金寶湯 (CPB) 2003 Q4 法說會逐字稿

Good morning and welcome to the Campbell's Q4 and year end earnings conference. All participants will be able to listen only until the question and answer portion of the conference. This conference is being recorded. If you have any objections you may disconnect at this time.

I would like to introduce Mr. Len Griehs, Vice President of Investor Relations. Mr. Griehs, you may begin.

Good morning, and welcome to Campbell Soup Company fourth quarter and fiscal 2003 conference call.

Before we begin the business at hand, just a few words I would like to say. While we carry on today with our normal lives and business, this day is not just another day. I will always remember with great personal sadness the terrorist attack on the innocent people working in the World Trade Center, and the collapse of the towers at almost this very moment, two years ago. I know that many of you witnessed it personally, or were certainly personally affected by it, and I am sorry that this call may intrude on your personal reflections today.

Please, before we begin, in honor of those who lost their lives that day, including some of your and my friends, and for the families that have been scarred forever by this tragedy, please pause with me for 10 seconds of silence.

Thank you. Our agenda this morning will be as follows: Jerry Lord, Vice President and Controller, will open with financial results for the fourth quarter and fiscal 2003. Bob Schiffner, Senior Vice President and Chief Financial Officer, will offer some comments on our outlook for fiscal 2004.

Also joining us today is Mark Sarvary, President of Pepperidge Farm, who will discuss some of the progress of Pepperidge Farm. We know that there is great interest in this business and we hope that his presence here, and his comments, will give you some further insights into the progress we've been making there.

We will then open for your questions, and joining us for the question and answer session will be Doug Conant, President and Chief Executive Officer. Our remarks will last approximately 30 minutes.

Earlier this morning, we issued a press release and an additional schedule of selected quarterly financial information. These will be referred to during the call and may be found on our web site, www.campbellsoup.com.

This conference call will be rebroadcast. It will be accessible approximately two hours after completion and will run through midnight, September 16. The rebroadcast number is 1-800-967-7626. You may also listen to the rebroadcast by logging on to our web site and clicking on the web site banner.

Our discussion will contain forward-looking statements that reflect the company's current expectations about 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.

Now, let's begin with our results with Jerry Lord.

Good morning, everyone.

First, a few comments about the presentation of our fourth quarter and full fiscal 2003 numbers. As of the beginning of this fiscal year, the company adopted FAS 142, goodwill 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 noncash goodwill impairment charge of $31 million after taxes, or 8 cents per share, related to stock profit, 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.

Lastly, fiscal 2003 included 53 weeks, compared to 52 for fiscal 2002, and the fourth quarter of fiscal 2003 included 14 weeks, versus 13 weeks in the fourth quarter of fiscal 2002. The additional week accounted for approximately 7 to 8 percentage points of sales growth in the fourth quarter and approximately 1 to 2 percentage points of sales growth in the year.

I will begin my discussion with consolidated fourth quarter highlights. Then I will move to consolidated highlights for the full year. Finally, I will discuss reporting segment information for the full year only. Fourth quarter results by reporting segment appear on both the press release and the supplemental schedule that I will not spend time discussing the quarterly segment results.

Let's turn to fourth quarter highlights. Worldwide wet soup shipments increased 6%, U.S. soup shipments rose 7%, and international soup shipments rose 3%. In the U.S., condensed soup shipments declined 5%, ready-to-serve shipments increased 29%, and broth shipments increased 22%.

North America Sauces and Beverages had strong growth in sales, driven by volume gains on 'Prego', 'Pace', 'V8', and Latin America.

Sales results in Biscuits and Confectionery were driven by the Snack Foods Limited acquisition in Australia, solid gains in Pepperidge Farm and Arnotts, and currency translation.

International Soup and Sauces delivered double digit sales growth due to currency translation and the impact of the Erin Foods acquisition in Ireland.

Now let's turn to specific results for the fourth quarter. Sales grew 19% to 1.5 billion. Earnings before interest and taxes increased to 155 million from 128 million. The year-ago number included 18 million of goodwill and intangible asset amortization, which has now been eliminated under FAS 142.

Now, let's look at the composition of this 19% sales increase. Volume and mix increased 6%. Pricing added 2%. Reduced promotional spending added 3%. Currency added 5%. And acquisitions added 3%.

Gross margin declined 2.9 percentage points, due principally to the cost of quality upgrades, the lower margin structure of acquisitions, costs related to the discontinuance of certain co-packing contracts, and Pepperidge Farm's new bakery transitional costs offset by lower Australian manufacturing reconfiguration costs.

Total marketing rose 17%, with currency and acquisitions accounting for 7 percentage points of the increase. Increased advertising behind businesses in the North America Sauces and Beverage portfolio, including 'V8', 'Prego', and 'Pace', was a key driver for the remaining increase.

Corporate and allocated expense increased as a result of higher legal expenses related to current litigation and a noncash charge related to the carrying value of the company's investment in affordable housing.

Net interest expense was $45 million, versus 44 million a year ago. Net earnings were 74 million, versus 55 million in the prior year. Reported net earnings for last year's fourth quarter included 14 million of amortization expense, since eliminated under FAS 142, and 4 million after-tax costs related to the Australian manufacturing reconfiguration.

Diluted earnings per share was 18 cents, versus 13 reported a year ago. Reported earnings per share for last year's fourth quarter included approximately 4 cents a share of amortization and approximately 1 cent a share for costs associated with the Australian manufacturing reconfiguration.

Now let's turn to full-year results. First, I will discuss the consolidated results in the same format, and then I will discuss the reporting segments.

Sales for the year grew 9% to $6.7 billion. The composition of this sales growth is as follows: Volume and mix increased 3%. Pricing added 1%. Currency added 3%. And acquisitions added 2%. Worldwide wet soup shipments increased 2%. Soup shipments in the U.S. rose 2%, and international soup shipments also rose 2%.

Earnings before interest and taxes increased to 1.105 billion from the year-ago $984 million. The year-ago amount included 70 million of amortization expense, since eliminated under FAS 142, and $20 million of expenses related to the Australian plant reconfiguration.

