金寶湯 (CPB) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Campbell Soup 2006 year-end earnings conference call.

[OPERATOR INSTRUCTIONS].

I would now like to introduce your host for today's conference, Mr. Leonard Griehs, Vice President, Investor Relations.

Mr. Griehs, you may begin.

Thank you.

Good morning and welcome to Campbell Soup Company fourth quarter fiscal 2006 conference call.

5 years ago in July 2001 we held a meeting at the Roosevelt Hotel in New York city.

On that day, we announced the transformation plan that represented the single most comprehensive commitment to revitalization ever undertaken in the history of the Company.

Today we will report on our best financial performance of the past 5 years, largely an outgrowth of the investment initiatives announced at that meeting.

One of the analysts who attended our meeting in July, 2001, was Ruth Ketler, of Fiduciary Trust.

Later we interviewed her for her reaction to the meeting and to help us assess our communication efforts going forward.

Unfortunately, Ruth could not follow our progress of the past 5 years.

Ruth died along with many others in the September 11th attack on America.

The Wall Street Journal article later profiled and described how they found her name badge in the rubble of the World Trade Center.

So while we must carry on our business today, let us never forget those who no longer can do so.

Those who innocently boarded planes and those who reported for a routine day at work.

And let us all remember, never forget how important our own family, friends, and even life became that day.

For those who died and the families that still mourn them on this day five years later.

I pause for a brief moment of silence.

Our agenda for this morning's call will be as follows, Anthony DiSilvestro, Vice President and Controller will open with financial results for the fourth quarter and fiscal year.

Bob Schiffner, Senior Vice President and Chief Financial Officer will offer some summary comments and provide guidance for fiscal 2007.

We will then take your questions.

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

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 take approximately one hour.

It will be available for replay at approximately two hours after the call is complete through midnight September 15th.

The replay is 1-888-266-2081.

Or 1-703-925-2533.

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.

Our 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, which are subject to risks and uncertainties.

These include statements concerning the impact of marketing investments and strategies, share repurchase, pricing, new product introductions and innovation, cost-savings initiatives, quality improvements, and portfolio strategies, including divestitures on sales, earnings and margins, and other factors described in the Company's most recent 10-K and is updated from time to by the Company in its subsequent filings with the Securities and Exchange Commission.

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

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

We have provided a reconciliation of those measures to the most directly comparable measures, which is available on our investor website.

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

Anthony?

Good morning, I will start our discussion today with a look at our total company results for both the fourth quarter and the full fiscal year.

Starting with the fourth quarter, we reported earnings per share of $0.11 in fiscal 2006 versus $0.23 in 2005.

There were several items impacting comparability in the fourth quarter, which I will highlight.

We reached agreement for the sale of our U.K. and Ireland businesses.

As such, we will begin reflecting the operating results of these businesses as discontinued operations.

During the quarter, we recorded $61 million or $0.15 per share of expenses related to the divestiture.

These expenses included $7 million in costs, $5 million after taxes, associated with the sale and $56 million in tax expense representing taxes on the difference between the book and tax basis of the businesses sold.

In the fourth quarter of 2006, the Company recorded in continuing operations a non-cash tax benefit of $14 million or $0.03 per share from the anticipated use of higher levels of foreign tax credits, which can be utilized as a result of the sale of the U.K. and Ireland businesses.

During the fourth quarter of 2006, a $4 million or $0.01 per share charge was recorded associated with the repatriation of earnings from non-US subsidiaries under the provisions of the American Jobs Creation Act, or AJCA.

Beginning in fiscal 2006, the Company adopted Statement of Financial Accounting Standards number 123R, shared payments.

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

Had we expensed all awards in fiscal 2005, the pro forma impact on the year ago fourth quarter would result in $7 million reduction in net earnings, and a $0.02 reduction in EPS, resulting in net earnings of $89 million and earnings per share of $0.21.

After factoring these items into the reported results, earnings per share for the fourth quarter would have been $0.23, compared to an adjusted 2005 result of $0.21, an increase of 10%.

For the full year, we reported earnings per share of $1.85 in fiscal 2006 versus $1.71 in 2005.

There are a number of items impacting comparability in the year, and I will highlight those now.

The pro forma impact in fiscal 2005 of SFAS 123R would result in a $29 million reduction in net earnings and a $0.07 reduction in EPS, resulting in net earnings of $678 million and earnings per share of $1.64.

