金寶湯 (CPB) 2005 Q4 法說會逐字稿

[OPERATOR INSTRUCTIONS] This conference is being recorded.

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

I would like to turn the call over to Mr. Leonard Griehs, Vice President of Investor Relations.

You may begin.

Good morning everyone, and welcome to Campbell Soup Company fourth quarter, fiscal 2005 conference call.

Our agenda for this morning's call is as follows.

Anthony DiSilvestro, Vice President and Controller will open with financial results for the fourth quarter and fiscal year;

Bob Schiffner, Senior Vice President and Chief Financial Officer will offer some summary comments and provide guidance for fiscal 2006;

We will then take your questions, joining us for the Q&A session will be Doug Conant, President and Chief Executive Officer.

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

These are also posted on our website.

Our call will be available for replay approximately two hours after the call is complete.

Through midnight September 16.

The replay number is 1-800-879-6754, or 1-402-220-5334.

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, pricing, new product introductions and innovation, cost savings initiatives, quality improvements, and capital expenditures, impact on sales, earnings, and margins and other factors described in the Company's most recent 10-K 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.

We have provided a reconciliation of those measures to the most directly comparable measures, this is available on our investor website at www.campbellsoupcompany.com.

Now let's begin our discussion of results with Anthony.

Good morning.

First let's turn to results for the fourth quarter.

Net sales for the quarter were up 5% to 1.5 billion.

Here is the break down of the change in sales.

Volume and mix subtracted 1%.

Price and sales allowances added 3%.

Decreased promotional spending added 1%.

Currency added 2%.

Earnings before interest and taxes were 181 million compared to 129 million in last year's quarter.

Last year's quarter included a gain of 10 million resulting from the sale of an idle manufacturing site in California and 32 million restructuring charge.

The footnote on the supplemental schedule attached to the press release details this restructuring charge by segment.

I will also include the impact of the charge by segment in my discussion.

Gross margin percentage for the quarter rose to 40.6% from 39.1% as productivity improvements and pricing were partially offset by cost inflation.

Marketing and selling expenses decreased 3% to 234 million from 242 million due in part to lower levels of advertising.

Administrative expense increased 18% to 168 million from 142 million primarily due to higher incentive compensation and employment related expenses and the cost of implementing SAP in North America.

Research and development expenses decreased to 27 million from 28 million a year ago..

Other income of 2 million for the fourth quarter compared to 12 million in the prior year's fourth quarter.

This change was primarily due to the prior year's gain of 10 million from the sale of an idle manufacturing site in California.

Net interest expense was 46 million, up 3 million due to higher interest rates.

The tax rate in the fourth quarter was 28.9%, down from 31.4% in the comparable quarter.

Due to lower taxes in our international operations where we recorded a one-time benefit from a change in Australian tax law.

Net earnings for the quarter were 96 million or $0.23 per share compared to 59 million or $0.14 per share in the year ago quarter.

Last year's fourth quarter included a 6 million or $0.02 per share gain from the sale of property and a $22 million or $0.05 per share charge related to restructuring.

Excluding these items earnings in the fourth quarter of last year were $0.17 per share.

Now let's turn to full year results.

Net sales increased 6% to 7.5 billion.

Here is the break down of the change in sales.

Volume and mix added 3%, price and sales allowances added 2%.

Increased promotional spending subtracted 1%.

Currency added 2%.

Earnings before interest and taxes were 1.2 billion compared to 1.1 billion.

Earnings in fiscal 2004 included a 32 million restructuring charge, a 10 million gain on sale of property and a 16 million gain from Campbell's share of a Class Action settlement involving ingredient suppliers.

Gross margin for the year declined to 40.5% from 41.1%.

The percentage decrease in 2005 was due to the impact of cost inflation, partially offset by productivity improvement and higher selling prices.

Marketing and selling expenses were 1.2 billion, an increase of 3%.

Administrative expense increased 5% to 571 million from 542 million.

Cost associated with the implementation of SAP in North America accounted for 2 percentage points of the increase as did the impact of currency.

Research and development expenses increased 2% to 95 million from 93 million.

Other income of 4 million in 2005 compared to 13 million in the prior year.

The prior year included the 16 million gain from Campbell's share of the Class Action settlement and the 10 million gain on the sale of property in California.

These were partially offset by adjustments recorded to the carrying value of long term investments in affordable housing.

Net interest expense was 180 million versus 168 million.

The increase was due to higher interest rates partially offset by lower debt levels.

The tax rate was 31.4% compared to 31.7% last year.

Net earnings for the year increased to 707 million or $1.71 per share.

This compares to fiscal 2004 net earnings of 647 million or $1.57 per share.

However, three items need to be considered in last year's net earnings and earnings per share.

A $10 million or $0.02 per share gain associated with Campbell's share of a settlement of the Class Action suit.

A 6 million or $0.02 per share gain from the sale of property.

A 22 million or $0.05 per share charge for restructuring.

Excluding these gains and charges, EPS for 2004 was $1.58.

Now let's turn to reporting segments for both the fourth quarter and full year.

U.S. soup, sauces, and beverages.

Sales for the fourth quarter rose 2% from 521 million from 511 million.

And operating earnings were 104 million to compared to 78 million for the prior year period.

