金寶湯 (CPB) 2006 Q2 法說會逐字稿

Good morning. And welcome to the Q2 earnings release conference call. All lines will be in a listen-only mode until the question-and-answer session. [OPERATOR INSTRUCTIONS]. At the request of the Company today's conference is being recorded. I would now like to introduce today's conference host Mr. Leonard Griehs, Vice President of Investor Relations. Sir, you may begin.

Good morning, everyone. Welcome to Campbell Soup Company's second quarter fiscal 2006 conference call. On our call this morning will be Doug Conant, President and Chief Executive Officer; Bob Schiffner, Senior Vice President and Chief Financial Officer; and Anthony DiSilvestro, Vice President and Controller. Our financial results press release and supplemental schedule were sent out earlier this morning. These are also posted on our website. Our call this morning will last approximately one hour. It will be replayed approximately two hours after the call is complete. The replay numbers are 1-800-294-3091 or 1-402-220-9769. It will run through midnight February 24th. 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 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, capital expenditures and tax rate, 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. Now this discussion includes certain non-GAAP measures as defined by SEC rules. We have provided a reconciliation of those measures to the most directly comparable measures, which is available also on our investor website at www.campbellsoupcompany.com. Now, here is Anthony DiSilvestro to discuss the financial results for the second quarter.

Good morning. Before I discuss results, one reminder on comparability for the second quarter and the sixth months. Beginning in fiscal 2006 the Company adopted Statement of Financial Accounting Standards No. 123R share-based 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 second quarter would result in an 8 million reduction in net earnings and a $0.02 reduction in EPS generating net earnings of 227 million and EPS of $0.55 respectively. For the six months the pro forma impact would result in a 14 million reduction in net earnings and a $0.03 reduction in EPS generating net earnings of 451 million and EPS of $1.09, compared to the $1.13 reported in 2005. Please note the per share amounts do not add due to rounding.

In the first quarter of 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 a prior period. In addition, the Company reduced interest expense and accrued interest payables by 21 million and adjusted deferred tax expense by 8 million, an aftertax effect of 13 million. The aggregate non-cash impact of the settlement on net earnings was 60 million or $0.14 per share. During the first quarter of fiscal 2006 the Company finalized its plan 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. During the first quarter 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 recorded in the first quarter was reflected as a 13 million pretax reduction to COPS. The impact on net earnings was 8 million or $0.02 per share. After factoring these items into the reported results the earnings per share for the second quarter of $0.61 in 2006 compares to the adjusted $0.55 in 2005, an increase of 11%. For the first six months, adjusted earnings per share would be $1.20 in 2006 versus $1.09 in 2005, an increase of 10%. Now, a few highlights of the quarter. U.S. Soup had strong sales growth in all three businesses, condensed, ready-to-serve and broth. "Away From Home" continued its outstanding performance driven by the continued growth of refrigerated soups. Our cash from operations was up significantly to 649 million from 500 million, an increase of 30%.

Now, let's turn to the specifics of our financial results. Net sales rose 3% to 2.3 billion. Sales growth for the quarter breaks down as follows: Volume and mix added 1%; price and sales allowances added 4%; currency subtracted 2%; EBIT was 403 million, compared to 389 million a year ago. EBIT for the prior year's quarter would have been 12 million lower had all stock awards been expensed. After adjusting for this, EBIT increased to 403 million from 377 million in 2005, an increase of 7%. Gross margin improved to 41.5% from 40.6% primarily due to the impact of pricing and productivity, which more than offset cost inflations. Marketing and selling expenses rose 2 million to 364 million, a 1% increase primarily due to higher selling expenses partially offset by currency. Administrative expense increased 27 million to 156 million primarily due to stock-based compensation expense recorded in 2006 under SFAS 123R, higher employee benefit costs, and costs associated with the implementation of the SAP Enterprise Resource Planning System in North America. Research and development costs were flat at 24 million. Net interest expense was 43 million, down 2 million versus a year ago due to lower debt levels and higher interest income partially offset by higher interest rates. The tax rate was 29.4% versus 31.7% in the prior period. This lower rate for the quarter was the result of the resolution of the 1996 to 99 Federal income tax audit. We now expect the full year tax rate to be 29 to 30%, excluding the first quarter tax contingency settlement and the impact of the AJCA dividends. Net earnings for the quarter were 254 million, compared to 235 million for the quarter a year ago. And diluted EPS for the quarter was $0.61 versus $0.57 in the year-ago quarter. Net earnings in the prior year would have been 8 million lower or $0.02 per share had all stock awards been expensed.

