and why consumers make the decisions to buy soup, and when, how, and why they make the decision to eat soup. This research has given us enormous help in shaping and refining our soup strategy. For example, on the convenience dimension, those of you who attended Doug's presentation at Cagney in February heard about our retail concept of Nmm-nmm Good To Go. Besides expanding Soup At Hand with 7 new varieties, we will add a new microwavable line of Chunky Soups and Campbell's Select.

This microwave line will help expand the usage occasion for both Chunky and Select and it plays against a convenience element of our focus. Other elements built around this convenience platform are easy open lids across the entire line and new shelf sets which more clearly present Campbell's Soups and make the aisle much easier to shop. On the value dimension, our research shows that approximately one-third of Ready To Serve soup consumers buy mainly on price. And historically we have not had a strong presence in this segment of the ready to serve market. Next year we will change that as we launch Kitchen Classics, a new line of Ready To Serve soups that will provide value-conscious consumers with a much better reason to choose Campbell's'. The kitchen classic's line is the next step in the evolution of Campbell's Classic Soups which were introduced in May 2000. Kitchen Classics have been formulated to take advantage of new technology such as cold blend.

We will introduce 10 varieties including two value shopper favorites, New England Clam Chowder and Lentil. Kitchen Classics will show up on store shelves in the fall and will have a suggested retail price of $1.59 and a targeted promotion price of under $1, although prices by store will probably vary. That compares with a suggested retail price of $2.29 to $2.49 for Chunky and Select products. In 2004, our portfolio will be positioned to win in every dimension of the soup category. We are positioned to win with convenience as easy open lids appear on all soup products and a new Nmm-nmm Good to go soup section in the store offers soup portability in ways never done before. Added to that will be the convenience of shopping the soup aisle with new gravity-fed dispensers in many stores. We are positioned to win with variety as seven new items of Soup At Hand appear, including three targeted specifically toward kids and teens.

Complementing our other 200 soup items which range from Pepper Pot Condensed to select Italian Style Wedding Ready To Serve. Combine all this with new integrated communications which will debut in the fall, and I believe we are positioned to have the kind of breakout soup year that Doug talked about in February. Next year we will continue to upgrade both Condensed and Ready To Serve soups with the cold blend manufacturing process. Next year we will have new shelf sets and fixtures for Condensed soups in many stores that have tested extremely well in improving consumer takeaway. Next year we will have a new section within the soup aisle dedicated to convenience and portability. Next year we will have more improved products and more focus on cooking soups and kids' soups, two areas of Condensed that we believe have very solid growth potential. We will be on the way to aggressively growing our Ready To Serve soup business and improving trends in Condensed and we will be filling the gaps in our portfolio with new products that focus on taste, value, nutrition, convenience, variety, and quality. Now I'll turn the meeting back over to Len.

Thank you. Stephanie, could we please start the Q&A process?

Thank you. At this time we're ready to begin the formal question-and-answer session. If you'd like to ask a question, please press "star 1". You will be announced prior to asking your question. To withdraw your question, you may press star 2. Once again to ask a question, please press "star 1". The first question comes from John McMillin of Prudential Securities. Sir, you may ask your question.

Good morning everybody.

Good morning.

Congratulations, sincere congratulations, it's been a while. Doug, you didn't mention the weather and you know these results are so meaningfully above expectations on the top line and the bottom line that I don't want to suggest all of it or even a good part of it came from the weather, but I just wonder if you could kind of quantify because the biggest opposition I'm hearing is now the weather's turning warm, why do I want to buy Campbell's now? If you can quantify what it did to your business in this great quarter.

John, this is Doug. And I don't want to -- I won't answer your question exactly in terms of quantification but a few observations. First of all, when we were talking in our last conference call, before I had any idea what the weather was going to do, we expressed that we had expectations that our soup business would be strong in the third and fourth quarters. Second of all, we feel good about our soup performance, although we won't get into consumer take away, you have access to enough data to see that relatively speaking, we had a very strong quarter versus the other alternatives in the market. Which suggest that the programming is starting to gain traction independent of the weather. The last observation would be obviously the weather was not unfavorable and in the pockets of the country it was, in fact, favorable and the category responded. My own personal opinion is that wasn't the key driver in our performance but certainly it gave us a little tail wind. That's about as far as I would characterize it.

As far as the retail -- I won't call it a build, but less de-stocking, can you quantify that? It looks like if you're talking about shipments up six, what do you think your take away was in the quarter?

