金寶湯 (CPB) 2006 Q1 法說會逐字稿

[OPERATOR INSTRUCTIONS] Today's conference is being recorded, if you have any objections you may disconnect at this time.

I will now turn the meeting over to Mr. Leonard Griehs, Vice President of Investor Relations.

Sir, you may begin.

Thank you.

Good morning everyone.

Welcome to Campbell Soup Company first quarter fiscal 2006 conference call.

On the call this morning will be Bob Schiffner, Senior Vice President and Chief Financial Officer;

Anthony DiSilvestro, Vice President and Controller;

And joining us for the question and answer session will be Doug Conant, President and Chief Executive Officer.

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

These are posted on our website.

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 1-866-428-3803.

That will run through midnight, November 25.

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

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

These include statements concerning the impact of marketing investments and strategies.

New product introductions, cost savings initiatives, quality improvements 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.

This discussion includes certain non-GAAP measures as defined by SEC regulations.

We have provided a reconciliation those measures to the most comparable GAAP measures which is available on our investor website at Campbellsoupcompany.com.

Now, Anthony will discuss our first quarter results.

Good morning, before I discuss results, let me remind you that beginning in fiscal 2006, the Company adopted Statement of Financial Accounting Standards Number 123R share base payment.

Under SFAS 123R, compensation expense is now recognized for all stock based awards including stock options.

Had we expensed all awards in the prior year the pro forma impact on the year ago quarter would result in a 6 million reduction in net earnings and a $0.02 reduction in EPS generating net earnings of 224 million and EPS of $0.54 respectively.

Additional items impacting comparability are as follows.

In fiscal 2006, the Company recorded a non-cash tax benefit of 47 million resulting from the favorable resolution of a U.S. tax contingency related to transactions in government securities in prior periods.

In addition, the Company reduced interest expense and accrued interest payable by 21 million.

And adjusted deferred tax expense by 8 million and after tax effect of 13 million.

The aggregate non-cash impact of the settlement on net earnings was 16 million or $0.14 per share.

During the first quarter, the Company finalized its plans to repatriate earnings from non U.S. subsidiaries under the provisions of the American Jobs Creation Act and as a result recorded incremental tax expense of 8 million or $0.02 per share associated with a one time incremental dividend of 225 million.

This dividend is in addition to 200 million that was provided for in fiscal in 2005 making the total dividends expected to be repatriated under the act to be 425 million.

At the beginning of fiscal 2006, the Company changed the method of accounting for certain U.S. inventories from the LIFO method to the average cost method.

The impact of the change to this preferable method of accounting was reflected as a 13 million pre-tax reduction to comps.

The impact on net earnings was 8 million or $0.02 per share.

Prior periods were not restated since the impact of the change on previously issued financial statements was not considered material.

After factoring these items into the reported results, adjusted earnings per share for the first quarter would be $0.58 in 2006, versus $0.54 in fiscal 2005, an increase of 7%.

It is important to note that for fiscal 2006 the sum of the individual items do not add to $0.58 simply due to rounding.

Now let's turn to our reported consolidated results.

Sales for the quarter grew 1% to 2.11 billion.

Sales growth for the quarter breaks down as follows.

Volume and mix subtracted 3%, price and sales allowances added 4%.

Increase promotional spending subtracted 1%.

Currency added 1%.

Gross margins increased to 41.8% from 40.5%.

Gross margin was favorably impacted by 0.6 percentage points related to the change in accounting method from LIFO to average cost.

The remainder of the improvement was due to the impact of pricing and productivity which more than offset cost inflation.

Marketing and selling expenses increased 6 million to 320 million primarily due to higher selling expenses.

Administrative expense increased 9 million to 138 million primarily due to stock base compensation expense recorded in 2006 under 123 R. And cost associated with the implementation of the SAP enterprise resource planning system in North America.

Research and development costs rose 4 million to 24 million.

Earnings before interest and taxes were 401 million compared to 381 million a year ago.

Items impacting comparability include the 13 million benefit recorded in the current year related to the change in accounting method for inventory and in the year ago period compensation expense was not recorded for stock options.

Had all stock based awards been expensed, EBIT would have been 10 million lower than the reported amount.

After adjusting the results for these items, earning before interest and taxes were 388 million in 2006, and 371 million in 2005.

An increase of 5%.

Net interest expense was 26 million, down from 44 million had a year ago.

The current year reflected a non-cash reduction in interest expense of 21 million related to the favorable settlement of a U.S. tax contingency.

Excluding the impact of the settlement interest expense increased due to higher rates.

The tax rate was 19.5% versus 31.8% in the first quarter a year ago.

The tax rate change was caused by two factors.

The net non-cash tax benefit of 39 million recorded in the current year resulting from the favorable resolution of a U.S. tax contingency and in fiscal 2006 taxes were also impacted by an 8 million incremental expense or $0.02 per share associated with the repatriation of non U.S. earnings under the American Jobs Creation Act.

The adjusted tax rate which excludes the items just mentioned as well as the impact of the change in accounting method for inventory was 29%.

The reduction between the current year adjusted rate and the 31.8% recorded for the year ago period as well as our expected full year rate of 31% is primarily due to tax planning strategies and the favorable resolution of some outstanding tax audits.