For the first six months sales were up 2% to 4.4 billion, and EBIT was 804 million, compared to 770 million a year ago. EBIT for the first six months of the prior year would have been 22 million lower had all stock awards been expensed. And EBIT for the first six months of the current year includes a 13 million benefit related to the change in accounting for inventory. After adjusting for these items, EBIT for the first half of 2006 would have been 791 million, compared to 748 million in 2005, an increase of 6%. For the first half, net earnings were 556 million versus 465 million a year ago and EPS was $1.34 versus the $1.13 reported in the comparable period a year ago. Items impacting the comparability of net earnings for the first half of 2006 were mentioned earlier, so I will just mention them briefly again: A benefit in 2006 from a 60 million or $0.14 per share tax adjustment, a benefit in 2006 from an 8 million or $0.02 per share adjustment related to the conversion from LIFO to average costs, an incremental tax expense in 2006 of 8 million or $0.02 per share associated with the AJCA repatriation. Net earnings for the first six months of fiscal 2005 would have been 14 million or $0.03 per share lower had all stock awards been expensed.

Now let's turn to operating highlights by reporting segment. I will discuss the numbers for the quarter only. The supplemental schedule accompanying the financial release contains six months comparisons. I will offer some comments on the year-to-date numbers where they make comparisons more meaningful. U.S. Soup, Sauces and Beverages. Sales of 1,018,000,000 were up 6% from 956 million in the year-ago quarter. Sales growth for the quarter breaks down as follows: Volume and mix subtracted 1%, price and sales allowances added 6%, decreased promotional spending added 1%. Operating earnings were 242 million, compared with 216 million in the year-ago quarter. Prior year earnings would have been 1 million lower had all stock awards been expensed. The increase in operating earnings was due to higher prices and improved productivity, which more than offset cost inflation. U.S. Soup sales for the quarter rose 7% with condensed sales up 6%, ready-to-serve soup sales up 9%, and Swanson broth sales up 6%. Condensed eating soups achieved solid sales growth due to pricing, effective advertising, and continued growth in our kid's soup varieties. Condensed cooking soup sales grew from pricing, as well as from strong holiday performance and increased advertising. The Condensed Soup business continued to benefit from an increase in gravity-feed shelving systems, which are now installed in 14,700 stores versus 11,000 at this time last year.

Sales of ready-to-serve soups showed strong growth primarily due to pricing. Campbell's Select Soup sales were led by the introduction of Campbell's Select Gold Label Soups. Campbell's Chunky Soup sales benefited from advertising and promotional activity linked to the NFL. Sales of ready-to-serve soups were adversely impacted by the discontinuance of Campbell's Kitchen Classics. The convenience soup platform achieved double-digit growth with Chunky and Select in microwaveable bowls and Soup At Hand sippable soups all performing well. The introduction of Campbell's Chicken Noodle, Tomato and Vegetable Soups in microwaveable bowls also added to sales growth. Swanson broth sales grew, driven by consumer's preference for aseptically-packaged broth and successful holiday merchandising activity. For the first half, total U.S. Soup sales were up 1%, condensed sales were up 4%, ready-to-serve sales were down 5%, and broth sales were up 8%.

Now, let's move to the other parts of this reporting segment. V8 Vegetable Juice recorded double-digit sales increases from volume and pricing. Sales benefited from increased distribution in non-grocery channels and the growth of single-serve varieties. A new beverage, V8 V-Fusion, a 100% juice beverage that gives you a full serving of vegetables plus a full serving of fruit was launched during the quarter and received strong trade acceptance. Prego Pasta Sauce sales increased due to pricing and improved marketing effectiveness. Pace Mexican Sauce sales also increased. Campbell's Chunky Chili sales declined due to difficult comparisons against the introductory marketing activity a year ago, although Chunky Chili in microwaveable containers performed well. Campbell's SpaghettiO's Pasta sales declined due to more aggressive competitive activity.

Now, let's turn to our second reporting segment, Baking and Snacking. Sales for the quarter decreased to 1% to 429 million from 433 million. Sales declined for the quarter breaks down as follows: Volume and mix subtracted 1%, price and sales allowances added 2%, increased promotional spending subtracted 1%, currency subtracted 1%. Operating earnings declined to 40 million from 47 million in the year-ago quarter. Prior year earnings would have been 2 million lower had all stock awards been expensed. The lower earnings were primarily due to declines in the Biscuits business in Indonesia, amidst a more challenging economic environment and declines in the Snack Foods business in Australia due to a significant increase in competitive activity. Pepperidge Farm Bakery sales grew driven by whole grain breads, muffins and bagels, and strong holiday stuffing sales. Pepperidge Farm Cookies and Crackers sales increased driven by higher Goldfish Cracker sales, partially offset by declines in Milano and Mini Cookies. Pepperidge Farm Whims, the poppable snack cookie introduced at the beginning of the fiscal year has not performed up to expectations. Frozen Bakery sales increased slightly driven by pastries, Garlic Toast and the introduction of new Artisan breads. Arnott's sales declined primarily due to currency and weak private label performance, which more than offset sales gains in the branded Biscuit business.