In the first quarter of 2006, the company recorded a non-cash tax benefit of $47 million, resulting from a favorable resolution of a US tax contingency related to transactions in 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, 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.

Associated with the agreement to sell our U.K. and Ireland businesses, we recorded a net $61 million, or $0.15 per share of expenses.

For the year, the Company recorded incremental tax expense of $13 million or $0.03 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 pretax reduction to cost.

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

After factors in these items into the reported results, earnings per share for the fiscal year would have been $1.83 compared to an adjusted 2005 result of $1.64.

An increase of 12%.

The remainder of our discussion will be focused on the performance of continuing operations starting with the fourth quarter.

Net sales for the quarter were up 4% to $1.45 billion.

The change in sales breaks down as follows.

Volume and mix added 1%, price and sales allowances added 3%, increased promotional spending subtracted 1%, currency added 1%.

Earnings before interest and taxes were $139 million compared to $161 million in last year's fourth quarter.

EBIT for the prior year's quarter would have been $11 million lower had all stock awards been expensed.

Gross margin percentage rose to 42% from 41% primarily due to higher selling prices and productivity gains continuing to outpace cost inflation.

Marketing and selling expenses increased 15% to $262 million from $227 million, primarily due to increased advertising.

Administrative expense increased 10% to $177 million from $161 million, primarily due to higher compensation and benefit costs, stock based incentive compensation recorded in 2006 under SFAS 123R and costs associated with the implementation of SAP in North America.

R&D expenses increased 7% to 29 million.

Other expense was $4 million compared to income of $1 million in the prior year due to a write down of a trademark in Australia and expenses related to foreign currency hedging transactions.

Net interest expense was $41 million, down 5 million due to lower levels of net debt.

The tax rate in the fourth quarter was 14.3%, compared to 29.6% in the prior year's quarter.

The fourth quarter of 2006 was favorably impacted by $14 million from the anticipated utilization of foreign tax credits, partially offset by $4 million in tax expense related to the AJCA.

Excluding these two items, the tax rate would have been 24.5%.

This reduction in comparison of the prior year is due to the favorable resolution of tax audit and the benefits associated with various tax-planning strategies.

Earnings from continuing operations for the quarter were $84 million or $0.20 per share compared to $81 million or $0.20 per share in the year ago quarter.

Items impacting comparability for the fourth quarter are $4 million in tax expense, or $0.01 per share related to the repatriation of earnings under the AJCA.

A $14 million tax benefit or $0.03 per share from the anticipated use of foreign tax credits related to the divestiture.

Net earnings for the fourth quarter of 2005 would have been reduced by $7 million or $0.02 per share had all stock awards been expensed.

After adjusting for these items, earnings from continuing operations for the fourth quarter would have been 74 million, even with the prior year's period and earnings per their would have also been even with the prior year at $0.18.

Now, let's turn to full-year results from continuing operations.

Net sales increased 4% to $7.34 billion.

The change in sales breaks down as follows.

Volume and mix added 1%, price and sales allowances added 3%.

Earnings before interest and taxes were $1.15 billion compared to $1.13 billion for the prior year.

Items impacting comparability for the year are a $13 million gain related to a change in the method of accounting for inventory from LIFO to the average cost method during the first quarter of 2006.

EBIT for 2005 would have been reduced by $45 million had all stock awards been expensed.

After adjusting for these items, EBIT increased 5% to $1.138 billion.

Gross margin for the year increased to 41.9% from 41%, primarily due to higher selling prices and productivity gains continuing to outpace cost inflation.

Marketing and selling expenses were $1.2 billion, an increase of 6%, primarily due to higher levels of advertising.

Administrative expense increased 12% to $617 million from $549 million, primarily due to stock based incentive compensation recorded in 2006 under SFAS 123R.

Higher compensation and benefit costs and costs associated with the implementation of SAP in North America.

Research and development expenses increased 10% to $99 million from $90 million due to higher investment behind our new product development efforts.

Other expense of $5 million compared to other income of $5 million in the prior year driven by the cost to acquire the rights to the Goldfish trademark in certain international markets and the writedown of a trademark in Australia.

Net interest expense was $150 million versus $180 million due to -- due to a reduction in accrued interest associated with a favorable resolution of a U.S. tax contingency related to transactions and government securities in a prior period.

And lower net debt levels.

The tax rate, 24.6% compared to 32.4% last year.