Net earnings for the quarter were 302 million versus 230 million in the year ago quarter.

Diluted EPS for the quarter was $0.73 compared to $0.56 recorded in the year ago quarter.

Net earnings and earnings per share in 2006 were impacted by the following items. 60 million or $0.14 per share net adjustments to taxes and interest expense related to the favorable resolution of a U.S. tax contingency. 8 million or $0.02 per share benefit related to the change in accounting method per inventory. 8 million or $0.02 per share of incremental tax expense associated with the repatriation of non U.S. earnings under the American Jobs Creation Act.

In the year ago quarter, net earnings and earnings per share would have been 6 million lower or $0.02 per share had all stock awards been expensed.

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

U.S. soup, sauces, and beverages.

Sales of 970 million were down 2% versus 994 million in the year ago quarter.

The sales decline for the quarter breaks down as follows.

Volume and mix subtracted 7%.

Price and sales allowances added 5%.

Operating earnings were 288 million compared with 275 million in the prior year period.

Earnings for the first quarter of this year included an 8 million benefit from the change in the method of accounting for inventory.

Prior year earnings would have been 1 million lower had all stock based compensation been expensed.

Operating earnings were driven by higher selling prices and productivity gains which more than offset the impact of lower sales and cost inflation.

Total soup sales declined 6%.

Condensed soup sales rose 1%.

Ready to serve soup sales declined 17%.

Broth sales increased 9%.

Let's look a little deeper into the performance of each of these soup segments.

Condensed soup sales increased 1% on top of a strong first quarter last year with both eating and cooking soups contributing to sales gains.

The condensed soup business benefited from the continuation of more effective advertising and from the gravity feed shelving systems which are now installed in more than 14,000 grocery stores.

Ready to serve soups declined 17% after a very strong first quarter a year ago when sales were up 18%.

The decline was primarily due to a shift in the promotional strategy for Campbell's Chunky soups and discontinuance of Campbell's Kitchen Classics soups.

Campbell's Select sales increased in the quarter due to the introduction of Campbell's Select Gold Label aseptically packaged soups.

The convenience platform which includes Campbell's red and white bowl, Campbell's Soup at Hand, and Campbell's Chunky, and Campbell's Select in microwaveable bowls increased 10%.

The introduction in microwaveable bowls of Campbell's red and white favorites, chicken noodle, tomato, and vegetable was well received by consumers.

Swanson broth sales increased driven by continued growth in cooking usage and consumer's acceptance of aseptically packaged broth.

Shifting to other product categories.

Sales of beverages increased significantly driven by double digit sales growth of V8 vegetable juice and higher tomato juice sales.

These gains more than offset declines in V8 Splash juice drinks.

In January we will introduce a new product in this line called V-Fusion.

Is that 100% juice which is half vegetable and half fruit juice.

In fact the fusion contains full servings of both vegetables and fruit.

The product has been enthusiastically received by our retail customers.

Prego pasta sauce sales declined due to a high level of competitive activity in the category.

Pace mexican sauce sales grew on higher volume driven by new and more effective advertising.

Campbell's chunky chili sales declined in comparison to a year ago when the product line was introduced.

Although sales from the launch of new microwaveable bowls partially offset declines in the canned varieties.

Campbell's canned pasta sales increased as consumers continued to respond favorably to the transition from Franco-American to the Campbell's brand.

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

Sales for the quarter were 458 million compared with 449 million.

An increase of 2%.

Sales growth for the quarter breaks down as follows.

Volume and mix subtracted 2%.

Price and sales allowances added 3%.

Increase promotional spending subtracted 1%.

Currency added 2%.

Operating earnings rose 9% to 50 million from 46 million in the comparable quarter.

Earnings for the quarter include a 5 million benefit from the change in inventory accounting.

Prior year earnings would have been 2 million lower had all stock based compensation been expensed.

Operating earnings were also impacted by higher earnings at Arnott's and favorable currency which were partially offset by declines at Pepperidge Farm due to a higher level of marketing expenses in support of a launch of Whims poppable snack products.

Pepperidge Farms sales grew as both fresh bakery and biscuit sales increased.

In fresh bakery, English muffins, whole grain and farm house breads and sandwich rolls all showed good growth.

Cookie and cracker sales increased primarily due to solid performance of chocolate chunk cookies and distinctive crackers.

Sales of Goldfish snack crackers increased slightly.

Arnott's sales increased due to currency and gains in our two icon brands, Shapes and Tim Tams.

New Tim Tam balls a poppable snack also showed strong consumer acceptance.

International soup and sauces.

Sales were 420 million compared to 416 million.

An increase of 1% due to currency.

Operating earnings were flat at 55 million.

Prior year earnings would have been 1 million lower had all stock based compensation been expensed.

Operating earnings growth in Canada as well as the favorable impact of currency was partially offset by declines in Europe and Latin America.

Let's look at highlights from Canada, Europe, and Asia Pacific.

Sales in Canada grew strongly primarily due to gains in condensed and ready to serve soups and in broth.

During the quarter Soup at Hand was introduced to strong consumer acceptance.

Currency also contributed to sales growth.

In Europe, sales declined due to lower volume in the U.K. and the unfavorable impact of currency.