Our third reporting segment is International Soup and Sauces. Sales declined 4% to 483 million from 502 million. Sales declines for the quarter breaks down as follows: Volume and mix added 1%, currency subtracted 5%, operating earnings increased to 81 million from 70 million. Earnings for the prior year would have been 1 million lower had all stock awards been expensed. The higher earnings for the second quarter of this fiscal year were primarily due to strong market performance in Canada and lower marketing spending in Europe primarily in the U.K. The higher earnings were partially offset by currency. Sales in Europe decreased primarily due to currency. Higher volumes of aseptically-packaged soups and instant-dry soups in France and aseptically-packaged soups in Belgium were offset by weakness in the U.K. where we continued to operate in a challenging environment. In Canada sales grew double-digit, driven by strong performances in ready-to-serve soup, including Soup At Hand, which was introduced this fiscal year and by favorable currency.

The balance of our portfolio is reported as other. This includes the business of Godiva Chocolatier worldwide and the business of Away From Home in the U.S. and Canada. Sales increased 6% to 351 million from 332 million. Sales growth breaks down as follows: Volume and mix added 5%, price and sales allowances added 2%, currency subtracted 1%. Operating earnings declined to 69 million from 72 million in the year-ago quarter. Operating earnings in the prior year would have been 2 million lower had all stock awards been expensed. Operating earnings declined slightly primarily due to higher expenses and the unfavorable impact of currency at Godiva, which more than offset gains in Away From Home. Away From Home sales grew significantly due to the growth of refrigerated and frozen soups. Godiva sales rose as a result of strong retail and direct sales channel performance in North America. That completes our segment discussion. One other item of note before we move to the balance sheet, unallocated corporate expenses increased 13 million to 29 million due to stock-based compensation expense recorded in 2006 under SFAS 123R, higher employee benefit costs, and costs associated with the implementation of the SAP Enterprise Resource Planning System in North America.

Now, let's turn to the balance sheet. Total debt was 2.9 billion, compared to 3.1 billion a year ago. Cash at the end of the second quarter totaled 267 million, an increase of 222 million above the first quarter. This increase is U.S.-driven and results from the fact that all domestic commercial paper has been repaid. We expect to have excess cash balances until fiscal 2007 when we will repay 600 million of maturing long-term debt. Cash from operations for the first half was 649 million versus 500 million. The significant increase reflects lower increases in working capital, increased earnings, and lower cash settlements related to foreign currency hedging transactions. Capital expenditures were 85 million, compared to 104 million. We expect that our capital spending program this year will finish in the 330 to 340 million range. Now, Bob Schiffner will make a few comments before we open up for questions.

Thanks, Anthony. And good morning, everyone. I am pleased with the resurgents of our topline growth in the second quarter consistent with our expectations. I am also pleased with our efforts to mitigate the impact of cost inflation in a responsible fashion as supported by our improved profit margins. While ready-to-serve soup volumes through the first half was not at robust as anticipated, the second quarter showed significant improvement. We'll expand the funding of marketing programs for ready-to-serve soups in the second half. With expectations of improving volume growth trends. I am also very pleased with the strength of our cash flow for the six months. As I have said numerous times, strong cash flow is the whole market of Campbell's Soup Company and we're working hard to better leverage it to create improved shareholder value. Examples of this are our recently announced strategic share repurchase program of up to $600 million over the next three years and our ongoing anti-dilutive repurchase program. During the second quarter we purchased 4.2 million shares at a cost of $127 million, approximately $50 million of this amount covered strategic repurchases.

As I have said before we continue to experience cost inflation at a 4 to 5% annual rate. As part of our efforts to offset cost inflation through productivity and pricing, and manage our profit margins we have announced the U.S. price increase to the trade effective February 27th. The pricing action represents an approximate 2.3% weighted average price increase on our U.S. Soups, Sauces and Beverages business. Approximately 40% of our SKUs will be affected, and the price increase does not include any of our Chunky or Select Ready-to-serve Soup products. We expect to deliver fiscal 2006 results exclusive of the previously mentioned one-time items consistent with our goals; namely, sales growth of 3 to 4% and earnings per share growth of 5 to 7% from the adjusted fiscal 2005 base of $1.64 per share. Given our sales and earnings performance in the first half, meeting these targets implies two things for the back half, first, we expect EPS will be relatively flat, and second, that sales growth will be slightly higher than our 3 to 4% target. This back half expected performance is driven primarily by higher marketing spending to support base business and new products, as well as higher SAP spending. And now I will turn it back to Len.

Rosie, could you start the question-and-answer session, please?

[OPERATOR INSTRUCTIONS]. Our first question comes from David Nelson of Credit Suisse.

Good morning.

Good morning, David.

So essentially what you just said was that price increase is that the higher marketing spending will act to offset the benefit of that and the benefit of maybe some relative outperformance that we saw in this just reported quarter?

