金寶湯 (CPB) 2005 Q1 法說會逐字稿

Welcome to Campbell's Soup first quarter 2005 earnings conference call.

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

After the presentation we will conduct the question an answer session. [Caller instructions.] Today's conference is being recorded.

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

I'd like to introduce the host of today's call, Mr. Leonard Griehs Vice President of Investor Relations.

And Mr. Griehs you may begin.

Thank you.

Good morning and welcome to Campbell Soup Company's first quarter fiscal 2005 conference call.

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

Joining us for the question and answer session, will be 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 website.

Our call this morning will last approximately one hour.

It will be replayed approximately 2 hours after the call is complete.

The replay number is 1-800-873-2059 or 1-402-220-5376.

It will run through midnight November 26.

You may also listen by logging on to our website, www.campbellsoupcompany.com and clicking on the webcast banner.

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

This discussion contains forward-looking statements that reflect the Company's current expectations about its future performance.

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

These include; statements concerning the impact of marketing investments and strategies, new product introductions, cost savings initiatives and quality improvements, all on sales, earnings and margins and other factors described in the Company's most recent 10-K.

And as updated from time to time by the Company in its subsequent filings with the Securities and Exchange Commission.

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

This discussion may include certain nonGAAP measures as defined by SEC rules.

We have provided a reconciliation of any measures to the most directly comparable measures and available on our investor website at www.campbellsoupcompany.com.

Now I'll turn it to Anthony who will discuss our first quarter results.

Good morning.

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

As we previously announced, beginning with this first quarter for U.S. soups, we will discuss sales only for condensed, ready to serve and broth.

And will no longer discuss sales volumes.

We have new reporting segments to reflect changes in our organizational structure.

These organizational changes were announced in fiscal 2004.

Restated segment information has been provided for the first quarter of fiscal 2004 in the current release.

In the 10-Q filing for the first quarter we will provide additional quarterly restatement for fiscal 2004 and 2003.

During our discussion today I will provide the description and content of each reporting segment.

Now, let's proceed with highlights from our first quarter results.

The first quarter was a very strong sales quarter for U.S. soups with condensed, ready to serve and broth all showing solid growth.

Condensed eating soups generated strong growth and condensed cooking soups grew from a weak year ago performance.

The Chunky brand had especially strong soup performance driven by special trades promotions and tie-ins to the National Football League.

In an extension of the Chunky brand, Chunky Chili was introduced in the U.S.

And gained wide acceptance by both customers and consumers.

This extension of Chunky is important because it supports the proposition that the Chunky brand can perform well in the broader simple meal arena and adds us to another section of the grocery store.

Pepperidge Farm achieved sales growth all parts of the business.

And Arnott's in Australia showed strong sales due to growth in growth in Savoury Biscuits and salty snacks.

Europe accelerated its revitalization program which should improve future business results.

Godiva achieved double digit sales growth.

And refrigerated soups and away from home venues grew significantly.

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

Sales rose 10% to 2.1 billion.

Sales growth for the quarter breaks down as follows: Volume and mix added 9%.

Increased promotional spending subtracted 1%.

Currency added 2%.

EBIT was 381 million, up 8% versus a year ago.

Gross margin declined to 40.5% from 42%. primarily due to increased trade promotion and cost inflation, partially offset by productivity improvement.

Marketing and selling expenses rose 21 million to 314 million, primarily due to higher advertising and consumer promotion spending and currency.

Administrative expense rose 6 million to 129 million, primarily due to currency and the expenses associated with the implementation of the new sales and distribution system in Australia.

Which was announced in the fourth quarter of fiscal 2004.

Research and development costs declined 1 million to 20 million.

Other expenses declined to 2 million from 10 million, due primarily to lower adjustments to the carrying value of investments and affordable housing partnerships.

Net interest expense was 44 million up 1 million versus a year ago, primarily due to higher interest rates.

The tax rate was 38.1% versus 32.2% end of first quarter a year ago and consistent with our expectations for the full fiscal year.

Net earnings for the quarter were 230 million versus 211 million in the comparable quarter a year ago.

Diluted EPS for the quarter was 56 cents up 10% from the 51 cents recorded in the year ago quarter.

Now, let's turn to operating highlights by reporting segments.

I will give the first quarter numbers for this fiscal year and last fiscal year.

U.S. soup, sauces and beverages; this reporting segment includes the following retail businesses: The Campbell's brand condensed and ready to serve soups, Swanson broth and canned poultry, Prego pasta sauce, Pace Mexican sauce, Campbell's Chunky chili, Campbell's canned, pastas gravys and beans, Campbell's Supper Bakes, V8 Vegetable Juice, V8 Splash juice beverage and Campbell's tomato juice.

