金寶湯 (CPB) 2005 Q3 法說會逐字稿

Good morning and welcome to the Campbell Soup Company third quarter 2005 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'll turn the meeting over to Mr. Len Griehs, Vice President of Investor Relations for Campbell Soup Company.

Sir, you may begin.

Good morning and welcome everyone to our third quarter fiscal 2005 conference call.

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

Our financial results press release and the supplemental schedule which accompanies that were sent out early 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 1-866-459-3544, or 1-203-369-1333.

It will run through midnight, May 27.

You may also listen by logging on to our Web site, 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, pricing, new product introductions, cost savings initiatives, quality improvements, Capital expenditures and tax rates on sales, earning and margins and other factors described in the Company's most recent 10-K as updated from time to time by the Company in it's 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 includes certain non-GAAP measures as defined by SEC rules.

We have provided a reconciliation of those measures to the most directly comparable measures and that is available on our investor Web site at www.campbellsoupcompany.com.

Now, here's Anthony DiSilvestro, our Controller, to discuss financial results for the third quarter.

Good morning.

As a reminder, this year we have new reporting segments which reflect changes in our organizational structure announced last fiscal year.

The restated segment information is provided for the last two fiscal years in the 10-Q filings for the first quarter and second quarter.

Let's start with some highlights of the quarter.

Diluted earnings per share were $0.35 versus $0.34 reported in the year ago period.

Last year's third quarter earnings per share included a $0.02 gain from Campbell's share of a class action settlement involving ingredient suppliers.

Our sales growth of 4% was consistent with our expectations given the pricing action we took at the end of February.

U.S. retail soup sales in the quarter were flat.

Condensed soup and broth had good gains offset by declines in ready-to-serve soup sales.

Both gross margin and operating margins were up slightly versus the year ago quarter.

This performance is consistent with our goal of exiting the year with improving margins.

Campbell's Chunky Chili performed well continuing to build on its start this year.

And Campbell's Soup At Hand rebounded as sales grew this quarter.

Our Baking and Snacking segment had strong sales and double-digit earnings growth with both Pepperidge Farm and Arnott achieving excellent results.

And Away From Home refrigerated soups from stockpot fueled strong sales and earnings growth.

Godiva grew double-digit same store sales in North America.

Our cash flow was very strong, with cash flow from operations reaching 772 million for the nine-months, a 196 million increase versus the prior year.

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

Net sales rose 4% to 1.7 billion.

After nine-months sales are up 7% to 6.1 billion.

Sales growth for the quarter breaks down as follows: Price and sales allowances added 2%, currency added 2%.

Volume and mix was flat, EBIT was 259 million, up 7% versus the prior year's 243 million.

Last year's EBIT included 16 million from the gain on the settlement of the class action suit I mentioned earlier.

Gross margin was up slightly to 40.4% versus 40.3%, primarily due to productivity improvement and higher prices offsetting continued higher costs.

Marketing and selling expenses were 275 million, down 1% from last year's 278 million, primarily due to reduced consumer promotions partially offset by higher selling expenses and the impact of currency.

Administrative expense was 145 million, up 4 million from the prior year primarily due to currency.

Research and development costs rose 1 million to 24 million.

Other income was 2 million versus 13 million in the prior year period, primarily due to the 16 million gain from the ingredient supplier class action settlement in the prior year.

Net interest expense was 45 million versus 40 million, due to higher rates and lower interest income.

The tax rate was 31.8%, up from the 30% in last year's quarter, but consistent with what we expect for the full fiscal year.

Corporate unallocated expense increased to 15 million from 6 million a year ago.

The 6 million in the prior year included a 16 million gain from the ingredient supplier class action settlement.

In this year's third quarter, the local legal expenses and lower corporate administrative expense, were partially offset by expenses associated with the implementation of SAP.

Net earnings for the quarter were 146 million versus 142 million in the quarter a year ago.

The year ago quarter included a gain of 10 million from the class action lawsuit.

Diluted EPS for the quarter was $0.35 versus 0.34 for the year ago quarter.

The $0.34 included $0.02 from the gain from the class action lawsuit.

For the nine-months diluted EPS was $1.48 versus $1.43.

The $1.43 reported last year included $0.02 cents for the gain.

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

I will discuss the numbers for the quarter only.

The supplemental schedule you receive contains nine-months comparisons.

I will only comment on nine-month numbers if it makes comparisons more meaningful.

U.S.

Soups, Sauces and Beverages.

Sales of 627 million were down 2% from 637 million in the year ago quarter.

Sales growth for the quarter breaks down as follows: Volume and mix subtracted 6%, price and sales allowances added 2%, decreased promotional spending added 2%.

Operating earnings of 152 million rose 8% from 141 million in the year ago quarter, due to higher selling prices, lower marketing spending, and productivity savings, which were partially offset by volume decline and higher energy related costs.

U.S. retail soup sales four the quarter were flat, with condensed soup sales up 4%, ready-to-serve soup sales down 6%, and broth sales up 7%.

For the nine-months, total U.S. retail soup sales were up 5%, condensed sales were up 6%, ready-to-serve sales were up 2%, and broth sales were up 10%.

