金寶湯 (CPB) 2006 Q3 法說會逐字稿

Welcome and thank you for standing by.

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

[OPERATOR INSTRUCTIONS] Today's conference is being recorded.

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

Now, I would like to introduce Mr. Len Griehs, Vice President of Investor Relations.

Sir, you may begin.

Good morning and welcome to the Campbell's Soup Company third quarter fiscal 2006 conference call.

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

Our financial results, press release and supplemental schedule were issued earlier this morning.

These are also posted on our Web site.

Our call this morning will last approximately one hour.

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

The replay numbers are 1-866-470-8797 and 203-369-1497.

It will run through midnight, May 26.

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

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

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

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

These include statements concerning the impact of marketing investments and strategies, new product introductions, cost savings initiatives, quality improvements, capital expenditures, tax rate and portfolio strategies 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 it's subsequent filings with the Securities and Exchange Commission.

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

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

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

Now, here is Anthony to discuss the financial results for the third quarter.

Good morning.

Before I discuss results, one reminder on comparability for the third quarter and the nine-months.

Beginning in fiscal 2006, the Company adopted Statement of Financial Accounting Standards Number 123R share-based payments.

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 third quarter would result in an 8 million reduction in net earnings and a $0.02 reduction in EPS generating net earnings of 138 million and EPS of $0.33 respectively.

For the nine-months, the pro forma impact would result in a 22 million reduction in net earnings and a $0.05 reduction in EPS generating net earnings of 589 million and EPS of $1.42 compared to $1.48 reported in 2005.

Please note that 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 and government securities in a prior period.

In addition, the Company reduced interest expense and accrued interest payable by 21 million and adjusted deferred tax expense by 8 million, an after-tax benefit of 13 million.

The aggregate non-cash benefit of the settlement on net earnings was 60 million, or $0.14 per share.

During the first quarter of fiscal 2006, the Company recorded incremental tax expense of 8 million, or $0.02 per share associated with the repatriation of earnings from non-U.S. subsidiaries under the provisions of the American Jobs Creation Act.

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 pre-tax 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 third quarter of $0.40 in 2006 compares to the adjusted $0.33 in 2005, an increase of 21%.

For the nine-months, adjusted earnings per share would be $1.60 in 2006 versus $1.42 in 2005, an increase of 13%.

Now, a few highlights of the third quarter.

U.S.

Soup had very strong sales growth with gains in all parts of the business.

Of particular note are the continuation of strong performances in condensed and the rebound of ready-to-serve soups which began in the second quarter.

RTS had been helped by strong sales growth of microwavable products, and most notably, Campbell's classic varieties which are now in microwavable bowls.

Also, stronger retail takeaway is occurring in outlets with new gravity-feed shelving for microwavable products.

Pepperidge Farm achieved double-digit sales growth as all three of its businesses of bakery, cookies and crackers and frozen contributed strong performances.

U.S.

Sauces and Beverages brands Prego, Pace, and V8 achieved double-digit sales increases.

Canada achieved double-digit sales and earnings growth.

Cash flow from operations for the first nine-months was 977 million versus 772 million, an increase of 27%.

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

Net sales rose 6% to 1.8 billion.

Sales growth for the quarter breaks down as follows: Volume and mix added 4%, price and sales allowances added 3%, reduced promotional spending added 1%, currency subtracted 2%, EBIT was 275 million compared to 259 million a year ago.

EBIT for the prior year's quarter would have been 13 million lower had all stock awards been expensed.

After adjusting for this item, EBIT increased 12%.

Gross margin improved to 40.7% from 40.4%, primarily due to higher selling prices and productivity gains continuing to outpace cost inflation.

Marketing and selling expense rose 4% to 285 million, primarily due to higher advertising.

Administrative expense increased 15 million to 160 million primarily due to stock-based compensation recorded in 2006 under SFAS 123R, higher employee benefit costs and costs associated with the implementation of SAP in North America.

Research and development expenses rose 4% to 25 million.

Net interest expense was 41 million, down 4 million versus a year ago due to the impact of lower net debt levels partially offset by the impact of higher interest rates.

The tax rate was 29.1% versus 31.8% in the prior period.

This lower rate for the quarter was the result of favorability and the finalization of the Company's fiscal 2005 U.S. tax return and benefits associated with tax planning strategies.

Net earnings for the quarter were 166 million compared to 146 million for the quarter a year ago and diluted EPS for the quarter was $0.40 versus $0.35 in the year ago quarter.

Net earnings in the prior year would have been 8 million, or $0.02 per share lower had all stock awards been expensed.

For the nine-months sales were up 3% to 6.2 billion, and EBIT was 1.79 billion compared to 1.29 billion a year ago.

EBIT for the nine-months of the prior year would have been 35 million lower had all stock awards been expensed, and EBIT for nine-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 nine-months this year would have been 1.66 billion compared to 994 million in 2005, an increase of 7%.

For the nine-months, net earnings were 722 million versus 611 million a year ago, and EPS was $1.74 versus the $1.48 reported for the nine-month period a year ago.

Items impacting the comparability of net earnings for the nine-months of 2006 were mentioned earlier: A benefit from a 60 million, or $0.14 per share tax adjustment, a benefit from an 8 million, or $0.02 per share adjustment related to the conversion from LIFO to average cost, an incremental tax expense of 8 million, or $0.02 per share associated with the AJCA repatriation.

Net earnings for the nine-months of fiscal 2005 would have been reduced by 22 million, or $0.05 per share had all stock awards been expensed.

After adjusting for these items, net earnings for the nine-months would have been 662 million compared to 589 million for the prior year's period, an increase of 12%, and diluted EPS for the nine-months would have been $1.60 versus $1.42, an increase of 13%.

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

I will discuss the numbers for the quarter only.