The 2004 operating earnings included a pre-tax restructuring charge of 8 million.

Operating earnings were driven by lower marketing, higher selling prices, and improved productivity which more than offset cost inflation.

Here is the break down of the change in sales.

Volume and mix subtracted 5%.

Price and sales allowances added 5%.

Reduced promotional spending added 2%.

Let's ouch on a few highlights for soup during the fourth quarter.

U.S. retail soup sales for the quarter rose 5% with condensed soup sales up 19%, ready to serve soup sales down 18%, and broth sales up 28%.

U.S. condensed soup sales were driven by both eating and cooking soups.

Higher levels of advertising, effective kids marketing programs, and higher selling prices drove achievement of the double digit sales growth.

Sales of Ready to Serve soups declined due to a planned shift in promotional and marketing programs and strong competitive activity.

The effects of which were partially offset by higher prices.

Broth sales rose due to volume growth associated with expanded use in cooking.

Now, let's turn to the full year results for the segment.

Sales of 3.1 billion rose 3% from 3 billion a year ago and operating earnings were 747 million compared to 730 million reported a year ago.

Last year's earnings included a restructuring charge of 8 million.

The operating earnings increase was primarily due to productivity improvement and higher volumes and prices which were partially offset by cost inflation and increases in marketing.

Here is the break down of the change in sales.

Volume and mix added 2%, price and sales allowances added 1%.

For the year, total U.S. soup sales increased 5% with condensed soup sales up 8% Ready to Serve sales down 1%, and broth sales up 12%.

U.S. condensed soup sales were driven by a double digit increase in eating soups.

The combination of successful merchandising and kids promotional programs combined with increased advertising and higher prices spurred this growth.

Cooking soups achieved sales growth behind strong holiday performance.

Condensed soups continued to benefit from the gravity feed shelving systems which are now installed in over 14,000 U.S. retail stores.

In Ready to Serve Campbell's Chunky soup sales rose 7%.

Delivering another year of growth behind increased trade promotion and advertising link to the National Football League.

These strong sales were offset by declines in sales of Campbell's Select soups and Campbell's Chicken Classics.

Campbell's Select decline of 15% was due to strong competitive activity throughout the year.

Bob Schiffner will discuss our plans for Campbell's Select in his remarks.

Sales of microwavable soups were flat as double digit growth of microwavable bowls was offset by declines for Campbell Soup at Hand.

Broth sales benefited from expanded use of broth in cooking and strong consumer response to two new organic broth varieties in aseptic containers.

The successful launch of Campbell's Chunky chili in cans and microwavable bowls added to sales gain.

Campbell's SpaghettiOs pasta sales rose as consumers responded to the transition from the Franco American brand to the Campbell's brand and to new television advertising.

Sales of Prego pasta sauces declined slightly while sales of Pace Mexican sauces were flat.

Pace Mexican sauce sales improved in the fourth quarter due to effective merchandising activities during the important Cinco de Mayo holiday.

V8 vegetable sales increased due to higher sell-in prices and improved volume.

Sales of V8 Splash juice beverages and Campbells tomato juice declined for the year.

Baking and snacking.

Sales for the quarter were 439 million, up 7% from 411 million reported in the year ago quarter.

And operating earnings were 69 million compared to 55 million in the prior year period.

Last year's operating earnings included a restructuring charge of 10 million.

Operating earnings were driven by strong sales at Pepperidge Farm and by the impact of currency.

The change in sales breaks down as follows.

Volume and mix added 1%.

Pricing and sales allowances added 2%.

Reduced promotional spending added 1%.

Currency added 3%.

Sales for the year were 1.7 billion.

Up 8% versus 1.6 billion a year ago.

And operating earnings were 198 million, compared to 166 million a year ago.

Operating earnings for 2004 included a restructuring charge of 10 million.

Operating earnings growth was driven by strong sales at Pepperidge Farm, a significant improvement in the Australian snack foods business and by currency.

These gains were partially offset by expenses associated with the implementation of a new sales and distribution system in Australia.

Here is the break down of the change in sales.

Volume and mix added 4%.

Price and sales allowances added 3%.

Increase promotional spending sutracted 1%.

Currency added 2%.

Let's look at a few highlights of the principal businesses comprising this segment.

Pepperidge Farm had an excellent year with sales increases in each of its three major segments.

Fresh bakery sales increased double digits driven by product improvement and distribution gains on breakfast products as well as strong volume growth on Carb Style and Farm House breads.

Pepperidge Farm cookie sales also achieved double digit sales gains driven by established lines such as Chocolate Chunk and Soft Baked as well as the introduction of sugar free cookies and Whims poppable snacks.

Pepperidge Farm Goldfish continued to experience growth for the 14th consecutive year.

The frozen business achieved increased sales for pot pies, frozen bread, and frozen pastries.

Arnotts sales improved primarily due to currency and volume gains.

Arnotts delivered sales growth across all three of its major businesses, sweet biscuits, savory biscuits, and salty snacks.

International soup and sauces.

Sales for the quarter were 350 million, up 3% from 340 million a year ago and operating earnings were 37 million, compared to 30 million in the year ago period.

Prior year operating earnings included a 10 million restructuring charge.