Sales of 994 million were up 10% from 900 million in the year ago quarter.

Sales growth for the quarter breaks down as follows: Volume and mix added 13%, price and sales allowances subtracted 2%.

Increased promotional spending subtracted 1%.

Operating earnings of 275 million rose 4% from 265 million.

Operating earnings growth was primarily due to significantly higher sales volumes, partially offset by the cost of increased trade promotion and advertising.

And higher raw and packaging material costs moderated by productivity improvements.

Condensed soup sales rose 10% and ready to serve soup sales rose 18% while Swanson broth sales increased 7%.

During the past 3 years of the transformation plan we made a number of investments aimed at improving the performance of condensed soups.

Specifically, cold blend processing for higher garnished products; easy open lids on all products, new varieties, focused advertising and marketing in support of kid soups and cooking soups and the installation of gravity feed shelving systems.

This year these elements have reached critical mass and are making a more meaningful impact on the business.

Both eating and cooking condensed soup sales improved during the quarter.

Condensed and eating soups sales improved significantly in part due to the combination of successful merchandising and kids' marketing programs including; more varieties of kids' soups, condensed cooking soup sales grew in part due to increased shipment ahead of stronger holiday promotion events and the introduction of 3 new Southwestern style cooking soups.

Both eating and cooking condensed soups benefited from the installation of additional gravity feed shelving systems in stores.

During the first quarter there were 11,000 in place versus 2,800 in last year's first quarter.

This broadens consumer awareness of all varieties of condensed soups and makes the consumer search for specific varieties much easier.

Turning to ready to serve soups we continued to develop more effective marketing programs and to expand our ready to serve soup lines to meet consumer preferences for variety, convenience and nutrition.

During the first quarter strong retailer support and consumer response behind increased promotional activity for Campbell's Chunky soups drove significant sales growth for that brand.

Raw sales grew in part due to increased shipments ahead of stronger holiday promotion events and the introduction of 2 new organic broths.

In the convenience arena, Chunky and Select microwavable bowl sales grew.

However Soup at Hand sales declined compared to the year ago quarter in which we introduced 7 new varieties and had multiple introductory retail promotions to simulate trials.

This year we added only 2 items to the line.

And we are implementing marketing programs more evenly throughout the soup season.

Repeat purchase of Soup at Hand remains high.

Moving to other businesses in this reporting segment I'll start by discussing the introduction of 4 varieties of Campbell's Chunky Chili in 19 ounce cans.

Which as I suggested earlier established the Chunky brand in the simple meal arena in a more meaningful way.

So far this introduction has been very successful and is generating excitement with our customers and our consumers.

In January, Campbell's Chunky Chili will be available in microwavable bowls as well as canned.

Campbell's Chunky Chili can be found in the chili aisle of the grocery store.

An important extension for us into a new area of the store.

Sales of V8 vegetable juice declined, primarily due to the timing of promotional activities.

While sales of V8 Splash fruit drink and Campbell's tomato juice declined due to increased competitive activity.

Prego pasta sauce sales increased as category trends improved.

While Pace Mexican sauce sales declined, primarily due to class in trade mix.

Campbell's SpaghettiOs sales increased, primarily due to restored advertising.

And the change from the FrancoAmerican to the Campbell's brand.

The rebranding of SpaghettiOs allows us to incorporate it under the Campbell's brand umbrella of marketing and trade promotions.

Now let's turn to our second reporting segment, baking and snacking.

This segment includes the following businesses;

Pepperidge Farm cookies, crackers, breads and frozen products in the U.S., Arnott's biscuits in Australia and Asia Pacific and Arnott's salty snacks in Australia.

Sales for the quarter were 449 million compared with 416 million, an increase of 8%.

Sales growth for the quarter breaks down as follows: Volume and mix added 5%.

Price and sales allowances added 2%.

Increased promotional spending subtracted 3%.

Acquisitions added 1%.

Currency added 3%.

Operating earnings rose 10% to 46 million from 42 million in the comparable quarter.

As the impact of higher net sales, currency and productivity gains were partially offset by commodity cost inflation and expenses associated with the conversion of Arnott's distribution system from direct store to warehouse delivery.

Pepperidge Farms sales grew on the strong performance of the fresh bakery business which leverages the expanded distribution of Pepperidge Farm bagels and English muffins, continued strength of Pepperidge Farm's whole grain bread and the introduction of Pepperidge Farm's carb style breads and rolls.