In Asia Pacific, sales rose significantly driven by continued growth in soup and beverages in Australia.

Our final segment reported as other includes the business of Godiva Chocolatier worldwide and the business of away from home in the U.S. and Canada.

Sales were 262 million compared to 232 million, an increase of 13%.

Sales growth breaks down as follows.

Volume and mix added 10%.

Price and sales allowances added 3%.

Operating earnings were 26 million compared to 22 million.

Prior year earnings would have been 1 million lower had all stock based compensation been expensed.

Operating earnings growth was also driven by strong sales growth and margin improvement in the away from home business.

Away from home sales increased primarily due to double digit growth in soups.

Refrigerated soups marketed through retail deli programs and canned and frozen soups sold through traditional away from home channels experienced significant growth.

Bakery products also showed solid growth.

Godiva sales grew double digits driven by both U.S. and international performance.

In the U.S. new initiatives such as Chocolixer beverages and Godiva Platinum, a new chocolate collection delivered strong results.

In Japan, the introduction of Godiva Platinum and refurbished boutique stores have driven increases in consumer traffic resulting in improved sales performance.

Now let's turn to the balance sheet.

Total debt was 2.98 billion compared to 3.46 billion a year ago.

Cash flow from operations was 113 million versus 64 million in the year ago quarter.

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

Capital expenditures were 38 million compared to 47 million.

We are forecasting total year capital spending to be 360 million.

That concludes my discussion of the first quarter.

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

Thanks, Anthony.

I'm pleased with our EPS performance in the first quarter given the very tough sales comparisons against last year.

Our profit margins continued to improve in a tough inflationary environment as we continue to leverage solid cost controls and strong productivity improvements.

Although we remain comfortable with our 4 to 5% cost inflation forecast, we will continue to emphasize effective margin management throughout our company to guard against any future volatility in cost.

It is also worth noting that our U.S. soup marketing strategy has been significantly revamped this year to not only spread spending more evenly throughout the year but also to ensure a more efficient program than we experienced last year.

As mentioned in our press release this morning, the phasing of our marketing spending along with the residual impact of our price increase and our decision to increase promotional prices have unfavorably impacted first quarter U.S. ready to serve soup volumes.

These decisions have resulted in consumers experiencing average retail prices per can for chunky that are up double digits versus a year ago.

We believe, however that these decisions also bode well for comparatively stronger sales performance in the second and third quarters as we compare against weaker quarters last year.

Looking at the full year, we continue to be comfortable with our 5 to 7% EPS growth forecast.

Now, let me shift to another subject we announced this morning.

The approval of the strategic share repurchase program.

Beginning immediately, we will launch a $600 million three year share repurchase program.

The program leverages our strong cash flow generation and reflects the confidence we have in our long-term growth prospects.

Under a separate program, we will also continue to purchase shares to offset any impact of dilution caused by shares issued to fund incentive compensation plans.

It is also important to note that these programs will not alter our dividend strategy as we will continue to target an earnings payout ratio in the 40 to 42% range.

I will now turn the meeting back to Len.

Okay, will you start the question and answer session please.

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Eric Katzman from Deutsche Bank.

Your line is now open.

Good morning, gentlemen.

Happy holidays.

I guess the first question, Doug, could you just kind of characterize the competitive environment in ready to serve given the price increases, General Mills' timing versus your timing, now you are hopefully both on the same page.

Can you kind of just talk about that briefly?

Absolutely.

Eric.

Overall, we are very -- first of all, the total soup portfolio we are very comfortable with.

As we reported today, all of our other segments, both condensed and broth are performing nicely as they lapped strong year ago quarters.

So we feel very good about that.

We also feel very good within RTS about our select business which experienced growth primarily driven by the aseptic launch and also the microwaveable platform.

The key challenge area for us is in chunky.

And a year ago in a very competitive market we stepped up to the plate with chunky and responded to we thought -- what we thought was a significant competitive threat from Progresso.

And tried to preempt the season with chunky which we did and we had outstanding performance as you know in chunky last year.

However, we have learned from that.

We probably went over the top with it and it was somewhat inefficient in terms of the impact on our marketing spend and our programming for the balance of the year.

We've recalibrated things this year and we are very comfortable going forward.

From a total soup portfolio perspective, just in our retail soup.

If I take the CAGR over the two years I'm operating in the 3 to 4 percent range in this first quarter and I think our outlook is very good.

I'm very comfortable with it.

But like anything else, you learn how you can do things better every year and we are going to do things a little better this year than we did last year.

That having been said, though, last year we did all right.

Last year we delivered a real solid year in soup although it was inefficient.

Sales were up nicely, U.S. soup sales up 5% and we turned around condensed and we held our own with ready to serve.

So we're not going to beat ourselves up over this.

We feel we are on the right track.

We delivered a good quarter, we've reset ready to serve and now we're ready to compete in a rational way.

And then, Bob, can I ask you about the LIFO change?

I guess first kind of why do it now because I thought in a generally kind of inflationary environment that LIFO would actually be better than average cost, at least in terms of appearances.

Then second, how does this affect the comparability as we progress through the year?

Is this $0.02 what you expect for the full year, or should we see like $0.01 to $0.02 benefit per quarter and is that in your forecast?

