金寶湯 (CPB) 2004 Q3 法說會逐字稿

Good morning and welcome to the Campbell Soup Company third quarter 2004 earnings release conference call.

At this time all participants are in a listen-only mode.

After the presentation we will conduct a question-and-answer session.

To ask a question please press star one.

Today's conference is being recorded.

Now I will turn the meeting over to your host, Mr. Leonard Griehs.

Sir, you may begin.

Thank you.

Good morning and welcome to Campbell Soup Company third quarter fiscal 2004 conference call.

On the call this morning will be Bob Schiffner, Senior Vice President and Chief Financial Officer, Anthony DiSilvestro, Vice President and Controller, Brad Schneider, Assistant Controller.

Jerry Lord, whom you have been accustomed to hearing on these calls, as Vice President and Controller was recently named Vice President Finance and Strategy for our new Campbell North America division led by Mark Sarvary.

We wish Jerry well in his new position and we welcome Anthony DiSilvestro, our Controller, as a new participant in these discussions.

Anthony joined Campbell in 1996 and has had several assignments within the finance function.

Most recently he was Vice President and Managing Director of Campbell International.

Also participating in today's call is Doug Conant, President and Chief Executive Officer.

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 the call is complete.

The replay number is 1-866-436-9388.

It will run through midnight May 28th, 2004.

You may also listen by logging into our Web site, www.Campbellsoupcompany.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.

This discussion will contain forward-looking statements which reflect the company's current expectations about its future plans and performance, including statements concerning the impact of marketing investments and strategies, new product introductions, 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 here's Anthony to discuss our third quarter results.

Good morning everyone.

I'll begin with a reminder of the reporting format we began this fiscal year.

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 are including a sales analysis by reporting segment as well as for the total company.

This analysis of sales by segment looks at changes in volume and mix and replaces reporting of soup volume by fluid ounces.

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

This reporting more accurately reflects our strategy to focus on dollar sales rather than fluid ounces.

In order to be clear about the mix shift in U.S. soup, we will highlight changes in both sales dollars and fluid ounce shipments of condensed, ready to serve, and broth for the remainder of this fiscal year.

However, we will no longer report volume for total U.S. wet soup or worldwide soup shipment.

Let's turn to some highlights from our third quarter results.

Net sales for the quarter were up 4%.

Currency had a favorable impact of 5 percentage points on the quarter's sales.

Keep in mind that we were going against a very strong quarter a year ago in which sales grew 17%.

Earnings per share of 34 cents included a 2 cent nonrecurring gain from Campbell's share of a class action settlement involving ingredient suppliers.

U.S. sales of condensed and ready to serve soup declined following a very strong second quarter and first half.

Nine-month sales are strong and are more indicative of the progress we have made in growing ready to serve while moderating declines in condensed soup.

In the U.S. we made continued progress with our new gravity feed shelving system for condensed soup with nearly 5,000 stores now containing this shelf design.

By the beginning of the next soup season we will have installations in some 8,000 stores compared to 3,000 in January.

In Sauces and Beverages V8 Vegetable Juice and Campbell's Tomato Juice had strong sales growth and Prego performance improved significantly.

In Biscuits and Confectionery, Arnott's had good sales growth and Godiva improved but Pepperidge Farm sales growth slowed primarily due to increased competition in the cracker segment and weakness in frozen.

International Soup and Sauces showed strong gains in both the European dry and Australian broth and beverage businesses during the quarter.

However, the European wet soup and sauce business, particularly in the U.K., remains soft.

Now let's turn to the specifics of our financial results, first for the quarter and then for the nine months year-to-date.

Sales rose 4% to 1.7 billion.

Earnings before interest and taxes for the quarter were 243 million including 16 million from the gain from the settlement of the class action suit I mentioned earlier.

This compares to 235 million in the prior year quarter.

Sales growth for the quarter breaks down as follows: Volume and mix deducted 1%, pricing added 1%, increased promotional spending deducted 1%, currency added 5%.

The decline in volume and mix compares to a 6% gain in the year-ago quarter.

Gross margin for the quarter declined from 42.5% to 40.3% as cost inflation, the cost of quality and packaging improvement, higher promotional spending and mix were partially offset by productivity improvements and higher selling prices.

Marketing and selling expenses rose 5% to 278 million primarily due to currency.

Administrative expense declined 2 million to 141 million primarily due to lower bad debt and legal expenses in the quarter.

Research and development costs were even with a year ago at 23 million.

Corporate unallocated expense decreased primarily due to four factors: A nonrecurring gain from Campbell's share of a class action settlement involving ingredient suppliers, lower expenses related to the carrying value of the company's investment in affordable housing, lower expense from currency hedging gains and losses related to financing of international activities, and reduced expenses related to ongoing litigation.

Net interest expense was 40 million, down 5 million versus a year ago due to lower debt levels.