Operating earnings growth in Canada was more than offset by softness in Latin America and Europe.

The change in sales for the quarter breaks down as follows.

Volume and mix subjected 1%, price and sales allowances added 2%.

Increased promotional spending subtracted 1%.

Currency added 3%.

Sales for the year were 1.7 billion.

An increase of 7% versus 1.6 billion a year ago.

And operating earnings were 221 million, compared to 205 million a year ago.

Fiscal 2004 results included a restructuring charge of 10 million.

Operating earnings growth was driven by currency and sales growth in Canada.

Partially offset by declines in Europe and Latin America.

Here is the breakdown of the change in sales.

Volume and mix added 2%, increased promotional spending subtracted 1%.

Currency added 6%.

Let's look at some the highlights of the year.

In Europe, sales increased primarily due to currency and strong sales gains in both wet and dry soups in France and Campbell's wet soups in Belgium.

Sales increased in Asia/Pacific due to volume gains in Australian beverages and broth and in Asia where we launched a new dry soup product aimed at breakfast consumption.

Currency also contributed to sales gains in the region.

Sales in Canada increased significantly due to currency and volume gains.

Canada continues to drive volume growth in its Ready to Serve soup business including Campbell's Gardennay aseptically packaged soup.

Other.

Sales for the quarter were 188 million, up 10% from 171 million with an operating loss of 11 million versus a loss of 8 million in the prior year's period.

Operating losses for the fourth quarter are typical due to the seasonal sales pattern of the Godiva business.

The prior year fourth quarter included a 3 million restructuring charge.

In the fourth quarter of fiscal 2005, higher operating losses at Godiva more than offset the profit growth in the away from home business.

The change in sales breaks down as follows.

Volume and mix added 6%, price and sales allowances added 3%.

Currency added 1%.

For the year, sales were 1 billion.

An increase of 11% from 903 million, and operating earnings were 110 million compared to 101 million for the prior year.

Fiscal 2004 operating earnings included a restructuring charge of 3 million.

Operating earnings growth was driven by the strong sales growth in both businesses.

The change in sales breaks down as follows.

Volume and mix added 7%.

Price and sales allowances added 3%.

Currency added 1%.

Let's look at a few highlights of the year.

Away from Home delivered strong sales growth led by continuous success of a deli soup program built around premium refrigerated soups.

This program is growing rapidly and complements our retail soup portfolio as it gives us another format which is proving increasingly popular.

As we announced in July, a new higher capacity stock pot plant is currently being constructed in the state of Washington to accommodate the growth of this business.

Godiva worldwide sales increased double digits with North America, Europe, and Asia all contributing to growth.

In North America, Godiva achieved double digit same store sales results driven by new sugar free chocolates and the relaunch of the significant truffle line.

Additionally Godiva in-store theater dipping stations and introduced, Chocolixer, a refreshing drink made with Godiva chocolates.

Let me make one comment on corporate expense.

Which declined 21 million for the year.

The decrease was due to lower costs associated with ongoing litigation, lower adjustments related to the carrying value of long-term investments and affordable housing partnerships and lower expenses from currency hedging related to the financing of international activities.

Partially offset by the gains in 2004 related to the Company's share of a Class Action settlement and the sale of a manufacturing facility.

That wraps up my review of sales and earnings.

Now let's turn to the balance sheet.

Total debt was 2.99 billion.

Down from 3.35 billion in the prior year.

Cash flow from operations was 990 million, versus 744 million.

The significant increase reflects improves working capital performance, increased earnings, and lower cash settlements related to foreign currency hedging transactions.

Capital expenditures were 332 million, compared to 288 million in fiscal 2004.

This is below what we had previously forecast.

This concludes my discussion of the year.

Bob Schiffner will now offer some closing comments.

Good morning, everyone.

I am pleased that we have been able to deliver strong sales EBIT and EPS growth in fiscal '05 in what is becoming an increasingly challenging global consumer food industry.

Our results for fiscal '05 were consistent with our expectation.

That earnings gains would be skewed to the back half since we had planned for higher first half marketing spending.

In addition, we expected a full off in second half volumes as a result of our planned price increase.

As I have said repeatedly, our focus this year has been on margin recovery.

And on striking the right balance between sales growth and earnings growth.

The price increase we took at the end of February was an important step in improving profitability, especially as we look at the significantly higher costs of energy and materials.

Also important was our emphasis on improving productivity throughout the organization.

Which is required as we continued to absorb the incremental costs associated with our North American SAP project.

Turning to our product platforms I am especially pleased with the outstanding growth in condensed soup during fiscal '05.

The 8% increase is the best we have experienced in a number of years.

I am also very pleased with the performance of our Chunky brand which continues to be a star.

On the other hand, I am disappointed with our 15% sales decline in our Campbells Select soup business.

As we told you at our meeting in June, in fiscal '06 , we were putting major efforts behind restoring Select's vitality by launching more distinctive advertising aimed squarely at core users and putting our three Select can best sellers in convenient microwavable bowls.

We are also placing a major effort behind innovation with the introduction of Select Gold Label soup in aseptic packages.

A high quality soup that will reinforce the upscale image of the Select brand.

