金寶湯 (CPB) 2004 Q1 法說會逐字稿

Good morning and welcome to Campbell's first quarter earnings conference call.

All participants will be able to listen only until the question and answer session of the conference.

This conference is being recorded.

If you have any objections, you may disconnect at this time.

I would like to introduce the host for today's conference, Mr. Leonard Griehs, Vice President Investor Relations.

Mr. Griehs, you may begin.

Good morning and welcome to Campbell Soup Company's first quarter fiscal 2004 conference call.

On the call this morning will be Bob Schiffner, Senior Vice President and Chief Financial Officer, Gerry Lord, Vice President and Controller, Brad Snyder, Assistant Controller.

Also participating today are Doug Conant, President and Chief Executive Officer, and Jim Goldman, President of North America Sauces and Beverages.

Our financial results press release and supplemental schedule were sent out earlier this morning.

These are also posted on our Web site.

Our call this morning will last approximately one hour.

It will be replayed approximately two hours after this call is complete.

The replay number is 1-800-938-1164.

It will run through midnight, November 28th.

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

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

Discussion this morning will contain forward-looking statements which reflect the company's current expectations about its future plans and performance including statements concerning the impact of marketing investments and quality improvements on volume and earnings.

These forward-looking statements rely on a number of assumptions and estimates which could be inaccurate and which are subject to risks and uncertainties.

Actual results could vary materially from those anticipated or expressed in any forward-looking statement made by the company.

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

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

Now I'll call on Gerry Lord to discuss our first quarter results.

Good morning, everyone.

I would like to begin with a few points about a change in our reporting format.

Beginning with this quarter, the earnings statement distributed with our press release is in the same format as that included in our SEC filings.

Commentary on variances will address this format.

In addition, we will be sharing an analysis of sales by reporting segment as well as for the total company.

This has been in our 10-Q and in addition, we will include this analysis in our conference call material.

This analysis of sales by segment includes trends in volume and mix and this will replace discussion of pure soup volume.

As we have shifted more of our new product activity behind the convenience platform, we are generating more dollar sales per fluid ounce but in many cases, individual units contain fewer fluid ounces.

This reporting will more accurately reflect our strategy of focusing on dollar sales rather than fluid ounces.

In order to be clear as to the mix shift within the U.S. soup business, we will continue to highlight fluid ounce shipments of condensed, ready-to-serve and broth.

We will no longer report total U.S. wet soup or worldwide soup shipments.

Here are some highlights from our first quarter results.

The first quarter was one of our most significant quarters for new soup products in recent history.

These new products were focused against the ready-to-serve business and in particular, the convenient platform.

We launched seven new varieties of Soup at Hand bringing that line to 11 varieties, four varieties of Campbell's Select in microwavable bowls, and six varieties of Chunky in microwavable bowls.

Consumer response has been strong and above our expectations.

Both initial and repeat orders from our customers have been strong.

We are selling all the microwavable bowl varieties that we can make.

In fact, for both Chunky and Select microwavable bowls, we've accelerated capacity expansion in order to be able to meet this demand going forward.

Soup at Hand has demonstrated strong growth, more than doubling sales versus a year ago.

Partially in response to demand from both consumers and customers, competition has become more aggressive on price.

Beverages continued to show strong performance.

In Biscuits and Confectionery, Pepperidge Farm showed strong sales cross the business and Arnott's delivered strong top and bottom line growth.

Europe also began to improve with stronger than anticipated performance.

Now let's turn to the specifics of our financial results.

Sales rose 12% to $1.9 billion, EBIT was $354 million up 7% versus a year ago.

Sales growth for the quarter breaks down as follows: Volume and mix was up 2%, pricing added 2%, reduced promotional spending added 2%, acquisitions added 2% and currency added 4%.

Gross margin declined to 42.0% from 43.1 as unfavorable product mix, the higher cost of quality and packaging improvements, and the acquisition of businesses with lower margins was partially offset by higher condensed soup selling prices and lower promotional spending.

Marketing and selling expenses rose $19 million to $293 million primarily due to the impact of currency and acquisitions.

Administrative expenses increased $15 million to $123 million primarily due to the impact of currency and expenses related to litigation.

Research and development costs rose $2 million to $21 million due to the impact of currency and continued investment in new product development.

Net interest expense was $43 million down $2 million versus a year ago, primarily due to lower short-term debt.

The tax rate was $32.2% versus 32.6% in this quarter a year ago but consistent with the average rate for fiscal 2003.

Dilulted earnings per share for the quarter was 51 cents.

This compares to 47 cents recorded in the year ago quarter which was before the cumulative effect of accounting change.

In fiscal 2003, the company recognized a one-time non-cash goodwill impairment charge of $31 million after taxes or 8 cents per share related to the adoption of SFAS Number 142.

Now let's turn to operating highlights by reporting segment beginning with North America Soup and Away From Home.

Sales of $805 million were up 8% versus a year ago and operating earnings of $221 million were also up 8%.

Sales for the quarter breakdown as follows: Volume and mix was even with a year ago, pricing added 2%, reduced promotional spending added 4% and currency added 2%.

In U.S.

Soup, ready-to-serve shipments rose 6%, condensed shipments declined 7% and broth rose 14%.

Let's examine some of the key drivers of the quarter's results for soup.

Our first quarter plan was centered on an early and effective rollout of convenient products.

Marketing efforts focused on promoting this line in order to drive strong trial by consumers.

From all of our initial data, it appears that this convenience platform is becoming a winner.

Campbell's Chunky and Select microwavable bowls attained national distribution early in the quarter and consumer demand driven by advertising, in-store merchandising and sampling exceeded our expectations.

As I mentioned earlier, we are accelerating investments in our plans to add production capacity for these products just as soon as possible.

In the short term, we are focusing production on the most popular items but demand continues to exceed supply.

Soup at Hand is performing extremely well.