The current year was favorably impacted by $14 million, from the anticipated utilization of foreign tax credits as well as by $47 million due to the favorable resolution of the U.S. tax contingency related to transactions and government securities in a prior period.

And $13 million from tax expense related to the AJCA.

Excluding these items, the tax rate would have been 29.1%.

This reduction in comparison to the prior year is due to the favorable resolution of tax audits and the benefits associated with various tax planning strategies.

Earnings from continuing operations for the year were $755 million or $1.82 per share.

Net earnings for 2005 were $644 million or $1.56 per share.

Items impacting comparability for the year are an $8 million or $0.02 per share gain related to a change in a method of accounting for inventory from LIFO to the average cost method during the first quarter of 2006.

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

The aggregate non-cash benefit of the settlement on net earnings was $60 million or $0.14 per share. $13 million in tax expense or $0.03 per share related to the repatriation of earnings under the AJCA.

A $14 million tax benefit or $0.03 per share from the anticipated use of higher foreign tax credits which can be utilized as a result of the divestiture.

Net earnings for 2005 would have been reduced by $28 million or $0.07 per share had all stock awards been expensed.

After adjusting for these items, earnings from continuing operations for the year would have been $686 million compared to $616 million for the prior year's period, an increase of 11%.

And earnings per share from continuing operations would have been $1.66 as compared to $1.49 in the prior year.

Also an increase of 11%.

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

U.S. soups, sauces, and beverages, sales for the fourth quarter rose 7% to $556 million from $521 million in the year ago quarter.

Here is the break down of the change in sales.

Volume and mix added 1% and price and sales allowances added 4%.

Reduced promotional spending added 2%.

Operating earnings rose to $114 million from $104 million in the year ago quarter.

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

Operating earnings growth was driven by higher prices and improved productivity partially offset by higher costs and increased advertising expenses.

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

U.S. retail soup sales for the quarter rose 9% with condensed soup sales up 4%, ready to serve soup sales up 20%, and broth sales up 5%.

Both condensed eating and cooking soups delivered sales growth driven by higher selling prices and significantly increased advertising.

The sales of condensed soups also benefited from the increased number of our gravity fed shelving systems.

As of the end of the fiscal year, this shelving was installed in over 16,000 stores.

Strong sales of ready to serve soups came primarily from increased volume.

Campbell's Select sales increased significantly, driven by Select Gold Label, aseptically packaged soups, and microwavable bowls.

Campbell's Chunky sales grew, with gains in both microwavable bowls and cans.

Ready to serve soup sales also benefited from the introduction of Campbell's classic varieties, chicken noodle, tomato, and vegetable in microwavable bowls.

In aggregate, the convenient line of products achieved double digit sales growth.

Swanson broth sales grew driven by consumer's preference for aseptically packaged broth.

Now, let's turn to the full-year result for this segment.

Sales of $3.3 billion rose 5% from $3.1 billion a year ago.

The change in sales breaks down as follows.

Volume and mix subtracted 1%, pricing and sales allowances added 6%.

Operating earnings were $815 million versus $747 million reported a year ago.

Current year earnings include a one-time gain of $8 million related to the change in method of accounting for inventories.

Prior year earnings would have been 4 million lower had all stock-based incentive compensation been expensed.

The operating earnings increase was primarily due to higher prices and productivity improvements, partially offset by cost inflation and higher advertising.

For the year, total U.S. soup sales increased 4% with condensed soup sales up 5%, ready to serve sales up 1%, and broth sales up 11%.

Condensed eating soups achieved solid sales growth due to pricing, effective advertising, and continued growth in our kid's soup variety.

Condensed cooking soup sales grew from pricing as well as from strong holiday performance and increased advertising.

The sales of condensed soups also benefited from the increased number of gravity fed shelving systems as mentioned earlier.

Sales of ready to serve soups were driven by the introductions of Select Gold Label, and Campbell's Classic varieties in microwavable bowls, which were offset by declines in Campbell's Chunky and the discontinuation of Campbell's Kitchen Classics.

Sales of Chunky soups earlier in the year were negatively impacted by change in promotional spending to lower discounting and rebounded over the course of the year.

Sales of soups in microwavable containers, the convenience platform, grew significantly, driven by the introduction of Campbell's Classic varieties in microwavable bowls and gains in Campbell's Select and Campbell's chunky in microwavable bowls, and by Soup In Hand.

Swanson broth sales grew double digits, driven by consumer's preference for aseptically packaged broth, which has benefited. from the introduction of organic varieties and successful holiday merchandising activity.