Condensed eating soups achieved double-digit sales growth in the quarter in part due to the combination of successful merchandising and kids promotional marketing programs, as well as increased advertising and pricing.

Condensed cooking soup sales declined as volume was negatively impacted by lower marketing spending in the quarter versus the prior year.

However, it is important to point out that we have had a very successful year for cooking soups with year-to-date sales flat, which is a significant improvement over historical trends.

This reflects increased marketing support and a shift in spending to the higher consumption period throughout the Thanksgiving to Christmas holiday season.

All condensed soups, eating as well as cooking soups continued to benefit from gravity feed shelving systems, which are now in more than 13,000 stores.

Total sales of ready-to-serve soups declined, primarily due to a shift in promotional spending and marketing programs to the first and second quarter, strong competitive activity during the third quarter, and the implementation of a price increase effective at the end of February.

However, the convenience soup platform, which includes Soup at Hand sippable soups in microwaveable for Chunky and Select had very strong sales results with gains in all areas.

Swanson broth sales increased due in part to the growth from expanded use in cooking.

This year we introduced two new organic broth varieties in aseptic containers to complement existing lines.

The aseptic container for broth has been a significant driver of growth.

Campbell's Chunky Chili continues to perform well in the marketplace after a successful introduction at the beginning of the fiscal year.

The Chunky brand resonates well with consumers in the simple meal category.

Campbell's SpagettiOs pasta sales experienced significant growth, driven by a reduction in trade promotions and higher volume.

The business continues to benefit from the conversion to the Campbell's brand as well as increases in advertising.

Prego Pasta sauce and Pace Mexican sauce sales declined due to lower marketing and a higher level of competitive activity.

In beverages, sales of V8 vegetable juice increased due to higher prices and increased volume while sales of V8 Splash declined due to competitive pressure.

Now let's turn to Baking and Snacking.

Sales for the quarter were 421 million compared with 389 million, an increase of 8%.

Sales growth for the quarter breaks down as follows: Volume and mix added 4%, price and sales allowances added 4%, increased promotional spending subtracted 1%, currency added 1%.

Operating earning rose 33% to 36 million from 27 million in the comparable quarter driven by higher prices, volume gains and productivity savings, as well as lower expenses in the Australian snack food business but partially offset by higher commodity costs.

Pepperidge Farm continued to show strong sales results with all businesses showing improvement.

Sales of fresh bread and bakery products were up double-digits for the third consecutive quarter.

This growth was driven primarily by new products such as carb style bread and rolls and also by gains in the whole grain bread variety which have become increasingly popular.

We have also continued to expand the recently improved line of Pepperidge Farm bagels and English muffins.

Pepperidge Farm cookie sales also rose double-digits driven by both established lines such as Chocolate Chunk, and new products which include four additional varieties of soft baked cookies and sugar free line.

Sales Goldfish crackers continued to grow as new advertising featuring an animated character named "Fin" helped to sustain momentum on the core product line.

Pepperidge Farm frozen products continued to experience growth across pot pies, frozen breads, and frozen pastries.

Arnott's sales rose as the business benefited from prompt, strong customer programs and new product launches including Arnott's desert cookies and new kettle chip varieties.

Our third reporting segment is International Soup and Sauces.

Sales were 435 million compared to 412 million, an increase of 6%.

Sales growth for the quarter breaks down as follows: Volume and mix added 2%, increased promotional spending subtracted 1%, currency added 5%.

Operating earnings were 59 million compared with 57 million, an increase of 4% due to currency.

Sales in Europe were up versus year-ago primarily due to currency.

Strong growth in Liebig soup in aseptic containers in France, and Erasco wet soup in Germany was offset by lower sales in the U.K.

In Asia Pacific sales rose driven by volume gains in broth and beverages and favorable currency.

Sales in Canada grew significantly driven by volume gains for ready-to-serve soups and V8 beverages and by currency.

Now, let's turn to the remainder of our portfolio, Godiva and Away From Home.

Other.

Sales were 253 million compared to 229 million, an increase of 10%.

Sales growth breaks down as follows.

Volume and mix added 5%, price and sales allowances added 4%, currency added 1%.

Operating earnings were 27 million, up 13% from 24 million a year-ago, due to strong sales growth.

Away From Home sales grew significantly, led by continued double-digit sales growth of refrigerated soups were a new deli soup program at stockpot has achieved early success.

Godiva same store sales were up double-digit in North America as new and stronger in store merchandising, increased advertising and promotional activity, and new product introductions drove higher traffic through Godiva retail stores.

Now let's turn to the balance sheet.

Total debt was 2.99 billion compared to 3.31 billion a year-ago.

Cash flow from operations for the nine-months was 772 million versus 576 million.

The primary drivers of this significant increase were improved working capital, lower cash settlements related to foreign currency hedging transactions, and higher earnings.

Capital expenditures were 166 million compared to 142 million.

We have been forecasting capital spending at 380 million this year.

We will likely finish the year at approximately 350 million.

A portion of this reduced spending will shift to fiscal 2006.

During the quarter we repurchased 2.2 million shares at a cost of 62 million as part of our program to offset the impact of shares issued through incentive compensation programs.