Eric, let me just start with your first question.

The bottom line is we have been off of LIFO for tax purposes for many years.

We have stayed with it on a financial reporting basis and very frankly we believe that, in fact, an average cost approach is actually preferable to LIFO in that it generates a much better matching of cost and revenue.

So again this is just a financial reporting change and we think as I said LIFO -- or in fact, average cost is a preferable valuation approach.

In terms of the impact on the rest of the year, it is really not going to have any major impact at all.

The $0.02 is basically the extent of it.

In fact, we expect that future comparisons will be basically pretty solid.

Okay.

So I will pass it on in a second.

But just the fact that we're, it seems like we are heading into a more inflationary environment and the benefit that LIFO would generate from that, that you don't care?

It's just kind of--?

Again, from a cash flow stand-point, that's the consideration.

Again, we are off of it for tax purposes which is in fact where you would get the major cash flow impact.

Again -- is it something that if we stayed in a very high inflationary impact down the road, is it something we would consider again for tax purposes?

The answer to that would be that in fact we would have to stay flexible.

But I don't see inflation continuing at the current levels down the road.

So at this point, as far as I'm concerned, it would be unlikely that in fact we would revisit that for tax purposes.

Okay.

Thank you.

Okay.

Next question.

Chris Growe from AG Edwards.

You may ask your question.

I just have two questions for you.

The first one is relative to the increase in competition in the convenience platform and also, of course, on the pricing side for chunky, I know marketing timing did play a role.

But, is there a need, Doug, for more marketing dollars to commit to the category?

Are you seeing a heightened competitive state that you need to respond to in any way?

I don't forecast marketing spend.

But what I would tell you is we've rebalanced our spending and we are comfortable going forward that we have a nice competitive posture.

In terms of the increased competitiveness in the convenience platform with branded competitors and private label coming in, as we reported, we are very comfortable with our competitive posture there.

We were up 10% and we can hold our own on that.

We have good critical mass there.

And we are also expanding our IQ maximizer shelf management program into the convenience section and that is just rolling out now.

I think we are going to be a formidable force there as we are at retail and condensed.

So I'm generally comfortable with it.

I would also say that as far as ready to serve and our competitiveness, we do anticipate rolling out the maximizer beyond our convenience platform into ready to serve as well.

And that work is underway with several customers as we speak.

So we are very comfortable with our competitive posture in ready to serve.

And then just a question I guess to Bob on the margin side.

You did not take up your increase of commodity costs you expected for the basket for the year.

Is it that you are comfortable with the efficiencies to offset that and have costs really gone higher?

Or -- and I guess do you continue to expect some margin growth this year for gross margins?

No, in fact, as I said, we are very comfortable with our 4 to 5% cost inflation forecast.

We are long in a number of areas and the only real uncertainty that I see down the road could be another spiraling up of energy costs.

But we will -- we have our foot to the market and I believe we have enough flexibility going forward to accommodate any shift in that area.

So we're basically comfortable where we stand at this time.

And then do you still expect some gross margin expansion for the year?

The efficiencies in line of what you have been expecting so far?

Yes, we are comfortable that our gross margins will expand.

And we are comfortable that in the fact that we will have a better gross margin at the end of this year versus what we had last year.

Okay.

Thank you.

You're welcome.

Okay, next question.

David Nelson from Credit Suisse.

Following on Chris there with the growth margins, was 130 basis point improvement in gross margin in a rising cost environment, 200 basis points improvement in soup division, EBIT despite less operating leverage from lower sales.

Where are we here in the game of improving efficiency?

It seems to me we would be still in the early days given you've only had your trade efficiency software in for a couple of years and you don't even have SAP in yet.

Well, there is a lot of -- we are doing a solid job, David, across the board.

There is just not one thing standing out that is driving the gross margin and operating margin improvement.

Obviously in a highly or what is a more inflationary environment today than we've obviously experienced in the recent past, our disciplines are in place.

As I have mentioned previously.

We are focus ing as a company on cost control, mix management, et cetera.

And in fact all of those things work together to improve margins.

And as I have said, we are comfortable given my previous statement.

David, this is Doug.

On top of that, I think your observation about early in the game and some areas is quite right because we do believe we can get more efficiency out of our market spend and we also believe SAP is going to create the significant benefit for us.

So we still have a lot of tools to work with here and that's why we are modestly bullish in a tough environment that we can have a good margin story.

Could you comment on the pace that you might expect for the rollout of the gravity feed shelving both for ready to serve and also for convenience, please.

Well, we are much farther along on the convenience platform.

It's starting to roll out.

We have been exploring that with our customers for the better part of six months to a year.

So that will be -- that will be our lead item and we are just now starting to roll out with ready to serve.

So we are committed I think you are going to see modest growth, modest numbers on both of those this year because basically we can't reset the shelves during soup season so we are going to have to wait until the spring.

But you are going to see good growth over the next two years, I think, from those initiatives.

Thank you very much.

Next question.

David Driscoll from Citigroup, your line is open.

Thank you.

Good morning, everyone.

You mentioned here that promotional spending is going to be more even throughout the year and that if I remember everything correctly, last year, of course we -- I thought in the first quarter that promotional spending was unusually high now.