Gross margin declined 0.9 percentage points. The same factors that impacted the quarter also impacted the year. Total marketing was up 7%, with currency and acquisitions accounting for 5 percentage points of the increase. Net interest expense was $181 million, versus 186. The tax rate for the year was 32.2%.

Diluted earnings per share before the cumulative effect of the accounting change was $1.52, versus $1.28 reported a year ago. Reported earnings per share for last year included 13 cents per share for amortization expense and 3 cents per share for costs associated with the Australian manufacturing reconfiguration. Consistent with guidance given last September, pension expense increased approximately 4 cents per share in fiscal 2003, versus fiscal 2002.

Now, let's move to results by reporting segment. For comparative purposes, prior year business results have been adjusted to exclude amortization expense eliminated under FAS 142.

Starting with North America Soup and Away From Home. Sales of $2.6 billion were up 3%. Operating earnings of 632 million were even with a year ago. Gross margins declined as a result of quality improvements, packaging improvements, and product mix. SG&A expenses increased due to shelving initiatives, systems upgrades, and capability improvements.

U.S. wet soup shipments were up 2% over the prior year. Shipments of condensed soup declined 6% for the year. This was primarily driven by a weak first half when condensed was down 9%. You may recall that we had difficult comparisons in the first quarter against the prior year, and we followed a bit in our January shipments. Shipment trends in the second half improved.

Ready-to-serve soup shipments rose 8%, with both 'Chunky' and 'Select' showing strong shipment growth. Campbell 'Soup at Hand' finished the year with strong results. As previously announced, we are now shipping 7 new varieties as part of our 'M'm! M'm! Good! to Go' convenience platform.

We are also now shipping now both 'Chunky' and 'Select' soups in microwavable bowls as part of this platform. Indications are that initial acceptance of these products is strong with customers and consumers.

Swanson Broth shipments rose 13% as consumers continued to respond to advertising and promotion, supporting broth as an everyday ingredient for cooking.

Let's turn to a breakdown of soup shipments by Cooking and Eating. Cooking soups rose 4% while Eating soups were even with year-ago.

Canada experienced solid growth in soup shipments, helped by the regional roll-out of new Campbell's 'Gardennay' soups in aseptic packages.

Away From Home sales declined slightly as good growth in soup shipments was offset by declines in lower margin businesses. Stockpot had an especially strong year.

Now turning to North America Sauces and Beverages. Sales increased 5% to 1.246 billion, driven by strong gains in 'Pace', 'V8' beverages, and 'Prego', partially offset by declines in 'Franco-American' products. Operating earnings increased 12% to 289 million dollars, driven by the sales gains and improved gross margins.

'Pace' volume gains were driven by growth in mass merchandisers and the launch of 'Pace' Mexican Creations. 'Pace' is the only Mexican sauce advertising coast to coast, and is the best-selling Mexican sauce west of the Mississippi. 'Pace' Mexican Creations is the single largest 'Pace' initiative since our acquisition of the brand. This is a line of 5 flavors of cooking sauces in a pour-over format that brings flavors of Mexican food to the consumer at home.

'Prego' shipments increased as growth in the core business and the launch of 'Prego' Hearty Meat Sauces in the fourth quarter more than offset declines in 'Prego' Pasta Bake Sauce, which was heavily supported last year. 'Prego' Hearty Meat Sauce is being strongly supported with dedicated advertising.

The total Beverage business was up on the strength of base 'V8', Campbell's Tomato Juice, and the launch of 'V8' Splash Smoothies. 'V8' Splash Smoothies have been a key driver in our efforts to put the beverage business back on a growth track.

Now, turning to Biscuits and Confectionery. Sales increased 18% to 1.774 billion. The Snack Foods Limited acquisition accounted for 8 percentage points of the sales increase, while currency contributed 4 percentage points. Base business growth accounted for the remaining 6 percentage points.

Operating earnings increased 14% to $212 million, with currency translation accounting for 4 percentage points of the growth. Operating earnings included $1 million of costs related to the Australian manufacturing reconfiguration, compared to 20 million in fiscal 2002.

In 2003, we recorded transitional expenses of $10 million related to closing the Pepperidge Farm bakery in Norwalk and starting up the new bakery in Bloomfield, Connecticut. In the fourth quarter of 2003, Godiva received a one-time payment of $5 million related to the transfer of the Godiva ice cream license.

In the first quarter of fiscal 2002, we announced a $72 million investment to build the new Pepperidge Farm bakery. The bakery is now up and running. Mark will talk more about this and other Pepperidge Farm highlights in a few minutes so I will not mention anything specifically about Pepperidge Farm.

In Asia and Australia, sales expanded on growth in Arnotts core cookie lines and the addition of Snack Foods Limited. Following the close of the fiscal year, Arnotts signed an agreement to purchase three biscuit brands. This acquisition, subject to Australian government approval, gives us additional small, but strategic, brands that compliment Arnotts' existing biscuit business. Additionally, Arnotts signed an agreement to manage the exclusive sales and distribution of Pringles chips brand in Australia. This began in mid August.

Godiva sales increased globally and its new stores and good growth in Asia offset continued negative trends in same store sales in North America. Godiva opened 25 new stores worldwide, while closing 15 unprofitable stores. Godiva successfully introduced several products worldwide, including a new nut and chocolate collection.

Now turning to International Soup and Sauces. Sales increased 14% to 1.052 billion. Currency translation and the acquisition of Erin Foods in Ireland accounted for the growth. Operating earnings increased 7% to $128 million, due primarily to favorable currency translation, partially offset by $8 million in costs related to the discontinuance of certain co-packing contracts.

Stronger sales of instant dry soups across Europe were offset by weakness in the wet soup and sauce sales in the U.K., France, and Germany. The U.K. shortfall reflects declines in 'Homepride' sauces and branded soups. In Germany, we are eliminating some of our unprofitable private label soup business. Our dry soup brand, 'Heisse Tasse', performed well. In France, volume declined in the fourth quarter due to unusually warm weather and aggressive competition. In Australia and the Asian regions, both soup and sauces delivered solid top and bottom line growth.