Year-to-date we have spent 66 million on share repurchases.

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

Thanks, Anthony and good morning, everyone.

As we discussed earlier in the year, and at our presentation at Cagney, we have shifted focus towards stabilizing our gross and operating margins.

Clearly the price increase we took at the end of February helped as did our emphasis on improving productivity throughout the organization.

I am satisfied that the third quarter is beginning to reflect our efforts to improve our margins as we continue to drive the proper balance between top line and bottom line growth.

From a business perspective, we have been pleased with the results of our Baking and Snacking businesses as well as those of Godiva and our North American Away From Home business.

We are also pleased with the increased sales for condensed soup.

That said, our U.S. ready-to-serve soup sales have softened reflecting both increased competitive activity, which started late in the second quarter, and continued throughout the third quarter, and the expected impact on volume of the price increase implemented at the end of February.

We expect this softness will moderate as we progress through the fourth quarter and move into fiscal 2006 when we will deliver one of our strongest innovations programs in years.

Specifically, in ready-to-serve soup we are expanding our convenience platform with the truck of Campbell's microwaveable red and white classics such as chicken noodle and tomato, as well as introducing an entirely new platform with Campbell's Select Gold Label, a premium soup line in an aseptic package.

In summary, I am pleased with our third quarter and nine-months results.

Our nine-month results including sales growth, EBIT growth, and EPS growth, are on or ahead of our financial targets.

We look forward to a solid fourth quarter and remain committed to delivering EPS for the year within our targeted range of 5 to 7% versus the adjusted fiscal 2004 base of $1.58.

I'll be glad to expand on these points as we take your questions.

Len, back to you.

Okay.

Amy, would you start the polling for Q&A, please?

Thank you.

We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Judy Hong of Goldman Sachs.

Good morning, everyone.

I guess I wanted to start out with the ready-to-serve business and obviously that business was a little bit softer in the third quarter.

Can you just elaborate on the competitive dynamics?

You've talked about the increased activity that you saw from competition and if you could just get into a little bit more detail about that and how you think that would you respond to those competitive activities?

Judy, this is Doug Conant.

First of all briefly, let's step back and create a little context here.

First of all, for the first time in years, we have the total U.S. soup business growing in all three segments.

Condensed sales up 6, ready-to-serve sales up for the nine-months 2%, and broth sales up 10.

We feel very good about that.

As you know, it's been a long journey to get our condensed soup sales on track and in fact they are and we're bullish about our opportunities with that going forward as with broth.

Ready-to-serve, we have had very competitive activity over the last quarter and a half or so, but we also have to view that within context.

Since we started our transformation plan in 2001, the ready-to-serve soup segment of total soup in dollars has grown about 4.5 share points.

We've accounted for four of those share points.

In other words, we've accounted for over 80% of the growth of ready-to-serve soup.

When we did take our price advance, we did anticipate that there would be increased competitive activity because obviously we announced the price advance early and competition had the opportunity to take advantage of that.

We chose to focus on getting our prices up at retail for the fall as opposed to dealing back the price advance in the spring when it's the lowest volume time of the year.

The most important thing is that we're thinking smartly about how we set prices for the next soup season.

That was the focus here.

Competition clearly took advantage of it, but I would say that we are very confident in our ability to compete in ready-to-serve soups having grown, accounted for 4 of the 4.5 share points of growth.

The other thing I would say is as we look forward we're bullish about our opportunities as we go into the next soup season because we have our strongest innovation program in years in ready-to-serve soup with the aseptic launch, which has been exceptionally well-received by our customers, as well as the microwaveable red and white classic launch, which has already also been well-received.

So we have good momentum going there.

We're also moving our shelving success that we're seeing in condensed into the ready-to-serve arena as well, specifically in the convenience area.

We're rolling out convenience maximizers as well as our condensed soup maximizer and we also have a shelving platform for our aseptic soups.

So between the shelving and the innovation we're very comfortable that we're going to be able to compete once we get into the next soup season.

The focus here was on selling in our line for the next soup season and on getting our prices properly set at retail.

And we're very comfortable.

The strategy is playing out as we would have expected it to.

Okay.

And then just a follow-up to that and I know you probably won't give any specific guidance today for fiscal '06, but any insight that you may have about the outlook for '06?

I mean you've talked about a lot of positive things that could help next year, if you could just talk a little bit more about that and get into some of the other factors like the cost outlook for next year.

Judy, I'll lead off and I'll let Bob follow-up a little bit, but we're going to be painfully predictable here.

Our guidance is 3 to 4% on the top line and 5 to 7% EPS on the bottom line.

Today and more than likely when we provide guidance in September which is typically when we will, it will be the same guidance, 3 to 4 and 5 to 7.

We do have our challenges on the cost front like everybody else has and it has to be well managed and Bob, would you care to elaborate on that a little bit?

We are in fact looking at a cost scenario that I think is probably slightly under what we saw last year but still high by historical standards.

And I think cost inflation somewhere probably around the 3 to 4% range.

One of the other areas that is impacting us, as I believe it's probably impacting other companies, is our pension and post retirement expense.