Yes, David, we have a very strong second half marketing plan in place. Clearly that will help, we believe, to mitigate some of the impact of the price increase, as well as higher SAP spending and, in fact, those things are driving the flattish earnings performance in the second half.

I guess then to follow-up on both of those, just first of all maybe on the SAP, the CapEx guidance of near 3.30, isn't that just a little below what you would --?

Yes, we were forecasting originally for the year roughly 360 million. Our forecast is now somewhere between 330 and 340. It is obviously not SAP-driven, but it is really a function of a number of projects that are slightly off their estimates, so there is no one major headline in terms of that.

So it is not a shifting, it is just costs are coming in lower?

That's correct.

And then on the marketing, if I can pursue that just one more step, in the quarter price and sales allowances presumably -- lower sales allowances added four. Would that be roughly evenly balanced between pricing and reduced sales allowances? And then I guess within that, talk about the higher marketing because that -- you're talking about in the second half, is that mainly against the consumer or do you -- is that planned to step back up of sales allowances?

No. Let me answer the first part of your question. Most of that was trade promotion or, excuse me, most of that was pricing versus sales allowances and, in fact, in the second half clearly the increase is in consumer and advertising as opposed to trade.

So we should expect to see reduced sales allowances as we move through the year and the higher marketing is against the consumer?

Sales allowances are different than our trade promotion.

Okay.

So the answer is we don't expect really any major change in sales allowances through the year.

Got you.

And what I said about trade for the second half holds.

Thank you.

Okay.

Next question, Rosie.

Thank you. And your next question comes from David Adelman of Morgan Stanley.

Hi, good morning, everyone.

Hey, David.

Good morning, David.

I wanted to ask a few things. First, the price increase you mentioned earlier, Bob, was that 2.3% in the U.S. Soup/Sauce business or was it 2.3% across the portfolio?

No, it is a weighted average 2.3% across the Campbell's USA segment.

Okay. And was that your plan coming into the year or is that a reflection of higher-than-expected inflationary costs?

We don't really comment on our planning assumptions. Basically, though, it certainly is linked to our strategy of really trying to stay abreast if not ahead of cost inflation. As you know, David, our margins had declined in previously years a little bit more than we had wanted because of cost inflation, so this is clearly a new emphasis on taking more frequent smaller increases to stay abreast and even slightly ahead of cost inflation.

Okay. And presumably you would anticipate a less substantial adverse volume impact from this move than the price increase -- than your most recent price increase?

That's correct.

David, this is Doug. The recent price increase or the big one we took last year was the first one in about five years against ready-to-serve, and it was at a much higher amount. This is much more nominal, and it is -- we think we ought to be able to pass this through in a reasonable fashion.

Okay. And then lastly, can you comment on the weather impact in January, and the impact you think that that may have had both on retail take-away in January, and then secondly, the trade inventory levels going into the second half of the year?

Well, we will never use weather as an excuse for performance. And quite frankly, I feel great that we could have a January that was as challenging as this January was from a weather perspective, and still deliver solid sales growth in the -- over the quarter, recognizing that January is the single biggest month of the year for us. So we felt good about our ability to drive the sales growth, certainly the weather slowed some of that down. It was a record high January, and in terms of temperature, well-above I think, over 30% above average and well-above the next highest month -- the next highest record in January. So we feel good about it.

In terms of our inventories, about 60% of our volume is managed with continuous replenishment, CRP. So we have pretty good visibility into inventories, and they're up slightly, but not materially. So we feel as if quote/unquote we weathered January very well.

Okay. Thank you, Doug.

Next question, Rosie.

Thank you. Our next question comes from Pablo Zuanic of JPMorgan.

Hi, guys, good morning.

Hi, Pablo.

Hey, it is actually Reinaldo [De Sants.]

Okay, Reinaldo.

I am on the line for Pablo. But a really quick question, I heard the announcement of the 2.3% price increase. And we realize that the Company has had very good profit margin expansion in the last three quarters. But after you start lapping last year's 5% of February price increase, what would be the main drivers of profit margin expansion and should we assume that by then margin expansion will be less than what it has been recently?

I think you have to assume that the absolute change in profit margins will be somewhat less, but we still expect as we look over the back half to see some margin expansion, albeit not as much as we saw over the last half of last year.

Okay. All right, thanks. And just on another note, given that the sauces and beverages are about 40% of the U.S. Soups, Sauces and Beverages Division, and we hear so much about what you have done in soups, can you give a little bit more color about what you're doing in beverages and sauces and how we should think of that in terms of revenue growth and margins?

Absolutely. We feel as we covered, as Anthony covered, we feel very good about our beverage platform for growth around V8. We have done a couple of key things to drive that growth. One is expanding our distribution on our single-serve products and that's driving good, strong growth in V8 at very high margins. And then we're also launching V8 V-Fusion, which is our new beverage drink, which has been very well-received by our customers. So we think we're well-positioned to drive substantial growth with V8 over time, and feel -- we feel very good about the Beverage business.