Turning to other parts of our portfolio, our baking and snacking business continues to do well as do our North American, Away from Home, and Godiva businesses.

Within international Europe continues to be a challenging environment and we continue to pursue innovation that will help us improve profitability and begin to grow this business in a more consistent pattern.

In 2006, we expect continued inflation pressure in plastic packaging, utilities, and transportation costs due to higher energy costs.

Our earlier estimate of 3 to 4% annualized cost inflation now is shaping up tobe in the 4 to 5% range and the impact of hurricane Katrina adds further uncertainty to energy related costs going forward.

Despite this higher inflation estimate and the increased uncertainty around energy costs, we are still targeting to deliver sales growth of 3 to 4%.

Growth in earnings before interest and taxes of 5 to 6%, and EPS growth of 5 to 7%.

Keep in mind that this growth will be off an adjusted base due to the adoption of FAS 123-R in fiscal '06.

Specifically fiscal '05 EPS of $1.71 would have been $1.64 if all stock based compensation had been expensed.

I will now turn the meeting back to Len.

Okay.

Would you start the Q&A session please.

[OPERATOR INSTRUCTIONS] Our first question comes from Eric Katzman.

Good morning everybody.

I guess the first question I would have is on the pricing, you obviously took it later than some of the competition and it looks like they particularly in Ready to Serve soup came back at you very hard.

Were you surprised at how aggressive they were given that they had kind of moved first on pricing and what does that -- how does that figure into your forecast for the soup season?

Eric, this is Doug.

We weren't surprised at all.

As Bob alluded to in his remarks, we were expecting some competitive response given that we had had a very strong first half at the expense of those competitors.

When we held pricing until the end of the soup season.

We were prepared for the kind of competitive activity we saw.

We are focusing on bedding down our price increase and establishing our retail price structure and we think we are going to be more than -- we'll be certainly fully competitive as we go into this year.

We are comfortable with our competitive posture and we expected a competitive pressure, particularly on Ready to Serve.

We were please with the condensed progress in the fourth quarter and -- where we had also prices going up and Swanson broth as well.

Two out of three isn't bad and we are well positioned for next year.

Okay.

And let me just follow-up quickly with Bob.

Bob, if my math is right, your operating cash flow number to the 990 million was up 33%, and if I subject the CapEx from that, your free cash flow was up 44%.

I'm kind of wondering, one, what is the components of that growth?

And then, two, what should we expect for like depreciation amortization in CapEx in '06?

I would say that the primary reason for the strong cash flow was our working capital performance.

We have managed inventories aggressively.

We have managed our receivables in a very strong fashion as well.

Obviously the earnings increase also contributed to that.

And we had slightly less payments associated with some derivative instruments that in fact matured in '04.

All of those elements contributed to the earnings or the cash flow increase and as I look at '06, we expect the non-cash charges associated with amortization and depreciation to be roughly 2 -- excuse me, 290 million.

290.

And CapEx?

Ca Ex we expect will be in the vicinity of 360 million for fiscal '06.

And that's just the timing of SAP?

Is that why that's moving up?)

There are a couple of factors.

Obviously the SAP spending will start to increase as we get further into that project.

And another big impact will be on the new stock pot plant that we are building in the state of Washington.

So those are our primary factors for the 360 million spend.

Thank you.

Next question.

Our next question is from Terry Bivens.

Good morning, everyone.

Hi, Terry.

Doug, I know the Nielson figures IRI figures have some severe limitations, but as you look at August, they clearly weren't very good.

Can you give us an update on how the quarter is looking?

I mean this is obviously pretty important quarter to you guys in October and are you seeing -- I know it's mid quarter, but are you seeing improving trends as we look forward to the next couple of months?

Well, clearly, Terry, we expect improving trends going forward.

We knew we had to bed down our pricing which I alluded to just a minute ago.

And we were very purposeful in the way we approached that.

We are now gearing up our activity for the soup season.

It's kicking off as we speak.

And we expect solid, certainly very solid performance in the first half of this year.

But to be clear, last year we had a significant price advantage that we don't have this year.

So we -- while we have a very strong promotional portfolio and expect to be fully competitive and expect to be picking up momentum from where we have seen it over the last few months, it's still going to be a challenge to get up to the levels we had last year at this time when we had the dramatic price advantage.

How would you characterize the acceptance of the new Campbell Select Gold Label thus far?

We feel very good about it.

The acceptance has been very encouraging.

Advertising has yet to really hit in any meaningful way.

And given that it's a whole new format in a new package at a new place on the shelf, we have got to wait to enable the advertising to really hit in a fulsome way to be able to read it but the acceptance has been very good.

Just speaking about Select for a minute, in our whole, we feel very good about our soup portfolio overall.

Condensed, as you know, we've been talking about it for a long time but we finally got it where we want it.

It grew this past year.

But even over the last three years it's now stable versus three years ago.

We feel good about that.

We feel good about Swanson broth which has been consistently growing around the 9 to 12% range over the last three years.

RTS is the challenge.

We had good success with Chunky this year growing 7% and as you know Chunky has been a real growth engine for us over time.

The challenge has been to get Select right.

Well, after five years of growth on Select, we had a challenging year this year and we declined 15%.