Again, we expect that to go up in the vicinity of $25 million year-on-year.

So all of those cost issues are being factored into our planning right now.

But again, we're not going to give you any feel for next year until we release our fourth quarter earnings in September.

We still are working against a 5 to 7% EPS expectation.

Right.

Thank you.

You're welcome.

Just clarify that when we said the 3 to 4, and 5 to 7% last June, were did not specifically target that for F '05 alone.

We said at that point that would be, those were our financial goals going forward so that's the context in which that guidance was given.

Next question, Amy?

Thank you.

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

Good morning everybody.

You might be painfully predictable but quarter-to-quarter there's some ups and downs.

But what you're saying is that while these results for the quarter were above Street expectations, Bob, they're basic in line with where you thought?

Yes, John, absolutely.

And so maybe the $0.22 number for the fourth quarter, that First Call has out might obviously be a little bit on the high side.

John, we're still, it's not our practice to qualify our annual earnings guidance so we're sticking to the 5 to 7%.

I guess I wondered what meant by solid to the fourth quarter?

John, and I'll let Bob finish up, we are still, we did take the price increase.

We did expect volumes to moderate.

We are climbing out of that.

The pricing is getting to retail.

And so we just have to manage this thing carefully.

This was the first price advance we'd taken in ready-to-serve soup in five years and we're just working through it.

I don't think it, and we're managing it in a balanced way.

That's sort of how we view the fourth quarter.

Okay.

And just, and you've made some statements to investors that you feel like you've won soup season and I know these Nielsen numbers or IRI numbers don't tell all.

And whether you look at 12 weeks or 52 weeks, you've had meaningful market share declines through this soup season.

I guess I'm just trying to understand what you mean by winning.

Well, John, first of all winning the soup, for us winning means hitting our earnings guidance and that means if our earnings guidance is 3 to 4 on the top line and 5 to 7 EPS, that means soup has to be contributing in that range and in that sense we feel as if we're winning.

Also, the only thing I can say about the publicly available numbers is they don't fully state our business strength.

It's just the market share decline seen in these numbers are just kind of staggering, you know, 300 basis points to twelve-week dollar share, 400 basis points to unit share, these are twelve-week, I guess can you just give us a rough idea what you're seeing kind of all together?

Are these numbers half right?

Because I mean if it's just simply the category that's growing you deserve some credit for that, but a lot of the guys from your background, the [kilts] background just don't tolerate these types of market share without some lack of applause.

John, first of all let's just briefly talk about the category for a minute.

Okay.

If you look over the last five years, there are only three categories in food that have grown both dollars and volume, that's bottled water, total chocolate candy, and soup.

And I guarantee you the soup, and that's in FDM, and the soup number has been exclusively driven by Campbell's and all the innovation we've brought to the category.

So the category is holding up nicely.

If you look at it just on a fiscal year-to-date basis as a category, you would see that it's in the top, on FDM, you're going to find it's in the top six of all the categories in the grocery store, trailing only bottled water, three deli categories, or four deli categories and, excuse me, three deli categories and frozen dinners, otherwise it's outperforming all the other segments on a dollar sale versus year-ago, and that, I would assert, is clearly driven by Campbell's as well.

So first of all, from a category perspective, whether it's over five years or fiscal year-to-date, I feel very good about where the category is headed.

And those numbers understate what's really going on because as distribution has broadened a lot of things are happening beyond FDM.

So category we feel good about.

We feel good about condensed.

We feel good about our Chunky soup business which is performing very well.

Our vulnerable primarily has been in Select and our Select soup and we have an innovation plan against that set for next year that we're very confident in.

So overall I feel very good.

I feel good on condensed.

I feel great on broth and I feel as if we have a very good competitive posture in ready-to-serve.

So on balance I'm very comfortable.

Of course we don't like to see twelve-week numbers slipping, but we view this on a year in year out basis.

Because as you know, in this category, any time Progresso wants to spend aggressively and get some hot merchandising, they can impact results in a quarter.

I view it over time and over time our numbers are very attractive.

Okay.

Thank a lot.

Thanks.

Next question, Amy?

Thank you.

Our next question comes from David Adelman of Morgan Stanley.

Good morning, everyone.

Doug, can you be a little more specific about where things are in terms of the evolution of the price increases at retail?

Have you started to raise your merchandising price points, things of that sort?

Well, we're not going to, you know what you see at retail and what's reflected at retail is the impact of our price increase and that was our design.

We're not aggressively merchandising right now, which is why we've been at a competitive disadvantage in the lowest part of the season.

And so we're comfortable with where the retails are headed and we're comfortable with our planning for next year and that's about all I can say.

Can you remind me where the aseptic products margin structure is within the spectrum of your soup product margins today?

We feel very good about our aseptic soup margins and we've got a proposition there that's very unique to the marketplace, certainly the only branded aseptic soups which are of superior quality to anything that we make in those flavors.

And they're unique to the marketplace.

The margins are, prices reasonable and the margins are very attractive.

But they're above average, Doug?

Yes.

Okay.

And then one last thing.