Beverage sales grew double digit driven by the significant growth of V8 vegetable juice and the introduction of V8 V-fusion, a 100% juice beverage that gives you a full serving of vegetables plus a full serving of fruit.

These gains were partially offset by a decline on V8 Splash beverages.

In sauces, both Prego pasta sauce and Pace Mexican sauce delivered sales growth.

Baking and snacking.

Sales for the quarter were $438 million versus $439 million reported in the year ago quarter.

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

Volume and mix added 2%, pricing and sales allowances added 2%.

Increased promotional spending subtracted 3%, currency subtracted 1%.

Operating earnings were $62 million compared to $69 million in the prior year period.

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

The earnings decline was driven by weakness in Indonesia and the unfavorable impact of currency.

Earnings growth from biscuits was offset by significant declines in its snack foods business.

Earnings at Pepperidge Farm were flat reflecting expenses related to discontinued product.

Sales for the year were $1.75 billion versus $1.74 billion a year ago.

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

Price and sales allowances added 3%, increased promotional spending subtracted 2%, currency subtracted 1%.

Operating earnings were $187 versus $198 million a year ago.

Current year earnings include a one-time gain of $5 million related to the change in method of accounting for inventories.

Prior year earnings would have been $8 million lower had all stock-based incentive compensations been expensed.

Solid operating earnings growth in Pepperidge Farm was more than offset by declines in our Indonesia biscuit business and in Australia where significant declines in Arnott's snack foods business were only partially offset by gains in its biscuit business.

Earnings were also negatively impacted by currency.

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

Pepperidge Farms achieved solid sales gains driven by increased volumes in both bakery and cookies and crackers.

In bakery, sales increased due to continued gain in whole grain bread, aided by the introduction of whole grain swirl bread.

In cookies and crackers, sales growth was driven primarily by the double digit growth of Goldfish crackers, which benefited from the introduction of Goldfish 100 calorie packs.

Frozen sales declined slightly.

Arnott's sales declined, due to the unfavorable impact of currency and declines in its snack foods business, due to intensive, competitive pressure, partially offset by growth in biscuits.

Gains in the biscuit business were achieved across both sweet and savory.

In sweet biscuits, our Tropic portfolio delivered solid performance behind double digit growth of our core Tim Tam brand.

In savory biscuits, growth was driven by the Shapes brand, which introduced new flavors of the world variety in 2006.

These gains were partially offset by declines in the private label biscuit business.

International soup and sauces.

This segment no longer reflects the results of our U.K. and Ireland businesses, which are now accounted for as discontinued operations.

Sales for the quarter were $260 million, up 2% from $256 million a year ago.

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

Increased promotional spending subtracted 1%, currency added 3%.

Operating earnings were $5 million compared to $17 million in the year ago period.

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

The operating earnings decline is due to expenses associated with improving the cost structure of the supply chain in Europe and in organizational realignment in Europe due to the sale of the U.K. and Ireland businesses.

Sales for the year were $1.25 billion, an increase of 2% versus $1.22 billion a year ago.

The change in sales for the year breaks down as follows, volume and mix added 3%, currency subtracted 1%, operating earnings were 144 million compared with 143 million.

Prior year earnings would have been 3 million lower had all stock-based incentive compensation been expensed.

Operating earnings were driven by gains in Canada, which delivered strong sales performance, partially offset by expenses associated with improving the cost structure of the supply chain in Europe and an organizational realignment in Europe due to the sale in U.K. and Ireland businesses.

Let's look at some highlights of the year.

Our business in Canada had solid sales performance due to the favorable impact of currency and strong performance in its core soup business.

In particular, the ready to serve soup business grew double digits aided by the launch at Soup At Hand, which has been widely recognized in Canada as one of the best new product launches of the year.

Our soup business in Australia also delivered double digit growth driven by our ready to serve soup and broth businesses.

Campbell's Chunky soup, Campbell's aseptic soup, and soups in microwavable bowls were significant contributors to this performance.

In Europe, sales were down primarily due to currency.

Excluding the unfavorable impact of currency, sales grew slightly driven by gains in Belgium and higher sales of V8 vegetable juice.

Other, sales for the quarter were $200 million, up 6% from $188 million.

The change in sales breaks down as follows.

Volume and mix added 4%.

Price and sales allowances added 3%.

Increased promotional spending subtracted 2%.

Currency added 1%.