Well, we don't mix -- get into the takeaway. I would tell you that our expectation on our retail inventories on a nine--month basis is that they're basically flat versus last year. So you get some inventory moving around as we obviously didn't build inventories in the second quarter as much as we expected with that January performance, but as a result, as Jerry Lord mentioned in the overview, we also didn't have that big decline of inventory to work off so we were able to ship more into the third quarter just to meet ongoing demand. So that on a 9 month to date basis our retail inventories are basically flat. So we feel very good about the performance in that way.

And while I have Larry, you said you're going to be in every area, every growing area of the soup category for next year. I don't see anything really in health or organic soups. You obviously have not unveiled your entire idea plan for '04; is that correct?

This is Larry, John. In terms of the nutrition aspect, there are things that we are continuing to work on, a couple of them that you mentioned and other things. So we have not totally unveiled what's in our strategies going forward. But that's clearly an area that we're doing significant work in.

John, this is Doug. Most of the activity in 2004 is going to be against marketing our existing products with the view on the health attributes. There is -- we have some long-term projects around sodium and around some other things that we've talked about in the past that will start to take shape in the out years but this coming year is going to be primarily focussed on the marketing the health attributes of some of our existing items.

Okay. Well, thanks and congratulations again.

Thanks.

Next question, Stephanie?

David Nelson of CSFB, you may ask your question.

Congratulations.

Thank you, David.

I guess my question would be that I hear lots about plans and new marketing initiatives and then I also see less marketing. Is that a function that the marketing initiatives are really the future and the lower marketing is the last three months, lower marketing spending?

Okay. Lower marketing spending you're talking about, okay.

Over the last three months it was lower in North America.

Bob will take that question.

Hi David, this is Bob Schiffner. We have been doing a few things of that, I think has probably gone somewhat unnoticed. We have been working very, very hard the trade promotion line. Obviously, trying to squeeze out as much productivity in that spending area as we can. And I think our year to date performance is, in fact, representative of that when you look at it on a nine-month basis. So when you look at our marketing spend, I think you have to take that factor into the analysis. As you know, the fourth quarter is not a huge quarter for Campbell's and we expect our marketing to be relatively flat in that quarter and we will spend more time with you in September to talk about our actual marketing plans for next year. But again, we expect to have a very competitive marketing program in place for '04 to support all of these great initiatives.

David, this is Doug. We feel good about our marketing spending levels, they're the right levels to drive the businesses reflected in the performance in the third quarter. We feel like we're spending the right levels and that we're getting increasingly knowledgeable about how to leverage the spend more effectively and marketing productivity is a theme that we've been working on all year, and it's starting to be reflected in the spend. We feel good. We're basically spending around 22% of sales in total and we feel good that that's a good competitive level, able to enable us to drive the kind of growth that we're starting to drive.

So it's efficiency-driven so it should be secular?

It's efficiency-driven. ¶

Okay. Well, thank you very much.

Bill Leach with Bank of America, you may ask your question.

Good morning.

Good morning, Bill.

I'll also add my congratulations.

Thanks, Bill.

Let me ask short-term question, and a little bit longer term question. In terms of your fourth quarter guidance, you're guiding basically flat earnings despite the fact this quarter is better than expected and as I recall, you have one extra week in the fourth quarter, which numerically gives you like a 7% head start. Are you just being conservative or is there anything else in you're fourth quarter guidance?

Our volume forecast for the fourth quarter relative to our soup business is, in fact, relatively flat. So again, to that respect, we are probably somewhat conservative. The other thing that in fact we'll be seeing in the fourth quarter is that we have some fairly large start-up expenses at our new Pepperidge Farm plant. And, in fact, that will offset a lot of the incremental impact from the extra week in the quarter.

Okay. And Doug, in terms of next year, even though I know you don't want to give specific forecasts, if you look at the mine-month results, your soup volume is up 1%, Condensed is still down 6%. Are we basically on track to our original forecast to take the earnings down and grow 8% from their reduced base, is that still sort of vaguely what we're thinking next year?

We're not going to get into that guidance, we will get into that guidance at the appropriate time in September. What I would say is we still have some tough sledding in Condensed. In our Condensed soup, we had a good quarter, we were up 2% but the reality is we're down 6% year to date through the first nine months. And we think we're going to claw back against that decline as we go forward next year. We also think we can meaningfully accelerate our trends in Ready To Serve soup primarily behind our convenience platform. So we think we have the right formula to have a solid year in soup next year. And the balance of the portfolio is coming together in a solid way. So we feel good about the direction. It's premature to get into the guidance.