On the sauce side, I think we would expect sauces to grow at about the average for our -- for the Company. They clearly aren't receiving as much emphasis as our Soup business, however, they are receiving solid support. And as we indicated in the release, we've seen growth in both Prego and Pace, which are our two biggest entries there. So on balance we feel that we have a pretty solid portfolio performance and an outlook for solid performance over the next year.

Reinaldo, the second part of your question was around -- was it the margins in the business? What was that?

Yes, just in terms of your revenue growth and margins.

We really don't disclose the beverages separately on that, I think. But remember that these are all processed in our heat processing plants, and so margins are comparable to what we have in heat processing, but we really don't disclose that piece separately.

Right. Okay. All right, thanks, guys.

Thank you. Rosie, next question.

Thank you. Your next question comes from Christine Mccracken of FTN Midwest.

Good morning.

Hi, Christine, is it cold in California.

It is freezing. [Laughter].

Good. Eat soup.

Good news. In any case wanted to follow-up I guess on this 4 to 5% cost inflation that you're seeing. I'm wondering if you can provide a little bit more color around specifically what's driving that, if it is still energy and packaging, and when you might lap kind of these higher costs?

Yes. Obviously, most of it ultimately is energy driven. It is safe to say that we're seeing more of cost inflation in packaging materials than we are in raw materials. Obviously, our freight expense has been heavily impacted by the energy situation. And as I said, if anything, our estimate for the full year now after the second quarter versus the first quarter is probably somewhat lower, although, it is still in the 4 to 5% category. And one of the things that we're starting to look very strongly at is what it looks like for next year. And although this is very, very preliminary, we hope it to be a little bit below this year, still probably in the 3 to 4% range, but probably not as high as 4 to 5. But, again, that is very, very preliminary, and obviously, we're on top of this situation constantly. So that's what I have to say on cost inflation.

Okay. And then just in terms of these productivity improvements that you're seeing, you mentioned a couple of times that that's having an impact, a positive impact on margins, but we haven't talked a lot about specifically where you're seeing the most progress, I am wondering if you could provide a little more color around that?

Yes. I would say that it has been remarkably diversified. Everything from plant efficiencies, leveraging material suppliers for improved pricing, we --.

Trade promotion.

Trade, yes, obviously on the marketing side we work hard to generate levels of productivity there. So the answer is, and I think I've commented on this before. We have a very focused enabler program here at our Campbell's. Everybody is involved in it. We track it considerably, and it is a multi-faceted all-out war for this Company.

Clearly, one of the things that Doug and I both believe strongly in that, in order to be successful in our industry today, productivity has to be an ongoing thing, it has to be emphasized consistently, and we feel we do a very good job on that here at Campbell Soup.

Is it, have you quantified kind of productivity improvements how much margin benefit you expect to get from those specifically on an annual basis?

Yes, we do. In fact, we do a lot of work in terms of bridging our gross margin performance and trying to break it down by its individual components, and in fact, suffice to say that our productivity plays a very significant role in that gross margin performance that you've seen.

Okay. Thanks a lot.

Your welcome.

See you next week.

Next question, Rosie.

Thank you. And our next question comes from Chris Growe of A.G. Edwards.

Good morning.

Good morning, Chris.

Good morning, Chris.

I just wanted to make one -- just get one point clear and that was on the price increase. Should we assume since it is not going to Chunky or Select that it is mostly Condensed; is that a fair statement.

Chris, it is really across a number of products in that whole division.

So it's going to include V8 and Pace and Prego?

But, Chris, that's not an unreasonable statement.

Okay. Got you. And then just in terms of marketing for the whole Company, I know there was a comment about it being down in Europe, and I'm sure it was down for the overall Company, I know that's just part of the plan for this year. But can you talk about that in general for the second quarter?

Yes, our marketing is actually the -- we in fact planned the timing of marketing is actually very different this year versus last year. As you know last year we spent a lot of money in the first quarter. This year it is more effectively planned throughout the year; i.e., the reason for the increase in the second half because we were -- we, in fact, did not have a tremendously heavy marketing program in last year's second half. And so when we look at it year-to-year spending is, for the most part similar.

Okay. And then just my last question was regarding your international profits, they were up much stronger than -- much more strongly than I expected. I know one of the reasons for that was the strong growth in Canada. But are there programs perhaps in the second half of the year that are designed to try and turn around Europe for example or try to stabilize Europe maybe would be the way to say it? That could ease or work against the profits in the second half of the year?

Well, we certainly had -- Europe did deliver solid profitability in the second quarter. And you've kind of got to view Europe two ways. One, on the continent, France, Germany and Belgium, we have very solid performance with topline growth and solid bottom-line performance. In the U.K. at the moment it is just -- it's probably the most difficult market in the food industry these days. And there we have great brands that by enlarge are improving their share performance, but the categories aren't well.