Following all of our activities surrounding the convenience platform, Progresso responded by broadening its 99 cents per can promoted price driving consumer purchase growth and share gains that unfavorably impacted our canned, ready-to-serve, and condensed businesses.

Despite this heavy promotional spending by competition, our key convenience brands Chunky, Select, and Soup at Hand in aggregate grew shipments in excess of 10%.

Moving on, we continue to roll out our new gravity-fed shelving system for condensed soup.

We currently have approximately 2,800 in stores.

This represents about 10% of our ACV.

Test results from initial placement have been quite positive.

Sales in Canada, excluding currency, was slightly below a year ago due to start up issues related to transitioning to a new distribution partner.

These issues are now behind us.

Away From Home sales finished up versus year ago led by solid soup performance.

Now let's turn to North America Sauces and Beverages.

Sales increased 7% to $327 million and operating profits increased 1% to $78 million.

The sales increase for the quarter breaks down as follows: Volume and mix was up 3%, reduced promotional spending added 4%.

Jim Goldman will be giving you an overview of this business in a few minutes.

I'll mention here just a few highlights of the quarter.

Sales were driven by strong performance on V8 vegetable juice, the growth of V8 Splash Smoothies which were introduced in the second half of last fiscal year and reduced promotional spending.

This strong beverage performance was driven by new advertising, continued success of new varieties of V8 and Campbell's tomato juice.

Prego experienced a decline in sales due to weakness in the entire Italian sauce category and Pace sales were even with a year ago.

Now, let's turn to Biscuits and Confectionery.

Sales for the quarter increased 20% to $491 million.

Earnings rose 10% to $46 million.

Sales growth for the quarter breaks down as follows: Volume and mix was up 5%, pricing added 3%, acquisitions added 6%, and currency added 6%.

Let's take a look at the highlights of each of the three businesses in this reporting segment, Pepperidge Farm, Arnott's, and Godiva.

Pepperidge Farm sales increased driven by strong cookie growth.

Consumer response to our new mini cookies has been excellent while our seasonal lines have strong growth heading into the holiday period.

Swirl, farmhouse and natural whole grain breads contributed strong sales growth driven by distribution gains in mass merchandise.

Arnott's had an excellent quarter delivering strong sales growth in biscuits.

Additionally, we added three key brands to the portfolio following the acquisition of businesses from George Western's Foods Limited.

Snack food sales were soft due to heavy competition.

Godiva sales were ahead of last year due to a recovery in our Asia Pacific and worldwide duty free businesses and strong results in direct sales which include catalog and Internet.

Same-store sell sales in the U.S. were below last year.

Now moving to International Soup and Sauces.

Sales increased 18% to $286 million.

Operating profits rose 35% to $35 million.

Sales growth for the quarter breaks down as follows: Volume and mix was up 8%, pricing subtracted 1%, increased promotional spending subtracted 2%, acquisitions added 1% and currency added 12%.

First, let's look at our European businesses.

Sales were up versus year ago driven by better performance of dry soups.

In the UK, we relaunched two improved products, Batchelor's Cup of Soup and Oxo gravies supported by new advertising.

Wet soup and sauce sales continued to decline.

In Asia Pacific, soup sales rose significantly across the region.

In Australia, sales gains were driven by new product introductions and strong performance in broth.

New varieties of broth and strong marketing programs designed to expand usage occasions drove the performance.

V8 and V-Plenish, a 100% fruit and vegetable juice showed good gains.

Now, let's turn to a discussion of the balance sheet.

Total debt was $3.7 billion compared to $3.9 billion a year ago.

Cash flow from operations was a negative $66 million for the quarter, compared to a positive $70 million a year ago.

This $136 million lower cash flow reflects a $50 million voluntary contribution to the U.S. pension plan and a larger seasonal increase in working capital than year ago which is mostly timing related.

Now, that concludes my discussion of the quarter's performance.

Now Bob Schiffner will offer some brief comments on our outlook for the remainder of the year.

Thanks, Gerry and good morning, everyone.

I feel good about our total business performance in the first quarter.

U.S. soup sales were satisfactory despite the heavier promotion spending from Progresso.

Our convenience soup platform was successfully expanded and our Chunky, Select and Soup at Hand brands combined grew more than 10%.

Pepperidge Farm and Arnott's turned in solid performances and our international soup and sauces business showed improvement.

This year, our marketing for U.S. soup has shifted more to the second quarter versus year ago as we want to make sure that our second quarter programs are strong and effective.

In the first quarter, we focused heavily on getting the shelves set right with new products.

We expect that the marketplace will continue to be extremely competitive.

Given our goal of winning the soup season, we will meet these competitive challenges aggressively.

Given this scenario, we expect second quarter EPS to be in the range of 52 cents to 54 cents per share down from last year's 56 cents per share.

For the fiscal year, we are keeping our earnings per share guidance the same, approximately $1.58 per share.

I want to conclude by saying that I believe strongly that the things we had been doing to revitalize the business are working.

We see signs of this success across our entire portfolio.

I am very optimistic about our long-term ability to deliver on our financial goals and to deliver consistent increases in value for our share owners.

Now, let's move on.

On last quarter's call, Mark Sarvary , President of Pepperidge Farm, spoke about Pepperidge Farm strategies and progress as part of our continuing effort to help you understand more about our portfolio of businesses.

We want to continue that effort.

Today, Jim Goldman, President of North America Sauces and Beverages is here to share an overview of his businesses.

Thanks, Bob.

Good morning.

Our Sauces and Beverages division was created in August 2001 as part of Campbell's transformation plan with the objective of bringing dedicated focus to a large and highly profitable piece of our business.

In fiscal 2003, our Sauces and Beverages businesses accounted for almost 20% of our worldwide sales and slightly more than 25% of our worldwide EBIT.

Our division is made up of four business groups: Our Beverage business, including our V8 brands and Campbell's tomato juice represent approximately 35% of sales.

Our Prego and Pace Sauce businesses also represent approximately 35% of sales.