For the quarter, the business posted an operating loss of $12 million versus a loss of $11 million in the prior year'speriod.

The prior year loss would have been $1 million higher had all stock based incentive compensation been expensed.

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

For the year, sales were $1.084 billion versus $1.005 billion, an increase of 8%. the change in sales for the year breaks down as follows, volume and mix added 6%, price and sales allowances added 3%.

Increased promotional spending subtracted 1%.

Operating earnings were $110 million, even with the prior year.

Prior year earnings would have been $6 million lower had all stock-based incentive compensation been expensed.

Operating earnings growth was driven by solid growth at Godiva.

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

The away from home businesses in the U.S. and Canada delivered solid sales growth driven by soup, including retail refrigerated soups and beverages.

Godiva worldwide sales increased, driven by same store sales growth in all regions.

In the U.S., new products such as Platinum and Chocolixir achieved good results.

Sales in Europe were also driven by increases in duty-free.

In Asia, new store openings also contributed to sales growth.

That wraps up my review of sales and earnings.

Now let's turn to the balance sheet.

Total debt was $3.213 billion as compared $2.993 billion in the prior year.

Cash and cash equivalence were $657 million, that's compared to $40 million in the prior year.

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

Net debt, which deducts cash and cash equivalence from total debt was $2.566 billion, versus $2.953 billion in 2005, a reduction of $397 million, reflecting our strong cash flow.

Cash flow from operations was $1.226 billion compared to $990 million, an increase of $236 million driven by significant reductions in working capital and higher cash earnings.

Capital expenditures were $309 million compared to $332 million in fiscal 2005.

This is less than our previous forecast due to lower than anticipated spending across all of our businesses.

During 2006, we purchased 15 million shares of stock at a cost of $506 million.

As of this total, 6 million shares were purchased as part of our previously announced strategic share repurchase program.

The remainder was repurchased to offset dilution from incentive compensation plans.

This concludes my discussion of the year.

Bob Schiffner will now offer some closing comments.

Thanks, Anthony.

And good morning, everyone.

I am quite satisfied with our results for the quarter and the full-year.

Our operating performance from continuing operations for the quarter were stronger than our expectations with solid top line growth and good gross margin improvement.

Our adjusted EPS from continuing operations for the quarter was flat due to significant advertising increases.

But it is important to note that we still delivered adjusted EPS growth of 11% for the year, which is well ahead of our 5-7% EPS growth target.

Most importantly, we met or exceeded all of our financial targets while investing heavily behind new product activity and incremental advertising support.

Fiscal 2006 was arguably the best financial year in the past five with several notable achievements.

Specifically, our top line growth from continuing operations was at the upper end of our target range.

Margins also improved substantially.

Our cash flow was excellent, driven by continued strong working capital management and strong cash earnings performance.

We delivered very strong shareholder returns, launched a strategic share repurchase program, increased our dividend and continued to reduce net debt.

In August we completed the sale of our U.K. and Ireland businesses, which were historically dilutive to both our top line and bottom line growth.

In addition, we entered the new soup season with notable progress on our three North American soup initiatives.

Reduced sodium, premium shelf stable, and premium refrigerated.

We enter the new fiscal year with a pro forma 2006 earnings base of $1.73 per share.

This is based on the adjusted earnings from continuing operations of $686 million combined with the pro forma impact of repurchasing approximately 17 million shares with $620 million of the proceeds from the U.K.-Ireland sale.

From this new base of $1.73 per share, we expect to deliver from continued operations financial performance consistent with our current goals of 3 to 4% sales growth, EBIT growth of 5-6% and EPS growth of 5-7%.

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

Matt, would you begin the Q&A session, please?

[OPERATOR INSTRUCTIONS] Our first question is from Chris Growe of AG Edwards.

Your question, please.

Good morning.

Good morning, Chris.

I just have a couple questions for you.

The first one would be regarding sort of the price gaps.

And condensed soup you've seen rising price gaps, some market share declines and vice versa in ready to serve, price gaps have come down a little bit.

If there's any kind of further price gap work you foresee the need to do in 2007?

Chris, this is Doug Conant.

As you know we don't really comment on the market share data given the incomplete nature of the way the data's collected.

What I would point to is solid sales performance on condensed soup in particular after years of decline we now have two straight years of solid sales growth.

And we're very comfortable with our competitiveness in condensed soup sales.

I would say the same thing is true increasingly with ready to serve soup.