The supplemental schedule accompanying the financial release contains nine-month comparison.

Year-to-date highlights will be mentioned where they make comparison more meaningful.

U.S.

Soup, Sauces and Beverages sales of 713 million were up 14% from 627 million in the year ago quarter.

Sales growth for the quarter breaks down as follows: Volume and mix added 8%, price and sales allowances added 6%, operating earnings were 171 million compared with 152 million in the year ago quarter.

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

Operating earnings growth was driven by higher volume, higher selling prices and productivity improvements which more than offset cost inflation and increased marketing expenses.

U.S.

Soup sales for the quarter rose 15% with condensed soup sales up 11%, ready-to-serve soup sales up 17%, and Swanson broth sales up 30%.

Both condensed eating soups and condensed cooking soups showed strong sales growth driven by significantly increased advertising and effective merchandising.

The condensed soup business benefited from additional installations of gravity-feed shelving systems which are now installed in more than 15,200 stores compared with 12,800 stores last year at this time.

As I mentioned in my highlight, ready-to-serve soups have continued their rebound in the third quarter.

This can be attributed to a number of factors.

We have broadened the number of products in the RDCS convenience platform and it has responded with robust growth in the quarter driven by Campbell's classic varieties as well as with growth and sales of Chunky and Select bowls.

The gravity-feed system for our convenience line is also helping to drive growth.

It is installed in approximately 1,300 stores.

Preliminary results indicate that the system will be as effective in stimulating consumer purchase for microwavable soup products as it has been for condensed soup products.

Sales of the Campbell's Select brand grew significantly driven by higher marketing spending, more effective marketing programs, and the introduction of restaurant-style Campbell's Select Gold Label soups.

Sales of the Chunky brand were flat.

Also, sales of ready-to-serve soups were adversely impacted by the discontinuance of Campbell's Kitchen Classics.

Turning to broth, Swanson broth sales were up significantly primarily due to increased marketing spending and effective promotional activity around the Easter holiday.

For the nine-months total U.S.

Soup sales were up 4%, condensed sales were up 5%, ready-to-serve sales were flat, and broth sales rose 12%.

Now, let's move to the other parts of this reporting segment.

Beverage sales rose double-digits driven by V8 vegetable juices which had strong volume gains in the grocery channel and benefited from increased distribution in club stores and growth of single-serve varieties.

The introduction of V8 V-Fusion also contributed to beverage growth.

Sales of V8 Splash declined for the quarter.

Both Prego Pasta Sauce and Pace Mexican Sauce achieved double-digit sales growth driven primarily by increased marketing spending.

Now, let's turn to our second reporting segment, Baking and Snacking.

Sales for the quarter were 422 million compared to 421 million in the year ago quarter.

Sales change for the quarter breaks down as follows: Price and sales allowances added 3%, currency subtracted 3%, operating earnings were 35 million compared to 36 million reported in the year ago quarter.

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

Operating earnings were driven by higher earnings at Pepperidge Farm which was partially offset by expenses associated with an organizational realignment in Australia designed to improve the cost structure of the business going forward, lower earnings in Indonesia and the unfavorable impact of currency.

Pepperidge Farm sales grew 11% on 6% volume growth with all three businesses contributing to this sales increase.

Let's look at a few highlights.

In bakery, whole grain breads performed well as consumer demands continued to grow for whole grain products.

Pepperidge Farm cookie and cracker sales increased driven by double-digit growth of Goldfish, which benefited from the introduction of 100-calorie packs.

Our new Pepperidge Farm Delight cookie varieties had good consumer acceptance and the core Milano and Chocolate Chunk varieties also contributed to growth.

In frozen, sales gains were driven by Texas Toast varieties.

Arnott sales declined due to currency and weakness in its snack food business.

Sales in Indonesia declined due to the challenging economic environment in that region.

Our third reporting segment is International Soup and Sauces.

Sales declined 1% to 430 million from 435 million reported in the year ago quarter.

Sales decline for the quarter breaks down as follows: Volume and mix added 1%, reduced promotional spending added 2%, currency subtracted 4%.

Operating earnings were 70 million compared to 59 million.

Earnings for the prior year would have been 1 million lower had all stock awards been expensed.

The higher level of earnings was due to strong market performance in Canada and lower marketing spending in the U.K., partially offset by currency.

Sale in Europe declined 8%.

Excluding the unfavorable impact of currency, sales in Europe were flat with declines in the U.K. and France offset by gains in Germany and Belgium.

During the third quarter the Company announced that it was exploring strategic alternatives for our businesses in the U.K. and Ireland.

In Canada, double-digit sales gains were driven by growth in condensed soup, RTS soup including aseptic soups, and by currency.

In Asia Pacific sales gains were driven by ready-to-serve soup, broth and beverage sales in Australia, partially offset by currency.

The balance of our portfolio is reported as Other.

This includes the business of Godiva Chocloatier worldwide and the business of Away From Home in the U.S. and Canada.

Sales grew 7% to 271 million from 253 million in the year ago period.

Sales growth breaks down as follows: Volume and mix added 7 %, price and sales allowances added 2%, increased promotional spending subtracted 1%, currency subtracted 1%.

Operating earnings were 27 million flat with the year ago quarter.

Operating earnings in the prior year would have been 2 million lower had all stock awards been expensed.

Away From Home sales grew driven by strong performance of refrigerated soups and frozen soups.

Additionally, our Away From Home business in Canada had strong performance in soup and bakery.

Godiva sales rose driven by strong performance in North America which benefited from higher retail comp store sales and higher wholesale shipments.

The international businesses in Asia and Europe also contributed to growth.

This completes our segment discussion.

One other item of note before we move to the balance sheet.

Unallocated corporate expenses increased 13 million to 28 million primarily due to stock-based compensation expense recorded in 2006 under SFAS 123R.