I perhaps am just thinking maybe a little too strictly on soup, but I'm hoping you guys will help me understand this.

I guess my question really comes down to the fact that promotional spending for the whole company was up in the quarter, but I keep hearing you guys saying that it's going to be more even throughout the year.

Can you connect the dots here for me?

Yes, David, there are a couple of things playing out here.

Number one, most of that increase for the total company was really outside of our U.S. soup business which obviously didn't come through in our discussions.

So that's number one.

The second thing that's playing out is that obviously whenever you take a price increase, unless you hold promotional price -- if you don't increase promotional prices, you are going to get a much higher rate because promotional allowances are also, in fact, impacted by the price increase.

So that's another thing that, in fact, is playing into the numbers as well.

It's really the combination of those two factors that are generating the overall slight increase in promotional allowances for Campbell Soup.

Doug, would you address the question then that overall it seemed like last year promotional spending was up.

You were very aggressive in the soup season.

Your -- both condensed and RTS sales trends were excellent in the first two fiscal quarters a year ago.

As you and I discussed back at those conference calls you were very pleased with those market share trends.

But profitability had suffered during the periods.

Now I find that we seemingly are in opposite situation where the sales trends are not as good.

Market share trends are definitely not as good.

And yet profits are up.

Is this a -- we can't seem to win here?

One way we get the top line and we get market share but we get negative profit comparisons.

This time we are going the opposite direction.

Well, all I think you are seeing, David, and I don't want to overanalyze this, is a rebalancing of our planning and what we are communicating is that we are very bullish about our -- the quarters going forward that we are going to be lapping and we are very comfortable with our guidance for the year as a company which obviously implies we are very comfortable with our guidance on soup.

It's simply rebalancing act and a very dynamic environment and you have to remember that last year was the first year in five years that the market had experienced pricing actions in the soup category competitively.

So it became a bit of an unusual year.

And all of us -- ourselves, our branded competitors, and private label had to manage through that and it was not as efficient as we would have liked and arguably not as effective.

So we learn from it and we are doing things a little differently now.

And that's all I can say about it.

And one final question.

Can you explain the slow down in the sales momentum in baking and snacking and what you might expect for the balance of the year?

Well, we feel like there are two big opportunity areas for us as a company, simple meals and bake snacks.

Bake snacks is primarily virtually all Pepperidge Farm and Arnott's.

And as we look at -- we've had somewhat of a challenging first quarter, but our -- basically our marketplace momentum has held up nicely.

Pepperidge Farm is well positioned on the whole grain platform.

And as we communicated, we had good strength in our core areas of cookies and crackers as well as fresh bakery, frozen did pull us down a bit, but that's not the core business for us.

So we feel good about Pepperidge Farm.

Well positioned to continue to grow.

We had a bit of a -- we launched a new poppable snack platform around Whims which quite frankly the idea is great, the execution is not as good as we hoped it would be and we have got to keep working on that.

And that threw our comps off for the first quarter of this year.

Arnott's, we continue to go forward and we have a very dominant market position there, as you know, and we are very comfortable with our ability to compete with Arnott's.

Overall we are comfortable with our competitive posture in bake snacks.

And in the balance of the year, so basically effectively what I'm -- to be more clear about it, I am seeing an 8, 9% sales growth in the year ago periods.

This quarter we grow 2%.

Is that the kind of rate that we should be thinking about in terms of sales growth for baking and snacking balance of the year.

We don't get into the segment forecasting, but we -- I think to say we are comfortable at a 3 to 4% growth rate for the Company this year and then I will let you do all the analysis to figure out the breaks.

Thanks very much.

Next question.

Filippe Goossens from Credit Suisse First Boston.

Yes, good morning.

My two questions are actually for Bob.

First, Bob, with regard to the repatriation , the total amount is going to be 425.

Given that at the end of the last year, you only had about 40 million cash on hand.

Do you assume that you will have to borrow for that or that's not going to be a requirement?

Our expectations right now is that in fact we will probably have to borrow a portion locally to fund that $425 million dividend.

And is that going to be in the term market, Bob?

Or you might just do that in commercial paper over there?

It will probably be -- we in fact really haven't totally finalized our strategy, but my expectation is that it will probably be in the term market.

And then my second question, during the analyst meeting here in New York you had indicated that the Board was reviewing kind of the optimal capital structure you now announced a $600 million share buyback.

Is that basically the completion of that review?

Or you are still kind of thinking where ultimately you want to be from a ratings perspective?

No, that's basically the completion of that review.

Okay, great.

Thank you so much, Bob.

Next question.

David Adelman from Morgan Stanley, your line is open.

Good morning, everyone.

Can you talk vis a vis the share repurchase how you think about that within the context of your earnings growth rate targets?

In other words is that something -- you haven't changed them despite presumably the accretive impact of buybacks so is that something that just gives you more confidence in your targets?

Well, David, yes, the 5 to 7% EPS range factors has always factored in the likelihood of a strategic share repurchase program.

So it's in that estimate going forward.

Can you walk through, Bob, what you were trying to balance in coming up with 600 million over three years as opposed to 1 billion or 400 million?

Because it's not much more than the debt reduction you've generated just in the last year.