Goldfish sales increased, primarily driven by new distribution and increased promotional activity.

In frozen 3 new varieties of Premium pot pies contributed to sales growth.

Arnott's sales rose driven by strong performance of Savoury biscuits and higher sells of Kettle branded salty snacks.

During the quarter Arnott's opened a sales office in China and brought in biscuit distribution in that country.

Our third reporting segment is international soup and sauces.

This segment includes the soup, sauce and beverage businesses outside of the United States, including;

Canada, Europe, Mexico, Latin America, and the Asia Pacific region.

Sales were 416 million compared to 386 million, an increase of 8%.

Sales growth for the quarter breaks down as follows: Volume and mix added 3%, price and sales allowances subtracted 1%.

Increased promotional spending subtracted 1%.

Currency added 7%.

Operating earnings were 55 million compared with 53 million, an increase of 4% due to the favorable impact of currency.

As I mentioned in the highlights, our European businesses are in the midst of a revitalization plan to enhance future performance.

This plan includes strong investment and innovation behind wet and instant dry soup and sauces.

And focused on extending our presence into the simple meals and convenience arenas.

As an example of our activities this year, we introduced Super Noodles To Go in the UK.

Aimed at the convenience outlet.

And in both Germany and the UK we have introduced a package that combines instant dry soup with toppings such as croutons to offer a higher value convenience product.

We're also improving the quality and the positioning of our Home Pride sauce business in the UK.

And expanding the number of sizes of the Liebig line of aseptic soups in France.

Now, commenting on the specific financial performance for the various regions: In Europe sales were down as growth in Belgium and the UK behind the lines of and Super Noodles To Go were offset by softness in Germany and Ireland.

In Asia Pacific sales declined slightly as higher sales of soups and beverages in Australia were offset by lower soup sales in Asia.

In Canada, soup and beverage sales increased significantly, rebounding from a weak year ago period.

The balance of our portfolio is being reported as other.

This includes the business of Godiva Chocolatier Worldwide and the business of Away From Home in the U.S. and Canada.

Sales were 232 million compared to 207 million, an increase of 12%.

Sales growth breaks down as follows: Volume and mix added 8%, price and sales allowances added 3%.

Currency added 1%.

Operating earnings were 22 million, even with year ago as increased earnings for Away From Home were offset by a decline in earnings by Godiva.

Reflecting investment in new product launches and a new advertising campaign ahead of the primary sales season.

Away From Home sales increased primarily due to higher sales of refrigerated soups partially offset by lower sales of frozen soups.

Godiva sales improved significantly.

Reflecting double digit growth in North America same store sales driven by new products.

Before I hand the discussion on earnings I want to mention corporate unallocated expense on the supplemental schedule.

This declined by 11 million to 17 million primarily due to low lower adjustments to the carrying value of investments and affordable housing partnerships and lower costs associated with ongoing litigation.

Now let's turn to the balance sheet.

Total debt was 3.46 billion compared to 3.72 billion a year ago.

Cash flow from operations was a positive 64 million versus a negative 66 million in the year ago quarter primarily due to lower seasonal increases in working capital.

Capital expenditures were 47 million compared to 23 million.

This higher amount is consistent with our forecasted capital spending this year of 380 million.

That concludes my discussion of the first quarter.

Now, Bob Schiffner will offer a few comments before we open up for questions.

Thanks, Anthony and good morning, everyone.

Clearly I am pleased with this excellent start to the year.

And I'd like to offer some perspective on this.

We decided to move our consumer marketing and trade promotional spending more into the first quarter this year and I am pleased to see that it had the desired impact of driving category growth and giving us a much stronger competitive profile.

Which drove significant increases in consumer purchases.

Clearly this was a stronger than anticipated quarter, especially in the U.S. soup business.

However, we need to maintain our competitiveness over the full fiscal year to ensure that this sales growth is incremental versus the prior year.

Having said that, I believe our competitiveness has improved dramatically from just a few years ago when we started the transformation plan.

We now have better product quality, more convenient packaging and more effective consumer marketing and merchandising.

Now, let me turn to margins since I told you before that this would be a major focus going forward.

Gross margin was down for the quarter.

This margin decline was due to higher rollout and packaging material costs and higher promotional spending.

As I have stated before, we expect gross margins to be down versus year ago.

But we also expect to see an improving trend as the year goes on.

Our operating margin performance was quite promising as it was down only slightly versus prior year.

The actions we took in June benefited us with lower selling, administrative and R&D expenses as a percent of sales.

Finally, I am especially pleased with the rebound in our cash flows.