Now, let's turn to the balance sheet.

Total debt was 2.9 billion compared to 3 billion a year ago.

Cash and cash equivalence were 530 million at the end of the third quarter compared to 32 million a year ago.

We expect to continue to maintain higher cash balances until fiscal 2007 when we will repay 600 million of maturing long-term debt.

Net debt was 2.4 billion compared to 3 billion a year ago.

Cash from operations for the nine-months was 977 million versus 772 million.

This significant increase was driven by improved working capital performance, higher earnings and lower cash settlements related to foreign currency hedging transactions.

Capital expenditures for the nine-months were 146 million compared to 166 million.

We expect that our capital spending for the year will be approximately 330 million.

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

Thanks, Anthony, and good morning, everyone.

I am pleased with our results for the quarter.

Our operating performance in North America was one of the strongest in my tenure here at Campbell Soup.

This quarter, in a challenging cost environment, we have had a relentless focus on cost containment and have been able to improve margins and drive sales growth simultaneously.

Our U.S. and Canadian soup results are exceptionally pleasing, not only for the quarter but also for the nine-months.

These results support our objective of growing the top line without resorting to heavy promotional discounting.

As a result of our stronger than expected third quarter, it is no surprise that our full year's earnings per share growth is now expected to exceed our target of 5 to7% off the adjusted fiscal 2005 base of $1.64 per share.

Although we plan to invest at significantly higher levels in the fourth quarter relative to last year behind counter seasonal advertising and new products, we expect fiscal 2006 earnings to finish 9 to 10% above the $1.64 base.

And while we will not give specific guidance for next year until we release full results in September, keep in mind that we plan to sustain this higher level of spending behind new products into fiscal 2007 and our tax rate will return to a more normal level as well.

With that, I'll turn it back to Len.

Okay, Pat.

Would you start the question-and-answer session, please?

Yes, thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Christine McCracken with FTN Midwest.

Your line is open.

Good morning.

Good morning, Christine.

I was wondering just looking at Pepperidge Farm because that seems to have had a pretty dramatic turnaround, specifically looking at the outstanding growth that you've seen in Goldfish, can you expand on what you've changed there?

Obviously marketing has been a big piece of that but could you expand on kind of what's driving that?

Christine, Doug Conant here.

We had a comprehensive plan focused on Goldfish.

Everything from the product to the package to the merchandising with new advertising and also the launch of our 100-calorie pack.

All that together sort of hit critical mass in the third quarter and we expect the momentum to continue.

It's really a collection of several things.

It's no one particular thing that's driving the growth.

If I had to highlight one thing I'd go back to what Anthony said, the 100-calorie packs have been very helpful.

All right.

And just if you could, low sodium is going to be a big piece of '07.

And you highlighted I think about 25 or so new SKUs at the recent FMI conference.

I'm wondering if you can talk about kind of what you're seeing in terms of the initial buy-in and what kind of penetration ACV you're looking for in '07?

There's great enthusiasm both on the consumer and customer level for our lower sodium products.

We expect full distribution of a majority of our items and that's about as far as I would go.

There is nothing that would dampen our enthusiasm for it that we've experienced so far.

Have you targeted any, you know, contribution you expect to see from low sodium next year?

Well, we've targeted it, but it's going to be very tough to call.

There are a couple things.

One is the major question is the degree of incrementality we expect to see from this effort and part of that incrementality would be driven by our ability to attract lapsed users who have left the franchise concerned about sodium back into the franchise and we're just going to have to wait and see how that develops.

The initial test results are encouraging but we're just going to have to wait and see.

Great.

Nice quarter.

Thank you.

Next question, Pat?

Yes.

That comes from Mr. David Palmer with UBS.

Your line is open.

Good morning.

Great quarter, congratulations.

Thank you.

Is there anything different about this year, do you sense, in terms of the timing of shipments into, you know, as folks head into the next soup season?

Will things start even earlier because there is new platforms being introduced?

David, we don't expect anything materially different.

We oftentimes will be shipping product into the trade at the end of our fiscal year getting ready for the next soup season.

That's a typical seeming scenario and we would expect to see the same general approach this year.

It won't be significantly different than last year.

And is there any color that you could offer in terms of the retailer inventory levels as it stands?

Was there any reason to believe that shipments may trail a consumer takeaway numbers, all channel takeaway numbers?

We're very comfortable with our retailer inventory numbers, and we feel sales and consumption are moving nicely and we're very comfortable with it.

Bob?

No, David, as you know, we have access to a lot of inventory information that our customers give us and, you know, there's no indication that inventory levels are different at this time of the year versus historical years.

Okay.

Thank you.

Great job.

Next question, Pat?

Yes, Mr. David Driscoll with Citigroup Investment Research.

Your line is open.

Thank you.

Good morning, everyone.

Good morning, David.

I think in the math works out in fourth quarter at 19 to $0.20.

That's down, I think from $0.23 in the year ago period.

Actually $0.22, David.

I'm sorry, $0.22 in the year ago period.

Can you provide some color around this in terms of sales and margin trends?

The quarter was obviously very strong, it's a very nice quarter so I'd just like to hear your thoughts on how the year is going to wrap up.

David, the lower EPS is, frankly, just due to some pretty heavy counter seasonal marketing and, in fact, new product marketing.

We expect sales growth to be equivalent to our year-to-date sales growth and so, you know, we can attribute it 100% to the higher marketing investment that we're planning.

Doug, what's it going to take for you to change your ideas on what this business can grow at over the long-term?

You stated this 5 to 7% long-term EPS guidance, you put in what looks like a very nice year here and you've done a lot nice incremental things to really move the business forward.

What will it take for you to really advertise that Campbell's is a different Company and that the Company can really achieve EPS growth commensurate with where we see many of the other peer companies within the group?