Okay. Let me ask one last question. Larry could you talk a little bit more about the Campbell's Kitchen Classics? On the surface it just sounds like you're selling a product 33% less. Why wouldn't that denigrate the pricing in the whole soup category?

Basically when we went back and did our consumer research, what we found is that there was a gap in our portfolio relative to the value-seeking consumers. About a third of the consumers in ready-to-serve are value-seeking consumers and they primarily skew towards older and ethnic. We found that we had a gap there that nothing was really formulated to compete in that arena. Our existing premium quality soups, Chunky and Select are both have -- are formulated to a unique target and marketed to those. So we saw it as a real rounding out of our portfolio in the area of that third of the consumers in ready-to-serve that seek value.

Okay. Well good luck with it. Thank you.

Thank you.

Next question, Stephanie?

Chris Collins of JP Morgan, you may ask your question.

Good morning and my congratulations as well. Can you just comment, you mentioned that you had a little bit, I guess, of negative mix impact on the gross margin line. I'm trying to think through some of the factors there in a bit more detail and again what your outlook might be over the next couple of quarters for the gross margin line as you presumably improve your mix?

Chris, that gross margin issue is related specifically to the fact that our RTS business is growing faster than our Condensed business. And, in fact, this has been a trend that we have faced since I've been here. Our expectation as I have said publicly a number of times, when you add in the quality improvements that you will see in '04 that our gross margin will continue to decline slightly through '04 and our expectation is that following '04 we expect to see a improvement going forward. So that -- we've been very, very consistent on in terms of our external communications.

Okay. And then just the other thing, could you just give us an update on the shelf set, the various programs you have in place there? I know you had had the target for going back to last year's calendar fourth quarter and could you give us an update on that?

Sure, Chris, this is Larry. In terms of the shelf set that we have out in the stores now, it's based on six different principles. We have in place in over half the stores in the U.S. five of the six principles. The sixth principle, which is signage and dividers, we have in about a quarter of the stores. The shelving initiative that we're taking out next year, the gravity-fed system incorporates all six consumer principles, and we have had very, very strong response from our customers and we'll be starting to set those in stores in June.

Chris, this is Douglas Conant. When Larry talks about half the stores, that's equivalent to the 13 to 15,000 number that we've talked about in prior conference calls. So we're about where we expected to be and now we're moving to Phase II which incorporates gravity-fed shelving.

Okay, great. Thank you.

Stephanie, next question?

Terry Bivens of Bear Stearns, you may ask your question.

Good morning. Just a quick question on these Kitchen Classics. I know sometimes you have, when Progresso gets down to about a buck or so on promotion, it makes it tough to sell both the Ready To Serve and your Condensed. Larry, I guess you've addressed it with a gap there in your lineup but to what extent are you worried that when you go at a targeted promotion point of below a buck, that you begin to cannibalize your higher margin Condensed? That's my concern there.

The way that we're addressing that, Terry, is in the way that we have spaced our promotional calendar and the way that we're targeting our promotions against the value seekers in ready-to-serve. And the market really starts to divide between Condensed, eating and Ready To Serve in a way that we believe we can manage pretty successfully across both those areas of the portfolio.

Terry? This is Doug. At Cagney we talked about the segmentation in Condensed a little bit of our cooking soups and our kids' soups which account for, depending how you look at it, 75 to 80% of our portfolio. We believe those are pretty insulated versus this new value offering in RTS. There is overlap with adult eating varieties of Condensed but we think that's manageable as we go forward. Cooking soups are very insulated and there's no clear interaction with Ready To Serve. And likewise, our kids eating soups like our Fun Favorites and some of the other items are insulated. So there's nominal overlap on this with Condensed, with this lineup.

Terry, let me just add something on that. We have engineered these products to have a very similar margin structure to Condensed. So again, it's in fact -- if, in fact, people want to trade up, it, in fact, will be to our benefit. ¶

Okay. So these are going to be a bit more high margin than that $1.59 would indicate at first Blush?

Yes.

Okay, great. Thank you very much.

Terry, let me --

Go ahead.

They will clearly have a higher dollar margin or penny profit, and we'll have a very similar percentage margin structure to Condensed.

Okay. Very good.

Okay?

Thank you.