Now, turning to a brief discussion of balance sheet and cash flow, total debt at the year-end was $3.5 billion. Cash flow from operations was $873 million, compared with 1.017 billion in the prior year. The year-ago result benefited from a significant reduction in working capital to record-low levels, which have been maintained in fiscal 2003. Capital expenditures finished at $283 million, slightly higher than the 269 million of a year ago.

Now to discuss the outlook for fiscal 2004, here's Bob Schiffner, Chief Financial Officer.

Thank you, Jerry.

Fiscal 2003 wrapped up with a solid quarter, and we are pleased to deliver expected results in a challenging environment. As we enter the third year of the transformation plan, we note that many of our initiatives are beginning to take hold.

For example, cold blend technology for our domestic soup business is almost fully implemented. In the U.S., all of our soups are now being produced with easy-open lids. Our new gravity-fed shelving for condensed soup is now starting to appear in grocery stores. Instore test results of the fixture have been very encouraging.

The growth of ready-to-serve is continuing at a rapid pace. In fact, as we exit 2003, ready-to-serve, plus broth, now represents about half of our shipments on a fluid ounce basis in our North American soup business. We have introduced 'Kitchen Classics', a new line of ready-to-serve soups to fill a value gap in the marketplace.

The convenience platform is off to a solid start. We are generating significant awareness through advertising, we have launched promotions such as 'Tasty Tuesday', and soup sampling at Wal-Mart. 'Prego', 'Pace', and Beverages have really developed under Jim Goldman and are now beginning to generate strong sales growth. These three businesses combined are as large as our ready-to-serve soup and broth business, and our leveraging the same thermal processing advantages as soup. Products like 'V8' Splash Smoothies and 'Pace' Mexican Creations show real promise in creating new platforms for expansion and growth.

Pepperidge Farm, under Mark Sarvary, is experiencing growth in crackers, cookies, and bread, and has lots of innovation showing up on the shelf and in the pipeline.

Arnotts in Australia has had consistent growth driven by product innovation in biscuits, and is positioned to dramatically improve profitability following two years of cost savings work and plant rationalization.

We can now see some momentum building in our business. As we enter fiscal 2004, we are focused on creating the right balance between growth and returns. Thus, we are maintaining comparable levels of both capital spending and marketing investment.

In marketing, we're committed to sustaining the current level of investment behind all of our thermal and snacking businesses. I'm really pleased with the performance of both North America Sauces and Beverages, where we had our best sales in five years, and Pepperidge Farm, where every year we are generating a high percentage of sales growth from innovation behind crackers, cookies, and bread. We are going to make sure these programs are funded at the necessary levels.

Bottom line, we expect earnings per share in fiscal 2004 to be approximately $1.58. This includes approximately 3 cents for incremental pension and post retirement medical expense. Also, keep in mind that fiscal 2003 had the benefit from the 53rd week, equating to approximately 2 cents per share.

For the first quarter we expect to earn between 48 and 50 cents per share. We expect reported sales growth of 2 to 3% in fiscal 2004, which is equivalent to a normalized 3 to 4% factoring out the extra week of 2003. We are excited and cautiously optimistic. We expect fiscal 2004 to be another solid year.

Now, I will call on Mark to give you a review of one of our most outstanding businesses, Pepperidge Farm.

Thanks a lot, Bob, and good morning.

I've been part of the Campbell's executive team leading the Pepperidge Farm business for a little over a year I now, and I'm going to give you a brief overview of the division, its role in the Campbell Soup Company transformation plan, and an outline of the key elements of the strategy we're implementing to fulfill this role.

First of all a brief overview. Pepperidge Farm is a valuable part of the overall Campbell's company. It's approaching a billion dollars of sales, with a three-year compound growth rate of 6%. It has four major components.

The bakery business, the original business, founded by Margaret Rudkin in the '30s, is today approximately 35% of total sales. Pepperidge Farm is the best-selling premium bakery brand in the U.S. The cookie business, which includes the 'Milano' and 'Chunk' brands, is 20% of total. Here again, Pepperidge Farm is the leading premium cookie brand in the United States. So, [at least,] the 'Goldfish' cracker business is 25% of the total and is growing fast. And finally, the remainder is our frozen business, which includes garlic bread, puff pastry and puff pies.

Pepperidge Farm's role in the Campbell. transformation plan is to create additional growth engines beyond the soup, sauces, and beverage businesses. We are meeting growing consumer demand for premium, high quality, indulgent products, and specifically focused on snacks and baked products.

In addition, our role is to capitalize on recent strategic investments, notably the new bakery, which was just opened in Bloomfield, Connecticut, to accelerate the growth rate of both the top and, particularly Pepperidge Farm's, bottom line. To do this, our strategy is focused on four critical areas.

Number one, improving cost effectiveness across the entire supply chain. Number two, broadening and strengthening our distribution. Number three, developing and introducing significant new product lines. And number four, building consumer brand loyalty by investing behind integrated new campaigns for Pepperidge Farm and 'Goldfish' crackers.

I would like to talk briefly about the progress we've made against each of these areas. Firstly, on our progress against improving cost effectiveness across the entire supply chain. Most importantly, the Bloomfield bakery opened on time and on budget. And only a little more than a year after ground-breaking. The two initial lines are working at expected levels of productivity, and we will soon be capitalizing on the savings due to the increased productivity of these larger, faster lines.

The majority of our employees in Bloomfield came from our Norwalk plant, which is now closed. We are very proud of the smooth transition from one plant to the other, a tribute to the professionalism of the over 500 employees involved.

However, Bloomfield is not the only area where we've made progress against increasing our cost effectiveness. For example, over the last 12 months, we have increased the effective capacity of 'Goldfish' production by over 15%, with no new lines and only relatively minor capital investment. We have also expanded our bread capacity outside of the Bloomfield plant to accommodate the growth we've been experiencing recently. Again, without major investment.

The next major strategic area is broadening on and strengthening our distribution. And there are two major initiatives in this category that I would refer to. First, our pilot program, and second is our convenience store business.