Well, we're building an innovation machine here for our category and we're never going to apologize for investing in our Company and what we're doing here is we're continuing to invest while we deliver above average returns and that's a model that's working for us now and I see absolutely no reason to change it.

Now, when we establish some of these more competitively advantaged platforms around reduced sodium, around premium where we have the opportunity to, in a sustainable way, command higher margins and better mix, then we can have a different dialogue, but right now, we're still very comfortable with our guidance and I would also remind you that we're in the middle of a major North America SAP installation at the same time.

So we've got, we're building growth platforms, we're investing to drive consumer takeaway and we're rebuilding our infrastructure really from the bottom up through SAP and we're still delivering very good returns and I feel good about the mix, I feel good about the balance and I look forward to a day when we can talk about bigger and better but this is pretty darn good.

Just one final question.

I think in the nine-month results, the condensed franchise was up 5% but RTS was flat.

Can you just comment on really what's going on on the ready-to-serve side and what would you expect from that type of business going forward?

Well, we put, as you know, we have sort of converted the condensed business to a more of a turn business driven by consumer support and innovative shelving and marketing.

We are doing the same thing with broth and we're in the process of trying, and I believe we will, successfully transform the RTS category in that direction.

We've pulled back from aggressive deep discounting on Chunky this year and we gave up some volume on that dimension.

But on the other hand, we started to focus more on the consumer differentiation with our Select brand and our premium brands and our microwavable bowls and all of those businesses have grown nicely.

Chunky's the one area that we had difficulty with this year and we think that the table is set for that to be a real productive contributor to growth next year while the rest of the RTS franchise is also well positioned.

So I think that we're putting the building blocks in place to drive sustainable growth in ready-to-serve and I think the outlook is pretty -- I'm bullish on the outlook for next year.

Super.

Thanks a lot.

Again, congratulations on the very nice quarter.

Pat, next question?

Mr. Todd Duvick with Banc of America Securities.

Your line is open.

Yes, good morning.

Hi, Todd.

From a fixed income standpoint, certainly it's good news that we hear about the $600 million in debt that you're planning to pay off in fiscal '07.

I wanted to know if you could kind of step back and tell us a little more broadly about your plans for your credit rating and how you view your optimal capital structure because one could easily argue that you really don't need to be an A-rated Company and yet with your debt reduction plans it looks like that's what you plan to do.

Could you just speak to that a moment?

Yeah, Todd.

We've stated historically that in fact we would like to be an A-rated Company, you know, and in fact get our commercial paper rating back to A1/P1.

As you know, now and it's now A1/P2.

We also announced a couple quarters ago the fact that we are instituting a share repurchase program as well.

A strategic share repurchase program roughly $200 million a year.

I think if anything, we've become a little bit more practical about our debt rating.

We seem to have strived to achieve it, however, you know, we weren't making a lot of progress toward that goal.

So, at this point, my sense is there really isn't anything magical about the A debt rating for Campbell's Soup, and, frankly, if we were to fall down to a triple B-type rating, that would be probably okay from my standpoint and, frankly, more consistent with a lower cost of capital.

So if anything I think that we've kind of changed our vision a little bit, although I'm not so sure you're going to see a major change in the way that we in fact control our capital structure going forward.

Okay.

No, that's very helpful.

And then I guess that leads into my second question with respect to free cash flow priorities.

Certainly, debt reduction I guess in the near-term you've got the share repurchase program that you mentioned.

What are you thinking about in terms of acquisitions and I guess how do you balance that with something that you're looking at like in the U.K. and Ireland in terms of potential divestitures?

Well, I'm not going to comment at all about the U.K. and Ireland.

Again, we've announced we're in fact taking a look at strategic alternative and that's exactly what we're doing.

And as far as acquisitions are concerned, you know, I think Doug has commented on this a lot as well.

We, in fact, continue to look at acquisition opportunities and, in fact, we'll pursue them when they, in fact, make both strategic sense as well as the price is not overly expensive in our view.

And Todd, Doug again.

On the acquisition front, we're going to acquire properties that we genuinely believe can help make us sustainably good going forward that are basically in our sweet spot where we can, where we think there's a high likelihood of significant success, so we're going to be careful there.

We're not going to try and buy earnings or growth in any one-year just to hit a target.

And would I be correct to assume that you'd be looking at existing geographies and categories as opposed to venturing out into something new?

We're open to new geographies as we've expressed in other forums.

We are looking at emerging markets and we are looking at opportunities in emerging markets and should we find the right one, we would consider it.

Okay.

Thank you very much.

Pat, next question?

Next one comes from Edgar Roesch with Banc of America.

Your line is open.

Hi and congrats on the great quarter.

Hi, Ed.

I was wondering on the cost side of things what you're seeing especially on tomatoes?

It seems like that is an area of some inflation.

Is it anything, you know, kind of out of the boundaries of what you expected?

I think if anything, our view on cost inflation has probably increased since the last time that I spoke to you at the end of the second quarter.

I think we were looking more at kind of 3 to 4% cost inflation.

I think now for next year it's probably a solid four plus percent.

Obviously, tomatoes have played a role in that upward estimate but again, I think it's much too early to tell what that will ultimately cost us and, you know, the good news though is that, in fact, we do have a very diversified cost base and at this point we're not expecting any availability problems relative to next fiscal year.

Okay.

And then I don't know if you can address this much at all but I was wondering on the organic side of things if you're seeing much in terms of retailers or consumers expressing to you in your marketing studies, you know, a demand for Campbell's Soup organic varieties?

There's clearly interest in organics in this industry and it's gathering momentum.