Our prepared food portfolio, including Franco American Spaghetti-O's and gravies, Swanson canned poultry, and Campbell's Pork and Beans accounts for approximately 20% of sales.

Finally, our Campbell's de Mexico and Caribbean Latin America businesses account for the remainder of the businesses under my responsibility.

Collectively, these businesses have delivered improved performance since we began the transformation plan.

In fiscal '03, net sales grew in excess of 5% and EBIT grew over 12%.

This improving performance was driven by three key factors: One, a significant step up in dedicated resources devoted to the businesses coupled with the broad-based upgrade in talent across the division and across all functional groups supporting the division.

Two, a reinvestment in consumer marketing.

The bulk of this reinvestment has been deployed against our Beverage, Pace and Prego businesses that account for the majority of sales and earnings in the division.

And three, the creation of a dedicated business development effort that has yielded a much higher level of product and packaging innovation.

In fiscal '03, we introduced over 20 new items with meaningful innovation across our portfolio.

With that as background, I'd like to profile each of our business groups and discuss the initiatives we are taking to drive the business going forward.

First, I would like to discuss our Beverage businesses.

Our Beverage portfolio is led by our V8 vegetable juice brand.

After declining in sales each year from 1998 to 2000, V8 has grown net sales in each of the last two years by a compound annual growth rate of 5.4%.

This growth has been driven by our successful drink smarter television campaign highlighting our strong wellness credentials coupled with the ramp up in consumer and advertising support.

In addition, the brand has benefited from the introduction of V8 Lemon Twist, a new variety with a lemon twist flavor introduced last January.

After several years of decline, our V8 Splash business stabilized in fiscal 2003 upon introduction of V8 Splash Smoothies introduced in January.

This product had sales of approximately $25 million in its first end month in the market.

We'll maintain momentum on V8 Splash Smoothies through the introduction of three terrific new flavors this January coupled with two exciting new flavors on our base V8 Splash business.

Finally, our Campbell's tomato juice business is the leader in its segment and has also grown strongly over recent years through tomato goodness marketing and new varieties, including the September introduction of Campbell's first organic product, Campbell's Organic Tomato Juice.

During fiscal 2003, we established a dedicated single serve beverage business team designed to enhance our business in this important part of the beverage category.

This group has championed the creation of Invigorate, V8's better for you energy beverage being introduced this January.

Invigorate is the first beverage in the fast growing $1 billion energy segment that's 100% juice and no added sugar.

Initial customer response to this new energy beverage from V8 has been positive.

In summary, we have re-established our beverage business as a growing, vibrant part of the Campbell's portfolio.

Our V8 trademark is powerfully uniquely positioned in the category with unparalleled wellness credentials.

The brand has responded to a step up in marketing and in innovation which will continue in the months and the years ahead.

Next, I will talk about our Pace and Prego businesses which represent roughly $450 million in net sales with attractive margin.

Both brands are well positioned in their respective categories, and have strong brand equity with consumers and with customers.

Prego is the nation's number two pasta sauce with strong, product-based advantages versus the category leader.

Pace is the number one salsa picante in the country with strength west of the Mississippi and in the southeast.

Marketing investment on these brands has declined precipitously in 1996 through 2000 with advertising spending dropping to less than 4% of sales in fiscal 2000.

Innovation was virtually non-existent and sales were eroding.

Since fiscal 2000, these brands have grown net sales at a compound annual growth rate of plus six behind its significant ramp up to consumer marketing and advertising and a step up in product and packaging innovation.

Over the past six months, we broadened Pace's product lineup by introducing a line of enchilada sauces and Mexican cooking sauces under the Mexican Creation's name.

On Prego, we introduced a superior and unique line of meat sauces under the Prego Hearty Meat Sauce sub-brand.

Going forward, Pace and Prego will continue to receive strong support and focus.

We expect continued growth from these strong and profitable consumer franchises which are well positioned in large categories that are important to our customers and to our consumers.

Next I will discuss our prepared food brand.

Our prepared foods businesses consist of Franco American gravies and Spaghetti-O's pasta, Swanson canned poultry, and Campbell's Pork and Beans.

When we created the Sauces and Beverages division two years ago, our first priority was to stabilize and establish growth across our three largest businesses, V8, Pace and Prego.

Now that we've done this, we are broadening our focus with the goal of stabilizing our prepared food businesses.

We've already taken steps to make these brands more relevant by bringing our packaging up to date graphically while adding easy open lids and quality improvements across much of the portfolio.

We've also increased our trade funding and programs for the first time in many years to enhance our competitiveness in the marketplace.

Finally, for the first time in seven years, we are advertising Franco American gravies with both television and print advertising during this critical holiday season.

Stabilizing these prepared food businesses will be a challenge.

We on the front end of our plan to stabilize these businesses and we are committed to improving our performance over time.

Finally, I will touch on our Mexico, Caribbean, Latin America businesses, which are small but have established an excellent track record of growth over the past several years.

The compound annual growth rate on these businesses over the past three years is plus 21% net sales excluding currency.

Soup and beverage products account for the bulk of our businesses across both our subsidiary in Mexico and our export operation in the Caribbean and Latin America.

Our ears are focused on the region center on enhancing distribution, marketing and manufacturing capabilities while simultaneously leveraging soup, beverage and food innovation originating from Campbell's units in the United States and beyond.

In conclusion, over the past 27 months, we've taken definitive and successful steps to transform our Sauces and Beverage businesses.

We have strong momentum across most of the portfolio and are well positioned to grow profitably in years ahead.

We have a talented, energized and committed team on the field and we are determined to unleash the power of our people and our brand to make a strong contribution to the overall Campbell Soup Company's transformation.

Thank you.

Now I will turn it back to Len.

Samantha, could you please start the polling for Q&A?

Thank you.

At this time, we are ready to begin the question and answer session.

If would you like to ask a question, please press star one on your touch-tone phone.

You will be announced prior to asking your question.