And until we get the right business propositions behind those brands, we've decided we are not going to spend behind them in terms of significant consumer marketing investment. And what you see now is just the pacing of our investment while we try and get our business propositions right. I don't think there is more to read into it than that.

Okay. Thanks a lot.

Good. Next question, Rosie.

Thank you. Our next question comes from Terry Bivens of Bear Stearns.

Hi, good morning, everyone.

Hi, Terry.

Just a couple of quick things. I assume you're not going to talk about volumes in the Soup business. I would be interested in getting a little bit more color on that. But is that possible?

You're correct in your assumption, Terry, yes. We really -- the sales numbers are the only numbers we really give now in soup.

Okay. And, Doug, just to go just a little bit further into David Adelman's question, you feel the soup inventories following January are a little bit up from where you thought they might be. It sounded like -- it doesn't sound like you're concerned about it. How has shipments gone following the month of January?

Well, Terry, I think the way to think about it is as Bob actually said in his comments, we expect stronger-than-average sales growth in the second half of the year, and so if three to four is normal, we're talking more than that. And we also talked about where all the marketing spend was -- or much of the marketing spend was against ready-to-serve where we're also holding prices. So I think you can assume we expect the Soup business to have a pretty solid second half.

It is hard to read into January or February. January was, as I said to David, the warm weather was not helpful. Inventories went up a little bit, but then we had a snowstorm, and we'll just have to wait and see how it plays out. But fundamentally, we're very pleased with the progress we're making. And quite frankly, I thought with a normal January we might have had -- I know we would have had a stronger quarter, but it just wasn't meant to be. Obviously, we're pretty confident in our ability to perform in the second half.

Well, it is a nice easy comp for next year. One further thing, I have been talking to some soup buyers for some of the chains, and the one remark I have heard more than once is a desire to have more consumer push behind the new gold label. Would I be correct in taking from Bob's remarks that we can expect a much stronger push there either promotionally or in terms of consumer support behind that?

Terry, we are continuing to support the brand, but let me tell you, this is going to be a slow build. We've been doing aseptic soups in this Company for -- if you go back to Liebig's start in 1986 for 20 years, and every where we take it in the world, we know it is a new form and it takes awhile to get trial and to build the brand. So this is not a quick -- it is not going to be a fast start. It is going to be a slow build that is going to -- in the fullness of time be very important to Campbell's. So I think you will continue to see the brand supported, but we're not going to go over the top with that support in the second half.

Okay.

Terry, I think the other thing you've seen is we really approached this gold label in a different way because we did a huge sampling program, and that has continued because you got to get the people to try the product, and we've had actually very high repeat purchase.

Yes, I should say that the program is off to a great start. We're meeting our expectations which were high. The trial is building. The household penetration is building. Repeat is very high. And importantly from all of our tracking, 50% of the volume coming from Select Gold labels incremental. As we're starting to meet different usage occasion needs this soup is becoming more of a dinner soup as opposed to a lunch or a snack soup. It is also reaching different demographic targets. So it is incremental and it's on track.

Okay. Thanks very much. See you in Arizona.

Okay. Next question, Rosie.

Thank you. Our next question comes from Eric Katzman of Deutsche Bank.

Hi, good morning, everybody.

Hi, Eric.

A few questions. First up, the tax rate looks like it is going to help you by roughly $0.04 and yet you're not really -- that is roughly 2% growth. You're not changing your kind of estimates. Obviously, you're -- are you kind of using some of the tax benefit, as well as the pricing leverage to put back into A&P? Now, how do we think about that, Bob?

Well, our tax rate is definitely going to be slightly favorable this year relative to last year. Okay? Excluding the impacts of the big non-recurring items. You are going to see, Eric, more volatility in our tax rate quarter-to-quarter just because of how certain discreet items look. But, in fact, when I look at the full year versus the full year, which is the right way to look at it, our tax rate has benefited from a couple of things, one is, low income housing credits, which historically we have not taken to the tax rate because we had valuation issues relative to our low income partnership investments.

And then the second major opportunity this year is the manufacturing deduction that, in fact, we get under the AJCA legislation. So those are real tax planning benefits that, in fact, we have here at our Campbell's Soup. So first of all I don't apologize, okay, for the lower than tax rate, okay? That's something that, in fact, we have done here at Campbell's Soup. And as far as I am concerned, it has the same benefit from operating the business. Now, in our terms does this give us more flexibility? The answer is, yes, it does. I mean it, in fact, helps us maybe spend more aggressively on the marketing line and that's what in fact we've chosen to do.

Okay. And then second question for you, Bob, is you may have touched on this. But your current assets year-over-year were up like 15% and yet your sales were only up like, we'll call it one to two first half. What's going on because we don't have the full balance sheet but what's going on in current assets?