We're certainly participating in it actively with our organic broth offering under Swanson, organic Campbell's tomato juice, organic V8, organic Prego Pasta Sauces, organic Pace Mexican Sauces, so we're squarely riding the trend and the challenge for us is just to find a competitively advantaged organic platform for soup and we will, and that's an area of opportunity for us and when we do it, we'll do it in an advantaged way where we can really create some excitement in the marketplace.

Our assessment has been that the two big opportunities today, the biggest opportunities for our Company, are in the lower sodium area and in the premium soup area, not necessarily linked to organic.

Those are the two we've chosen to pursue now but you can be sure that organic is on the list.

Next question, Pat?

Yes, John Feeney with Wachovia.

Your line is open.

Congratulations, guys.

Hi, John.

First question would be, could you tell a little bit, Doug, about the competitive landscape in the soup business?

You mentioned how you cut back a little bit on the discounting and did that cost you money and volumes?

Looking forward over the next, you know, six to 12 months, I guess what, you know, have you seen anything competitively this quarter that concerns you, excites you, just to spend time to back and fourth over the past few years between you and your largest competitor?

Well, I really can't comment on the competitive activity.

We have a good sense of how we need to compete in the category and we're doing that now and we're hitting our stride.

Obviously, a competitor can choose to resort to deep discounting and change the dynamics, especially in a seasonal business when there's a big push in a quarter or two.

So from a competitive perspective, you always have to be alert to that, but we think we're hitting our stride as a competitor, realizing that at any time something wild could happen and we're hopeful the category hits it's stride but that's up to our competitors and I can't comment anymore than that.

Okay.

And you know, you mentioned, you had a tremendous amount of success in convenience-oriented platforms.

When you think about convenience stores, or at least more generally alternative channels besides traditional grocery, are they growing faster for you if at all, you know, relative to the mix or is it just great sales growth even across your channels?

We're seeing encouraging sales results relative to prior periods across all channels.

The convenience platform, obviously, plays into some channels where our regular canned products don't, and we're seeing that we're getting good traction there, but we're seeing it across all channels.

So pretty balanced, no real stronger growth in those channels?

Nothing that's appreciable, no.

And just finally, Doug, if you looked at all of the brands if you could sum up your [inaudible] there.

I mean you invested heavily against a lot of core brands and reaccelerated growth in a number of cases where some folks, you know, might have thought it wasn't possible, now if you look at the core brand V8, I know it's not all that big to you, can you talk about that core brand is feeling a little bit of decline?

Is it time to reposition that brand?

You know, what are your strategies around that core business?

I know the new products are good but that core V8 franchise going forward.

Well, quite frankly, we feel very good about V8.

We had a very good double-digit growth quarter.

We had a successful new launch of V8 V-Fusion.

Our core V8 business is actually growing.

We have one element of V8 that declined in the quarter and that was V8 Splash, but quite frankly, that's the least attractive margin proposition in the portfolio so it really hasn't hurt us that much, and we feel very good about the V8 platform for growth.

It's in the sweet spot for vegetable goodness and we've had good response from all of our trade partners across all channels.

And this year, we're going to be coming out with a, we're going to be, actually, replacing the existing V8 with a lower sodium version which is, we're going to be able to advertise as heart healthy and we think that's going to continue to drive interest in the core V8.

So overall, we feel very good about our V8 propositions.

I wish I had more V8s to deal with!

Well, you've done a great job.

Thanks very much.

Next question, Pat?

Yes, David Nelson with Credit Suisse.

Your line is open.

Good morning and congratulations.

Hi, David.

What's the business case for a big increase in counter seasonal soup advertising?

Well, we've actually, David, tested that in prior seasons and seen some response to it.

The response tends to lag the shipments, however, and so we're hopeful that it's going to give us, evidence would suggest it's going to give us some lift as we go into the Fall.

And it's been tested and worked and it's, we expect our -- we have some consumption momentum here that we just don't want to let get away from us.

Okay.

And then thinking about your earnings base given two things, one higher earnings for this year but also the impending sale of your U.K.

Ireland business.

Bob?

Where and how should we think about your base of earnings now?

Well, David, we're not going to really discuss that until September, but my comments were certainly aimed at possibly bringing down some of the euphoria we've seen.

We have a very healthy business, but again, as Doug said before, we're not going to change the strategic approach to how we've been building this business and, in fact, that's about all that I'll say until September.

Okay.

And ready-to-serve, well, you're strong across the portfolio, ready-to-serve, obviously up a lot which is encouraging, but ready-to-serve had been down 6% in '05 and actually down 13% in '04.

Have you got back to your '03 level of sales in ready-to-serve?

I'm not tracking those numbers.

We're back to the '03 levels on RTS.

Oh, yeah, we're definitely back to the '03 levels on RTS.

Okay.

Thank you very much.

Thanks.

Next question, Pat?

Yes.

Eric Katzman with Deutsche Bank.

Your line is open.

Hi, good morning, everybody.

Hi, Eric.

A few questions.

Did private label follow you on the private soup, or private label follow you on the soup price increase in condensed?

It's an account on a comp-by-comp basis and it continues to evolve but we expect that that will happen.

Okay.

And then, I thought during maybe it was Anthony's comments, but I thought you made some mention to, you were seeing some category growth in soup, I assume that that's a reasonable conclusion given your sales strength.

Can you make a little bit more quantitative comments on that based on the data you're seeing?

Well, unfortunately, we don't get into the consumer data but I will tell you, we think, and this is just common sense, Eric, that the more the market leader can spend against strong consumer propositions and against innovations in the market that reach the consumer, the more the category has an opportunity to respond as opposed to just getting trapped in a deep discounting circle of doom.

And we're breaking away from the deep discounting, we're starting to innovate and spend against the consumer, consumers responding, they responded in condensed, they will respond in ready-to-serve as we get into lower sodium and premium soups, and they have responded in broth.