The tax rate for the quarter was 30%.

Net earnings for the quarter were 142 million versus 129 million in the year-ago quarter.

This quarter included an after-tax gain of 10 million from the settlement of the class action suit.

Diluted EPS for the quarter was 34 cents, including 2 cents from the nonrecurring gain, compared to 31 cents a year ago.

Now I'd like to highlight results for the nine months, since it gives a more complete picture of how we have performed going into the final quarter of the year.

For the nine months, sales grew 9% to 5.7 billion.

This sales growth breaks down as follows: Volume and mix added 2%, pricing added 2%, currency added 5%.

Earnings before interest and taxes increased 4% to 986 million.

This included 16 million from the nonrecurring gain.

Gross margin for the nine months declined from 41.6%, I'm sorry, declined to 41.6% from 43.6% as cost inflation, the cost of quality and packaging improvements in mix were partially offset by productivity improvements and higher selling prices.

Marketing and selling expenses rose 5% to 911 million due primarily to currency.

Administrative expense rose 6% to 400 million due primarily to currency.

Research and development expenses rose 3% to 65 million.

Net interest expense was 125 million versus 136 million in the year-ago period primarily due to lower debt levels.

The tax rate was 31.7% which is our current expectation for the full fiscal year.

This compares favorably to fiscal '03's full year rate of 32.2%.

The lower tax rate was due to a lower tax liability following the filing of our 2003 U.S. tax return and the favorable resolution of state income tax audits.

Net earnings for the nine months increased to 588 million from 552 million before the cumulative effect of a change in accounting principles.

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

This year's net earnings included 10 million from the after-tax gain associated with the class action suit.

Diluted EPS was $1.43, including 2 cents from the gain on the settlement of the class action suit versus $1.34 reported a year ago before the cumulative effect of accounting change.

Now let's turn to third quarter operating highlights by reporting segment.

North America Soup and Away From Home.

Sales up 578 million, declined 4% versus year-ago, and operating earnings of 113 million were down 23% versus year-ago.

It is important to remember that last year's third quarter was a very strong sales quarter, with sales in this segment up 16%.

Sales for the quarter break down as follows: Volume and mix subtracted 4%, pricing added 3%, increased promotional spending subtracted 4%, currency added 1%.

The operating earnings decline was due to lower volume and higher promotional spending.

In U.S. soup, ready to serve sales declined 13% on a shipment decline of 9%.

The convenience platform, that is Soup At Hand and microwaveable bowls, continued to perform well in the marketplace.

U.S. condensed soup sales declined 6%.

A price increase taken in the fourth quarter of last year offset higher promotional spending.

Consumers responded positively to improvements such as gravity feed shelving, easy open lids and stronger marketing programs for condensed eating soups.

Broth sales declined 7% while broth shipments increased 1%.

Consistent with our second quarter discussion, we continued a higher level of trade spending in the third quarter for soup.

Canada's soup volume declined.

Away From Home sales grew on strong sales of Stockpot refrigerated soups.

Now lets turn to some highlights for the nine months for U.S. soup.

In ready to serve, sales rose 10% and shipments increased 7%.

We have seen a positive response to microwaveable bowls for Chunky and Select this fiscal year.

We have also seen a positive response to the promotional efforts behind both Chunky and Select cans.

Soup At Hand, in its second full soup season, demonstrated continued strong growth driven by further increases in trial and solid repeat purchase patterns.

In condensed soup sales declined 2% and shipments declined 5%.

Within this segment we have meaningfully improved performance of condensed eating soups.

However, this has been offset this fiscal year by lower sales of cooking soups.

In broth, sales rose 8% while shipments increased 6%.

North America Sauces and Beverages.

Sales of 301 million were up 2% versus year-ago and operating earnings of 66 million were up 12% versus year-ago.

The sales increase for the quarter breaks down as follows: Volume and mix was flat, reduced promotional spending added 2%.

Earnings were impacted by improved product mix and lower administrative expenses.

Strong sales of V8 Vegetable Juice and Campbell's Tomato Juice were accompanied by improved sales of Pace and Prego.

Sales of Franco-American pasta and gravies declined during the quarter.

The strong sales of V8 Vegetable Juice have come in all channels of distribution as consumers turn to V8 for its wellness attributes.

We also have increased advertising support behind the V8 franchise.

Pace performance was positively impacted by growth in alternate channels and successful promotions.

Prego sales recovered based on the impact of advertising and increased shipments to alternate channels.

Mexico and Latin America showed strong sales growth driven by beverages.

Biscuits and Confectionery.

Sales for the quarter of 481 million were up 11% versus year-ago and operating earnings of 37 million were down 3% versus year-ago.

Sales growth for the quarter breaks down as follows: Volume and mix added 2%, pricing added 1%, increased promotional spending subtracted 1%, currency added 9%.

Currency added 8 percentage points to the operating earnings change during the quarter.