In summary, although this quarter was stronger than anticipated, it is too early to revisit our outlook for full year guidance.

We continue to have confidence that we will achieve our primary financial goals to grow sales 3% to 4%, earnings before interest and taxes 5% to 6% and earnings per share 5% to 7% off the adjusted fiscal 2004 base of $1.58 per share.

Now I will turn it back to Len.

Thank you, everyone.

And Fran, would you know begin the question and answer session please?

Thank you very much.

So we will now begin the question and answer session. [Caller instructions.] Looks like our first question is from John Mcmillin.

Sir, your line is open.

With Prudential Equity Group.

Can I ask a technical question first?

What is in baking and snacking that wasn't in the old segment?

John, this is Doug.

The only change is that Godiva is no longer in it.

Otherwise, it's all the same.

Okay.

And then just in terms of keeping the earnings guidance the same for the year, and I know you don't give quarterly guidance but if this is in addition, where are you thinking there may be subtractions?

Well, John, from our - - I mean, this is the first quarter of a 4 quarter game.

And we're not going to get into forecasting quarterly performance but it's going to -- we have a challenging year ahead of us.

And while we're off to a great start and it certainly beats the alternative.

It's still just the first quarter.

Do you think Progresso is getting any - - I know they took a price increase, you didn't.

It looks to me now just based on the last Nielson data that they're spending it back.

Are you seeing that?

This is one of the things that causes us just to be careful in terms of providing any guidance about the future.

We expect them to be very competitive throughout the year.

And they certainly are competing now.

So we're not surprised by it.

This management team has been going toe to toe with them in a more competitive way now for going on the fourth year.

And we're not surprised by it.

And just into the unallocated corporate line for the quarter, I know you're saying that the 11 million drop was due to this affordable housing investment and litigation.

But if you compare it to 2 years ago, you know, it doesn't look like the change is that much.

Can you just break out what came from affordable housing, what came from litigation and what kind of the ongoing unallocated corporate expense line should look at?

Well, John, affordable housing is roughly 1/2 of the change.

It's been something that has been impacting us over the last couple of years.

Clearly we in fact think the worst is in fact behind us.

And my expectation going forward is that we're not going to have to expense as much as we have over the last couple of years.

So that's good news.

As far as the other piece of it, there's a lot of smaller expenses that are highly volatile.

Obviously litigation is in fact, one of them.

And you know, my expectation going forward is that we'll always have some noise in this expense area.

And - - but it's nothing that in fact I don't think we can handle.

So that's how I would summarize, you know, the answer to your question.

Next question, Fran?

Terry Bivens of Bear Stearns your line is open now.

I guess if you look into the second quarter and Doug, I know you guys don't want to provide quarterly guidance.

But you do have a tougher comparison certainly with ready to serve.

And I guess you're probably looking at the consensus numbers like the rest of us.

Are you feeling that the January quarter can be similar to the quarter we've just seen in October or is that a little bit too optimistic?

Well, Terry, we just - - we expect it to be a fully competitive quarter.

And as you know, it's never over until it's over in January because competitor activity can rear its head late in the season.

And so it's just - - it's too difficult to begin to call the second quarter even if we wanted to.

Okay.

Bob, would you have any number for raw materials, the increment that that hit you in the October quarter?

I - - Terry, that will actually - - we'll break that down in the 10-Q.

When that comes out you see the components of the change in gross margin.

Terry, but I will say that in fact it was a little strong stronger this quarter than in fact, what we expect on average for the year.

And you know, I would would say it was somewhere between probably 4% to 5%.

Which was a little bit higher than my annual guidance that I've given people of cost inflation, of somewhere between 3% and 4%.

But obviously, we expect it to be less of an issue as in fact the quarter goes on because we started seeing some pretty large increases in the second half of last year.

So that's --

So that's our expectation.

And steel can prices ought to be rolling over too.

Correct?

Well, we experienced higher can prices at the start of this fiscal year so part of that heavier than expected cost inflation was in fact due to steel cans.

Okay.

And just one last quick one.

What do you think is a decent run rate for the new line of chilis?

What kind of sales are you expecting first 12 months with those?

Terry, it's premature to call that as well.

We're going into a new category in a new section with a new competitive frame.

We're off to a good start and it's just - - and it's also very seasonal.

So we're going to - - I think we can give you a clearer understanding of that as we wrap up the second quarter.

Evan Morris of Banc of America your line is open now.

A couple of questions you mentioned a few times regarding the shipment number for soup were up ahead of promotional activity.

Can you give us the take away numbers?