To withdraw your question, you may press star two.

Once again, if you would like to ask a question, please press star one at this time.

One moment for our first question.

Our first question comes from Eric Katzman of Deutsche Bank.

Sir, you may ask your question.

Good morning, everybody.

Hi, Eric.

I guess first question is on the outlook.

Bob, I guess maybe it's best for to you respond to this.

With the second quarter being the bulk of the profits normally and that being down because of competition and the fact that you have a tough comp in the last quarter because of the extra week, I mean, will soup profits, do you expect those to be down for the rest of the year?

How exactly do you make up the difference?

Well, our second quarter is obviously a quarter that we are going to spend aggressively in, and as I expressed in my comments, Eric, we plan on winning the soup season.

Our plans, again, are broad-based Campbell's plans are such that we feel confident we can offset the spending in other places and we're very confident that we can deliver the $1.58 that we have forecasted for the year.

So, again, I think you have to look at the whole portfolio and understand some of the tradeoffs we're going to make down the road and, you know, if you do that, obviously, you know, you'll feel a little bit more secure about our ability to deliver the number.

Eric?

This is Doug.

I would also add to that, that we never contemplated, ever, delivering more earnings in the second quarter than we did last year.

We had always anticipated a commitment to winning the soup season so this isn't new news for us.

Okay.

Then maybe following up on that from a strategic perspective, Doug, I mean, you obviously are doing well with the microwavable stuff and that's a differentiated product and it appears that I guess, Progresso and private label is using whatever they can, which is primarily price, to compete.

Do you know, are they at this point either Progresso or private label, you know, attempting to duplicate a microwavable product?

Or are they kind of pretty much set with the traditional canned items?

And can we therefore expect them to just continue to compete on a price basis?

A couple observations.

One, I couldn't begin to speculate on what they are doing with their microwavable options.

We think we've demonstrated the power of a convenience platform when we launched Soup at Hand two years ago and have yet to be followed.

I think that would suggest that it's not as easy to follow as one might like to think.

But I can't speculate on what they're doing.

I would say that our focus in the quarter was clearly on establishing the microwavable platform for bowls.

In doing that, our customers got very excited about promoting those bowls and created an opportunity for can merchandising with our competition.

I'm very comfortable competing on cans versus the competition.

We're in our ninth quarter of our transformation plan, and if you take the bowls out, if you just compare the eight quarters before we launched the bowls, our Chunky and Select business based on your, the numbers you get is up in double digits which and almost 10 times the growth rate of Progresso on just basic cans.

We're happy to compete with cans.

Our focus in this quarter was on establishing bowls distribution but think we can be very competitive with cans.

We've demonstrated for the last eight quarters.

We might have a bump in the road in a month once in a while but we're very comfortable with our ability to compete in cans at competitive price points on both our ready-to-serve business and our condensed business, and we'll do just that

Okay.

Thank you have a great holiday.

Next question, Samantha?

Our next question comes from Terry Bivens of Bear Stearns.

You may ask your question.

Good morning, everybody.

Hi, Terry.

Two things.

I guess it's implicit in some of these plans that you will probably go back to your usual trade discounts as we move toward the month of January.

First of all, is that true, and second of all, we seem to be getting help on the top line from declines in promotional spending.

I've got to assume that kind of goes away as we go into the second quarter?

Terry?

Mm-hmm?

This is Doug.

Good morning.

Good morning.

We've been talking about this for a while.

We're getting a significant trade promotion productivity out of our trade budget.

We launched a program a year and a half ago now called our Customer Investment project where we've been driving trade productivity.

And in the face of all of the trade spend that we saw in this first quarter, for us to be delivering these kind of numbers in soup with reduced promotional spending tells you that we're getting more effective and efficient.

So that's part of it.

There is real trade promotion productivity there that we are realizing and feel there's more opportunity to be realized.

The other part of it as it relates to soup is that we basically had to begin allocating our bowl product at, in the month of October.

And that's for the foreseeable future.

And we had to shift all of our promotional plans around and some got pushed out of the first quarter back into the second, third and fourth quarters.

So you're seeing a reduction, a delay and some improved productivity in that number.

So it's a little complex but basically it's headed the right direction.

Okay.

And just one thing on the negative cash flow, can you give us a little bit more color on that?

Was that primarily receivables, inventories, what happened with that?

No, Terry this is Bob Schiffner.

Basically, we always have number one a seasonal build in working capital in the first quarter and that is certainly playing out here.

But it was not an inventory or receivables issue as much as it was kind of an accrued liability issue, and that is again due to the timing of some marketing spending.

So again, you know this is kind of a point in time situation and we expect our cash flow to improve going forward.

Okay.

All right.

Thank you.

Next question, Samantha?

Our next question comes from John McMillin of Prudential Equity Group.

You may ask your question.

Good morning, everybody.

I feel sorry for Jim Goldman no one's going to ask him a question.

Obviously, these market share numbers have been highlighted, and I guess it is a bump in the road, Doug, but my first question is, you know, if your shipments in the quarter were flat in domestic soup and we're seeing take aways, you know, obviously down, to what level have retail and pantry inventories built to a discerning level and is that part of this second quarter low guidance?

It's certainly lower than where we were at.

John, the -- we would have liked to have delivered greater sales growth.

We feel very good about our sales growth in North America soup being up 8%, and we feel good about our trend in North America soup over the last year quarter by quarter to deliver solid sales growth with increased productivity and solid volume growth.

Our focus here was on getting the shelf right and getting set for the soup season.

We feel we did that adequately.

All of our research suggests that there's great incrementality to the microwavable options.

And so we think the category is going to be expending through this and that the inventory is against that expanded area of opportunity is not significantly, going to be significantly different.

The other thing I can say is we're just not reading all this.

You don't have access to all of the data from the FDM tracking.

So especially with our microwavable options and even our cans, we see some good growth in channels in our track.

So it's hard to draw that determination I understand that, but we're comfortable with the inventory level we have.