Operating earnings were down primarily due to weakness in the Australian snackfoods business.

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 slightly as higher cooking and fresh bakery sales were partially offset by lower sales of frozen breads, cakes and pastries.

Arnott's delivered solid growth from crackers and new chocolate product introductions.

As mentioned in our second quarter release, competitive challenges in the Australian snackfoods business have necessitated increased marketing spending and has negatively impacted financial performance of that business.

Godiva sales were ahead of last year with improvement in all geographic areas.

North American retail traffic increased versus year-ago.

In the U.S., both Valentine's Day and Easter selling periods produced good sales.

International Soups and Sauces.

Sales were 307 million, an increase of 13% versus year-ago, and operating earnings of 38 million were up 3% versus year-ago.

Sales growth for the quarter breaks down as follows: Volume and mix subtracted 2%, reduced promotional spending added 1%, currency added 14%.

Currency also added 14 percentage points to operating earnings change year-over-year.

This was partially offset by declines in nonbranded product sales and increased advertising behind branded products.

In Europe, branded sales rose led by good results in France and improved performance in the U.K.

Liebig soup sales in France improved over a weak performance last year and U.K. sales gains of branded rice soups were partially offset by declines in Home Pride sauces and wet soup.

In Asia Pacific strong Australian beverage and broth results helped drive overall sales growth.

Now let's turn to the balance sheet.

Total debt was 3.3 billion, down more than 200 million from the prior year.

Cash flow from operations was 576 million for the nine months compared to 706 million a year ago.

Let me explain this lower cash flow.

First, this year we made a 15 million dollar voluntary contribution to the U.S. pension plan.

Second, working capital increased primarily due to a decrease in accrued liabilities.

Third, we made cash settlements on currency hedging contracts related to financing of foreign operations.

These factors were partially offset by increased earnings.

Capital expenditures were 142 million so far this year.

We are on track to invest approximately 290 million.

We have projects to expand capacity for Soup At Hand and other convenience soup products.

This capacity will come on stream in fiscal 2005 and fiscal 2006.

That concludes my discussion of the quarter's performance.

Now Bob Schiffner will offer some brief comments on our fourth quarter and fiscal year outlook.

Thanks, Anthony, and good morning everyone.

As we exit the soup season I'd like to take a minute and focus on the key positives and negatives that are currently impacting our business.

First on the positive side.

We made great strides this year on our convenience platform.

We were all pleased with the consumer response, and we are working hard now in our plants to add capacity to meet demand and allow us to fully promote the products in the future.

We saw improved trends in condensed soup and now that we have implemented cold blend technology, easy open tops and are making solid progress in rolling out gravity feed shelving, we expect to see a period of moderating declines for condensed soup.

Our beverage business continues to experience very strong growth while Europe has begun to show improved top-line performance as our innovation program begins to make a difference.

Also on the plus side Arnott's biscuits are producing good results and Godiva is starting to grow again.

On the negative side, I believe that consumers purchased a lot of soup during the heavy promotion months of January and February and that resulted in some pantry inventory building that impacted third quarter performance and consumption.

We have experienced higher trade promotion costs in meeting price-driven competition in soup which has unfavorably impacted our soup margins and we believe that we will need to continue to maintain this competitive investment in fiscal year '05.

In addition, we are starting to see increases in raw material and packaging material costs while our SG&A expenses have grown faster than our top-line has grown, further impacting margins.

Also on the minus side, our Pepperidge Farm biscuit business is losing some momentum as we deal with increased competition in Goldfish, including heavy competitive trade dealing.

In summary I am pleased that we have been able to deliver on expected results this quarter.

And looking at our nine-month results, our performance is solid and consistent with our expectations.

Most importantly, we have improved over fiscal year '03 results and progress is continuing.

However, as we start looking toward fiscal year '05 and begun a thorough review of our three-year transformation plan, our profit margins are below where we expected them to be.

This is something we need to deal with starting now, and we will share our thoughts with you at our investor meeting on June 25th.

Looking to the fourth quarter, we will continue to fully support marketing efforts and be prepared to enter the fall with an exciting array of new products and line extensions, especially in soup.

Therefore, we are forecasting this fiscal year to come in at approximately $1.60 per share which includes the nonrecurring 2 cent gain from the third quarter.

This implies fourth quarter EPS of approximately 17 cents per share versus 18 cents a year ago.

Keep in mind that we have one less week in the fourth quarter this year.

Now I'll turn the meeting back to Len.

Thank you.

Amy, we can now begin Q&A.

Thank you.

We will now begin the question-and-answer session.

If you would like to ask a question, please press star one.

You will be prompted to record your name.

To withdraw your request press star two.

One moment, please, for the first question.

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

Sir, you may ask your question.

Good morning everybody.

Hey, John.

One question for Bob and then one for Doug if I could.

Bob, the, I guess sales were helped by about 80 million because of currency.