Well, basically our operating working capital, okay, is in fact favorable versus last year, so it's not certainly happening in terms of operating working capital. The issue that I think you're missing is that our cash is up substantially at the end of the second quarter versus the end of the second quarter last year, and that's because we're now starting to accumulate [inaudible].

Okay, I understand that.

-- because we spent down all of our commercial paper. And as I said previously, as Anthony said in his remarks, we'll be growing cash throughout this year, and then, in fact, using that cash to repay about $600 million of maturing debt next year.

Okay. Last question for Doug. I guess I am not sure whether to make too much of this, but it just sounds like international ex-Canada is becoming more of a problem. I mean I don't know how much business you have in Indonesia but for you to list that first as being a problem, and hurting that segment, I am not going to be in Indonesia any time soon, but I don't know what's going on there. And then you've got more snack competition in Australia. It sounds like you're pulling back because you're worried about your portfolio or where you're positioned in Europe. So how concerned should we be about this, not just for this year but even looking into next?

Well, first of all, I think internationally we are certainly more challenged than we are in North America. The good news is that North America is the bulk of the sales and earnings and the North American ship is moving firmly in the right direction. In international it is a collection of challenges. As I mentioned in Europe we see on the continent a solid performance. We do have a near-term performance in the U.K. but we feel very good about our portfolio there. We've just got to get the business propositions right. We go to Asia-Pacific -- that the big business, which is our Arnott's Branded Biscuit business is performing solidly and growing.

Where we got hurt was around the edges of that business, which had to do with some private label work and some initial tough quarter end comps in snack foods. And we did get hurt by Indonesia, we have been struggling in Indonesia since -- although it is not big but we've been struggling in there since the tsunami, and then the government affecting the way they're pricing their energy, and it has been one thing after another. So it is a challenging environment out there. We think it is manageable. We think we can get international to a place where it can be not dilutive to our overall performance. But it certainly was a challenging quarter.

Okay. Thank you.

Next question, Rosie.

Thank you. Our next question comes from Jonathan Feeney of Wachovia.

Good morning, guys.

Good morning.

First a comment. I want to congratulate you guys on having such clean financials and disclosure. It is so easy to connect everything. It is like giving all of us an extra hour we didn't have, relative to some other companies. So thanks for that.

I appreciate that, Jonathan. Yes, thank you.

A question for Bob first. In the context of your 4 to 5% cost inflation guidance for the year, it looks to me like so far we're running flat COGS year-over-year on, call it a 2% blended volume mix decline. It seems to me it has -- that cost inflation has to be running behind that through the first half. So are we talking about that accelerating in the second half of the year?

No, but, in fact, I think what you're seeing is the benefit of productivity that plays into your analysis. I mean if you did a bridge of COGS, you would basically see a big impact on our productivity offsetting cost inflation. So, again, do I believe cost inflation might be a little bit lower in the second half relative to the first? The answer is no, okay? But the rate of increase I am hoping is going to slow somewhat.

I think it's actually going slow. Oh, interesting. Okay. And for Doug, could you comment on the competitive landscape and soup because when -- you're already taking some share here in warm January, still having a good quarter. And I wonder if this weighted average 2.3% price increase you're talking about, there is some risk that maybe others with the history of not following pricing in this category might not follow. And what can you tell us about the competitive landscape and what gives you confidence that will stick?

Well, I am quite sure it will stick because that's something totally within our control. The competitive landscape I think, the best I can do is tell you you need to ask them.

[Laughter] Oh, I do.

We feel very good about our ability to responsibly execute this increase. It is covering costs -- the pieces of portfolio that are going through this increase were ones we didn't advance -- by and large are ones we didn't take last year. So this is cumulative several years of cost build-up that we're covering. And our experience on the few businesses where we have taken price in lower amounts is that we can execute it reasonably well, so we're comfortable with it.

Okay. And just finally, Doug, how aggressively are you considering maybe entering adjacent businesses, looking at adjacent businesses? Because when I look at the financial leverage at Campbell today, it is about an EBITDA turn south of the group, and even relative to the Company's own history and where you've come so far with this base business, are you looking more say to adjacencies now than you were a year ago?

Well, we continue to look at adjacencies. As we highlighted in the Annual Report, we're focused in two major areas, Simple Meals and Baked Snacks, they cover 85% of our portfolio. And in simple meals, we're heavily anchored in soup, and baked snacks we're heavily anchored in biscuits, but there are some adjacencies there that we're looking at. But quite frankly, the key to our success is going to be to drive breakthrough in those core categories of soup and biscuits in the near-term and that's our key challenge. We are looking at adjacencies as well, but the key challenge is to create breakthroughs in simple meals and baked snacks.

Okay. Thanks very much.

Next question, Rosie.

Thank you. Our next question comes from David Palmer of UBS.

Good morning.

Hi, David.

Do you think retailer prebuying ahead of the price increase, particularly was a boost to condensed sales in the second quarter or perhaps do you think that prebuying might be more of a factor in the third quarter? Perhaps in answering this you could address all channel consumer take away and condensed versus shipments.