Well, basically the balance is in fact between number one having enough borrowing flexibility to be able to continue to react to acquisition opportunities.

And, also, we clearly wanted to keep the rating agencies satisfied as well.

So the numbers that in fact we have come up with are basically in reaction to both of those stimuluses.

And despite the underlying tax rate in the quarter of 29% to be clear, you think the full year rate will still be approximately 31?

That's correct.

Thank you.

You're welcome.

Next question.

Christine McCracken FTN Midwest.

Good morning.

Hi, Christine.

Just wanted to dig a little bit deeper on that other business line looking at Godiva and away from home.

Clearly, Godiva has been bouncing back quite well in the past couple of years.

I'm just looking now at away from home and wondering what you are anticipating there from a trend standpoint.

It seems the stock pot has been helpful there.

Can you talk about that growth at Godiva relative to the away from home business.

Christine, this is Doug.

We are seeing solid growth in both of those businesses that I think we can characterize as being above average for the Company today and probably for the foreseeable future.

Godiva I think Anthony did a nice job of enumerating some the key reasons that we are doing better at Godiva but we've repositioned the business for growth.

We are driving it more as opposed to just being a gift driven business where you go in and shop at Christmas and Valentine's Day and Mother's Day for a gift.

We have gone into a self-treat mode where we are serving basically chocolate indulgences at the counter for immediate consumption.

The most notable one is our Chocolixer beverage which draws traffic in year around, not just around holidays.

And so we are changing the operating model at Godiva and it's very promising and very encouraging and what it suggests is we can leverage the existing retail space we have today in a more of a year-around way as opposed to just a seasonal way.

And there is great upside there so we are very optimistic about that.

On the away from home side, we were having good success in our core business which is simple meals focused on soup and we are seeing it both in frozen soup and a more competitive arena where we compete more directly with Hines.

But also with our refrigerated soup business with stock pot where we are making world class high quality soups that are available in a variety of formats for our foodservice customers and for retail delis.

That opportunity continues to look very good to us.

And in fact we -- as we've announced separately we have an $80 million plan under construction in the state of Washington to add some capacity for -- to that effort so we can continue to drive the growth.

We are advantaged there versus all the competitors that we are aware of in terms of our scale and our culinary capabilities.

We think there is a big opportunity there that we are going to continue to pursue.

So feel very good about both those opportunities.

Just to revisit, with Godiva doing so well, I know that we have talked in the past about a potential to spin this out or sell this business, is that something you'd will still consider at this point?

Or can you comment to that?

Well, we never say never.

But Godiva has been a part of our portfolio since 1966, and it has thrived as part of the Campbell Soup Company.

We have a great operating model for it where it has all the flexibility it needs to compete in its marketplace and where we can supply talent and resources.

We are very comfortable with it.

It's created value for our shareholders and it's thriving in this kind of situation.

So we are very comfortable with it and you never say never, but there is nothing on the horizon.

Great.

And then just on SAP, you mentioned that the cost relative to the implementation that were up a little in the quarter, can you tell us where we are in that?

Are we in the fourth inning here?

Or where are we relative to seeing the benefits.

She is -- Bob, she is talking your language, fourth inning.

I don't know if it's the fourth inning.

It's probably closer to the third inning.

But basically where we are is that we are on track and we will implement the system starting in Canada in the fourth quarter of this fiscal year and then in the following year, fiscal year '07, we will in fact start the rollout in the U.S. but we are on track.

As you know, we are also absorbing the one-time expenses of developing and implementing this system.

We are still very comfortable with the pace that we are on and so far so good.

The benefit -- the forecast for the benefits to start to come in is 2008 and beyond.

So we still have a couple more years of slogging to do to get this system in place and do it right.

But more or less this level of spending for the remainder of the year?

Yes, absolutely.

Next question.

Eric Larson, Piper Jaffray.

You may ask your question.

Good morning, everyone.

Hi, Eric.

Just a couple questions.

First, I'm just drilling down a little further on your -- I'm recalibrating your promotional case rates now that you are bringing those up -- with your price increase now that you are bringing those back up a little bit to sort of recalibrate which I think makes sense.

What has the -- what is the competition doing?

Have you seen any adverse promotional activity on the part of Progresso?

Well, I'll let you -- I'll comment very broadly on our observations but I will let you talk to the Progresso people about how they are doing.

Broadly speaking I would say you see what happens when we aren't aggressively promoting the category.

The category itself doesn't do particularly well.

There is no evidence in my line of sight that says the branded competition is doing particularly well during this quarter either at taking advantage of this recalibration.

So I think we are all recognizing that there is a way to compete in this category in a more efficient and effective way.

I will let you ask them.

I don't see anything unusual going forward.

Although, we still haven't gotten into the peak system.

I can remember a couple of years ago where competition reared its head and became very agressive in the month of January and dealt us a competitive blow for a quarter.

So you never say never in this business.

When you have a seasonal business with products that have pretty good margins, anything can happen and we are ready for anything.

Okay.

That's fair enough.

I guess the answer part of that, too though, is that promotion spending really doesn't build category growth over time.

It's really innovation.

So if you are shifting those dollars away from promotion and into brand building it should over time do better for the branded business.

That's absolutely true.