As I said, we always contemplated making sure we would have a competitive soup season and we will.

So we think we're well positioned to go forward.

Bob, do you have something to add to that?

Yeah, Doug.

John, I would just like to say that obviously we do a lot of tracking of retail inventories as you know.

Usually, the first quarter is clearly a quarter where retailers build inventories.

Our sample, which is about a 50% sample indicates that retailers have grown inventories this quarter less than what they grew last quarter.

So this is the third straight year where the inventory build in the quarter was lower than the previous year.

So again, I don't want to leave anybody with the, you know, with the thinking that, in fact, we've loaded inventories.

That is not, that has not been the case whatsoever.

Just my second and last question, Doug, deals with the past goal to quote unquote stabilize the condensed category.

You know, I'm thrilled with these microwave and new product efforts but, you know, right now obviously the size of it is just a fraction of the size of condensed which continues to tumble.

Just, you know, in terms of your goals going forward to stabilize condensed, you know, have they changed and to what extent are you disappointed with the rollout of the gravity shelving?

John, as I mentioned actually this past September, as we've uncovered an upside opportunity in the ready-to-serve segment through the convenience platform, it's allowed us to maintain our overall goal for the company of delivering three to four top line and eight EPS.

It's allowed us to pull down expectations for condensed and as I mentioned in September, our plan now is to moderate the declines of that segment.

And we think we have a solid strategy to do that.

So we can still deliver our top line and bottom line growth goals as a company by aggressively pushing the ready-to-serve segment with a lot of innovation and by simply moderating the declines in condensed.

And that's our planning posture here.

So we're targeting to moderate the declines in condensed.

We believe that is doable.

Actually, where we've rolled out the gravity-fed shelving in this past quarter with all of the 99 cent Progresso activity, with all of the pressure from the convenience platform, with the record level of innovation probably in the 135 years of soup targeted at the ready-to-serve segment, in the stores we rolled out into, all of the evidence suggests that we were indeed able to accomplish our goal of moderating the decline.

Our challenge now is to execute this rollout as fast as possible.

The challenge is that our customers are being very cautious with putting the hardware into their stores.

And we have tests now in customers, including Wal-Mart that represent about 12,000 stores.

And they're in the midst of evaluating those results and as the results roll in, we think we'll get them signed up, but it's just proving to be a challenge, getting them to complete the test and creating windows for our installation.

Unfortunately, we can't get in there and install them during the soup season as easily as we could off season.

So we're just driving along trying to make this thing happen as fast as possible.

It's a win for the consumer, a win for customer and a win for Campbell's.

So we're just pushing as hard as we can.

I think I've said earlier this is a two to three-year program to get these fully installed.

I believe when they are, along with our segmented focus on cooking, kids, icons and then the all other eating segment, I think we're going to have a proposition that moderates the decline that is partially offset by the pricing we've taken.

So I think we're going to be well positioned.

Well, even Donovan McNabb has made a comeback so --

Yeah.

Thanks a lot.

Next question, Samantha?

Our next question comes from Bill Leach of Neuberger Bermen.

You may ask your question.

Good morning.

Good morning, Bill.

I was just wondering about your guidance for the back half of the year.

If you assume your second quarter guidance is correct and your full year guidance is correct, you're looking for about a 10% earnings growth for the back half and yet your third quarter last year was strong up about 30% and you will have one less week as I recall in the fourth quarter.

I was just wondering if you could just elaborate on why you think things are going to get better in the second half?

Fist of all, I would say that your math is correct, but basically, as I said, you know, we've planed it that way.

Our programs are planned that way and, you know, we feel pretty confident that in fact we can deliver a pretty strong second half and, you know, without getting too far into the detail, you know, obviously it's going to be pretty timing-oriented.

And that's how we're going to get there.

Bill this is Doug.

Just building on that.

The other thing you're seeing is strength across the balance of the portfolio, which is giving us the ability to manage the portfolio for these kinds of competitive bumps in the road we have in soup.

So I think part of this reflects of just a stronger overall portfolio.

Doug, can I also ask you about your 8% goal?

Last year you were up 6% in cash EPS, this year you're projecting 4%.

As we look out to next year, I mean does 8% sound like a reasonable run rate?

Do you still feel comfortable with that number?

We've consistently said our goal was to get to eight and that remains our goal.

There are obviously plenty of challenges along the way.

This year, we had to deal with some pension expense issues, but that remains our goal.

Okay, thanks.

Next question, Samantha?

Our next question comes from David Nelson of CSFB.

You may ask your question.

Good morning.

Good morning, David.

I'll ask Jim Goldman a couple of questions.

Jim, I think you mentioned all the new Pace products but I thought I heard Gerry say Pace sales were flat.

So are we having some cannibalization there?

And I guess secondly, Invigorate, what's really the target market there and are you able to get into the right parts of the store?

Thanks for the questions.

Relative to Pace, we're just beginning to support our new innovations on Pace, so I think we'll see that reflected more powerfully during the back end of the year, but they're still relatively small compared to the large salsa and picante business that we have.

On Invigorate, it's a younger target or for our V8 franchise.

It's an important one in the beverage category and we feel very good about our ability to make that work.

Currently in convenience stores we have 90% distribution on our V8 products and we fully anticipate grounding our Invigorate business there.

But how is this proposition unique from some of the other functional beverages out there?

Actually, it's very unique versus the other energy beverages out there.

It is packaged in the slim can similar to the other energy beverages.

The big point of difference, David, is the fact that it's 100% juice product with no added sugar whatsoever and we also believe that we have a superior taste versus the other category entrants.

So we feel like many other V8 beverages, this one has very, very strong point of difference and hits at a time when consumers are increasingly looking for a better-for-you product.

Thank you very much.

You're welcome, thank you.

Next question?

Our next question comes from David Edelman of Morgan Stanley.

You may ask your question.

Good morning.

I want to ask you a few things.