Firstly, the growth of our pallet business to our retail customers, including Wal-Mart, Safeway, Kroger, Meijer, and so on. We are able to supplement the distribution strength of our almost 3,000 independent distributors, servicing over 3500 routes, by shipping floor-ready pallets to the cross-stock facilities of our large customers for promotional periods. This increases the effectiveness of our promotions by virtually ensuring that we get displays in every store, and allows the independent distributors to focus on replenishing the shelves and these displays. This is one of the fastest growing areas of our business and we expect even more growth in 2004.

Secondly, the growth of our business in convenience stores. We've gone from having little or no business in these stores, to having approximately 4,000 stores carrying our products today. And we project this will increase significantly by the end of fiscal 2004.

The third strategic area of focus is the development and introduction of new product lines. Over the years, Pepperidge Farm has introduced many line extensions, and these have been, and will continue to be, crucial to maintaining the vitality of the core business. But we recognize that in order to accelerate our growth rate, we need to introduce significant new products. As a result, we have revamped our innovation efforts to focus on large scale innovation, rather than exclusively flavor-based line extensions.

Last year, we made some progress on this front. We have had significant success with new products that are more than simple line extensions. Notably, 'Goldfish' Colors, many distinctive cookies, and the recent relaunch of Flavor-Blasted 'Goldfish'. A smaller business, but one that continues to grow very well, and in a new category for us, is frozen pot pies. I should also mention the significant major product improvements that we have made in our bread line. By naturally increasing the moisture retention of our breads, we have improved quality to our consumers and extended shelf life.

The fourth strategic area is building brand loyalty by investing behind integrated new campaigns for Pepperidge Farm as a brand and 'Goldfish' crackers as a brand. Clearly, our most valuable and leveragable assets are our two major brands, Pepperidge Farm and 'Goldfish'. Together, they are in over half of all the households in the United States. Remarkable for such premium brands.

However, our crust purchasing is relatively low. Only a small percentage of households purchase both our bread and our cookies, a similarly small portion buy both 'Goldfish' and cookies. This provides us with an enormous opportunity for growth merely by increasing loyalty to the brands.

Last week, we launched a new integrated advertising campaign for Pepperidge Farm, featuring an animated character. Each of the five spots is focused on the unique qualities of one of our best-selling products like 'Milano', 'Farmhouse' bread, and so on. But at the same time, each spot reinforces the quality and uniqueness of Pepperidge Farm as a brand. I have been encouraged by the initial response we have received for this new campaign.

Later this month, we will be debuting new 'Goldfish' commercials. These are based on the very successful jingle campaign that has been running for some time. However, these, too, are designed to broaden the brand by focusing on the new Flavor-Blasted products, which are aimed at slightly older kids than are the base 'Goldfish'.

Obviously, advertising is only part of the story. We are continuing to strengthen all aspects of brand communication. For example, our consumer promotions and instore merchandising is now integrated across the major product lines.

My final comment is on the Pepperidge Farm team. I am very pleased with the entire team we have today. It incorporates individuals with significant tenure and excellent track records. New executive team members who have joined us recently have been very successful in other companies.

In summary, Pepperidge Farm is an important part of the Campbell Soup Company, nearly a billion dollars and growing, and a significant part of the transformation plan as a source of new growth engines, and an important component of the growth in EPS.

Now, I'll turn the meeting back to Len.

Thank you. Eric, I'd like to start the question/answer session, please.

Thank you. At this time we are ready to begin the question and answer session of the conference. If you would like to ask a question, please press star one. You will be announced prior to asking your question. To withdraw your question, you may press star two. Once again, to ask a question, please press star one. One moment, please.

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

Thank you. I guess first question would be, I was a little bit surprised that, given the sales growth in the fiscal fourth quarter, that there there wasn't more leverage to the bottom line. And I was wondering if you could address that?

And then I have a follow-up on Pepperidge Farm.

Eric, this is Bob Schiffner. In the fourth quarter, there were a number of, what I would call, unusual nonrecurring charges that, frankly, were recorded, and I think if you look at it absent some of those charges, that, in fact, there is quite a lot of operating leverage in our P&L.

Okay. Can you quantify those items? I know you said they were noncash, but could you quantify -- ?

Well, I mean clearly, Jerry did identify a few of those in his comments. There was some litigation expense, there were -- there was a charge associated with low-income housing. There were charges associated with co-packing agreements, and so, you know, those were charges that, clearly, are of an unusual nature, which we absorbed. So, quite the contrary. We're actually very, very pleased with the profitability in the fourth quarter, and, in fact, I think we have demonstrated that we do have a lot of operating leverage in our P&L.

Okay. And then as a quick follow-up, I guess I was kind of surprised when you made the comment about -- that the club stores or other channels are starting to accept pallet distribution of cookies and crackers, and I always was under the impression, because the biscuit business is largely a DSD delivered products, that the turnover required on a DSD network, and yet you're finding the opposite in some of the new outlets.

How does the organization deal with that, and what do the DSD operators think of, kind of, having to compete with the warehouse delivered system?

Eric, this is Mark Sarvary. It is, in fact, it is not a competition. It is, in fact, very synergistic.

The mass merchandise are primarily delivered by pallet, with supplementing by distributors. The retail outlets such as Kroger, and so on, are primarily delivered by the independent distributors, the DSD system, and supplemented by the pallet delivery. But by working together, we found that we can get, actually, the best of both worlds, we can get the speed to market and speed to distribution of a big promotion that is associated with a warehouse delivery, and we can get the replenishment and service levels that you get in the store of a DSD system. And we're finding they work, really, quite well together.

Do you think that -- I mean, how recent is this change? I mean, is this -- did the Wal-Marts and the others just started requesting pallets and not DSD operators in their store?

We've been delivering pallets for several years. What we've seen is a dramatic growth in the retail outlet, the non -- it continues to grow in the mass merchandisers like Wal-Mart, but we have seen increased growth in the major retailers other than the mass merchandisers. And as I said, this is a very synergistic process that works very well between the distributors and the cross-dock facilities.

Okay. Thank you.

Okay. Next question, Eric?

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

Good morning, everyone.

Hi, Terry.