It seems like you may have shifted a bit ahead of consumption.

Is that a fair assessment?

It's just the normal timing of holiday promotions.

We have - - you know, we start shipping roughly 3 to 4 weeks before.

So again, the end of October benefited from that.

As it always does.

As it always does.

Right.

So it's not anything unusual.

Evan, this is Doug.

We typically - - we'll ship ahead of consumption a bit in the first quarter.

But I think - - and we won't - - and we don't provide consumption detail.

But it's instructive to look at our promotional spend to see if anything unusual happened.

And as Anthony highlighted in the promotional spend you'll find that it was a very efficient quarter.

So there was no unusual activity other than the planned inventory build levels.

Okay.

So that should reverse itself as we move through the second quarter?

Yes.

Yes well Evan, what we said that we wanted to make sure that we were out there for cooking season this year and that's important.

So that was one of the reasons why we moved and mentioned it as part of our strategy for this year is to make sure we're not behind in the cooking season.

So I'm not sure I'd phrase it as saying it as saying it reversed itself.

I'm just saying that we're out there in plenty of time for the cooking season.

So I just want you to remember that.

But the point of it is that this activity isn't different from any other year.

Okay.

No, that's fair enough.

And just looking also at the soup business.

In the soup, sauces and beverages segment, sales - - the increase in sales was much greater than the increase in profits.

And you gave the volume numbers for both segments of soup.

Can you give us a sense of what the profit growth for those segments of soup were?

Also the corresponding the profit growth?

Evan we don't break that number down for ready to serve versus condensed.

Were they both positive?

Again, we don't really discuss anything about the various segments.

It's really just soup or the division.

Okay.

Thank you.

David Nelson of CSFB.

Your line is open now.

In the top line guidance for the full year remained at 3% to 4%.

And given the strong quarter, it doesn't imply a lot for the rest of the year maybe a little over 1%.

And you had and 2% from currency just in this quarter.

Are we're looking at U.S. sales basically being close to flat for the balance of the year?

Is that the assumption?

David, what it means is that in fact we're not really giving any guidance on any of the numbers going forward.

As Doug said, clearly after one quarter you know, it's early in the ball game.

You know, obviously our soup business peaks in the second quarter.

And my sense is, you know, we'll have more to say on that after the end of the quart quarter.

But clearly I wouldn't read anything into it because basically we're not commenting on guidance for the rest of the year.

Okay.

If I could ask something about Pepperidge.

You got - - had some pricing there last year, getting pricing again this year.

Could you comment on what you're doing that's working in biscuits that doesn't seem to be working elsewhere?

David, I'd say we've got a terrific innovation model at Pepperidge Farm that is helping us across all of our segments.

Our many introduction in our sweet and our cookie line has been very positively accepted.

Our sugar free versions that are going out are also off to a strong start.

In bakery, we continue to benefit from our new formulas - - bread formulas that provide longer shelf life and better quality and as well as the low carb offering.

We have continuous innovation in Goldfish and also in our frozen arena.

And so we've got a model that constantly innovates.

And then our DSP system in Pepperidge Farm is unique to the industry.

And I think it's very competitive be anything that Keebler or Nabisco has to offer.

So I think it's the total pack package of Pepperidge Farm.

Eric Katzman of Deutsche Bank your line is open.

A few questions.

One, Doug, I know you can't talk specifics about pricing actions.

But just conceptually, you know, obviously you feel more confident about how things are going in particular with condensed and ready to serve.

You highlighted it as being up quite a bit. 2 of your competitors were willing to take prices up by you know, a fairly material 8% the amount in to ready to serve.

I suppose with the soup season pretty far into it, you're not going to do anything at this point.

But conceptually you put a lot of money into the business, why wouldn't you take prices up if competition - - or at least some percentage of competition is willing to kind of signal that they're willing to do so?

Well first of all, as you would expect we don't comment on any specific pricing actions in any way, shape or form.

That having been said, we have consistently said that over time we believe that we're going to need to in the fullness of time, price to cover our costs.

And in the fullness of time we will.

But we'll do it on our schedule, not anybody else's.

And we have put a lot value back into the category and into our franchise.

But quite frankly, before we started this journey 4 years ago, we took a lot out.

So we're just trying to get back to a sustainable business proposition where we can get the full advantage of our relative market share.

And you know, and we're clearly heading in the right direction.

But I can't - - I'm not going to provide any more specifics than that.

Okay.

That's fine.

And Bob, I guess this is kind of more of a question about just kind of reporting and policy.