Fist, Doug, do you think your U.S. soup business or the organization has sufficient operational flexibility to respond in real time to what's happening in the market?

Because you can you go back to last January where you had an issue here, you had an issue where competitors were [inaudible].

It appears like it's taking you some time to respond to that.

Does something need to change?

David, no.

We had a runaway success in our microwavable platform, we went on allocation October 5th.

We had to revisit all of our promotional planning for the balance of the year since we cannot promote while we're on allocation.

What that meant was we had to change our plans in October and quite frankly November.

And we've got the plans all locked and loaded now realizing that we can't promote the microwavable platform for December through the balance of the year and we think it's -- that was actually a very rapid response.

And even the issue we had last January, we did have a difficult January but even in that quarter, we had North American soup growth of 4% and then we won the next two quarters handily.

So I think we're about as agile as a food company can be on that front.

Now on the capacity front, we're chasing capacity on this microwavable piece and that is a challenge for us, and we're working through it.

But as I mentioned earlier, we launched Soup at Hand two years ago.

Nobody's been able to fiend a way to follow it, although it's been a runaway hit.

We think we're going to stay ahead of the curve on this one, too.

On the issue someone asked on the issue someone asked but I don't think it was answered, the issue of consumer pantry levels.

Is there a risk that on the traditional can business, consumers are going to have cupboards full of Progresso and that might affect your promotional effectiveness over the next couple of months.

Do you view that as a risk?

I suppose some people might view it as a risk.

We don't see any evidence that if we promote our products with the right marketing propositions that we can't sell them.

Progresso's not going to fill every pantry in America and we'll be just fine.

And then on the price increase you took in condensed.

Do you think that that's hurt you on the condensed side because there were wider pricing gaps in the market on the condensed side of your business?

Actually, we haven't.

It may hurt us in the short-term and we anticipated that.

We knew we were going to lead a pricing action and we anticipate over time that the private label will follow.

But it hasn't fully been reflected yet at retail and we're just working our way through it, but that was anticipated.

I mean, no surprise.

And then Doug lastly, can you give us some gauge of how strong you expect your soup sales to be in the second quarter given that you are clearly going to be sacrificing profitability to drive that business?

So, you know, for outsiders what's the right benchmark of success?

I couldn't begin to tell you.

I think we're on the right track.

If I look at our last four quarters of North America soup net sales reported net sales, we've been up 416, 12 and 8.

I think we're on the right track.

That 12 had an extra weekend in it so it would have been up only four in the fourth quarter this year.

But I think we're on the right track and we've got a convenience platform that even though we can't promote it is about twice as large as we anticipated.

So I think we're well positioned to compete.

Thank you.

Next question, Samantha?

Our next question comes from Romitha Mally of Goldman Sachs.

You may ask your question.

Good morning.

Good morning, Romitha.

Doug, just wanted to ask you.

When I think back to the first quarter of last year, I remember you having the same issue with Progresso being aggressive at the 99 cent price point.

Did you not anticipate that that would happen again this year?

Did that catch you by surprise?

Not particularly.

We knew they had two things to compete with.

They had a line targeted at Chunky and they had price.

And we were putting a lot of pressure on the shelf with the launch of all of our new items and we knew that sooner or later they were going to play the price card.

They've played it before the season and now we'll deal with it as we go forward.

We certainly weren't going to lead off the first quarter targeting 99 cent pricing.

That made no sense, but we're in position to compete in the season when it really matters.

As you've seen more recent data, is there something that gives you confidence that you're seeing a turn in your canned, ready-to-serve and in condensed businesses?

No, we have a lot of confidence in those businesses and it's not necessarily in our recent data.

As I mentioned earlier, if you just look at the first -- we're in the ninth quarter of our plan.

If you look at the first eight quarters of our transformation plan, our RTS business is up.

Just Chunky and Select they're up almost 10 times the growth rate on volume that Progresso is and we're twice as big.

So I'm very comfortable that we can compete in cans.

And then in terms of the microwavable products, are you seeing any cannibalization on the canned Chunky and Select as a result of that?

It's too soon to call because our focus in the first quarter was focused on getting the bowls established.

Progresso came back and did the 99 cent pricing and it's too soon to tease out the incrementality.

All of or pretesting suggests that it was going to be significantly incremental as Soup at Hand has been significantly incremental to the category as a whole.

So it's just too soon to call.

And then just one final question on the gravity feed.

In a conversation I had with Wal-Mart they didn't seem all that keen on the idea.

And if you don't get buy-in from them, are you concerned that's basically where most of the growth in the industry's coming from that this is not going to be successful?

Hey, Romitha, I'm not really going to comment on a specific test with a specific customer.

But I'll tell you.

If all of my customers were as supportive of our proposition as Wal-Mart is, I'd be a very happy man.

And these calls would even be more fun.

Okay.

So there's really no issue there.

We are in test of a variety of retailers.

What I will say, it has been reported that the test was completed at Wal-Mart, that's just not true.

It's in the field right now.

We're reading it, and we'll see where the results land.

Okay.

Thanks.

Good luck.

Thanks.

Next question, Samantha?

Our next question comes from Leonard Teitelbaum of Merrill Lynch.

You may ask your question.

Good morning.

My question's been answered.

I just couldn't remember how to get the hell out of the queue.

Thank you very much.

So long, Lenny.

Next question, Samantha?

Our next question comes from Evan Morris of UBS.

You may ask your question.

Good morning, guys.

Just a quick one for you.

You mentioned in your prepared remarks that the microwavable product has now achieved national distribution this quarter.

Can you just give us a sense of how much of the growth in that segment this quarter came from distribution gains?

Well, that's a brand new product, Evan.

Right.

We wouldn't break it specifically between microwave and canned.

The introduction was successful, but we wouldn't break the numbers down beyond that.

Okay.

You also mentioned winning soup season a few times before.

I think Bob did.