In the major U.S. business, where I think volume and mix was down six, obviously ready-to-serve was down at about that level, certainly certain product categories like condensed were up fairly strongly.

So where else was the, what else was down materially during the quarter?

In terms of volume and mix in U.S.

Soups, Sauces and Beverages?

Yes.

Bob can cover that.

Yeah, David, the other segments that were down or the other brands that were down are Pace Mexican business as well as Prego.

And we also in fact saw beverages down especially V8 Splash.

Is some of that due to your pricing in those sub segments as well?

Yes, absolutely.

Thank you very much.

You're welcome.

Next question, Amy?

Our next question comes from David Nelson of Credit Suisse First Boston.

Good morning.

The Cap Ex shift from this year to next, are you just pushing back some SAP installations, what's up with that?

No, basically it was mainly due to a planned stockpot plant to replace our existing plant in the Northwest which is being basically condemned by the County authorities there because they're building a wastewater treatment plant.

So we had projected that in fact we would get an early start on that new plant and due to some approvals that are necessary it's been pushed back a little bit.

That's the primary reason.

Okay.

And then commodity costs, you're looking at maybe 3 to 4% higher next year which is a little less bad.

How much was it incrementally negative this year?

It was probably around 4% in total.

Maybe a little bit above that because we've seen kind of a late impact due to energy related costs.

So I don't have a specific number on that but I would say it's probably slightly over 4%.

Great.

And then maybe you, Doug, please, on the momentum you've got in condensed now, it's got to be a combination of a lot of things.

Could you comment a little bit more on that, please?

Well, as we've reviewed in prior calls, we do believe it is momentum built on the back of several factors, improved packaging, improved product, improved marketing and most importantly I think one thing, the shelving, and we have at least, we have exceptional momentum going into next year now.

We're going to be continuing to expand shelving and we will be adding several thousand more units at retail.

We're also upgrading the units that we have at retail in higher impact shelving units which will help the base business nicely.

So, and the marketing programs are taking shape now for the fall and they look also very competitive.

Probably the most exciting thing for us in terms of a specific product activity is going to be tracking our condensed soup business a little bit more complicated but it really strikes a chord with the consumer and that's moving red and white into microwaveable bowls with chicken noodle and tomato, basically the condensed formulas and those products have been very well-received by our customers and have tested very well with consumers.

So we're excited about our red and white opportunities for next year and we expect the momentum to continue.

To be clear, we don't necessarily, we in no way are we forecasting another 6% sales growth next year but as we've always said, we believe we could make condensed soup competitive and we've certainly done that and we're comfortable we're going to be very competitive next year.

Great.

Thank you very much.

Thanks.

Next question, Amy?

Eric Katzman of Deutsche Bank.

Hi.

Good morning, everybody.

A few questions.

One, can you quantify what the cost was from SAP that you expensed through the corporate line?

Yeah, it was, Eric, approximately $6 million.

6 million.

And what have you said publicly about what that's going to be in this fiscal year and then can you give any sense as to how much that will ramp up in '06?

Well, we have two projects that are really impacting the P&L which is the Australian route to market project as well as SAP.

This year our expectations are that in fact those two projects will probably be somewhere in the vicinity of $15 million, and we're looking at next year to be probably somewhere in between 20 and 25 million.

Okay.

And then I noticed a change in terms of maybe it's just a wording change, but in the past when you announced the quarterly results you had promotion for the consolidated company and you didn't mention anything about sales allowances and now you're taking about price and sales allowances and no promo.

Is that just a wording issue or has there been some kind of change in how you're kind of reporting this stuff?

No, because it was just a more specificity around what we meant by pricing.

Obviously, there's some non-promotional allowances that went down from gross sales to net sales and basically we've chosen to put them against pricing and so it's just a more representative phrase.

Eric, are you talking about on the total company why we didn't mention promotional spending as part of the sales mix?

Because it was actually zero.

Right.

Okay.

So because like before you never mentioned price and sales allowances

Yes, we have-- [overlapping speakers].

No, this whole year we've put those two together.

If you go back we've always said price and sales allowances together.

Again Eric, it's just important to note that in fact those sale allowances that in fact we're hooking up with price are really non-promotional in nature.

Okay.

And then another question on the cost inflation.

I thought that you said also publicly that like your largest single cost is steel for the cans and that's only like 3 to 4% of your, percent of sales.

Right.

Slightly under 5%.

So I guess I'm, is benefits going to be up like well above that because it sounded like you have such a diversified input cost structure that it really shouldn't be that, I guess that bad compared to most other food companies in the next, I guess your fiscal year?

Benefits, we expect to be up substantially.

We expect health and welfare costs to be up over 10%.

I talked about the pension and post retirement expenses and then the other thing that will certainly impact us are plastic material costs as well as freight expenses which are all, which are all being impacted by the cost of crude oil.

So those are other areas that are really where we're expecting growth next year and they're included in the 3 to 4%.

Okay.

And then last question, on the, I guess to Doug.

Doug, are you, I guess it doesn't sound like you're that surprised at Progresso's pricing aggressiveness of late, but can you talk a little bit about kind of what private label did from your perspective looking across the entire spectrum?

Are they following?