Can you give us roughly what had helped earnings?

John, we don't specifically get into that level of detail, but clearly it did help earnings, and that was factored in our, you know, our forecast for the quarter that, in fact, we gave you back at the end of the second quarter.

So in terms of currency, frankly there were no surprises.

It wasn't greater or less than what we had expected.

And as far as the lower tax rate and, I mean, you were good enough to add the 2 cents to your guidance because of the capital gain.

You just kind of kept your guidance the same despite of the tax rate benefit.

Was that factored in before the quarter?

We had known that we, in fact, could have had some positive outcomes of some state income tax audits, and, in fact, it worked out that way, and that is the reason why the tax rate has been taken down, and, yes, to some degree it was anticipated.

And then, Doug, good morning.

Good morning, John.

Other companies like Wrigley are doing a lot of innovation, and you're certainly to be applauded to build this kind of 200, $250 million convenience platform.

Wrigley's, even though they're not necessarily clear about a lot of things, they're kind of clear that these new products will not have sustaining lower margins in their existing business.

I don't know if you've really ever kind of come out and said point blank that this convenience platform will not be a negative to margins.

I think Bob kind of alluded that maybe they wouldn't hurt margins, but I think the broader question is, looking at these margin declines, is this kind of a secular longer term trend or do you believe this kind of convenience platform can kind of carry the margins of old?

John, I believe there are a lot of moving pieces here, obviously.

When we start talking about margins, particularly in soup, we have the natural confluence of condensed and ready to serve compression.

I think it's reasonable for anyone to expect that we should be able to stabilize and grow our margins in soup over time, and that's the goal.

The new products ought to be over time, they ought to get to being a neutral to an accretive presence in our margin structure.

And I guess you're going to get into that time in the end of June?

As we've been talking about, from a margin perspective, since we launched the transformation plan, we talked about a need to pull margins down and we anticipated through the transformation plan that they were going to come down anywhere from four to, around three to four points.

The reality is they've come down around five to six and it's something we have to address going forward but it was always part of our plan to level out and stabilize in '04 and '05 and then to start to rebuild, and that's where we're headed, so we'll talk about it more in June but this is not a surprise to us.

Great.

Thanks a lot.

Next question, Amy.

Leonard Teitelbaum of Merrill Lynch you may ask your question.

Good morning.

Could you tell us what your tax rate anticipation is for the full year?

If you said it earlier, I missed it, I'm sorry.

We're now forecasting roughly 31.7% for the year which is basically our year-to-date rate.

All right.

Now, the stackable shelves that you've been talking about, we noticed that some private label guys also have them.

I was kind of, my understanding that you were almost going to be exclusive on that.

Could you comment on that on how private label got in there with shelves that look like yours?

Len, this is Doug.

Our program all along has been to provide shelving for the entire condensed soup section which includes private label.

So in all these sets we're creating the opportunity for private label to be part of the revitalization of the condensed category and so you'll see private label in every store that we've put a shelf set in.

And that's part of the plan, it always has been.

We're trying to revitalize the category.

We're finding that we're revitalizing private label but actually our branded business is doing even a little better than that.

That's just part of the strategy

Doug, the drop in operating margins which by your admission had not been anticipated, should we look at this as a, certainly not a quick fix but one that's a reasonable fix that you could have?

How long do you think it's going to take to turn this thing around?

Len, first of all the drop in operating margins over time, as I just mentioned with John is something that we had talked about when we went back and launched this plan and said we had an unsustainable margin structure and it was going to take us the full three years to work our way through that.

We're at the end of those three years at which point we have pretty consistently said we expect to stabilize and grow.

I thought you said it was about 100 basis points lower than you had--

There's no doubt it's lower than we had anticipated because it's taken a little longer to get condensed soup, all the elements right, and it's taken and we've been hurt just like everybody else in the near-term on some commodity cost increases but we believe it's a manageable proposition and we believe we'll be able to work through it in a reasonably timely way.

We'll amplify on in that our June meeting.

Last question.

Do you have automatic escalators due to fuel costs on transportation in light of both commodity as well as, I'm sure, you've mentioned certain price increases, do you anticipate anymore pricing action between now and, let's say, next soup season?

Len, we can't as you know, we can't comment on any pricing activity that hasn't been already expressed.

Thank you very much.

Thanks, Len.

Amy, next question.

Christine McCracken of Midwest Research you may ask your question.

Good morning.

Good morning Christine.

First just a point of clarification.

If I heard you correctly you're planning on about 150 million in Cap Ex for fourth quarter.

Any chance that that would get pushed out into the next fiscal year?

Christine, we always spend a lot of capital in the fourth quarter because that's when we can get in the plants and, you know, our soup lines are at a seasonal low at that time.

So it is not unusual for us to spend a high degree of our capital in the fourth quarter, and that's the case this year.