Can you just go over again what the metrics are that you defined, you know, winning the soup season because earnings are going to be down next quarter, margins have been declining.

Just trying to get a sense of how you measure that.

Is it dollar share, is it volume share?

Can you walk us through that?

Sure.

I think for -- our assessment for this soup season is that we have to fully establish our convenience platform in the market and that will be a win.

We have to deliver strong net sales growth in the December through March period or in the second and third quarters.

And we have to have what we would characterize as share growth in the ready-to-serve segment.

At the same time, I would also say there's a qualitative judgment that where we would be looking to see our condensed decline moderate as we roll out our fully integrated program on condensed.

So there's net sales growth, ready-to-serve share growth and moderated declines in condensed would define a win for us.

Okay --

Excuse me, while allowing us to continue to deliver our company EPS commitment.

Okay.

So it sounds like you are measuring this more against your own internal objectives than, you know, more so what's going on in the marketplace.

Again, because ready-to-serve shares have declined quite a bit and you're going to spend a lot of money now so margins and profitability will be down.

Okay.

But again, more broadly just looking externally as you measure verse the category, it was just tough to understand what you meant by winning soup season as you just lowered guidance for the quarter.

But again, okay, so you're just measuring it more--

And just to build on that, this is a long-term game here.

We are building a strategic platform that will drive ready-to-serve growth far into the future, a platform that's going to moderate condensed declines and an innovation platform around convenience that is really, going to revitalize the entire category and probably drive greater category growth over time.

So we're establishing that platform this year while continuing to grow EPS.

And that's the game.

And Evan, this is Bob Schiffner.

I would also add that I think you've got to be very careful in terms of talking about share losses.

Again, I want to, you know, reiterate what Doug said earlier.

That you are not seeing, you know, the full out picture with the information and in fact you are getting.

And, you know, to jump to conclusions, you know, as you have, can be dangerous as far as I'm concerned.

No, no, I understood that we're not seeing the full picture.

Again, I was just really trying to get a better sense of how you're measuring this.

Okay.

And just last.

Doug, I guess this is for you.

Can you just comment.

You've done a lot of, you know, really good things from the innovation standpoint, from marketing standpoint over the past few years and now you're in the last year of this program and everything you would hope starting to come to a head here.

And then we get to a situation like we're in now where Progresso is promoting aggressively at 99 cents and you are put in a position where you have to step up your spending and lower earnings for next quarter.

I'm just trying to get a sense as why you aren't worried about sort of looking forward even into next quarter or next soup season that as you continue to innovate if one of your competitors specifically Progresso, continues to react like this, year after year, why -- how you'll really be able to reap the full benefit of all, of everything you're doing now?

It would just seem to me that it's just going to cause, it would just cause continued disruption.

Evan, the first observation is we haven't lowered the earnings call, we've kept the earnings at $1.58 for the year.

And as I mentioned earlier, we anticipated this quarter was going to be a full-spend quarter and it's right where we anticipated it would be.

In terms of our ability to compete over time, we have demonstrated consistently over the last two years the ability to grow the ready-to-serve segment and we see accelerating that growth and accelerating category growth in the out years.

So we see a very robust category as we grow soup at the expense of other meal alternatives.

Soup is ideally positioned on the wellness dimension to grow in the face of concerns on that front.

And we have the most convenient and the highest quality products to offer and we have the budgets to allow us to support it aggressively.

Our challenge is to moderate condensed declines which we think we can do as well.

And so we see a bright future for soup.

And then beyond that, we have demonstrated the ability to strengthen our broader portfolio so that even if we have a competitive quarter or two, we can take the challenge and continue to deliver solid performance.

Beyond that, our next three years are going to be even better than the last three years.

We've really set the table with a solid foundation and we've got some very promising strategic thinking around where we're going next.

And so I'm even more optimistic about the next three years than I was about the launch of our transformation plan to begin with.

Great.

Thanks.

Have a nice holiday.

Samantha, next question?

Thank you.

Our next question comes from Andrew Lazar of Lehman Brothers.

You may ask your question.

Good morning.

Hey, Andrew.

Hey Doug, just a broader strategic question.

Aside from executing on the shelf sets and condensed that you've talked about, are there any other sort of major initiatives that you would plan on condensed at this point?

I'm just trying to get a better idea of how your allocation of capital and sort of resource decisions were made internally between divisions.

I'm trying to get a better sense of maybe how much more you're willing to put behind condensed going forward aside from just executing on what you've already kind of put out there.

Our full up integrated plan, Andrew, is just getting into the market now with the improved products, the easy open end and the shelving.

That creates a base for us to compete with with superior products and superior visibility at shelf.

We're then marketing the brand against three distinct segments.

One is cooking, which is actually delivering solid performance, and the outlook for the cooking segment which is about a third of the business is very solid.

Another one is kids and icons.

And that's basically our kid target of products including chicken noodle and tomato.

And we have solid consumer marketing propositions to leverage against that.

The other is the all other eating segment which is one that is over time going to be most severely hurt by the aggressive RTS activity.

As I've shared at prior conferences, that's an area we've got to watch carefully.

But overall, I think we've got a solid condensed plan.

I don't expect a need to increase our resource deployment there at all.

I think as we grow now, you'll see all of that resource deployment going against the very promising convenience platform and a lot of the other initiatives that are queued up behind it.

Thanks very much.

Our next question, Samantha?

Our next question comes from John McMillin of Prudential Equity Group.

Sir, you may ask your question.

Doug this second quarter range of 52 to 54 is in line with your thinking at the beginning of the year?

Yes.

Okay.

And regarding the production issues, is the problem in making these microwavable products because demand is so strong or because production isn't everything you hoped it to be?

No, it's far and away it's consumption.

The numbers are two times what we had forecasted.

So there's no, there were no issues in line?

No.

Actually we positioned this -- this has been well executed.

Demand is just going well beyond our ability to supply it.

And as far as the California grocery strike for what has been at this very early stage some seasonally warm weather, are any of those issues to you?