But you know, it seems to me now that, you know, if I look at the top line in 6 of the last 8 quarters you've had 6% growth or better.

And yet, I realize, you know, it's your choice not to make quarterly, you know, forecasts.

That's our job.

And I'm not trying to shirk self-side responsibility.

But don't you think when consensus is kind of looking towards 2% to 3% and you report 9% or 10% or better on the top line, I'm not even talking about bottom line, that that's material enough that you should give some kind of preannouncement?

Or some kind of view that your results are significantly exceeding your long-term targets?

I mean, you know, 6 of 8 quarters now have been up well above anything that you've kind of suggested was even remotely possible.

You know, I think the point there is you know, not necessarily the quarter but how we think it's going to impact our annual guidance.

Because that's all we give right now.

And again, our sense is, is that it is much too early in the year to start giving a different viewpoint on annual guidance.

And you know, therefore that is what is justifying our strategy in terms of how we communicate this.

And that's about what I have to say.

But you know - - I don't want to just kind of beat this up here.

But you know, you know, fairly far along in the quarter I mean, how things are progressing.

I'm not talking about updating annual guidance.

I'm just talking about giving the market a sense as to when you know everybody out here is looking for 2% to 3% top line and whatever 4% or 5% bottom line because that's what you're annually targeting.

When a quarter is materially different, don't you think you have some obligation to tell people that it's either going better or worse?

Eric, if I could just mention, we carefully review the information that we have available to us.

And if we feel that there is a material event that needs to be communicated prior to the time of announcements, we do review that.

And so that is our policy.

We do review that consistently.

David Adelman of Morgan Stanley, your line is open now.

Doug, I was curious, I mean, as you went through this quarter and into the early part of the fiscal second quarter are you seeing a change in the competitive behavior in the category?

And if that's the case, is that one reason underlying your conservatism?

First of all, I'm seeing - - the most profound change I'm seeing is in our own ability to compete and put our best foot forward in the marketplace.

And on that front I am more confident about our ability to compete day in and day out, quarter in and quarter out than I ever have been.

And that's particularly true in soup where I think all 5 of the things we've been doing on condensed soup to get it up and running in a very competitive way.

We finally got critical math on those things.

And it's starting to get traction in the the marketplace in a way that I think is arguably we can begin to view as potentially sustainable.

I also feel very good about our ready to serve business and very good about our broth business.

The challenge is that you never know what's going to happen with - - the wild card is competitive activity both at the branded and the unbranded level going into the second quarter. 2 years ago - - I think it was 2 years ago.

We were surprised by competitive activity and had a very difficult January month.

As the fundamentally change altered our outlook for the quarter.

We're just going to play through before we declare victory.

But to be honest, which we are, we do have a sense of confidence about our ability to compete.

Okay.

And let me ask Bob a question.

Bob, I think in the year end conference call you mentioned with respect to gross margins this fiscal year an objective to stabilize gross margins.

I interpreted that to mean flat.

Maybe I'm wrong.

But are you changing subtly your gross margin expectation for this fiscal year?

David, what I said is stabilize but we expected to be slightly down versus prior years.

So you know, I think the issue is over what we mean by stabilize.

And I view slightly down as being a stabilized situation.

But in fact we've always been totally consistent with saying that margins will be slightly - - that we expect them to be slightly down in, you know, our current fiscal year.

At the gross margin line.

At the gross margin line.

That's correct.

And slightly up at the operating line?

We haven't offered any specific guidance on operating margins.

My sense on that is we probably also expect them to be slightly down versus prior year but not as much as gross margins.

Next question, Fran.

Christine McCracken of Midwest Research.

Your line is open now.

Just following up on the earlier questions relative to the commodity cuts and your expectation for some cost pressure there.

You know, can costs look like they're going to come down.

I assume you're kind of locked in to longer term contracts for cans.

And maybe that doesn't start to benefit you into the next fiscal year.

But it looks like tomatoes looks to be down pretty dramatically this year.

Is that something you're seeing and expect to build into your cost basis going forward?

Well, let's start with the cans.

Our variable costs there is on steel prices.

And the answer is that they are not locked in contractually.

So frankly, it is somewhat of a random variable for us.

And you know, we hear all kinds of rumors both up and down in the marketplace.

So you know, I'm not going to speculate about that.

As far as tomatoes are concerned, most of our tomatoes are in the form of paste.

Which we harvest very early on in the fiscal year.

And as far as pricing is concerned, specifically on tomatoes, we've seen a slight increase year to year, but clearly not in any - - not to any extent that it is, you know, creating issues for us.

All right.

And then just on carb trends.