And are you a little bit surprised that Progresso, or General Mills, which is normally pretty rational on pricing, has been so aggressive even if it is just for one quarter?

Well, one thing I've learned is that, in the soup business anything can happen in any one particular quarter.

I'm comfortable that, look, the soup category's been under a lot of pricing pressure for a number of years.

For several years we held back on pricing while costs were going up and as we tried to get our competitive posture set properly, which we think we have done.

And so by and large I think the, everybody has been under significant margin pressure and I think in the fullness of time everybody's going to be a rational player in the market but I can't begin to predict that.

We're just, we intend to be competitive as we've always been and as we go into next year and we will compete, basically do whatever it takes to win the soup season.

So I can't begin to comment on Progresso or private label.

But is private label showing any signs of following yet?

By and large from what you're tracking you should see that they've moved reasonably, they've moved up.

In some cases they had already moved a little bit.

Okay.

Thank you.

Next question, Amy?

Thank you.

Our next question comes from Andrew Lazar of Lehman Brothers.

Good morning.

As you go into your next soup season potentially you'll have some other competitive entrants around the convenience platform and microwaveables and probably one might have thought we would have seen that from others even sooner than we have.

You've got a pretty good lead on that.

Just curious if you have a sense yet for what the pricing dynamic might look like for either private label or other branded players around some of the convenience platforms relative to what you've got out there?

And then secondly, as more entries come in in that sub segment, does that just go ahead and really accelerate, let's say, the shift that people make to the convenience platform where I think you've already got good a pretty good head start is what I'm getting at?

Well, Andrew, it's hard to forecast the competitive posture here because as you know we led this off, gosh, three years ago now and we have been waiting for competition to follow.

We knew it was more challenging than it looked, and in that sense that was a positive thing.

We just don't no exactly what competition's going to go and to do and to what extent we don't know how they're going to chose to compete in terms of pricing and consumer spending, so I can't begin to give you a coherent answer other than to say we're very pleased with where we are in the convenience platform, we'll be expanding the shelving solutions that we have in condensed over into the convenience platform.

We'll have Soup at Hand, Chunky, and Select and also our new red and white microwaveable bowl entries.

We like our competitive posture but it's just hard to read the situation that's taken so long to develop.

And we'll all know better when we go through one season where they're actually at retail.

Until then, it's anyone's guess.

Yeah, I didn't know if they had made it clear yet on kind of what potential price points, you know, various other entries would be at or not.

I would assume they'll be at a competitive price point, but we won't know until we get there.

As then far as what you think those other entries do to that sort of sub segment, because like you said, you do have a, a several year head start in that format, do you, you know, other competitive entries ultimately help just shift more people to where you already have a much greater share of soup.

Is that your perspective or what are the potential pitfalls, I guess?

Well theoretically, the fact is we do have a significant lead and we have obviously a well above average share of the microwaveable segment, we intend to defend that.

We won't know, we'll have to wait and see the competitive posture of these microwaveable items in terms of the quality of the products they're able to bring to market, the price points they bring.

I think, the canned products are going to be, offer very meaningful value over time, and I think there's always going to be a roll there.

But we just won't know until with get into one season of competitive activity.

And the last thing, and it's on this front, with the original shelving platform, which is certainly come on pretty strong, I think it took, or as I recall, took a little bit longer perhaps, or a little bit more convincing, you know, ultimately to get retailers to sort of change their shelving look and whatnot and put in hardware and for the initial condensed platform.

With the success that you've had there, have you already felt that this next wave in convenience will be easier because they see some of the value, meaning retailers?

We've had a very positive response, but it still takes time, they still want to make sure it's working in their store in their section, so I think what we learned the last time is, even though they're receptive to the idea they're going to take a measured approach.

This will be a slow build although it will be in thousands of stores.

It will be a slow build over the next two to three years basically as the condensed shelving solution was as we tailor it to every customer.

Thanks very much.

Thanks.

Next question, Amy?

Thank you.

Our next question comes from Eric Larson of Piper Jaffray.

Good morning, everyone.

I know we've beaten soup almost to death here, but there were some concerns I think at the end of the second quarter and obviously it's just one quarter, that your Soup at Hand sales had been maybe kind of flattish but it looks like they had a real good quarter in the third quarter.

Was that a timing issue?

Was it a different spending pattern in the third quarter with Soup at Hand?

Eric, this is a pretty simple explanation.

Last year when we launched the microwaveable bowls and we didn't have sufficient quantities, we were on allocation, we promoted aggressively Soup at Hand in the first half of the year because we didn't have enough bowl capacity.

This year we had bowl capacity in the first half of the year and we promoted the bowls more aggressively.

In the second half of this year, of last year we, we're lapping more reasonable numbers for Soup at Hand this year.

We're promoting it in a balanced way and this is unfolding just as our marketing expectations would have predict.

That's perfect.

And then just a final question.

How many stores were retrofitted with your shelving in the third quarter last year?

Had you 13,000 this quarter.

Do you have that number available?

I don't have that number available and we continue to expand beyond the 13,000.

Thank you.

Thank you.

Our next question comes from Pablo Zuanic of JP Morgan.

Good morning, everyone.