They have created problems for us, the California strike, but as I look at it, John, I think it's as much a category problem as it is as a Campbell's problem.

There's a few hundred thousand cases of product that could be attributed to that but I just chalk it up to a category there's always something going on and that's what's going on now.

As far as this whole carbohydrate craze, how do you market that?

I guess soup is friendly to that, but have you thought about any kind of creative marketing ideas?

John, on the overall wellness indirectly linked to the carbohydrate concerns that consumers are evidencing now, I go back to our overall portfolio is very well positioned with 77% of our portfolio viewed as being very healthy or somewhat healthy and that includes the carbohydrate concerns.

It goes beyond soup and includes all of the V8 activity and Pace and Prego.

And so we feel good about the way we're positioned and we're looking at umbrella ways to leverage that positioning, but it would be premature to talk about it.

Thank you.

Samantha, how many more questions in queue?

At this time, sir, there are three.

All right.

We'll take those and we're going to stop.

Thank you.

Our next question comes from Mitch Pinheiro of Janney Montgomery Scott.

You may ask your question.

Hey, good morning.

Most of my questions have been answered but I do have just a couple odd and end things.

One, you haven't talked about the Kitchen Classic lines.

How did that perform?

It looked like, I mean, if your core brands were up 10% in ready-to-serve and overall ready-to-serve about 6, was there any weakness here?

I know that's a new product.

Mitch, this is Doug.

Kitchen Classics, we put into the queue relatively late in the game and we had a slow sell-in on it.

I think when I was at Cagney this past year I talked about Kitchen Classics within the context of this is an important tool for us to be able to compete and meet the needs of the consumers, but it's going to be a two to three-year kind of challenge for us.

I think you are going to see some real benefit.

I think you are going to see some solid numbers from Kitchen Classics this year that's just beyond our expectations.

But I think over time it's going to grow and be able to compete in the significant way in the category.

As you recall, this is the first line that's really been engineered to compete at lower than RTS normal price points with full delivery on product quality.

So we think it's really well positioned to compete in the months and quarters ahead.

But it was a slow start, and with all the other activity we had going in the first quarter, I'm not surprised.

Okay, how about in terms of your Soup at Hand, what percentage of your sales are coming from, you know, the immediate consumption channels?

I don't have that right in front of me, and I don't think we split it out.

I will tell you, we're having as I've highlighted in prior conferences, we're having exceptional success with Soup at Hand and convenience drug and mass we're also uncovering opportunities through our Away From Home operation to take it even further in the next year.

So we see a lot of opportunity there.

But it's just in the formative stages.

Okay.

Then finally, what's the margin decline in Biscuit and Confectionery?

What was the driver of that?

Bob, Gerry, help me.

I'm not--

Mitch, I think, you know, it can be related to a pretty heavy up-spending program.

So again, I think that's driving that as well as the slight mix shift away from Godiva, okay.

Our Arnott's business and our Pepperidge Farm business grew more than Godiva and Godiva has some pretty strong margins associated with it.

So I would relate it back to those two reasons.

Does your new Hartford plant have any impact on the quarter?

Yeah, it did.

We continue to have start-up expenses.

They're ramping down.

But relative to a year ago there were some one-time expenses in the Pepperidge P&L related to that plant.

That plant is up and running, beautifully.

I was up there this past week and it's up and running and on schedule.

All right, thank you.

Okay.

Next, Samantha.

Our next question comes from Terry Bivens of Bear Stearns.

You may ask your question.

Thank you.

Just in Evan's defense, if most of us didn't jump to conclusions, Bob, we'd never get any exercise at all.

So let me ask you one thing on Wal-Mart.

We've talked about this before, but if you go straight off your public documents, it looks like year on year as we closed out the '03 year, your sales to Wal-Mart were up I believe somewhere in the 9% area which is lower than total food sales at Wal-Mart.

And can you give us a little more color on what's happening there?

It seems like you are under-indexing other packaged food makers, but maybe I'm missing something there.

Terry, I think what you're looking at is in a 10-K when we talk about the percent of our world wide sales coming from Wal-Mart.

That's correct.

And the fact that each year I think we said it was like 12% or whatever.

Yeah.

And I think what you're jumping to the conclusion that you're not growing any better than that and I'm not sure that's accurate or not because it's a worldwide number.

It's a worldwide number and it's confused by currency which has gone up for our external businesses so in the U.S., you don't clearly see the trend in the U.S.

The U.S. trend is definitely stronger than that overall number would suggest.

And we're very happy with the growth there.

That's why I'm asking.

Okay, I'll go over that in detail later.

Thank you.

Okay.

Last question, Samantha?

Thank you.

Our last question comes from Eric Katzman of Deutsche Bank.

Sir, you may ask your question.

Thanks.

Real quick, Bob, I was wondering, can you give us some more details on just kind of your assumptions for the fiscal year in terms of Cap Ex, D&A, interest expense, tax rate, shares outstanding, some of the non-operating items?

I'm going to, our cap spending we're assuming to be approximately $280 million, and as far as the other stuff, I think I'll turn it over to Gerry Lord who might, you know, have those numbers.

Yeah, the tax rate that we booked for the quarter is the rate that we anticipate for the year at this point in time.

The shares outstanding?

Shares outstanding in terms of they're going to over time remain relatively constant as we continue to buy back shares to offset dilution from option and restricted stock grants.

So they may bob up and down in a quarter but over time they're going to stay fairly constant.

Okay.

The depreciation amortization?

Okay.

Just a second.

We're looking at about

Depreciation of about $240 million.

And amortization, you know, is negligible.

Yep.

And then lastly, interest expense?

I think we gave an estimate on interest expense in the first quarter.

I don't think we had a significant change in that.

Okay, so no change there.

Okay.

All right.

Thank you.

Thanks.

All right, Samantha, that's it.

Thanks, everyone, for joining us today.

This concludes today's conference call.

Thank you for participating.