This whole focus on aseptically packaged select soup is really the answer to get us back on the growth track with Select and we feel very good about the prospects of that but we have to wait for the advertising to fully hit in order for that to have a full impact.

Very good.

Thanks a lot.

Thanks.

Next question.

Our next question is from David Adelman.

Good morning, everyone.

Doug a couple of things.

First, do you think your performance in condensed is hurting Select?

No.

And secondly, Bob's comments talked about higher gas prices affecting your input costs.

Are you seeing any evidence in any of your categories that higher pricing at the pump is affecting consumer behavior or overall category trends?

It would be hard for us to make that link now.

But we were watching it closely because it is a concern.

And then in the fourth quarter, Doug, would the volume trends in line with your expectations?

Did you think you would perform at that level in U.S. soup?

We were basically prepared for what we saw.

We delivered right on the estimates.

And your estimates as it turned out were very close to our estimates.

It met expectations.

Thank you.

Next question.

Our next question is from David Driscoll.

Hi, good morning, everyone.

Hey, David.

Can you tell me what the stock option expense for 2006 is anticipated to be?

David, yes, we expect it to be roughly $0.07 per share.

That would be flat with last year?

Yes.

And then more on this commodity cost side.

On your last conference call I think, Bob, you mention 3 to 4% commodity cost inflation.

I think you just told us a moment ago that it would be 4 to 5% yet you're maintaining your guidance here, your longer term guidance.

Can you give me some background here as to why you have that confidence?

All things equal it would seem to me commodity costs go up guidance would come down.

What's offsetting it?

Obviously we have a lot of flexibility in terms of how we plan for F '06.

And obviously inflation will dictate certain behavior in terms of other discretionary spending elements of the plan.

Again, we take very seriously our commitment of driving consistent earnings growth and we will do whatever that takes and obviously we feel we have a lot of discretion in terms of how we get there.

That's how I would answer that.

David, this is Doug.

I just want to just build on that slightly.

In the sense of whatever it takes as long as it doesn't compromise our ability to drive quality growth in a sustainable way.

We won't compromise on that commitment.

Well, Doug, that would go into my next question on marketing spending.

In the quarter marketing spending was down I think as you alluded to in your comments, this is related to the marketing spending shifts throughout the year in fiscal '05.

For the full year what did marketing spending do?

I don't know if you said that in your comments?

Was it up, flat, or--?

Marketing spending was up for the full year.

It was up?

Yes.

And then for next year can you give us an idea as to what the plans are?

We're not going to discuss quarters.

Obviously our first quarter last year was an exceptionally strong quarter.

And I would advise you to take that into your considerations.

But other than that, we're not going to discuss quarters.

And we obviously aren't going to break out our P&L.

But our commitment -- the way we've driven growth is through a combination of innovation and smartly leveraging marketing spending and we're going to continue to maintain that profile.

Just one final question on Pepperidge Farm.

When I've looked at the sequential 12-week data, it appears that the Pepperidge Farm businesses, both the cookies and the crackers segments have weakened.

We saw back in June that the 12 week data from A.C.

Nielson was up nearly 12 percentage points but in the August 12, week block it was up only 3.5 percentage points.

That's specifically on cookies.

Again, it looks to me like I'm seeing weakness here and an ongoing trend.

How do you guys see it?

We feel very good about Pepperidge Farm.

And we go through cycles.

I'm not sure if you are talking category there or Pepperidge Farm in particular.

Pepperidge Farm in particular.

We feel very good about it.

Snacking is an all around -- a year-round business.

We are constantly tweaking our spending for different drive periods.

And we feel like we have a solid posture going forward.

We have got a good track record there and we think we will maintain it.

You think that 2006 growth would be similar to what we saw in 2005 for Pepperidge Farm?

We don't forecast the growth of the individual units but we feel that it will continue to grow.

Very good.

Thanks, gentlemen.

Next question.

Our next question is from Filippe Goossens.

Yes, good morning gentlemen.

Filippe Goossens Spectracom Research here at CSFB.

Bob, one housekeeping questions and then two questions if I may this morning.

The $451 million in short-term debt outstanding at the end of the year that was all commercial paper, Bob?

Yes, primarily, yes.

Yes.

Great.

Then my first question, you continued to pay down debt and based on my calculations your total debt over cash flow is about two times putting it at the lower end of your peers in the packaged food sector.

During the meeting in June you indicated you're currently reviewing the need for kind of still targeting Pier 1 SAP rating.

Any update on that analysis, Bob?

That analysis continues, and we are basically holding to our guidance that in fact we will continue to pay down debt until further notice.

Great.

And then the second question I had was, with regard to the Jobs Creation Act, any update in terms of where you will effectively repatriate any earnings from overseas under the Act this year?

Well, now that we are in F '06, obviously it's going to happen.

If it happens, it's going to happen in F '06.

We are just about through evaluating that situation.

And we will be in a position to comment on that either at the end of the first quarter or in fact sometime during the second quarter.

Great.

Thanks very much.

Bob.

Next question.

Next question is from David Nelson.

Congratulations.

Hey, David.

Your momentum in condensed is accelerating actually, you attributed some of that to the gravity feed shelving.

If the growth in gravity feed shelving slows down, would condensed growth slow down?