Just understand in terms of the margin improvement here in the quarter, it would part of it come actually from the SG&A line and grade, the price increase, the gross margin increase, the mix in improvement in condensed, all of that is captured at the gross margin level.

What I want to understand is, was it lower marketing expenses, is that very isolated for cooking soups and for sauces, or was it across the board and if so, is it sustainable?

Pablo, first of all I think the most gratifying number for me, okay, was the flattening of the gross margin line.

Okay?

I think that that, that is the thing that I was most concerned about.

So I was very, very pleased with how we performed relative to that measure.

You're absolutely right.

As you go down below gross margin we in fact did have lower marketing on the quarter and that was primarily in our Campbell's USA business, and really what that was, was a planned issue all along because as you know, we really front loaded the first half of the year, and our plans were to have lower spending in the second half and that's exactly what you see.

The SG&A performance again, is in fact, related to our restructuring we took at the end of last year and we continue to manage that area of the P&L very aggressively.

So again, I hope that answers your question.

Just a couple of follow-ups.

One for you, Bob.

In terms of guidance in 5 to 7% EPS growth, but you also talked about an 18% EBIT margin target if I'm not wrong for '07 or '08.

If that's the case, the way we work out the math with 3 to 4% revenue growth and a target margin of 18%, you should be able to report better than 7% EPS growth.

What am I missing there?

Pablo, we didn't really say that the 18% was going to be attained in '07.

We in fact said we could see 100 basis points getting us from 16 to 17% maybe within that time frame, but the 18% was a vision that was further out than the years that in fact you just mentioned.

Okay.

And just maybe one for Doug.

In terms of the SAP roll-out, I understand that will not make a big difference in soup USA until probably '07 or '08, but can you just try to give us a sense that qualitatively about the impact that may have in terms of the Pepperidge Farm business and I think the roll-out there is '06 and then what the impact would be in the case of soup?

It just sounds to me that because of the type of channel mix for bakery and for the cookies and crackers that the SAP benefits could be larger in that division than in the case of soups?

But if you can just expand a little bit there in terms of what we can expect.

Pablo, we really don't break out SAP by business unit, we do it on a total company basis.

It would be hard to read.

The way we're rolling it out it's going to be hard to read the impact in any specific unit because we're going to be incurring costs in other units getting them up and running.

So we don't really break it out.

It could provide a more significant benefit in Pepperidge Farm but we'll know when we get there.

We're actually rolling out a piece of SAP in our Arnott's business right now and we think that's also going to be helpful.

So you might be right on the more DSD-type businesses but we'll see when we get there.

And just one last question maybe more out of curiosity.

In the case of condensed soup my understanding was that the core business was really with kids and with older people, you know, you've seen the creamy soup, [inaudible] were more on the ready-to-serve soup side, why would you need microwaveable bowls for condensed?

Well, first of all it's not that simple and kids use the microwave is the answer.

But what we're finding is we're marketing condensed in a smarter way.

It certainly has a kid focus but it appeals to all groups of people who grew up with it.

So it goes beyond kids.

And also, kids are using the microwave all the time now and this is just an easier way to prepare your favorites.

Thanks.

Amy, how many questions do you have left?

We have three questions left.

All right.

We'll take those three and then we'll close.

Thank you.

Our next question comes from David Driscoll of Citigroup Smith Barney.

Thank you.

Good morning, everyone.

I wanted to ask a question on the marketing and selling line.

Marketing and selling as a percentage of sales came in I believe at 15.8% and that was down about 100 basis points year-on-year.

Did I hear correctly in your prepared comments that the principal reason why it was down was lower consumer promotion?

Yes.

And then can you expand on that a little bit, Doug, and tell me, we hear from all these other companies that they want to build brand and they want to put more advertising in consumer promotion monies in, why shouldn't I be concerned that that came down in the quarter?

Well first of all, I wanted to say that our total A &C budget for the year is right coming in where we expect it to.

It's right on our plan.

And we always had this plan a little front loaded in terms of advertising and consumer and we always knew the third quarter was going to be lighter as we were trying to set our price points with our pricing [initiative] at a higher level.

So none of this is a surprise.

Part of the uniqueness was where Easter fell this year in terms of promotional spending, particularly on our condensed cooking businesses where the Easter period did not land in the quarter quite the same way and we chose not to promote it as aggressively as we had last year.

We found it was better return on our promotional investment for condensed cooking soups in the holiday season and we devoted more of the funds there.

We pulled back a little bit in Easter and so there was a tactical reason that was probably the single biggest reason for the promotion change in the quarter.

But again it's all unfolding as planned.

Would you expect to the decline that I saw in this quarter is not indicative of where you're driving this thing?

No.

All right.

You want to see that number continue at the rate of sales growth.

Is that a fair statement?

I think that's probably a reasonable assumption.

We see total marketing spending sort of being around this 21 to 22% of sales, list sales of 21 to 22% of list sales and that's about the right level for us to be competitive and deliver reasonable returns.

And that will grow with sales growth.

Corporate expenses have been down year-over-year for the last three quarters and I believe there's some reasonably complicated explanation for this due to affordable housing or some such.