We expect to spend the full 290.

And all your planned expansions, then, are on track?

Yes.

Great.

And then just secondly, you talked about Prego growth, essentially you had talked about shipments into alternative channels helping to rebound sales in that business.

Can you give us some idea of whether this was a bit of trade loading to get that in, or is this over and above kind of what you'd been seeing before?

No this is just a little bit of a quarter-to-quarter shifting of our marketing programs, and it's some increased effectiveness of our advertising.

We're seeing no unusual aberrant behavior there over the nine-month period.

We feel it's pretty on balance.

We were encouraged.

I think at the end of our second quarter call we had highlighted the Prego.

We were concerned about it, and it's come back a little, in a more encouraging way than we had expected at the last call.

Maybe it is the end of the protein diet then.

Well, you never know, do you?

No.

Then just finally on commodity costs you did talk about obviously the cost pressures you're seeing there.

Any chance that we could get some sort of magnitude on that?

And then secondly, kind of tied to that, is part of that tied to on the packaging side the increase in steel costs?

As I understood it, you had long-term contracts there [inaudible], so I was wondering if that, there's been a shift, I guess, or a change how they pass raw material cost increases through to you.

Christine, there hasn't been a change.

We are taking a price increase on our cans starting on the first of June.

That is obviously related to the increase in the price of steel, and in terms of overall cost inflation, I think it's safe to say we started this year thinking roughly 2 to 3%.

It's clearly now increased to probably 3 to 4%, and our outlook for FY '05 is probably along the lines of 4 to 5 to 6%.

So we have seen a ramping up in costs, and I don't think we're much different than, in fact, most of the other companies in our industry.

You know, with the exception that, in fact, our steel can costs are going up rather dramatically.

Bob, just a clarification.

That price increase is coming to us, it's not, we're not taking the price increase on the cans, it's coming back to us.

Great.

Thanks so much.

Next question, Amy.

David Nelson of Credit Suisse First Boston you may ask your question.

Good morning.

Hey, David.

Corporate and unallocated was unusually low, as you said, for a number of reasons.

Should we still be thinking about 140 to 150 million on an ongoing basis for that line item?

David, yeah, I believe that's probably fair.

The problem with that line is that we do have a lot of recurring yet volatile costs that, in fact, do vary from quarter-to-quarter, but on an annual basis, which is the best way to look at that line, I would say that that's a reasonable assumption.

Great.

On the shelving unit, you said you were ahead of schedule and in the past I think you had said your goal was to be in 20,000 stores.

What's the time frame when you think you might be in 20,000 stores?

Well, we've certainly, we're hitting our targets now, we were, it's taking awhile to get up and running, as we were doing testing with our customers, David, but we believe we'll be in the 8,000 that we had targeted to be at starting the next soup season and I think it's going to take us at least 18 months to get beyond that with full implementation simply because we do it a store at a time, and we need to partner with each customer and each store manager to make sure it's working in those stores and then we also have to work around windows of opportunity for resets given how active the category is during the peak soup season, so I think it's probably an 18-month more process once we get the 8,000 in.

I know you talk about '05 in June.

Is that a 52-week year?

Yes, it is.

Great.

Thank you very much.

Next question, Amy.

Eric Katzman of Deutsche Bank you may ask your question.

Good morning everybody.

Hi, Eric.

Two questions.

I guess one, Bob, you mentioned that the, I guess, pantry loading was kind of greater than you thought.

I know that you, in the last three-year transformation program, you've been working on your systems, so is it a case where there is not just trade loading of the pantry level but also at retail that's kind of slowed things in the fiscal third quarter?

Well, actually, our analysis of retail inventories in the quarter indicates that there has probably been another decrease.

It's hard to evaluate the magnitude, but, in fact, the numbers appear to suggest that there was a decrease in retail inventories in the quarter, and, again, just looking back over the last two to three years, that, obviously, is an ongoing trend.

But in terms of pantry loading, this is our analysis that, in fact, we get from consumer panel information relative to tracking actual in-home inventory, for lack of a better word.

And my comments pertain to the fact that we have seen an increase in that panel information in terms of the amount of cans of soup that are, you know, that are in pantries.

It's not a tremendous increase, but it has increased.

Again, we believe that that has had some impact on shipments in the third quarter.

Eric, this is Doug.

Hey, Doug.

The other conundrum we have is we're bouncing around some pretty volatile period quarters, if you will, so we're trying to smooth it out looking at it on a year-to-date basis for the whole soup season but if you just look at the quarter, our second quarter this year was very strong, was up 17%.

Our second quarter last year was weak, and then our third quarter was up 18%.

So, which is what we're lapping here in U.S. soups, so it's hard to nail, on a quarterly basis, these inventory numbers.

When we look at it over a nine-month period we're satisfied that we've made solid progress, and over the nine-month period we don't see a dramatic increase in pantry inventory and we don't see any increase in retail inventory.