So we think that the better the consumer propositions get and the better the consumer spending profile gets the better the category will do and we should, in the fullness of time, get differentiated performance out of that.

That's the approach.

And I guess at Cagney you kind of had indicated that the premium soups and the refrigerated soups could each be several 100 million sales opportunity.

I assume you're kind of sticking by that initial view.

If anything, it would seem that the success you've had in the C-store, or the convenience platform, kind of would argue that those numbers are reasonable.

Is that a fair way to look at kind of like the incrementality of the new businesses?

Well, I'm hopeful that it will be.

Early test results have been encouraging but, you know, we're trying to build an innovation machine here that will just keep pumping these innovations out.

Our big focus next year is going to be on reduced sodium and advancing our premium aseptic businesses and expanding that footprint a bit, and getting the plans in place for the refrigerated soups on the perimeter of the store, and I think over the next three years, we can start to aspire to those kind of levels that we talked about at Cagney and they are all proceeding on a little different timetable but they're all directionally correct.

Okay.

And then last question, Bob.

I guess there's something is this going to be a high-class problem but, you know, your cash flow I think you said is up 27% year-to-date.

There doesn't seem as if there's been that much share repurchase activity, but when you look out into '07, you'll probably have some proceeds from the disposition of the U.K. assets, I think Cap Ex is at most going to be flat but probably coming down as the SAP spending kind of peaks, you know, assuming that there's not something crazy going on with working capital, it would seem that you're going to have a significant amount of cash flow coming in, so why wouldn't you be, given all of the momentum, why wouldn't you be aggressively repurchasing your stock now?

Eric, I would expect a much, a pretty strong fourth quarter in terms of share repurchases and it's a nice problem to have going forward and I think that some of your assumptions might be a little bit off, but for years I've said that one of the big selling points behind Campbell Soup is it's strong cash flow and I would expect that that will continue going forward.

Okay.

And then just lastly, the tax rate you said "normal"?

What does that mean?

Well, I think if you go back historically and, in fact, looked at our average tax rates, I think that would probably be a good indicator of what I mean by normal.

Okay.

All right.

Thank you.

Okay.

Next question, Pat?

Yes, Andrew Lazar with Lehman Brothers.

Your line is open.

Good morning.

I didn't hear you mention, and it might be because it was not an impact, but the impact from reduced promotional spending, specifically in Soup, Sauces and Beverages, was it just not an impact at all?

Is that why it wasn't discussed?

Didn't we -- It was in Anthony's comments.

I think it was --

Which one, U.S. Soup?

Correct.

Price and sales allowances we said, --

Right.

You're talking about -

Reduced promotional spending.

There was no impact in the quarter.

Got it.

And if you look at that trend in that unit really over the last two years or so, it has gone from being a hit to the sales line to certainly a more positive contributor in line with what some of your comments earlier were about the impact of trade spending.

So I'm trying to get a sense of I guess how much more there is to go on that front and, you know, in light of that is that where do you think maybe some of the benefits from SAP ultimately can be most helpful?

Like where are you in that marketing mix?

You had some good experience, I think, more recently in the soup season with kind of making that transfer over towards, you know, more high quality advertising.

Does that give you the confidence that there's a lot more to go there?

Andrew, I'll turn it over to Bob in just a minute, he can advance this but basically for us to be hitting our long-term or our directional guidance of three to four and five to seven, our U.S.

Soup, Sauces and Beverages business needs to be hitting three to four and five to seven in a quality way and we think our marketing mix is headed in the right direction.

We're going to keep leaning in on that trying to leverage our scale as much as we can in terms of our advertising and promotion, but we think the mix is headed the right direction.

We are, you know, this is a big year and the next two years are big years to harvest, to implement and harvest the benefits of SAP and that's where a lot of the cost is hitting.

Yeah, Andrew, I'm not really going to comment on our promotional strategy going forward, obviously, because that is obviously a competitive area, but one of the things that we had, that in fact we, in fact, continue to get better at and, in fact, this goes back to the early years of our tenure here is that we invested very heavily in trade promotion management systems.

These sit outside of the SAP environment but, in fact, we continue to leverage those and, in fact, one of the benefits that we, in fact, continue to see is, in fact, increased productivity in our trade spending, and whether or not we've hit a wall or not in terms of harvesting those efficiencies, I don't think we have and so, in fact, that's, I mean that's one of the reasons why, in fact, we're seeing the promotional impact on net sales improve as well.

That's certainly something that, in fact, shouldn't be just set aside because it is a significant piece of the trade promotion puzzle.

Got it.

And then just a last quick one.

I think that you made some shifts internally around kind of your R&D organization, I guess more kind of like breakthrough innovation teams around sort of bigger, better ideas.

I was hoping you could chat a little bit about that and if some of the things we're seeing this coming soup season are products of that or is this just a new transformation going forward?

Andrew, we have an organizational structure and then that is bedded down now and has been for about two years as we've started to get the organization where we wanted it to be, but we've also implemented these breakthrough teams which is another layer of team.

It's a virtual team with some, with a few dedicated resources that these teams are designed to drive our breakthrough initiatives across our whole portfolio, the lower sodium effort is for example, one of those teams as is a premium soup team.

And what we're finding this is enabling us to do is be a little faster, be a little bet better and be a little more complete with these projects than we would have been in our old structure.

So we've overlaid these virtual teams on top of the regular structure and it seems to be working as long as we don't have too many of them where they start running into each other.

But we're a focused Company now on a few key breakthroughs and the virtual teams are helping to accelerate our progress there.

And I'd highlight lower sodium, which we made a breakthrough in the sourcing area in this fiscal year, and I was able to come through and talk about it at Cagney which was amazing.

And that's the example of the speed we're able to bring now that we weren't able to bring before.

Thanks very much.

Next question, Pat?