It seems like with the new products that you've launched it kind of flies in the face of some of the weakness you've seen there.

It sounds like your products are actually doing quite well even though low carb products.

Is that consistent?

We feel very good about our position on carbs.

Our portfolio is naturally well positioned on the wellness dimension with soup and V8 beverages.

In areas where we might be a little more vulnerable such as Pepperidge Farm we had a record year in bakery last year.

And so our portfolio is relative - - has proven to be relatively insulated from the low carb craze.

But just to be on the safe side, we had some competitive varieties of Carb Request soups and low carb and carb style breads that have insulated us in a sufficient was.

So we feel very competitive on the wellness front particularly on carbs.

Okay.

And then just breaking out Godiva into this new category, should we read anything into that?

No, other than to - - we are trying to make sure that we're reporting in a way that's appropriate.

Yes.

What that in fact, represents is, in fact, with the strict interpretation of FASB 131.

I wouldn't read anything more into it than that.

Pablo Zuanic of JP Morgan, your line is open now.

Just first of all on condensed soup sales: In the past you've talked about trying to manage the decline in the category.

Are you willing to be more optimistic rights now and just say that the category is actually growing and is actually sustainable?

Pablo, we feel very good about the trend.

When we started we talked about - - admitted getting the decline.

We said it was going to be a long-term process. 3 years ago we were down minus 7%. 2 years ago we were down minus 5%.

Last year we were down minus 2% and this quarter we're up 10.

So we've been systemically going at this trying to make sure we had a comprehensive proposition that we were putting in front of the consumer and the customer.

It seems to be getting traction.

We think we can have a very winning market model if we stabilize condensed.

And that's what we're targeting to do.

They may be upside against that forecast.

But you can't declare victory after one quarter.

Now, I understand you can't comment between promotional activity within the 2 types of soups.

But again, looking at the Nielsen data and our own store checks, I would argue that if it's true that ready to serve soup is lower margin than condensed.

It seems to me that you have the really need to fund all the promotional activity in ready to serve soup with your margins in condensed soup.

And what I'm seeing actually is pricing increases in condensed.

And not as much promotional activity in condensed as in ready to serve.

Can you just comment strategically on that if you can please?

Well, first of all we have great margins on both soups, on both sides of the equation.

And they would be the envy of any food company.

Second of all, on condensed we do believe there's a consumer proposition here that will allow us to market our condensed soups in a way that's not as promotionally driven as perhaps we did at the end of the '90s.

So we think we can mitigate the decline of condensed soups without overly aggressive trade spending.

We do have good margins there as we do on ready to serve soup.

And we think the total soup is sufficient that we'll be able to drive all the individual segments.

Okay.

And just one last question.

If I think of Wal-Marts or rather EDLP channels, from a trade promotion point of view I would assume your strategies have to be different there.

Can you elaborate a little bit on that?

Well, our strategies with any EDLP customer are somewhat different than if we were with a high low customer.

Although all the programming is available to all the customers.

What we have is a continuous innovation plan that is hitting all 4 quarters of the year bringing new news in a very efficient way to those customers.

And we sort of hit our stride with virtually all our EDLP customers.

I wouldn't single out any one and comment on it.

The next question, Fran.

Eric Larson of Piper Jaffray your line is open now.

This is just a technical one. 11,000 gravity systems versus how many was that?

Bob was it -- I missed that number.

2,800.

2,800.

Okay.

Good.

Thank you.

And then the second question really relates to the shift om timing of your promotion.

Looking forward over the next 9 months is it somewhat somewhat of an equal pull from the quarters or would there be any particular quarter you'll have a much better improved gross margin improvement because of that shift in timing and spending?

I think you have to assume right now that it's a pretty even pull.

Pretty even pull.

I know we've beaten margins half to death here.

But when you look at just at your corporate consolidated margin, you're probably up in the number one or number two position in the food industry, let alone what you talked with with U.S. soup, sauces and others.

You know, it might not just be you know, the facts that the margins are high enough right now and that's what we should expect?

I would think if you let them get higher would be a - - something that got the Company into trouble 5 years ago.

Well, operating margins in excess of 18% are pretty strong.

However, we feel extremely strongly here that in fact we have to manage these in an extremely aggressive fashion.

That it is clearly an area where shareholder value creation can come from.

And you know, it's an area that in fact we are taking very, very seriously here.

So you know, as to whether or not we can increase these in the past, certainly you know, we're not going to allow them to fall dramatically versus current levels.

And I think that's the important take away.

Mitch Pinheiro of Janney Montgomery Scott your line is open now.