That's helpful.

Thank you.

And then correct me if I'm wrong, but the numbers now, kind of getting back to John's question earlier, condensed is about a billion dollar business annually and then the ready to serve business is also about a billion?

I'm talking U.S. here.

Uh-huh.

And then the convenience platform, I think the last update you said was running well above 100 million.

Eric what we had said, let me just clarify for you, those retail numbers, we normally don't give the numbers for condensed in RTS, but what we did say that if you add condensed, or you take ready to serve, plus broth, those dollar sales are about equal now with condensed on an annual basis, and we did say through the first six months of the year that we had $108 million worth of the convenience platform sales.

That includes Soup At Hand plus the bowls for microwave, microwave bowls for Chunky and Select.

So those were the numbers that we had given.

Okay.

And then just so I'm on the last question.

Just so I'm on the right page here, the last time you gave long-term growth rates I guess was at that the three years ago at the transformation plan, but the last time it was sales growth three to four, EPS up eight?

Yeah, that's what we gave at the transformation plan.

Okay.

Thank you.

Our next question comes from Eric Larsen of Piper Jaffray.

Good morning everyone.

Good morning, Eric.

I just want to touch base on this margin issue again.

It seems to me that the real change here, the new change is that you need to address more of a structural issue rather than an ownership issue in ready to serve type of soups.

Seems to me that as far back as I go, it's not ownership of who has Progresso, it's a structural issue, whether it's owned by Mills or Pillsbury, or Pet or Whitman or whatever, it's always been sold on some form of price, and maybe this is now, in your thoughts, you have to address more of a permanent deeper discount, or maybe even frequency on your ready to serve soup products.

Would that be an accurate observation?

Well, this Doug, and the observation in the current environment is absolutely.

I wouldn't want to necessarily forecast that into perpetuity but we made a decision very early on in the soup season this past year that we would meet competitive pricing, and we've done that, and we've maintained it through the third quarter.

And so that's our posture at the present time.

And we intend to be fully competitive.

Has the environment, did the environment toward the end of the soup season, with Progresso get better?

It looked like it came up about a dime a can toward the end of the season.

Did we see some improvement in that?

I wouldn't, I don't have the specific number right at my fingertips.

We saw a little moderation in trend, as we would have expected as we came out of the heavy promotion period in December/January, and we would have expected that, and we've seen it.

Okay.

And then one other final question.

The competitive activity in Australia with Frito-Lay, is this another, is this a one-year battle, or do you expect to see this ongoing for a bit of time as well?

We're positioned to be competitive now, and we will be, and we're seeing, while our earnings have been adversely affected in the near-term, our sales are responding, so we're going to remain competitive.

Okay.

Thanks, guys.

Amy, next question.

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

Good morning.

Hey, Andrew.

Doug, three years ago you talked a lot about the opportunity, or what you needed to try and do, you know, around condensed, in terms of, you know, the shelving and the quality initiatives, things that hadn't been done on that business for a long time, just to try and sort of stabilize things.

And you're still working through a lot of those initiatives right now.

Trying to get a sense of, when you think internally about resource allocation, first, philosophically, do you still feel like condensed has that kind of role that you initially thought, which was it's still where the majority of people in that form consumes soup and it should still play that type of a role?

How much more resource can we expect to go toward that piece going forward, or is it now just executing on the initiatives you've already discussed with respect to condensed and full force ahead on sort of the convenience platform?

Andrew, that's a good question.

I think when we first launched the transformation plan three years ago we talked about accelerating growth in ready to serve and targeting to stabilize the condensed business, and from a dollar sales perspective.

As we got into the plan last year we reflected on it, moderated on our position a bit as we uncovered the potential of the convenience platform so we said we had the potential to accelerate growth even faster we believed in ready to serve on the strength of that platform and that we were going to be able to deal with just moderating the trends in condensed as opposed to stabilizing the business.

I think we would still maintain that position today.

I know we would still maintain that position today.

However, the level of organization energy required to deal with the condensed trends in the next three years is significantly lower than it was in the last three years.

Upgrading all those formulas, upgrading all those lines for easy open ends, getting the shelving up and running has been a major organization challenge.

Going forward, we view that as work that's behind us, and now the heavy lifting is on executing that well but really accelerating the growth in ready to serve.

Then the last thing is with the higher levels of promotion that you've had, also getting back to a previous question around systems, my sense is you have a much better ability now to sort of understand what you're getting for what you're spending perhaps a lot better than you had before.

We have significantly improved our trade spending management and systems over the last three years, so we do have better insights.

They're still, quite frankly they're not as good as I'd like them to be, but they're competitive now, and we have the ability to manage that part of our P & L significantly better than we were able to manage it three years ago.

Thanks very much, Doug.

Next question, Amy.

Evan Morris at Banc of America Securities, you may ask your question.

Good morning.