Thanks.

Next question, Stephanie?

Mitch Pinheiro of Janney Montgomery, you may ask your question.

Good morning. Just staying on Terry and Bill's question, on Kitchen Classics, I think it was Terry or Bill, but does this indicate that, is this in a way that you'll be able to lower promotion in Chunky and Select, so sort of using this as your promo feature price and trying to back off there and if so, if that is part of the strategy, is that a risk, or what 's your margin analysis show.

This is Doug. I'll lead off and then I'll let Larry follow-up. First of all you've got a few Kitchen Classics within the approach we're taking to accelerate growth in the Ready To Serve business. We have Chunky and Select where we still have very competitive promotional profiles planned for next year. We also have the convenience platform which will accelerate Soup At Hand growth but is also going to be helpful to Chunky and Select because we're going to have branded microwavable versions of those available as well. We'll still have competitive promotional profiles on Chunky and select and get the tail wind created by the convenience platform. Then we have kitchen classic which fits into the mix in that it targets a new group of consumers who are looking for everyday low price in this segment, and it really doesn't exist right now, it's an unmet need. Overall, I think you're going to find that we're competitively positioned on all dimensions in Ready To Serve in a very meaningful way. You want to build on that, Larry?

The only thing I would add, Mitch, is that this is a truncated line, there's only 10 items in Kitchen Classics and it's really designed to fit the top 10 selling Ready To Serve items, from a value standpoint. So we will keep it a truncated line and we will give the variety-seeking consumers Chunky and Select in a way that is competitive every day but also has a strong competitive profile during the soup season.

In your prepared comment you talked about your - you're well positioned to improve the top line performance in '04, clearly leaving out any reference to the bottom line. But is it possible to provide some sense for what type of volume growth you need to sort of overcome the spending on the higher costs and the pop tops, the increased garnish, launching this new line? Is there some sort of -- give us some sense for what you need to see to cover that?

Mitch, as has been our practice, we will talk about that in our September earnings call.

Okay. Fair enough. You know, I visited the store in Cherry Hill where you have the gravity-fed shelf system in place, we understand that your Campbell's Soup is up solidly in the double digit area and you indicated that you're going to be installing 7200 of these gravity-feds in '04. Does -- my question is what drives that 7200 store number? What's the demand for it? What are the customers saying, why isn't it in 15,000 stores? Can you share with us those thoughts?

Sure. Basically I think the number that you're quoting, the 7200 was directional. We'll have several thousand of these out into the stores in fiscal 2004. Really what's driving it is we're going to get out there as fast as the customers will let us. There's just certain periods of time when we don't want to be in the stores resetting the shelves. Like during the holiday periods, customers don't want us in there resetting the shelves, due to volume of traffic that they have in there. So we see positive results from the gravity-feed system and we are going to get them out there as quickly as we possibly can.

Are these sort of the initial, whatever thousand you intend to go in, is that chain-specific or is this across a broad number of retailers?

It's part of our entire soup plan for 2004. And so it is chain-specific.

Okay. Thank you very much.

Thanks.

Next question, Stephanie?

Kevin Morris of UBS Warburg, you may ask your question.

Good morning, congratulations.

Thank you.

Just had a couple of quick questions. First, was there anything that was sort of one-time in nature here? The soup numbers were really strong, was there any sort of pantry loading, consumers hoarding anything, due to war concerns or is there none of that?

Well, as we've looked as this, basically as I've said, our inventories are comparable to year ago at this point in time. There's some movement quarter-to-quarter but on balance, there's no evidence of any unusual behavior either on the part of our customers or on the part of our consumers.

What we said is that we know there was some of that because of the difference between last year and we didn't have inventory builds at the beginning of the season, we didn't have it comparable to last year, so there was a piece of that growth that was due to just better managing of the inventories throughout the year. That was the only thing that you would say was unusual. Otherwise, it's really volume-driven.

Okay. And just to get a sense also on the Condensed side, obviously the numbers were good in the quarter here and you made mention that it's still a challenging environment. As you move through fiscal '04, do you expect that business to stabilize early in '04 or is it sort of as you exit the year?

Well, it would be premature to provide guidance that would suggest that we're going to stabilize the business. We think we'll improve the trends. And our focus is really on accelerating our Ready To Serve franchise. And the net net of that should put us in position to deliver kind of as a company, top quartile sales growth as we go forward.

Thank you.

Next question, Stephanie?