Bob, do you have any updates on the gross margin for next year? It was a bit lower than I expected in this quarter, although you did explain there were some reasons for that, but is there any update on that front for '04?

Terry, there is no update relative to what I've been saying all along, and that is we expect some minor deterioration in margins in '04. We've been very consistent about that.

That is going to be primarily due to the fact that it will be our first full year of easy-o cans and other quality improvements, and we expect, though, that following '04, that, you know, we will be in a period of stabilization, if not some modest improvement. And again, we've been very consistent on that. And you know, there is no change in our position.

Okay. And just on the always important question of consumption, I guess this extra week in Q4 muddies the water a bit. But if you look at a total U.S. soup number, it seems pretty clear that you probably ship well ahead of consumption on the ready-to-serve side, and I understand that's getting, you know, the 'M'm! M'm! Good! To Go' ready, but can you address that, just where you think consumption was in the quarter versus your shipments, and how the inventories look as we move into the season?

Terry, this is Doug Conant.

Hi.

Hi. We feel good about the way we've managed the inventory flow here. The shipments really, the bump in shipments is related to the building of pipeline in our -- for our convenience platform. And for the shipping of some other new soup items like 'Kitchen Classics', as we're building ACV on those, as well.

We have managed the inventory level quite nicely as we've phased out of our condensed cans into easy-open cans, and as well as building pipeline on the ready-to-serve products, and through it all as a company we've been able to deliver very solid-looking capital results. So we feel good about it. It has been well managed.

Okay. Thanks very much.

Okay. Eric, next question?

John McMillan of Prudential Equity Group, you may ask your question.

Good morning, and congratulations on these fourth quarter results.

Thanks, John.

Doug, you know, in -- on July 27, 2001, you gave company goals beyond fiscal year 2002, so really, beginning the fiscal year that just ended, of 8% compound annual earnings growth. Now, I know there are some issues getting started and so forth, but you know, this year, you certainly overachieved your targets, that a year ago. But you know, the numbers of 6% earnings growth was a little bit below that 8% target, and your target next year of 4% earnings growth is below the target. Do you plan to, like, make this up and, you know, do more than 8%? So when you say you're comfortable with delivering this, you recognize you've got some catch-up to do?

John, your point is well taken. That -- the spirit of our transformation plan remains intact. We've talked 3 to 4% top line, and we've talked 8% bottom line as a goal since we started this in July of 2001. We are now to a point where we're comfortable signing up for delivering the top line goal of 3 to 4%, and delivering it in a quality way. We're not going to compromise our ability to deliver that in a quality way by shortchanging any of our spending to do that. And that's -- that's putting us in a position where we're going to be delivering less than 8% EPS growth this year.

But I honestly believe that as we exit the transformation plan here, and this is the last year of that plan, we should be well-positioned to deliver good solid organic growth at that 3 to 4% level, and we should be well-positioned, as Bob talked about on a margin front, to begin to grow that bottom line at an 8% clip. I think we are going to be well-positioned to do that.

Now, between where we started and where we are, there has been a lot of heavy lifting and a lot of things have moved around. But I think the spirit of what we said, and, in fact, the actual output of what we committed to as we exit this plan, is going to be intact. Now whether we hit it perfectly in one quarter or one year, that's open to discussion. But your point is well taken.

Just -- the Godiva payment, Bob, when was that received and how was it treated?

It was received in the fourth quarter, John. And it was taken to income in the fourth quarter.

Okay. So if you sit here, and let's try to go through what Eric Katzman said, and if you say that the bulk of the unallocated increase was -- can you say the bulk of the unallocated increase was some of these one-time issues?

There's a lot of things moving around, John. Okay? I've commented on a number of them. The payment for the one-time was also on the other income line, as well. So, in fact, that's a little bit of a give-back. But, you know, but I think -- I think it is a reasonably -- you know, as a broad statement, your statement is probably true.

Okay. So the net -- I could suggest that the net one-time was about two cents?

Yeah, I mean, I'm not going to -- you know, I'm not going to give you all the numbers and, in fact, be incredibly precise, because -- because we just don't give that information out. But I think your statement in broad terms is right.

Can you just give me the size of the microwave soup sales? I know you put them in the ready-to-serve, and they certainly are very ready-to-serve, but can you just give me the total size of that microwave segment last year so I can measure the success in growth of that in the years to come?

John, we really -- the only number we gave on that microwave statement we said we started out we said Soup at Hand we thought should be a $70 million annual business. And you know, that was the only number we give. And we never really broke out any microwave sales. And I think that is just a level of detail that we were not going to provide at this point. As part of that ready-to-serve business.

Did you do what you said were you going to do in terms of that $70 million?

Yes.

Okay. Thanks a lot.

David Adelman of Morgan Stanley, you may ask your question.

Hi, good morning, everyone.

Hi, David.

Was the condensed volume shipments in the quarter below your plan, down five, given the extra week?

David, this is Douglas Conant. We managed it as we expected it to be managed. We were really winding down some inventories as we were gearing up to ship the new easy-open lids, and so we were carefully working with our customers to manage the flow of inventory there. And so the fourth quarter, in that sense, was an unusual quarter.

Doug, In condensed, are you changing the balance slightly in terms of your goals of profitability versus volume? It seems like you are trying to be a little more selective in the component of that business that you're emphasizing. Is that correct?

Yeah, David, that is an excellent observation. As we've commented recently in other forums, the -- as we've been working on this now 2 1/2 years, we've uncovered some real terrific growth prospects in ready-to-serve related to our convenience platform that lead us to believe we have the possibility to significantly accelerate our ready-to-serve growth over time.

At the same time, on condensed, we have uncovered segments where there is an opportunity to stabilize or possibly even grow those businesses, which would be our three areas, our cooking, our kid's focused icon brands, and our -- I'm drawing a blank, Len.

The icons, the kids, and the cooking.

Oh, okay, yes. Excuse me, the icon brands like tomato soup, the kid's brands like our Fun Favorites, and cooking, which are about three-quarters of our line, where we think we have the opportunity to stabilize, to perform better in those segments.