Hey, Evan.

Doug, in previous conference calls you sort of assessed where you were, as you went through soup season, and I think even talked about a goal toward winning soup season.

Now that soup season is over, and you hinted on this with a couple of your comments, but can you sort of assess how soup season went for you, and maybe even tie that into the quote you had in the release?

You said, "as you look toward next soup season you're putting plans into place to continue to drive top-line growth while also improving our bottom line performance".

If you can kind of walk us through that.

In 25 words or less, right?

Yeah.

That's what I thought.

First of all, I'd assess it as we've had a solid soup season.

Every year we have a new challenge but overall I'd say we had a solid soup season.

Our ready to serve sales year-to-date are up 10%, our condensed sales have declined only 2% and our broth sales are up 8%.

And overall I'd say that's pretty solid sales growth.

And our ready to serve sales are up 10% despite having the challenge in the first quarter of not being able to keep up with demand on the convenience products.

So we see further up side there, and as we're implementing all the pieces for the condensed effort to moderate the declines there we see encouragement there, so overall, in terms of top-line performance, I think our total U.S. soup sales are tracking around plus four, and strategically they're about where he think they ought to be, so overall I'd say a solid effort.

We do have a challenge on margins as I've alluded to earlier.

That's something we have to address, something we contemplated in the transformation plan would be an issue as we exited the transformation plan and move into the next three-year plan.

That's something we can address more in June, but overall I'd say we've had a solid soup season.

Despite, you know, the challenge to profitability, though.

I guess the question is then, I agree with you on the top-line, and I think this might be more for the June meeting, but I'm just trying to get a sense of how you balance better that top-line and bottom line since the bottom line has obviously been worse than I expected, and judging from your comments, worse than you expected.

The bottom line, as we talked about in the first or second quarter call, we did step up our promotional spending, and that was something we were prepared to do but didn't, wasn't exactly planned.

We had a contingency for it but, and so that did take a bite out of our margins that we have to assume is going to continue, so we have to do other things to make sure that we have the right margin framework to be able to compete and grow earnings as we go forward.

So that's something we've got to address and we'll address it in our June meeting.

Last question.

If we were to see price competition again next soup season, it sounds like you're planning for some, do you think, or how do we get comfortable that Campbell, as a company, has the necessary resources then to support all its businesses properly, beyond soup, if more money had to go toward price promotion again next soup season?

I think we've managed the portfolio in such a way that we believe we can be price competitive and grow our earnings base, and we'll talk more about in that June, but I think we have the right balance in our portfolio to be able to do that.

Great.

Thank you.

Amy, next question.

Terry Bivens of Bear Stearns you may ask your question.

Hi, good morning everyone.

Hey, Terry.

Don't want to beat a dead horse on this margin, but if you do look at the North American soups and Away From Home, it's almost a 500 basis point drop.

Granted, you had very difficult comps with the year-ago, and certainly cold blend I've got to think is a major part of that, but is there any way, either Doug or Bob to attribute maybe how much of that decline was due to higher promotional expenses that you didn't really anticipate going into the season?

I don't know if that's a fair question or not, but that does occur to me.

Terry, roughly, you know, obviously we spend a lot of time analyzing our margins, our gross margins specifically, and on a, in the third quarter, promotions had somewhere between a half a point to a point impact on margins.

So on gross margins specifically.

So, you know, without question, you know, it was a significant factor.

And, you know, I guess this goes back to John McMillin's question on the new products.

You're basically, with the convenience platform you're selling, what, 16% less soup for roughly the same price.

I guess what I'm wondering is, why wouldn't those margins be demonstrably better than what you already have in RTS?

Terry, we've got more complexity in the packaging proposition, however they ought to be very good margins, and over time they will be.

So over time would you expect, when you look at the reduced volumes there, you'd expect that to result in better margins on the new line?

Well, certainly comparable.

Again, Terry, this gets back to our age-old issue.

We do have much better penny profit margins by selling a convenience bowl versus the condensed proposition.

So, again, you know, we, in fact, do like the trade-off, and as long as we can invest at the margin, above our cost of capital, we think it's a solid business proposition, and, you know, we'll talk more about that in June, but, again, we feel that, you know, our whole RTS business model is a sound one, and, you know, we'll continue to invest behind the incremental capacity that, in fact, is required to support the growth of that business.

Okay.

One of your private label competitors is making noises about a convenience packaging similar to yours for the upcoming soup season.

Have you looked at that?

Do you --

Well, we've, Terry, this is Doug, and we fully expect competitive response here.

We feel very good about our first-mover status in the category.

We'd be surprised if there was broad-scale availability of a competitive proposition, and we're anticipating it, though, and so we'll be ready for it when it happens.

Okay.

Last question.

Just on the shelving.

I know Wal-Mart was doing some tests down in Georgia, as I recall, where did they stand on your shelving initiative?