Can you guys remind me what's going on here and then what should, are we seeing this mid-teens level?

Is that a normalized kind of number that we could use going forward?

In fact let me just tell you what the main reasons for unallocated corporate expense being down '04 to '05.

Basically three areas.

One is, we have lower legal expenses for a variety of reasons.

We also have a lower affordable housing expense which we've talked about a lot in the past.

And then the other area we have lower FX transaction losses.

So the three of those areas pretty much explain the year-on-year difference so the nine-months to nine-months difference.

Would you expect that the run rate that you're on then this year is a quote unquote more normal number?

Probably not because I would expect that we'll, as I expressed earlier, we're going to have higher SAP cost next year.

So my expectation will be that it will probably be a little bit higher next year.

Can you guys also give us a --

David, we got to move on here so I'll ask you to--

Thanks a lot, fellas.

Next question?

Terry Bivens of Bear Stearns.

Good morning, everyone.

Just a question on the shelving.

Most of the issues I guess have been pretty much covered by now.

But, Doug, I think you guys mentioned you had 13,000 shelves installed now.

Where would we expect to be at the end of the fiscal year and do you have a target for the end of '06?

Terry, we're not getting into targeting on the shelving unit.

These targets are, grow out of a complex set of discussions we have with our customers and it becomes very unpredictable as to when and how many we're going to get in at any one time, so we're not providing that guidance.

We will certainly have over 13,000 as we exit the year and that's probably where we're going to leave that.

How about a comment then on the convenience side of the RTS side of shelving, Doug?

Is that, my understanding is we will not see that this fall but perhaps in the fall of '06.

Is that a fair way to look at it?

We expect that you will see it in selective installations this fall and I expect a ramp up of that activity is going to somewhat mirror the kind of ramp up we saw with our condensed.

Okay.

Over a three-year period.

All right.

And last one for me, I know you have trouble commenting on specific accounts, but are there any large retailers in the state of Arkansas who might be more interested in looking at shelving than they were, say, a year ago?

All I would say is all of our, and I can say this without, beyond a shadow of a doubt, all of our retail customers are very interesting in shelving opportunities with us and view us as real innovator in the, not just in soup but in the entire center of the store and we're working with all of our retail partners on exciting shelving opportunities for this fall and then for beyond.

So we're actively working with all of our retail partners.

Great.

Thanks very much.

Amy, can we have the last question?

Yes.

Our final question comes from Christine McCracken of FTN Midwest.

Thanks.

Just on premium cookies if you could comment, obviously there's been quite a few new entries into this area that you've dominated for quite awhile and yet you're still posting double-digit gains.

Can you talk about possibly if you're seeing any increased competition and if you've devised any specific defensive program going forward or if you see it as business as usual?

The answer is yes, yes, and yes, Christine.

Anything else?

Only kidding.

Only kidding.

First of all, what's going on here is testimony to the strength of the brand, the Pepperidge Farm brand, which as you observed, has been established as the premium cookie leader and I think is well positioned to maintain that position we have.

So the brand is usually strong and very well established and difficult to compete with.

It's also complimented by an outstanding distributor network where we have over 3500 independent distributor who are very protective of their space and who are outstanding merchandisers of product.

And we view that as a competitive advantage as well.

So it gets hard to encroach on our section whether it's in bakery with bread, or whether it's in the cookie section.

And we're well positioned there.

And then the third thing is our level of innovation is, continues to expand.

Our latest innovation of this [Whims] product that we're gearing up to ship as well as upgrades in some of our other cookie lines puts us in a very good position to maintain a very competitive posture here.

I ran marketing at Nabisco years ago and we would constantly compete with Keebler, and constantly both of us would be trying to find a way to get into the Pepperidge Farm premium niche.

It is a difficult niche to crack when Pepperidge Farm is on such a role and Pepperidge Farm right now is the best performing biscuit company in the U.S., and arguably in the world, so we like our position there.

Then just follow-up on the bread and bakery, this is also been an area of strength that seems like things have been rolling along well there for about three quarters I guess.

Is this, are these, is this driven by new accounts and are we facing tough comps as we head into---

No, quite frankly we had a record year last year in bakery.

In fact our bakery team was the single, they won the Dorance award for the best performing team last year in all of Campbell worldwide.

They responded to the carb challenge last year and grew their business through innovation and great merchandising and they're doing it again this year with great whole grain products.

So we've had double-digit performance on top of double-digit performance there in top line sales.

And it's a very strong program.

This whole category should be seeing lower flour and probably bakery costs coming down.

Are you expecting to keep pricing or is this and area, and then possibly benefit as a result?

Well, we're not going to forecast pricing.

What I would say is we've also got an improving cost structure that we've been working on for the last three years.

We built a large new plant up in Bloomfield, Connecticut and that's allowed to us lower our costs in New England, which is a big market for us.

So we like our cost competitiveness and we like our game plan.

As we profiled at Cagney, we think our Baking and Snacking businesses are world class and we put them up against anybody.

Should be a good year.

Thanks.

Thanks very much and thank you, everyone, for joining us this morning.

This concludes today's conference call.

You may disconnect at this time.