David, we don't attribute all the growth to gravity feed shelving.

Certainly, it's been an important contributor as we've highlighted before we have got better products, better packages, better marketing, better innovation. and better shelving, and it's the combination of all of those things that's driving the performance.

Clearly the gravity feed shelving is an important component.

But I will tell you that we have several customers who are doing just as well without gravity feed shelving or not just as well but are doing quite well without gravity feed shelving.

It's a full program.

We expect the gravity feed shelving this year to be significantly upgraded in terms of the quality of the shelving which we think will have an impact and we are still implementing it in stores.

In fact I was in a store over the weekend where they hadn't installed it yet but it was installed last week.

We continue to go deeper with it.

It will continue to contribute significantly during the course of this next year.

On SAP, as you get further along in your progress there, that was going to be at least a component of improving trade spending efficiencies.

Any update on your learnings from SAP and progress on trade spending efficiency?

I'm going to let Bob talk about all that.

Bit first of all we implemented an important trade spending effectiveness and efficiency tool three years ago now and -- pre-SAP and we are getting very good return out of that.

We are improving effectiveness and efficiency of our trade spend and it's hitting our internal rate of return targets.

Now SAP is going to help us continue to advance our controls but basically our trade spending system's already in place.

You want to build on that, Bob?

I think you did a great job.

I did it just the way Bob taught me.

I just don't have a lot to add.

I think Doug's statements -- statement was in fact right on.

We, in fact, rely on that system that we invested a lot of money in three years ago and we are very happy with its performance and we have a lot more transparency to our trade spending here in the U.S.

We think it's generated considerable productivity.

And lastly, interest expense outlook for the next year?

We expect interest expense to be relatively flat year on year.

Obviously we are in fact forecasting continued increases in short-term interest rates, but we expect that will be offset through continued debt repayment.

Great.

Thank you very much.

Next question.

Our next question is from Chris Growe.

Good morning.

Good morning?

Good morning.

I just have a few questions for you.

The first one is, as we look to the upcoming soup season your ability to say, let's say win the soup season, will this continued imbalance between condensed and Ready to Serve growth, if that were to continue would you consider it still a successful soup season?

Well, we -- this is Doug.

We expect to see solid performance both in condensed and Ready to Serve during the course of the soup season.

We would be disappointed if we didn't see meaningful progress on both fronts and we fully expect to see that.

We have got strong innovation in Ready to Serve as we advance our microwavable capable line and introduce the gravity feed shelving system into our convenience platform, microwavable line as we launch the aseptic soups and have fully competitive programs in Ready to Serve and condensed, building on the condensed momentum.

We would be disappointed if we didn't see solid growth in both segments during the course of the year.

And then my last question is really for Bob, is on share repurchase, do we see the Company get more aggressive this year behind the stronger free cash flow in repurchasing shares.

Our strategy there really has not changed.

That is part of our anti-dilutive share repurchase program.

And basically with the increase in the share price this year we had some more options that were exercised.

So that is really what is behind the increase in share purchase activity.

You could have been more -- there's a tour if you will in terms of returning cash to shareholders getting more aggressive there?

As I have communicated in the past, it's an area that in fact we continue to evaluate.

Our official stance on that is still to pay down debt and that is about all I have to say on that issue.

Very good.

Thanks.

You're welcome.

Next question.

Next question is from Andrew Lazar.

Good morning.

Doug, in thinking about the changes you have made to the promotional strategy and pricing strategy in the back half of your fiscal year, I'm curious if there is anything that -- some of your -- any learnings around specifically looking at base line trends in your core soup business versus incremental that also help you feel perhaps more comfortable and confident going into the next soup season?

The key is we have got to -- over time we have to get beyond the big seasonal spend and over time we have got to get to more year-around support for the business.

We were headed that way over the last few years until we encountered this unique pricing situation this this past year and it caused us to think through a different plan this last year.

Over time in order to keep the base volume solid, we need to start to establish a year-round presence across our whole soup franchise.

In fact, we did that with condensed, we were advertising and promoting -- well, we were advertising condensed in the fourth quarter and it responded to it.

The number one reason people don't eat soup is because they don't think of it and we have to make sure that the brand is top of mind.

So there is a lesson -- we knew that going in and it was reaffirmed as we went into the back half of this year.

But -- and we will address it in the fullness of time.

That's the only real issue.

And then just lastly, on, any changes to kind of your store merchandising effort.

You have seen some of the benefits now that have come through from the gravity food shelving, any changes there that you have made or that you think might actually be able to enhance what you are doing at the store level given that's a bigger part of how you are getting it down now.

Well, it's a critical part of how we are getting it done and we have an enhanced system for the condensed section.

We're rolling out convenience platform section for all of our convenience items, our microwavable bowls and Soup at Hand.

We are also testing it for the Ready to Serve section.

So in the fullness of time here as we partner with our customers to learn what works for every customer, I think you can see us establishing a real beachhead in terms of shelf management in the section.

And we are just getting started in terms of our partnership with our customers.

This is really -- we are just wrapping up year one with most customers where we're getting all the learning and now we can start to leverage the learning and make it even better.

Thanks very much.

Next question.

Next question is from Pablo Zuanic.

Good morning, everyone.