They continue to evaluate it as do many other customers, and so it's still being evaluated.

All right.

Thank you very much.

Next question, Amy.

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

Good morning.

Hey, Mitch.

Just a couple of things on soup.

How did foodservice soup do in the quarter?

We had a pretty good month.

A good month?

Well, a good quarter.

A pretty good quarter, I apologize.

Stockpot had a good quarter, as we said.

So -- okay.

How about alternative channel?

What percent of sales in soup is alternative channel presently?

I don't think we break that number out.

For total company only we've talked about targeting, you know, about 15% of sales in alternative channels, that's fairly normal, but that's as far as we've talked about what is actually going through there.

I would think is soup less than that?

Well, there's a lot of products that go through that channel, Mitch, and so I think, you know, soup is a big factor, but you think about some of the things like V8 and some of the beverages are big alternative channel distribution things.

Okay.

So we --

Good enough.

The other question is, you know, we've talked a lot, you've talked a lot in the past about cost savings initiatives and hundreds of millions of dollars here and there.

Is there anything out there that you're looking at to help offset some of the inflationary pressures and sort of as a way to find reinvestment dollars for your planned, you know, promotional expense?

Well, Mitch, this is Doug again.

As we said, all along with this transformation effort we've known that we needed to address this margin issue as we came out of the transformation plan, so we've been looking very planfully at opportunities to do just that.

The premium on doing it now, given the escalated competitor activity is even more intense, but we'll profile in that June as we talk about all the available opportunities to get our margins right.

Mitch, this is Bob Schiffner, productivity savings has really been an area that has helped us considerably over the last three years.

We've averaged roughly over $100 million a year in terms of taking costs out of this business with a lot of small one-off actions.

This is an organization that is very much attuned to the importance of cost control, and I think we've tried to live that every single day.

But there are opportunities to take out incremental costs in this business in a more, bigger way, and, in fact, we will, you know, I think talk about that in June with you.

Okay.

Just two more things.

One, relative to Pepperidge Farm, fresh bread sales were up?

Yeah, we had a good, yet another good quarter in bakery.

Were volumes up as well, in bakery, fresh?

I don't know.

We talk about sales, Mitch.

Yeah, I'd say volume.

Certainly sales were, and so, and it was nominal pricing, so I think you'll to have draw your own conclusion.

Okay.

Good enough.

Thanks very much.

All right, thanks, Mitch.

Amy, how many more questions on the line?

Two more questions.

All right, we'll take those two, then we'll to have close.

Pablo Solanich of J.P.

Morgan, you may ask your question.

Let me just ask in terms of the gravity fed shelves and playing devil's advocate, they are supposed to facilitate the shopping experience but as a consumer, when I go and stand in front of those, first of all I had a hard time finding my traditional chicken noodle or tomato soup, which is at the bottom.

It's not on the shelf.

And then I see so many SKUs.

What's the feedback that you're getting from consumers?

Not from customers, not from stores but from consumers in terms of gravity fed shelves so far?

Pablo, this is Doug Conant.

We've done extensive consumer research which is what is, which is why the customers are engaged in it.

The consumers are able to find their products faster and they're also able to find varieties that they historically have had trouble finding.

So overall we see it's been a very positive consumer response.

The challenge with us has been to get our customers to test it in their stores, and they've tested, every customer, virtually, has tested this in their stores for an extended period of time, found very positive consumer response to it before implementation because it's just too much to reset that section if the consumers aren't excited about it.

Now every store is different, and every individual shopping experience might be different so, but on balance we find very positive response.

And so right now what percentage of your total condensed soup sales are coming from the gravity-fed shelves, approximately?

I don't know.

Okay.

And just the last question on that, in your supplying the space, I mean you have the shelves there for private label.

Is the idea to eventually also supply private label condensed soups to the stores?

We don't have any, we currently do not produce any private label product and supply it.

It's something we're aware it's an opportunity and some day we may get into it but we don't have any imminent plans.

If I may, just the last question in terms of margins, I'm sorry for so many questions on margins, but at the time you said that condensed soup sale margins had been stabilized.

Does that mean that the 500 basis point drop this quarter year-on-year was mainly on ready to serve soup or condensed margins were also down?

I think that the comment we made on condensed soup was that we were pricing to offset the increased cost last year of the easy-open lids and so that we were, our, we were strengthening our margins in condensed.

I don't think you could assume that the margins were stabilized in the third quarter.

Okay.

And the broth margins, are they closer to condensed or closer to ready to serve?

We really don't discuss that Pablo, so we can't really get into that.

That's fine.

Thank you very much.

Last question, Amy.

Leonard Teitelbaum of Merrill Lynch you may ask your question.

Asked and answered, over and out.

Happy to help, Len.

Okay, that's going to conclude our call for today.

Thank you everyone for joining us this morning.

This concludes today's conference.

You may disconnect at this time.