Overall, the way we've built our business proposition now, we have the ability to meet our targets without stabilizing the entire condensed franchise. But we still expect a significant improvement in trend this year on condensed, as all of our initiatives get to market.

Right now, this is the first year where we will have our products fully upgraded, our easy-open lids available, our condensed shelving initiative, our gravity-fed shelving initiative, rolling into the market, and new targeted advertising, targeting at the segments that are responsive to the spend. So we expect a significant improvement in trend, but we don't have to get all the way back to stabilization to hit our numbers.

One final thing, either for Bob or Jerry, could you quantify the benefit of foreign exchange to profitability to operating income in the fourth quarter? And what you may have embedded in your forecast for '04 in terms of the profit benefit from FX?

David, we just will not get into that level of detail, other than to say it did have a favorable impact, and as far as next year is concerned, we've pretty much assumed stable exchange rates year on year.

Thank you.

Okay.

Eric, next question?

Bill Leach, of Neuburger Berman, you may ask your question.

Good morning.

Good morning, Bill.

Hi, Bill.

I had a couple of questions. First, in terms of your first quarter guidance, the midpoint, that's a 4% gain, which doesn't seem to be very ambitious given that your soup volumes, as I recall, was down 8% in the first quarter last year. Why aren't you expecting a larger gain for the October quarter?

Well, Bill, this is Douglas Conant. The key is that we had a very unusual quarter two years ago that led to that 8% decline -- that affected our 8% decline last year. The 9/11 quarter was the first quarter of our transformation plan, and it was -- and our sales were affected by the -- by the 9/11 event. So we didn't expect to have a particularly good quarter last quarter. I mean, last year's first quarter. This year, we expect to do better than that. And, hopefully, there is some upside to that number.

Bill, let me also just add, too, we do have a slightly stronger marketing program forecasted for the first quarter, as well. So that is also playing into that.

The spending?

The spending. The spending has affected the earnings.

So as you look at the quarters for the year, your annual guidance is 4%, your first quarter guidance is 4%, is that -- do you see kind of steady gains each quarter?

No, it is a little bit too early to finalize that thinking, but I would, as a word of caution, probably tell you that that is probably not going to be the case.

Would you like to elaborate on that? [Laughter]

I know, in fact, you would like me to elaborate on it. But again, I think it's just too early in the ball game to state that, simply because, as you know, things always do move around. So we're just confident at this point of stating our forecast for the first quarter.

Well, Bill, we will update, you know, as we have this past year, each quarter. You know, to talk about that as we look at what's going on, so --

And my other question is, Bob, could you give us some financial guidance in stuff like the tax rate interest expense and capital spending?

Why don't I turn that over to Jerry.

We expect the tax rate to be broadly in line with this year's rate. And we expect capital spending to be pretty much at the same levels, as well.

What was that?

We spent $283 million this year. It will be close to the same number in '04.

And how about interest expense?

Interest expense, we expect to be probably in line, as well.

Okay. That's easy. Okay. Thanks very much.

You're welcome.

Next question, Eric?

David Nelson of CSFB, you may ask your question.

Good morning, just to follow on with Bill there, Bob was talking about comparable spending on cap ex, I guess that applies to marketing, also? Marketing will be flat on an absolute basis?

It will be flat, we've historically said that our marketing will be maintained relative to sales at the same rate. So to the extent that we're going to see, you know, an increase in sales, we would expect, possibly, to see a slight increase in absolute dollars.

We've been talking -- this is Douglas Conant. We've been talking consistently around that 21% of sales number for total marketing, and we're still operating in that range.

Yeah, that's 21 of list sales, which, you know, is more of an internal number.

And within that, you post, I think, for the second quarter in a row anyway, a reduction in trade spending. Could you comment a little further on how you're able to achieve that?

Yeah, we have spent a lot of resources to improve the overall management of our trade promotion funds. You know, we've talked to you before about our project, which we internally call our customer investment program, which is all about improving the overall productivity of our trade spend, and we've made a sizable improvement in that part of our operation, and we're very proud of that.

That's great. If I could ask another question, please, on the litigation in low-income housing, could you tell us a little more about what that really is and why it might be one-time in nature?

Yes, I'm going to turn this over to Jerry. And he can -- he can tell you a little bit about it.

Great.

First, a few comments on affordable housing investments. The company made a series of minority interest investments in the early '90s in affordable housing partnerships. These investments were projected to deliver economic returns in excess of the cost to capital based on tax credits, linked to such investments. The expected tax credit stream has been realized and we will continue to realize it for some years to come.

You know, from an accounting perspective, as opposed to the economics, we assess the carrying value annually, based on sample valuations by third-party experts and anticipated future cash flows. Estimated equity losses and valuation adjustments are booked quarterly. On the basis of new valuation information received in the fourth quarter, we took a more significant charge than we previously expected.

In terms of our disclosures, you can see the carrying value of these investments, they represent substantially all of the line item investments in note 15 on the accounts in our annual report, and 10-K. In terms of -- so going forward, we will continue to watch those valuations, as we realize the cash benefits.

In terms of litigation, we don't comment on any of the specific legal and litigation-related expenses. But at some level, those expenses will continue.

Okay. Thank you.

You're welcome. Next question, Eric.

Chris Galvin of J.P. Morgan, you may ask your question.

Good morning.

Good morning, Chris.

I think you've pretty much lapped the change in strategy with respect to smoothing promotional spending across the year, but just thinking about to last January where you had a bit of a hiccup. Could you just comment on going into the big soup season this fall, and how comfortable you feel with execution, and if there has been any changes you've made going into another big promotional season?

Chris, this is Douglas Conant again. Good question. Last year was the first year of implementation for our customer investment program that Bob talked about, which dramatically changed the way we do our trade spending with our customers. Through that implementation, we had some hiccups along the way, and one of those hiccups was in the January time frame. We're now fully up and running with that system. We've been doing it for a year. And while we continue to add refinements to it and advance the implementation, we are very comfortable with our ability to affect performance and to forecast performance. It is significantly enhanced versus where it was even six months ago.