Obviously we are on a path towards innovation across the soup portfolio and you will only see that accelerating as we go forward most notably with the IQ maximizer and the aseptic soups.

The other thing I would observe is you are right about advertising as well.

Advertising this category has the best ROI of just about any other category I have ever seen.

The number one reason people don't consume soups is because they didn't think of it.

If you get it -- and if you are advertising on air, it's amazing how keeping Campbell's brand top of mind can make a big difference.

We can have our ability to advertise be compromised by trade spending.

That's a very good comment.

And then the final question is for Bob.

By the way, congratulations on getting back to the discretionary share repurchase activity which, as you know, I have been harping on you guys for awhile.

One of the goals, Bob, that you were trying to accomplish was to try to illuminate the split rating on your commercial paper.

Has that been accomplished or no?

Not yet, but in fact our plan still allows room, Eric, going forward to pay down some debt.

So we are still hopefully on track to get there eventually.

You've heard me talk about this like I feel like a horse with a carrot.

Every time I reach out the rating agencies pull it back further.

It's not out of sight in terms of our strategy.

In fact, we will continue down that road.

Okay.

Great.

Thanks, everyone.

Have a good holiday season.

Next question.

David Palmer, UBS.

You may ask your question.

Hey, guys.

David.

A couple questions on condensed.

As you know, bowls have -- he momentum has been very strong there and it makes sense that you would step up spending to support ready to serve soup which has been losing share lately.

My concern is that condensed soup which has had a little bit slower growth lately and may have a little bit less lift from the gravity feed racks lately would go negative.

Could you perhaps give us some reasons why condensed sales will continue to grow?

Thanks.

Sure, David.

First of all, if we step back over the last three years we've sort of got this portfolio where we want it.

Basically we stabilized condensed and over the three years we have grown RTS at about a 6% clip which allows us to get it and we have grown broth, we have grown RTS at a 6% clip and broth at almost a 10% clip.

Overall our portfolio is delivering that 3 to 4% that we want.

Obviously there are puts and takes in any one quarter or any one year.

But overall we are about where we want to be.

In terms of condensed there are a number of things going on.

First of all, we are already in 14,000 stores with our IQ maximizer.

There's slight upside there in terms of number of stores but we are covering about 65% of our ACV which is all the high volume stores.

We are comfortable with where we are there.

That was just the first generation of our maximizer.

We are improving that regularly to improve impacted shelf and we are seeing good improvement from those upgrades.

The other thing we've observed is that advertising is highly effective once we have the shelf better organized and the products improved.

So we've improved the products and we are keeping a more consistent advertising level of advertising support there and condensed is responding.

We are very comfortable with our forecast of stabilizing condensed.

Getting modest growth out of it.

Maybe a little upside in any one given year.

While we continue to address the competitive issues in ready to serve.

So we feel very good about the platform going forward.

David, I think one thing you have to remember, too, we have now moved some of our condensed business into the microwaveable bowls and in a ready to serve format.

That's important part of our strategy going forward, too, as far as the convenience.

You may not see that reflected in the numbers that you see.

Interestingly, the number we announced on the condensed growth does not include, obviously ready to serve versions of those condensed products.

So we grew despite that, the launch of those microwaveable bowl items of our icon varieties, chicken noodle, tomato, and alphabet vegetable.

Are your media impressions up and could you maybe give us a percentage change on that?

Media impressions?

No, we really don't want to discuss the specific advertising or putting behind this.

Well, I'm just saying, well, okay.

Basically what I was talking about was the scale of advertising that -- but, and then the other question I was going to say was price gaps to private label and condensed, looking at scanner data it appears that that gap has widened a good bit as your volume growth has slowed a bit in condensed.

Any comments on price gaps to private label?

Well, first of all regarding the media observation, I think you are going to see good strong levels of support for our business for the balance of the year.

So I can share that much with you.

Now in terms of price gaps we are going through this situation where we are resetting prices as a result of our price advance that we took at the end of the last soup season.

And so that is now happening right now is we are resetting pricing for this soup season.

In the short term private label's taking advantage of that and exploiting some price gaps.

We think that is going to be manageable over time.

Thank you very much.

How many more questions in queue?

Just two, sir.

We will take those two and then we will stop.

Thank you.

Pablo Zuanic with JP Morgan, you may ask your question.

I'm trying to understand here regarding condensed soup, you had very good growth apparently at Wal-Mart which actually doesn't have shelves.

On the one hand, be disappointed to hear we are still around 14,000s shelves, 45% ACV because we have been there for awhile and you're implying that now it's more about improving the shelves that there is not much more room to install more shelves.

So I'm wondering whether that's good news or bad news.

But then I'm looking at the scanner data and I'm seeing that in the last three weeks condensed soup sales were down 2 or 3% you are reporting a growth of 1%.

So clearly you are doing better at what we call the animation of channels.

So I guess what I would like you to tell me at Wal-Mart why is it that your sales there on a same store sales basis are doing apparently so well despite the fact that you don't have shelves.

It's really related to the first question.

How, at the end of the day -- should we worry if we are still at 14,000 shelves?

Pablo, first of all the 14,000 shelves is 65% of ACV, not 45%.