Well, David, first of all, we're not going to talk about our take-away, but, in fact, I will say that as much as we try to prevent some prebuying, there is, but it has not impacted our second quarter performance. We'll see some level of prebuying in the month of February from the price increase, but that will work itself through in the third quarter. So, again, my answer is that it hasn't impacted the second quarter. We'll see some of it in February, but it will be all washed through the system by the end of the third quarter.

Okay, thanks. And one follow-up, on a percentage basis get the feeling that the percent increase in price and condensed will be certainly higher than the 2%. Just heading into the next soup season, should we maybe be a little worried about condensed volume because of the price elasticity, and then on top of that diminishing lift from the gravity racks, if not, maybe you can tell us why we -- what gives you confidence about condensed coming into the fall?

Well, I think, David, as we go through the year, I think it is important that we have to -- that we have to have the right elements in place to continue to drive growth in condensed, and believe me, we spent 20 years trying to turn this around. We're not going to compromise the turnaround that we've established here. We expect it to grow again next year and I think it is incumbent upon us to be able to share with you at the appropriate time the kind of initiatives we're going to be undertaking for the next soup season that should keep that momentum going, and we have every confidence that we will.

Thank you very much.

Okay, next question, Rosie.

Your next question comes from Edgar Roesch of Banc of America Securities.

Hi, a lot of my questions have been asked. On the performance of Whims so far has the disappointment been more on consumer trial distribution or of repeat purchasing or --?

Ed, the answer is yes.

Okay.

We are absolutely convinced that this poppable snack territory for Pepperidge Farm is a real promising territory. We saw great benefit when we did our Mini Cookie line, which was our single most successful new product launch two years ago, ever, and we thought we could follow it up with Whims with some innovative packaging, and some created product technology. We did not get the price value proposition right, and we have struggled with the introduction. We'll learn from it and come back at it in a fresh way, but unfortunately its impacted both our topline and our bottom line this year. We just missed this one.

Thanks. And then just one follow-up. Looking at the microwaveable soups, I mean how much benefit are you still getting from increased distribution at this point and is there more room to go, and particularly if you can talk about convenience stores? Thank you.

Over all we feel great about our -- about what we call our convenience platform. Our microwaveable soups are now over $250 million at retail. It is one of the most successful launches in the grocery industry in the last five years. They continue to grow in both distribution and turns overall, and that includes both our microwaveable bowls and our cups, our Soup At Hand. We are continuing to gain distribution in convenience stores and colleges and book stores, but it is a slow build. And we see upside to this. We see this as a very positive growth area for us where we're realizing double-digit growth now and we expect we ought to be able to continue to build on this.

Thanks very much.

Rosie, how many more questions on the line?

We have one more.

Okay. We'll take that one and then we'll stop.

Okay. Our final question comes from David Driscoll of Citigroup.

Well, good morning, everyone. And thanks for taking the question.

Hey, David.

Your FDM dollar share in ready-to-serve has been down in each of the last 15 four-week Nielsen periods, and it's down about 3.3 percentage points over the latest 52 weeks. Last year fighting for share was costly and it seems to have hurt margins. Where do you net out on this and really are you more interested in keeping pricing gains even at the expense of share?

Well, David, you know the answer. I am not going to comment on any consumer take away or share numbers because there are too many vague [reasons] in the numbers. We are satisfied with the progress we're making in ready-to-serve soups overall and we think we're well-positioned for the long-term. Obviously, in saying that I expect we'll do better in the second half of this year than we did in the first half. And we saw a momentum building in the second quarter. We think we will continue to see it for the year. But this is where -- we're in this for the long-term and we think we're going to have the right strategy in place.

Well, then just to follow-up on this one, it looks in the data that we can see in Nielsen that your soup unit volumes were down in the tens of millions of units in the quarter, and in well over 100 million units over the last 52 weeks according to the Nielsen numbers. The question that I have for you is, is there anything that you can do on the operational side? Can you reduce the number of shifts that you have in your plants or maybe more impactfully can you close one of your plants? Do you have enough excess capacity where that it would make sense given that the strategy looks to be one more of price rather than volume right now?

We're -- actually we're doing fine on getting returns on invested capital. And I can't comment on your data, but it doesn't cover the whole universe as you know, and it happens to be covering the universe that's not performing as robustly as the universe that's not covered. And so you can't -- it is just -- you've got a flawed foundation to have the logical discussion on top of it.

So are you saying that volume is not down at all?

I am not commenting on the volume.

David, we don't discuss -- we haven't discussed the market share data because obviously it doesn't have everything in there. So we really don't comment on IRI or Nielsen data.

Okay. Thank you for your answers.

All right. Thank you, everyone. Rosie, we'll end the call there. Thank you.

Thank you for attending today's conference call and have a nice day.