We also know that we are confident that this year we have adequate resources to carry us all the way through the soup season. And actually, beyond it. So that we're getting to a point where in the foreseeable future, we are going to have a year-round presence in advertising and promotion on soup, which we've been working towards since I got here, 2 1/2 years ago.

So I think the worst is behind us. And we're very prepared for this upcoming soup season, every week of every month. I have no doubt that the sales organization and the -- in fact, the entire Campbell organization, is going to be very focused on execution this year.

Okay. And did you take a price increase on soup this year?

We took a 4% price increase on our condensed soup business in June, and that was the first price advance we had taken in condensed soup in several years. I think about five years, and it was, really, driven by the cost of upgrading the product quality, and also adding easy-open lids, and was done in great partnership with our customers who have worked with us on it. We did it in such a way that it also gave the customers an opportunity to simplify the pricing at retail, which is a huge consumer problem.

Prior to that price advance, there were about -- on average, 15 different price points in the condensed soup category, in every store. The pricing that we took has enabled our customers, should they choose to, to drive down to four price points, and that has just been -- that's being fully implemented by our customers now, and we are seeing great progress on that front with several key customer, although it is too early to call. So there is a price simplification move here for the consumer, which makes it much more manageable at shelf. So we're very comfortable moving forward on this.

Okay, and then just the last one I had. Can you just talk about what you've used the maintenance level of cap ex, and then, whatever over and above that level you're spending, what that's going to be for in 2004? Because I think some of the big projects that dropped off in '03, like the new Pepperidge plant and some of the cold blend, those drop off, what is sort of taking that place?

Chris, that is is a good question. I would say that we foresee spending, capital spending, looking out into the foreseeable future, at a similar level to what we've spent over the last two years. You know, there, in fact, are some strategic opportunities that we're now evaluating that may up that slightly, but again, at this point, it would be premature for me to comment on that. So I would say maintenance at the existing level is our best guidance at this point.

Just to build on what Bob said for a minute, again this is Doug, we are sort of past the point of making the big fixes in the -- in the infrastructure that we -- that we have observed over the last three years. There are now some real opportunities emerging for us to enhance our growth prospects and better manage our costs. And we're evaluating them very carefully, but we're now to that level of strategic investment as opposed to just fixing what was broken. And that is why we're going to continue to provide guidance at around the current level.

Okay. Thank you.

Next question, Eric?

Eric Larson of Piper Jaffray, you may ask your question.

Good morning, everyone.

Hi, Eric.

A couple of questions. On your price increase, did you write a two or three 52nds check to the trade or did you allow a buy-in.

We, in fact, managed that where we did not allow a buy-in.

Okay. And second question is, where do you sit right now on the -- on the percent of retailers that have gravity-feed systems? For condensed?

Eric, this is Doug again. Just one comment on the condensed price, building on Bob's comment. We didn't have a buy-in, but we were also transitioning from the old can into the new easy-open can, so there was no incentive for either ourselves or the customers to load in with the old product. So that's how we managed that transition without a buy-in.

The gravity-feed shelving, we -- if I -- right today, we are targeting to have 3,000 fully installed within the next six weeks. We currently have about 1500 installed, and we'll have another 1500 installed in the next four to six weeks. At a conference earlier last week, I implied that that was all done and I was wrong. We will have 3,000 installed as we move into October. We are targeting in the next 18 months to have up to half the ACV installed with gravity-feed shelving in the condensed aisle. And then we're targeting -- I believe, personally, that in all high volume outlets, in the next three years, will be fully installed with gravity-feed shelving.

The issue is that we have to work with every customer in every store to tailor the implementation to work for that store and that customer, and that process just takes a while. And then we have the inevitable challenge of customers not wanting to reset shelves in the middle of the soup season. So we're working around the fringes of that, and we're doing it customer by customer.

That makes sense. Final question, on the gravity-feed are your customers sharing any of the costs of that, or are you -- are you expensing the cost of doing that as a merchandising expense? How are you paying for that?

Well, we're managing -- we're expensing the costs, and we're not going to get into how we manage those costs with our customers.

Okay. Thank you.

Thanks. Eric, next question.

Romitha Mally of Goldman Sachs, you may ask your question.

Good morning.

Hi, Romitha.

Good morning, Romitha.

Wanted to ask you a question about R&D spending. It was up quite sharply in '03. What is -- what is the expectation in '04?

Our outlook for -- Romitha, this is Doug. Our outlook for R&D spending is that it is going to continue to operate at an important level as we leverage our thermal technology across our entire portfolio, both in North America and globally, as we continue to advance innovation in our snacking and baking businesses, as well.

So, you know, we are continuing to be committed to the R&D proposition. It's really -- the technology is what is going to enable us to continue to add value to our products and differentiate versus private label.

So it's going to be comparable to '04?

Yeah.

Okay. And then, just in terms of condensed, Doug, it sounds like stabilization is not the goal for fiscal '04. You know, what -- what would you view as success in condensed this year?

Well, the way we've positioned that, Romitha, is a meaningful change in trend. And what we've reported this year is that we were down 6%. We expect to do significantly better than that. And I think we will. And we will just see. We've got so much activity going into the market right now on both ready-to-serve and condensed, that it is hard to call the number and declare where the interaction is going to take place. We expect a significant improvement in trend.

Okay. And then just finally, it may be too early, but ''Progresso'" has rolled out a Rich and Hearty line. Are you seeing that impact 'Chunky' at all?

Well, ''Progresso'' has, in fact, rolled that line out. We see, at this point, no impact on 'Chunky', and let me just put the ''Progresso'' performance in context. ''Progresso'' has done a nice job, both before they were acquired by General Mills and since, but when you look at just ready-to-serve soup, which is what ''Progresso'' is, and our portfolio of ready-to-serve, we are twice the size of ''Progresso'', and since our transformation plan was launched, we've grown eight times faster.

And on top of that, we're bringing innovation to the category in terms of the entire convenience segment, which we think will accelerate the growth of ready-to-serve. So, I think it's great that they are continuing to try and expand their presence, but I like our position.

And then just one final question. In terms of the top line guidance for the year, is it the three to four the long-term goal?

Three to four has consistently been the long-term goal.

Right, but for fiscal '04?