Second of all, I'm not going to comment on any specific customer, but for the last three years we have been talking about broadening our product availability and being wherever a consumer is looking to buy our soup products.

We are putting an emphasis on making those products more broadly available in all channels beyond traditional grocery while we also have an incredibly competitive program in the grocery channel.

Obviously our alternate channels are doing well.

And your observation about our large customer like Wal-Mart is, they don't have our shelving, they tend to do things in ways that work for them and they are satisfied with the way we are doing business with them and we wouldn't comment beyond that.

I guess what lessons do you have from stores that don't use shelves where your business is actually doing well.

It's been advertising and the new SKUs have actually provided growth there?

I'm just wondering, trying to put the shelves in perspective then.

We've said that there were five things that affected our condensed turnaround, one of which was the shelving which was the finishing touch on that program.

The first one was getting the products upgraded, the product quality right.

The second one was getting the packaging right.

The third one was getting the overall marketing spending right.

And the fourth one was doing a specific kid focused integrated marketing campaign.

And then also doing the shelving.

When we did all five of those things well, we saw a good response.

We are still doing all five of those things well and we think there is room to get solid growth out of condensed as a result of that.

And just a follow up for Bob.

Bob, I'm just trying to understand the impact of the mix on the profit margins this quarter, soup margins have 200 basis points.

Very ballpark your ready to serve soup had been flat or up in the teens like it was in the first quarter last year.

How has it impacted the margin increase?

Just give us a range to put this in perspective because I'm guessing that 100 basis points a good part of that is just mix.

Some of it is mix.

It's not as large as you're portraying it to be.

Okay.

And just one more question, Bob, on Pepperidge Farm.

In the past you talked about cracker and cookies margins being down temporarily because of the upsizing of the product, I suppose you've already lapped that.

Can't you just walk me through what's happening with bread margins and cookie cracker margins.

Just to have a sense directionally.

Margins in our Pepperidge Farm have improved in both the biscuit side of the business as well as the fresh bakery side of the business.

The margin improvement over the last number of years in fresh bakery has been very strong and probably one of our real success stories.

And is it an opportunity back here with the bread Pepperidge Farm, as you know Interstate Bakery has faced these problems, for you to be more aggressive in terms of a national distribution for Pepperidge Farm?

It seems to me like you still have some gaps there.

Yes.

We have -- we are constantly in fact looking at ways to expand our fresh bakery business into the western part of the country.

We in fact look at plants as well as we continue to also look at our possible alliances with other manufacturers as well.

So it is a key strategic issue for our Pepperidge Farm business and we will in fact continue to look at it until we ultimately crack the code.

It's not -- that having been said, it's not that it's such a huge opportunity that we feel we are missing a big opportunity in the near term or in the fullness of time we would like to be competitive there.

We already have our cookie business nicely established and it would be nice to get bakery in but it's not critical.

Just the last question, what lessons do you have from Kitchen Classics?

The idea was to have a value brand in ready to serve and apparently didn't work.

What's a lesson from that?

Well, Kitchen Classics was a tactical competitive brand that was implemented to make sure when we were slugging it out on the value side, we had sufficient alternatives for our consumers.

We feel like as we are upgrading the quality of our ready to serve business now, we think we can compete more on the basis of quality and less on the basis of price.

So we have to make choices.

We are leaning in on the aseptic soups and we're going to pull back from some of the value offerings.

Just to put the soup thing into perspective, we had an outstanding quarter a year ago in soup, no doubt about it and we reported it at 13% growth.

But for the next three quarters we had 1% growth as a result of that sales performance and we are lapping those numbers now and we are very comfortable with our ability to lap those numbers in a quality way.

Thanks.

That's useful.

Last questioner.

Terry Bivens from Bear Stearns, you may ask your question.

Good morning, everyone.

Do I get to ask eight questions as well?

Be reasonable.

Just two quickies then.

Just in terms of the promotions, obviously you promoted a lot during last year's period.

This year I guess most of the promotions I have seen in the RTS have been like four to five, four cans for five bucks.

I have seen Progresso do similar things.

But I don't know that my sampling is nationwide.

Have you seen anything as we move into the second quarter that indicates to you that Progresso would be more competitive on promotions than you might have anticipated?

Terry, I couldn't begin to speculate on that.

I will tell you we are very vigilant about this because in prior years we were caught off-guard.

So we are very vigilant.

I couldn't begin to speculate on what they may or may not do.

I just -- I do believe we will be ready to compete.

Just the last thing, in terms of the RTS, obviously you're rationalizing Kitchen Classic while you're adding the Gold Label.

Can you give us any help with the relative sales weights of the two?

In other words, I'm sure one is adding while the rationalization of the other is taking away.

Can you give us kind of degree of magnitude what's being added and what's being lost.

It's really not, it's not significant at this point because we are just getting into the market.

So it would be rounding here at this point.

They're basically a similar size.

So what we are gaining -- or theoretically as we go into Q2 should be -- okay.

I will follow up off-line.

Thanks very much.

Okay, everybody, thank you for calling in today.

I hope you have a good Thanksgiving and we have got a big Nor'easter coming which I hope it means you are going to eat a lot of soup.

See everyone later.

Thank you.

This concludes today's conference.

You may disconnect at this time.