Just a couple of odd end questions.

First, could you give us some idea of how you're doing in the sales per channel?

That's merge, convenience store.

Mitch, we're making good progress across all channels.

Was there - - was - - so obviously you're not going to answer specifics.

But was there one that was better than others?

Substantially better or --?

We're satisfied with the performance in all channels.

Okay.

Another just sort of a reporting line segment reporting segment is why wouldn't away from home be included in the U.S. soup?

Mitch, as I said, this was a strict interpretation of FASB 131.

And as that analysis worked out, Godiva and away from home, okay, actually were identified as individually reportable segments.

Now, since both of those segments were below 10%, we had the option of in fact, putting those together and in fact, reporting it as other.

And that's what we decided to do.

And that's the basis for the - - our new segment.

Fair enough.

How about the - - current assets were up 13%.

Was - - could you elaborate as to what may have been the lines there causing that?

Basically we had a very strong sales quarter, so receivables were up strongly.

How about inventories?

Inventories were up.

But you know, I think well under control in terms of that area.

Obviously we do spend a lot of time looking at those and managing those and we're very satisfied with the overall performance of inventories this quarter.

It appears our last question is from Andrew Lazar of Lehman Brothers and your line is open now.

Just 2 things.

One, Doug, going back when you initiated kind of the strategic plan, the key was obviously getting soup right and getting that back on track.

And I forget and I apologize how you worded it you said there might be other opportunities you mean beyond kind of soup.

And maybe you can help me on how you kind of worded that.

But I'm wondering what your thinking is there on looking out at those kind of other opportunities for the Company?

Maybe I'm - - do you remember what I'm referring to?

Well, not exactly.

I can't remember the way you worded it.

Not exactly, but I - - you went through soup and then what you had to do in kind of Pepperidge Farm.

And then said we're going to look at these other opportunities to get into other areas.

Perhaps it wasn't ever clear whether that was acquisitions or organic or how.

But I'm curious what your thinking on that is.

Our thinking is we began to profile at [CAGNE] and then in our June announcement is we have 2 core businesses, technology growth platforms in this Company.

One is around thermal.

The other is around baking and snacking.

The 2 of them account for more than 80% of our sales in EBIT.

We believe we can take those 2 platforms, thermal and baking and snacking, and in a focused scale kind of way grow them both in the markets they're in.

And migrate them into new markets over the next three to 10 years.

So our focus is really going to be to staying - - the theme we use around here is "staying close to home will take you a long way."

And so our focus is on thermal and baking and snacking and we think there's sufficient growth there.

We have some upside opportunity in 2 other areas that we think we can do more with.

One is dry soup and sauces that we acquired with Unilever.

And is getting traction and is growing again.

And the other one is retail chocolate which is rebounding quite nicely from the devastation of 9/11 and the subsequent issues that were indirectly associated to that.

So that's our area of focus.

We really have plenty of growth.

Plenty of growth opportunity in our existing portfolio.

Okay.

Thanks.

That's helpful and then just one follow up for Bob.

You know, a lot of times when you look at the cost structure of a business, many times there's only so much you can do, you know to an organization in a certain time frame.

And that the organization can sort of handle.

And I'm curious if you've got kind of a pipeline of ideas and thoughts around perhaps you know, continued aggressive action around the cost structure that you've kind of talked a little bit about.

Beyond what you've sort of laid out in detail for the Street.

And if those numbers are more sizable what maybe larger buckets would they fall into in terms of going after the cost structure?

Well, clearly, we do have an ongoing goal here, Andrew, of generating in excess of $100 million a year in what we call productivity.

And that obviously comes from all areas of the P&L.

And that is something we spend a lot of time on and we work very, very hard on.

Because clearly we think it's one of the absolute necessities if we're going to meet our financial goals as we've laid out.

That's going to have to play a very important role.

So you know, we do have a productivity mindset here in this Company.

As we look down the road and as we told you in June, we have 2 major projects that we're starting down the road on.

One is obviously the SAP project in North America.

Which we believe is going to have substantial productivity impacts on our Company.

And the second one is the route to market project in Australia.

Which we also feel is going to have a significant impact.

But in terms of, you know, what are going to be the next SAP project and the next route to market project, clearly, we're in fact working on that, you know, as we speak.

And you know, but I just can't give you specifics on that as of this point.

Other than to say we understand you know, how to play this game.

And that our productivity in the branded consumer food arena is an absolute must for success.

Okay.

Fran, that was the last question?

Yes.

Gentlemen, I have no further questions at this time.

Thank you everyone for joining us today.