Eric Katzman of Deutsche Bank, you may ask your question.

Good morning, everybody. A few questions. I guess I'm kind of surprised that you're not giving the takeaway data because I know in the past you certainly have given that. And seeing -- I'm looking at IRI data which isn't worth much anymore, you guys have access to retail link and my conclusion at looking at a 38% jump in broth shipments compared to IRI data, it says you're loading the trade. Maybe you could give us more detail on what the consumer takeaway is quantitatively in the third quarter.

As we've said, we're not going to give any consumer purchase data. We can't. And we haven't now for about two years. On the -- regarding broth, it's Easter timing in this quarter versus last year when it was in the prior quarter. So the other way to -- observation would be that as we said, retail inventories are basically flat year to year so that you can draw your own conclusions on shipments and takeaway.

Eric, we addressed that when we started this practice. We at some length, gave reasons we were not going to share consumer data because we felt it was less reliable because the omission of certain data that's in there. That we laid out for you on a conference call about a year 1/2 ago. So this is nothing new. We have not provided guidance or we have --

But I mean, there isn't -- the issue with Campbell's has been that one quarter you'll have great numbers and then the next quarter you don't. And we're kind of left to try to figure it out. And granted that's what we get paid for but I mean there are other companies in the industry that have retail link and are giving us some kind of FDM plus whatever panel data or other figures that they can include to give us a better sense as to whether the shipments equal the takeaway. So anyway, we could deal with that later.

Eric, let me also assure you that there isn't anything funny in these numbers in terms of loading or anything like that. I mean Doug talked about the inventory shift and other than that we've had consumption which is encouraging. So I don't think I would read anything else into it other than what we just communicated to you.

Okay. Next question has to do with the -- I think you kind of addressed this, but are the sizes of the new Kitchen Classics smaller and that's what's allowing you to have the -- to kind of offset what would appear to be a negative mix impact?

No, no, the size is the same as Select and Chunky.

So have you figured out some way to re-engineer Ready To Serve that should say to us that now Chunky and Select and the other Ready To Serves are even more profitable than they were?

No.

It's premature to -- I wouldn't assume that.

Okay. I'm not really sure why this line would be different from the others.

Yeah, I mean, it's a lower garnish level than in Kitchen Classics than you have in Chunky and Select.

So it's what's going in the can?

Yes, yes.

And then last question is with the change in accounting for promotion, you said, Bob, that you -- efficiency of promotion has helped in terms of - obviously helped the top line this quarter, but also in terms of your ability to impact the consumer, I guess. Can you talk about why we wouldn't, given that change, have seen better results on your gross margin? Because obviously a deduction, less promotion is going to directly help your gross margin.

It has this quarter, Eric, it certainly is something that has helped to offset the other negative gross margin factors. And it certainly has helped this quarter. And hopefully it will continue to help us in the future. So I think your point is correct. Where we're probably off is the magnitude of the help.

And what -- I mean, what specifically has changed that's allowing you all of a sudden to say, hey return on promotion is so much better?

We, in fact, now have tools in place where we can plan profitable promotions much more readily than, in fact, we could in the past.

Okay. Thank you.

Next question, Stephanie?

David Adelman of Morgan Stanley. You may ask your question.

Good morning, everyone. I wanted to ask about this issue, you've talked about it before, in the quarter, the lower reduction in retail, your customers' inventory. Can you quantify how much of an impact that had on your shipments in the quarter?

I'd say we wouldn't but it's an amount that would be somewhat less than half of that.

And was it visible during the quarter, was is more visible later in the quarter?

I'm not sure what you mean by that.

In other words, attributing in that half differential to the shipments, is that something that, did that materialize itself later in the quarter, throughout the quarter?

Well, David, this is the first time we've experienced this phenomenon. And, in fact, again, this is -- it's actually pretty straightforward to put into perspective. Obviously, soup is a very seasonal business. Historically, retailers grow their inventories as consumption increases in the first and second quarters. And usually what happens is that their inventories decline in the third and fourth quarters. So our shipments are impacted historically in the third quarter as the retailers liquidate some of the inventories. What happened this year is that we didn't see as much growth in retailer inventories in the first and second quarter. And obviously we, in fact, had a positive impact in the third quarter because there just wasn't as much inventory to bring down.

Okay.