Yes.

Terry Bivens with Bear Stearns.

Your line is open.

Good morning, everyone.

Hi, Terry.

Bob, just on the question of the input inflation.

I thought I understood you earlier, maybe it was on the second quarter call, to up your estimate for this year, fiscal '06 into the 4 to 5% range?

I just want to make clear on what you're looking at in terms of that input inflation?

Terry, I think 4 to 5% was the inflation for this year.

For this year.

Okay.

And in fact we said we thought it was going to be a little bit lower next year, 3 to 4% and now I'm saying that based on some recent activity in the commodity markets, we expect that it's probably going to be more in the four plus percent range.

We don't think it will get up into the five's but it will be clearly solid four.

Okay.

And just in terms of the productivity, I guess I might have to wait for the Q to see what that contributed to your gross margin, but could I ask, are the gains there on the gross margin line similar to what we've seen in the earlier two quarters this year?

Yes, they are.

Basically, our pricing plus our productivity savings are, in fact, outpacing cost inflation.

Okay.

And just in terms of productivity, how long do you think those kind of gains are sustainable?

I think they're going to be ongoing.

You know, I think any Company that in fact has to be competitive in our industry has to have a continuing list of cost reduction projects that it is moving on and so I don't think it's ever going to change.

If it does then, obviously, some companies in our industry will hit a wall because, obviously, our pricing is still something that is not something you can just snap your fingers and do.

Terry, just building on Bob's comment, we just recently completed our strategic plan taking yet another look at our next three years and with reasonable detail we're driving against a new model that we have internally called flat total delivered cost and we are uncovering projects that should enable us to maintain the momentum for the next three years certainly and then, you know, we'll take it from there, but in principle, I agree with Bob's answer.

I'd just say that over the next three years we see opportunity.

Okay.

And one last thing, Doug, this is probably for you.

I guess it's looking like our friends at Progresso also going to have a sea salt entry perhaps in time for the upcoming soup season.

How would you view that?

Could that blunt the impact or view of sea salt or are you looking at maybe it will expand the category, might you have to spend a little bit of money to distinguish your sea salt, you know, from theirs?

How are you viewing that at this early stage?

Well, I think the people to talk about to about the Progresso sea salt would be the Progresso people, but I will tell you, we anticipated me-too products coming into the marketplace in a rather aggressive way and we think we've built a proposition that is going to withstand any competitive pressure.

There are no surprises here.

We think we have an advantaged lower sodium ingredient, we have the advantage of having been working on this in an earnest way for several years, and we like our chances, Terry.

Okay, great.

Thanks very much.

Pat, how many more questions in queue?

We have about eight more questions, sir.

Okay.

We'll take those and then we'll stop after that, please.

Okay.

Thank you, sir.

Our next question comes from Mitchell Pinheiro with Janney Montgomery Scott.

Your line is open.

Good morning.

I'll be very quick.

In terms of spending in the fourth quarter, the kind of seasonal soup spending, is any of that related to the lower sodium soups?

No.

Okay.

In terms of SAP, you went live in Canada earlier this month.

Is that correct?

May 1.

How's that going?

Went smoothly.

Okay.

Three, in terms of the Away From Home sales, obviously big new customer driving that.

Looking out, I mean looking next year, I know we're not talking a lot about '07, but any guidance as far as like what kind of penetration you're going to have on the Away From Home?

The only -- we're not going to get into next year.

We're going to be rather methodical with this refrigerated soup initiative and, you know, we're committed to it because we're building a huge plan to support it, but we're going to be rather methodical with it and we see it a multi-year build and that's as much as I'll say and we'll elaborate a little more when we get to September.

Okay.

And last question.

Doug, you had mentioned, I guess earlier on there was a question about incrementality of the lower sodium soups versus your regular full sodium soups.

While they may be, you know, you're not sure, wouldn't a trade off, I got the sense lower sodium's going to be higher priced.

Am I incorrect in that assumption?

I think you'll see that I think it could easily be higher priced, that will be up to the trade.

So I just thought --

They set the prices.

Well, I thought if you trade one for another you'd rather have a, you know --

We're certainly not going to do anything that's going to be dilutive to our margins.

Okay.

Thanks a lot.

Thanks.

Next question, Pat?

Yes, Eric Larson with Piper Jaffray.

Your line is open.

Hi, guys, congratulations.

Quite a difference versus two years ago.

It's been a long journey.

I know.

It's well worth it.

Just a quick question on your in store gravity-fed shelves.

Help me if this is incorrect perception.

The first time around you had to sell the retailers on what the proposition was for them and that it was as much convincing them to try it as it was the time to install them.

As you develop new systems now for microwave and hopefully also for ready-to-serve, couldn't the process of getting those installed into retail go quicker than what the first round was?

That's a great -- if you would go talk to our customers we would love to have you with us!

The reality, here's the big difference.

The big difference is when we were doing condensed it was just our product and the customers product.

Now, we have other competitive products and other competitors and trying to for the customer to figure out how they're going to set their section with these other competitive products and whether they're part of a gravity-feed shelf or not is more challenging.

It almost becomes like a cost to serve, it's like the front end of a supermarket where you're sharing space across multiple manufacturers.

It just gets more complicated.

So we are going to be rolling out the convenience platform.

We do see the same kind of lift with it but we also have to deal with Progresso in that proposition and possibly others, and we will have the same issue when we go to ready-to-serve.

So we're going to roll this out customer by customer, account by account and my guess is it's going to take a couple of years, but we ought to be able to, in the fullness of time, get to the same place with our convenience proposition and our ready-to-serve proposition as we are with our condensed proposition but it's unfortunately, it's very arduous and it's going to take a few years.

There's just no way around it.

Okay, great.

That was a very helpful comment.

And then just one quick other question and this maybe goes to Bob.