Good morning, Pablo.

Just trying to get more color here in terms of the comps, you said that in the first quarter, first half in the Ready to Serve soup you have the difficulty of the price advantage you had less year not having necessarily now, and the fact that you started promoting early last year.

But does that apply to condensed soup and growth.

It seems to have that argument is value only for Ready to Serve.

Is that correct or not?

It's certainly much more relevant on Ready to Serve.

But was there anything different in terms of the price environment in condensed that you expect over the next three months compared to what you had, say in the first quarter last year in condensed particularly?

I think you can view our competitive -- well, I'm not going to get into forecasting any pricing behavior from competition, but what we have observed is that we have a very -- we have taken up condensed prices, too.

We've maintained a solid promotional and advertising profile and the business is responding.

And it would be foolish to change that wouldn't it.

And just to follow-up.

I know data like this has its limitations but for the quarter ending July, the data for condensed soup showed, actually, flat sales and if I understood correctly, you said that condensed soup was up 19% in the quarter ending July.

What can be closed in that gap?

Is Wal-Mart doing very good for you guys in condensed?

Are foodservice sales for condensed going up?

Just maybe give us some more color there?

Well, we really can't speculate on -- and rationalize the data you get, Pablo.

I wish we could be more helpful.

We feel very good about our condensed soup business across all of its channels.

Just one last question.

If I [Inaudilble - highly accented language] your chili line and the stock pot, there is clearly adjacencies, categories -- new categories that you are entering, what is happening in foodservice?

Is that an area where you're taking -- it seems to me that Heinz was well developed in soup and foodservice, are you starting to gain share in that channel and are there other product lines where we're beginning to see Campbell entering in new and new categories?

I think the -- certainly Heinz is well established in -- or the frozen soup business competitive business in Away from Home is very well established.

We have a solid presence there.

Our big growth opportunity which we've talked about is stock pot and pursuing refrigerated soups.

There we believe we have a significant advantage versus all the competition.

And hence, we've announced the intent to build a new facility and we are very optimistic about our potential with the chilled soups.

So we have the chilled soup.

We have aseptic soup which we feel good about in terms of leveraging technology and then we feel good about being able to go into adjacencies like chile.

Can you quantify the dollar sales for chili and the microwavable line for soups?.

In the past you have given us some numbers there.

Well, we have given -- we don't -- we aren't going to get into specific numbers on product lines.

We have articulated that the retail number for our convenience platform is estimated to be around $200 million.

Just so you know, Pablo, we do not include the chili in our soup in the numbers we report to you for soup.

Where are they then?

They are part of the division numbers but they're not included in the soup numbers that we give you.

Thank you.

When we reported this year that Chunky soup was up 7%. that's purely soup and then you layer on top of that chili which has been very successful as well.

All right.

Thank you.

How many more questions in queue?

Seven.

Okay.

I just wanted to let everybody know Doug has to leave for a meeting so we will take these questions.

But just so you know we will be answering it because Doug has a prior commitment that he has to go to.

Can we go to the next question.

Our next question is from David Palmer.

Hi, guys.

My question is on condensed soup.

You had a great year with 8% sales growth and that's obviously now a tough comparison.

It seems like there is several factors that could be -- could have impact the sales growth going forward negatively.

Obviously you have a tough comparison.

You have the wider price gaps to private label.

New red and white versions of microwavable bowls, new gravity feed shelves for the bowls, and perhaps diminishing lift from the condensed gravity feed shelves.

Any of these factors you would be more or less concerned about for condensed and maybe with the idea that you can help us figure out what sort of growth we can figure out for fiscal '06.

Thanks.

Certainly, all those factors that you raised are considerations.

But I don't think there is any single one that frankly keeps us up at night.

We offer in condensed soup we think a great consumer benefit and the price is right.

In fact, our expectation is that it will continue with the appropriate merchandising to be a very strong competitive product.

Okay.

You mentioned you were doing some kids marketing.

Could you perhaps give a sense of what that might have been for the lift for the quarter or the year in terms of sales growth.

Secondly, in the fourth quarter, how much did shipments of Select Gold help volume in sales?

Kids advising has been a huge plus for condensed soup for all of last year.

And in fact, we in fact went a little further and advertised condensed soup fairly aggressively in the fourth quarter for the first time.

Again, we think the kids advertising strategy has been a very, very strong factor in the success of our condensed soup business.

Just might take a note there is a website for our kids marketing it's www.mysoup.com.

So we have this website devoted to the kids and you will see a lot of the marketing and the effort we put into that behind it.

What was the second part of your question again?

Just Select Gold, the shipments, the initial shipments, what might that have lifted fourth quarter sales in volume.

It was not considerable.

Okay.

Thank you.

You're welcome.

Next question.

Our next question is from Eric Larson.

Hey, Eric.

Good morning, everyone.

I will just limit to one question and I'll follow-up with some other ones later, Len.

But my question is this, given the environment today, very fluid cost environment, you have about a 26 basis point improvement in your operating margins for all of '05.

Is that some somewhat a range that we could expect going forward?

I know that you've stabilized your margins and are improving them, but again, that cost environment is fluid.

What could we look forward to in the next 12 months?