Again, Romitha, we are going to report, because of the 53rd week, 2 to 3%.

Okay.

However, when you adjust out that impact, the normalized growth would be 3 to 4%.

Got it. Thank you.

Okay.

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

Four.

All right. We will take those four, and then we will quit.

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

Yeah, hey. Good morning.

Good morning, Mitch.

You know, Doug, since you've taken over you've managed expectations very well. I think you've beat numbers, in practically every quarter. So, does this $1.58, is this another -- I don't want to say it's conservative, but, I mean, is this -- is this a number that, you know, sort of, we can bank on, I mean, and if things, sort of, go your way, maybe it's the bottom end of the range?

Mitch, you know, we try and give the -- provide the best possible guidance we can provide every quarter. We took over a company that was in urgent need of revitalization. It has always been tough to call exactly what is going to happen. We think we've been very consistent. And we will continue to be consistent. Lord knows I hope we beat that number. We don't intend to disappoint. Anyone on this line or any of our shareholders. But that is our best estimate right now.

Okay. That's fair enough. How about -- with all the, you know, Kitchen Classics and the gravity-fed in particular, can you quantify the shelf space expansion, you know, or SKU expansion, or however you can quantify for us?

We're basically managing -- we're really driving more productivity on the shelf than anything else. There is some expansion in some accounts. But we're also working with our customers to prune our product line and the entire category to make sure the entire space is more productive.

The gravity-feed shelving is a great example of how we can drive productively at shelf, because we can put 15% more inventory on the shelf, and it makes it much more manageable and will limit the out of stock significantly. So we're -- it's really more about a shelf productivity play than anything else.

Now, as we demonstrate the vitality of what we're doing in the marketplace, I think we may have an opportunity to expand our presence more, but I think we have to prove ourselves more significantly first.

Okay. Is -- the easy-open lids, you know, if I recall, that was a pretty big aid in ready-to-serve consumption when that was introduced. Is that the expectation?

Well, the expectation on condensed is really a bundle of benefits expectation. We have the shelving phased in in a certain number of stores over the next three years. We have the product quality upgrades. We have the marketing upgrades, and we have easy-open lids.

When we went to easy-open lids on ready-to-serve, we were able to assess, generally, it looked like we got about a 2-point improvement in trend out of that. It would be -- it's just too hard to nail it for condensed, however, because we have so many things going on simultaneously.

Lastly, with transition inefficiencies, or whatever you want to call it with the Pepperidge Farm bakery, how -- can you quantify what that was in the fourth quarter?

We don't get into that level of detail, I don't believe. I think -- well, we might have -- We [INAUDIBLE] --

Yeah, we do. That's an expense, though, Mitch.

$10 million of added expense?

Correct. That wasn't all in the fourth quarter, but --

Full year.

A significant portion was in the fourth quarter.

Okay.

$10 million in the full year.

And you feel, you know, opening new plants is always, you know, sometimes, you know, there's things that come back to bite you, but you feel pretty good about where are you?

We turn that over to Mark, yeah.

Mitch, we -- the vast majority of the costs of the opening of the plant are behind us, and as I said in my comments, they are on plan in terms of time and budget, and with -- we are, this year, going to be realizing the benefits of the, you know, increased productivity. And so far, we're right on track with those increased -- the expected increase productivity.

That's for the first quarter. Is there any, you know, inefficiencies there that you've included in your budget?

The transition -- the achievement of full efficiency takes more than one quarter, as you know. But it is baked into our plans, and even net of that, sort of, transitional inefficiency we are still ahead of where we would have been with the old plant.

Lastly, what is your expanded shelf life up to now, how many days?

How much has it extended.

How many days.

It depends on the product, but broadly speaking, a sort of rough guide is about three more days than average, so it is, you know, 8 to 10 days.

Thank you very much.

Okay. Next question.

Bob Cummins of Shields and Company, you may ask your question.

Thank you very much. We all remember that last winter was extraordinarily cold, which is obviously good for soup consumption, and then, at least in this area of the country, this summer was pretty cold and rainy as well, especially June and July. Do your people calculate some sort of weather index, and can they measure to what degree in any fiscal year your consumption may have been above trend due to weather? And can you share that information with us for this past year?

Bob, this is Douglas Conant. We do look at weather trends, and we do contemplate that in our forecasting. What we find is that our trends are more susceptible to -- or more affected by marketing spending and by new product activity and by competitive activity than they are by weather. So, sometimes we get a little lift in a -- with a snowstorm, but by and large, the activity in our category right now is more affected by the level of spend and the competitive activity. So I wouldn't read a lot into the weather.

Do you feel as though, going forward in fiscal '04 though, that there's a period when your comparisons will become particularly tough in that regard?

Well, not particularly. We have a portfolio of products, especially this new convenience platform, that seems relatively indifferent to weather, as for On-the-Go snacking and behaviors outside of the traditional soup season. So we're comfortable with it.

Okay. Thank you.

Okay. Our next question, Eric?

John McMillin of Prudential Equity Group.

Hi. What was the price increase for ready-to-serve soup? And did that have any impact on the quarter shipments?

John, we didn't -- the only increase we took in June relatively to the RTF segment was on Soup at Hand. And that was about a 6% increase.

And that didn't have any material effect on our inventory position.

Great. And just to Mark, obviously 'Oreos' and all of Nabisco has been very promotional. Does that impact your business at all?

Yes, a little bit. I mean, they are very promotional, and they have been. But our business, we are not -- the category that we compete in in cookies, is, as I am sure you know, is more of the adult cookie area, than the whole family, and so it has some effect, but it is not a direct effect. What we've seen is that the group -- you know, we've been growing, and it has been driven by marketing and promotion and by new product introduction. So our -- there has been some effect, it has not been significant.

Thanks a lot.

Okay. Last question, Eric.

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

Well, this is easier than you thought. Mine was answered. [ Laughter ]

Okay. Thank you everyone for joining us this morning. And we will -- our next major appearance will be at the Cagney (ph) Conference in February, but we hope to be able to talk to many of you soon, shortly, and thanks again for joining us this morning.

Thank you, and this concludes today's call.