Now, did we foresee this? The answer is, since it was the first time, we, in fact, went through this phenomenon, we were surmising that, in fact, something like this could happen. And frankly it turned out that it did. And again to put into perspective, we think about roughly 60% of the sales growth in this quarter relating to our U.S. soup business was the result of this inventory adjustment.

Okay. And you would expect all else equal, this would be more of a normalized pattern going forward?

Very good question. And I think at this point it's pretty hard to predict. And I think a lot of it is going to have to do with how our trade promotions smooth out over time. Obviously, this year we did see a smoothing out of trade promotions. And obviously the second quarter we had a very weak January on the trade promotion front, and frankly in the third quarter we had a much-improved trade promotion calendar. So again, I think a lot of it will be dependent upon how the timing of trade promotions present themselves next year.

Okay. I understand it better. Thank you.

Okay.

Next question, Stephanie?

Andrew Lazar of Lehman Brothers, you may ask your question.

Good morning.

Good morning, Andrew.

Doug and Bob you've talked several times about just thinking about various ways to help simplify the pricing structure around a pretty complex lineup of products within U.S. Soup. And without really getting into what your thinking is there, what you may or may not do, does launching a lot of these newer products complicate that thought process or not?

Not really, Andrew. The products we're selling are teed up to address the price points that people are already shopping at. So we're just creating a more competitive profile here. Obviously, there are opportunities for both us and retailers to simplify the way we price at retail, and we're partnering with them to find ways to do that. I don't think the final chapter has been written in terms of how we can simplify price at retail. What we're focusing on right now is simplifying the shopping experience with the shelf sets and with the way we're branding our items and that's the primary focus right now.

Okay. And then you talked about how last year, I think, you tried to, if I understand it correctly, tried to smooth out your sort of trade promotional process, maybe to not have the huge peaks kind of and valleys. And perhaps I think you mentioned that the competitors had perhaps gotten a more aggressive sell-in leading into the soup season so consumers had their pantries loaded already, that might have hurt you as you went through some of the soup season. Can we expect perhaps a more aggressive move back towards -- you always have a seasonal approach, but something more than was last year to try to account for some of that, and get more than your fair share of buy-in, if you will?

Our intention is to be very competitive. Last year as we were competing in the first half of last year, we were also rolling out our new trade promotion planning tools. And we weren't as competitive as we would have liked to have been. We've learned a lot. It was reflected in our November and December performance as well as our February, March and April performance. So we feel as though we're starting to get our arms around it and we'll be in a position to be more competitive both in terms of effectiveness and efficiency.

A last thing for Larry. Have you been surprised one way or the other just generally as you tried to get more aggressive in rolling out new ways of shopping the soup aisle, in terms of retailers' willingness to understand where your coming from and move somewhat aggressively toward trying to make that happen? This is more of a general question. There are a lot of folks who still believe a lot of larger retailers still don't fet it, necessarily, but it seems like you're getting some pretty good execution or traction from these plans.

I would tell you in general that when we discussed simplifying the shopping experience with retailers, the fact that we had third-party validation of all the consumer end sites helped a lot. And so when we went out with the first wave of IQ shelf, simplifying the shopping experience, we got fairly good response from customers, many of which wanted to institute all six of the initiatives and some of them wanting to test. When we unveiled the gravity-fed system it became very apparent the benefit that this had in incorporating those six principles in a fixture. And so the response from our customers around this second generation of shelving has been very consistent in wanting to get it into their stores.

Thanks very much. Good luck with it.

Stephanie, how many more do we have in queue?

Just one more.

Okay, we'll take that and then we'll end the call.

Eric Katzman of Deutsche Banc, you may ask your question.

Just a quick follow-up, the new product, I know we're making maybe more of it than we should, but the Kitchen Classics, based on what your sense is, is that going to be just initially incremental to your shelf space? Who do you think is losing? If not, what views are you being asked to take off to put those on the shelf?

Basically, Kitchen Classics is a reformulation of items that we already have out there that were Ready To Serve classics. So we're only incrementally adding two items to the Kitchen Classics line. So we have been out presenting the entire portfolio with our convenience items, the Nmm-nmm good to go items, as well as Kitchen Classics and had very strong response from customers in terms of taking the majority of our items. So I feel like that we'll be in very good shape from a distribution standpoint as well as a shelf space standpoint. Okay. Thank you. Thank you, everyone. This concludes our call this morning. We'll be back in reporting our fourth quarter results in early September and you'll be receiving a notice as to the exact date and time of that over when the time nears. Thank you for joining us this morning.