Well, obviously we expect EBIT to grow at a slightly higher rate than sales.

So I think that will translate into margin improvement.

And my expectation is that that will be spread pretty evenly through the P&L.

You will see -- you in fact should see some improvement at the gross margin level as well as at the operating margin level.

Good, thanks.

You're welcome.

Next question.

Next question is from Leonard Teitelbaum.

Good morning.

Just really quickly.

I don't know if Doug had to leave or not, but has there been a change in philosophy on advertising?

We given us the heads up that first quarter of last year was very high and for appropriate reasons, this year, obviously I think seems you are indicating might be lower.

But I thought there was -- have you changed the way you time your advertising to consumption?

Or is there another paradigm behind it?

Len, the only change we made in fiscal '05 was to advertise condensed later in the year.

I think other than that it's been pretty consistent.

Clearly when you look at '05, the one major change is that we had spent a lot more trade promotional dollars earlier in the year.

And that was the difference that I think was significant in terms of looking at the '05 marketing program.

Okay, you indicated it was going to be up.

If we have a down first quarter or expenditures below what they were a year ago in Q1, then obviously we can do the math from that point forward.

Is that what we should be looking at?

Well, we're certainly not going to give you a clear vision of what we expect to do competitively.

But I will simply emphasize what Doug said, which is we are probably looking at an overall marketing plan that is more evenly spread through the year than it was in fiscal year '05.

Sure.

Now one last one.

Bob, what do you anticipate spending on IT will be in fiscal '06?

And what is your time frame for completing the cash portions of this?

We have not spoken specifically about the -- our IT spending.

You talk about SAP?

Basically SAP, and I know you were going to try to get everybody on the same platform.

I think we'd spoken about when you had your analyst day the last time and this is the first chance you really had to do it.

While I'm emphasizing SAP I think I would like to talk about all of it if you can give us a number, Bob.

We expect our SAP, P&L spending to be roughly double in '06, versus '05.

And that's estimated at roughly $20 million.

And the time period for completing the program?

Well, we are going to start rolling the project in fiscal year '06.

We will start with Canada which will happen in the back half of the year.

Then our game plan is, in fact, to move to the U.S. which will happen in the back half of '07.

And then Pepperidge Farm will complete the North American project and that's scheduled for FY '08.

That's beyond my retirement date so that sounds good to me.

Thank you very much.

Good, Len.

Thank you.

How many questions in queue?

Four.

All right, we will take those and then we will have to stop.

Our next question is from Ron Campagnino.

Good morning, gentlemen.

I think in the past year you folks have seen some stockpiling after unfortunate events and was wondering if you seen anything sort of abnormalish post Katrina?

I think it's been much too early to evaluate that.

So we will just have to proceed with this quarter and we will probably be able to comment on that at the end of the quarter.

Fair enough.

And just one quick question, Bob.

I think you said that the food industry was becoming increasingly challenging in your prepared remarks.

Was that simply based on rising fuel costs or did something else prompt that comment?

Clearly, we are facing cost inflation at much higher levels than we have, obviously over the prior ten years.

The last two years we have seen inflation probably at an annualized rate of 4% or better.

And that clearly makes this business much more challenging in terms of how you absorb those costs.

I think that's what I meant by my comments.

Okay.

Thank you very much.

Great.

Next question.

Next question from Bill Leach.

Good morning.

Bob, I was just wondering, in terms of the option expensing, should we just divide by four?

Would that be evenly spread by the quarters?

Yes, I think that's a fair assumption.

And for the tax rate should we use 32%?

We expect our tax rate to be probably a little below this year.

Just marginally though.

So like 31 something?

Yes, I think that's fair.

I don't know if you said the number, but can you tell us what your total soup volume did in the quarter in the year?

We said, for the quarter?

Yes, we did give that number.

Sale growth we said -- oh, you are talking about -- 5%.

That's sup volume?

For the quarter.

Was down 5%?

Yes.

It was down 5% for Campbells USA.

Are we talking dollars or volume now?

I don't know what you are talking about.

But I can clarify it.

In our Campbells USA sales bridge we expressed that in fact this quarter volume was down 5%.

And in fact -- but that's a volume measurement for all of our Campbells USA business of which soup is obviously a pretty big part of that.

But, Bill, we said soup sales were up 5% for the quarter.

We said condensed was up 19, Ready to Serve down 18, broth sales up 28.

Didn't Bob just say sales were down 5%.

That was for the division.

We are talking about the segment, Campbells USA and that's -- and in fact that's where we give our volume number and we said that overall volume in our segment was down 5%.

In other words you are not breaking out soup volume.

We did give you soup volume, but we said soup sales, you are talking about volume.

Yes, volume is volume, sales are sales.

We stopped doing that two years ago.

Correct.

Okay.

Just thought I'd ask.

Thanks.

Our next question is from David Driscoll.

Just a quick follow-up.

You said I think on the prepared remarks that you had a one-time tax benefit from something that happened in Australia.

Can you just quantify that for us?

Yes, it was about $0.01 a share.

That's all I needed.

Thank you.

Our last question comes from Terry Bivens.

Terry?

I'm all set.

Thank you.

Thanks a lot.

Thanks everyone for joining us today.

This concludes today's conference call.