Bob, I know that you're absorbing kind of start- up expense et cetera for SAP.

Can you give us a little update of what those might be and maybe you've quantified those in the past.

We just haven't had a recent update on what kind of your current quarters might be absorbing because you don't break them out.

Year-to-date we spent about 13 million.

We expect roughly another 5 million throughout in the fourth quarter, and in fact we expect those expenses to be above that next year.

As you know, next year is a big year for us in terms of starting to roll of SAP out to the U.S.

So, you know, that's where we are.

Okay, great.

Thanks guys, congrats.

Thanks.

Pat, next question.

Yes.

Mr. David Adelman with Morgan Stanley.

Your line is open.

Good morning, everyone.

Hey, David.

I wanted to ask you two questions, if I could, about your operating profit margins by division.

First in the international operations, you saw about a 300 basis point improvement and I was wondering if there were a few things you could flag there for that dynamic.

And then secondly, not to take anything at all away from the U.S. business, but earlier in the year, with lower sales you were seeing greater operating profit margin improvement than you saw in the third quarter and I was wondering why that proved to be the case?

Well, David, I think you know, the easy explanation on the changes in operating margins with, in fact, some of our segments is basically marketing is probably the biggest, has the biggest impact in terms of explaining margin differences.

Clearly, you know, the overall margin improvements that we're seeing on the total consolidated Company also played down to the segments as well.

And the second part of your question again was what?

So internationally it was the 300 basis point increase and then domestically in the U.S.

Soup and Sauce business, margins they were flat year-over-year but were increasing through the first half at a much more rapid rate.

But you're attributing that to higher marketing spending in Q3?

Absolutely, yes.

Okay.

Thank you.

You're welcome.

Next question, Pat?

Yes.

Pablo Zuanic with JPMorgan.

Good morning, everyone.

I've just got my list of questions here.

The first Bob, Doug said that when asked if you're willing to increase your long-term EPS guidance, you said no, we're keeping it at 5 to 7%.

I [wouldn't] interpret that as you guys keeping the guidance for '07 of 5 to 7% EPS growth despite the fact that you're saying you went into a higher tax rate, higher cost inflation, higher SAP cost and higher SG&A.

Can I make that assumption?

Well, we're not providing guidance for '07 yet.

We'll deal with that when we get to September.

We're saying, my comment was in response to a question of our model which was three to four at the top line and five to seven at the bottom line and that model still is operative for us.

We're not providing any guidance for '07 yet.

We've got to finish this year.

Okay.

And just in terms of the low sodium strategy, in terms of deciding if SKUs are totally replaced and SKUs are going to be extensions of totally new items, could you just remind us of what actual percentage of sales is being replaced?

You talked in terms of SKUs but you didn't say the percentage of sales and that just to explain how the decision is being made?

I can't give you that.

Perhaps, Len, I don't know.

Pablo, we won't really comment on the percentage of sales.

But we are replacing of our items.

I think that there are 12 items that are being replaced and there are a little more than that that are new, and I think it will become more apparent as we start shifting in the first quarter.

Right.

And I guess a follow-up.

In terms of the premium, aseptic soup obviously results seem to be quite good according to [inaudible] data, but from outside, one could maybe could see [inaudible] advertising support given the soup season, is that why you feel you have to increase advertising for the next season to support more premium than last year and because of a lesson learned from that in terms of how it's applied to the low sodium launch?

Pablo, we waited a little too long to advertise our aseptic soups in the U.S.

We were trying to achieve a certain distribution build before we started advertising, and in hindsight we look back and wish we had started our advertising about a month earlier in the heart of the soup season.

We, the prior year, we had launched all of our microwavable bowl entries and we had started advertising then we had a shortage of products so we were being very conservative with this launch.

We now have the distribution.

I think you'll see a full-year plan against our aseptic proposition.

Thanks.

Pat, how many more questions in queue?

We just have the one question, sir.

Okay, great.

Thank you.

Our last question comes from Steven Kron with Goldman Sachs.

Your line is open.

Hi, good morning, guys.

Thanks for taking the question.

I just had one quick question on the last business segment and the reported operating margins there which is the Baking and Snacking margins.

Clearly, you had strength out of the Pepperidge Farm business which was offset by the weakness out of the Arnott's business and I just was wondering if you could just provide a little bit of a status update on the incremental investment costs where we are to date on the distribution realignment in Australia and then just talk to the weakness on the top line and the competitive environment maybe around the Arnott's business?

Yeah.

Let's in fact, first talk about the route to market project which is what you're referring to.

That project is on schedule.

As we have said before, will have the biggest economic impact on that in fiscal year '08, so we'll have to wait one more fiscal year before that adds significantly to the bottom line.

And as far as the state of the business, I'll have Doug take that one.

On the business front, we see some category weakness in the biscuit category.

Our competitive position vis-a-vis the other competitors in the market is actually improved, but the category has been a little soft this year and our challenge is to do the same kind of innovation we're doing for Pepperidge Farm here in the United States and get that ramped up in Arnott's going forward and we think that's a very doable proposition.

So it's more of a category issue than it is an Arnott's issue and, of course, we are the category there so we have to take our game up a notch in the base Arnott's business but we've done that before and we've had a good run there.

So if I'm thinking about margins over the next 6 to 12 months I should think more flattish with Pepperidge still performing well and not likely to see the expansion in the Arnott's business until maybe a year out?

Absolutely.

Okay.

Thank you.

Okay.

Thanks, everyone for joining us this morning.

Just to let you know, we did announce we will be having a tasting of our Soups on June 29th here in Camden.

If you didn't get a notice on that and if you are interested please give me a call.

Thank you very much.

Pat, that ends our call.

Yes, thank you very much.

That concludes today's call.

You may disconnect at this time.