As we noted earlier at the beginning of last fiscal year, we made a strategic shift and chose to not aggressively promote our items.

And that was all part of a plan to bring more rational behavior into the -- into the ready to serve category.

And we think by and large that worked.

I would point to the momentum we have as we exit the year with ready to serve soup sales with sales trending up 20% in the fourth quarter.

We're comfortable with our competitive position.

We're going to take the high ground in this category.

We're going to lead, we're going to innovate, we're going to differentiate ourselves, and we expect to see solid growth coming out.

And just a quick question on the low sodium launch.

Looks like most of the shelves are pretty well set with the products.

Can you talk about maybe how many you've got on the shelf?

Maybe an average, and were there any of those volumes, maybe in the fourth quarter, and your sales in the fourth quarter?

Well, we did start shipping the product in the fourth quarter.

So it did -- we did take in the expense of shipping those products and also we did start to move it to retail.

They should be at retail in full force in September as you noted by the end of the month certainly.

And you'll see them advertise shortly thereafter.

The -- in terms of the specific number of items, I don't have that detail with me.

We think we have -- we will have good full representation at retail.

Perhaps maybe Len could get you more detail following the call.

That's fine.

Thank you.

And just one quick one.

In terms of your ongoing tax rate, would that be -- maybe Bob could comment on, perhaps.

Yeah, we expect that to be roughly in the 31 to 32% range in fiscal '07.

Okay.

Perfect, thank you.

Next question, Matt.

Our next question is from Bill Leach of Neuberger.

Your question, please.

Good morning.

I'm just a little confused about your tax rate again.

Looked like it was 14% in the fourth quarter from operations?

And you're guiding to the same gain in EPS and EBIT for the new year even though your tax is going to be much higher, how do you get that?

Well, that's exactly what we're doing.

We expect higher solid EBIT growth in fiscal year '07.

And it will be slightly offset by the higher tax rate.

Didn't you say it was going to be 31 versus 24?

That's quite an increase.

Well, again, we had a lot of favorable impacts.

The 24% is in fact restated to be approximately 29%.

And the difference between 29 and 31 is really due to the vagaries of year to year, audits and other tax planning than in fact we're doing.

So, again, we're pretty confident of the 31-32% this year.

It will be slightly higher than our so-called normalized rate in '06 of slightly over 29%.

And we'll be swimming upstream against that rate, as you, in fact have said in '07.

So the $1.73 pro forma number is based on what tax rate?

A 29% tax rate or a 24% tax rate?

It's really based on the 29% tax rate.

and the difference between the 29 and the 24 is the one significant favorable tax success we had in the first half.

And can you give us restated quarterly earnings per share for last year?

Those -- we'll get those to you with the first quarter 10-Q.

And with the share buyback, do you plan to pursue that right away?

We do, Bill.

We in fact hope to employ a -- an approach that in fact gets us immediate recognition.

Okay, thank you.

Next, question, Matt?

Our next question is from Terry Bivens of Bear Stearns.

Your question, please.

Good morning, everyone.

Terry.

Certainly I think there's an argument to be made that as condensed goes.

That kind of dictates how your earnings go.

Doug, you had an outstanding year, obviously in condensed.

It was up 5.

You've got significant new product coming out this year, you have the private label business run by a company now that should have little incentive to get aggressive on price.

So within your overall comp line algorithm, where would you see that condensed number going as we go forward relative to where it was this year?

This past year?

Terry, I am still basking in the glow of two consecutive years of sales growth with condensed soup.

We don't provide guidance on the individual pieces.

We think we're well-positioned to maintain the momentum we've built, particularly with the encouraging response we've had, at least from our customers, if not our consumers with our reduced sodium efforts.

So we look to stay in positive territory and outperform the average food industry growth of 1-2%.

Okay.

And just one more quick one in terms of the aseptics.

The Gold Label.

I think we've talked before that some of the grocers felt you didn't support it as much as you could have.

Going into this soup season, what's the status there?

Do you -- I mean it sounds like you're going to put more money into the Gold Label brand?

Terry, first of all, to pause for a minute, we feel very good about the momentum we have overall with U.S. with 4% growth.

Condensed is up.

Ready to serve, broth sales up, good momentum as we exit this year.

We have three strategic initiatives we've talked about, reduced sodium soups, premium shelf stable soups in the aseptic pack.

And premium refrigerated soups.

We've talked about launching the reduced sodium soups, and I think that will be the primary contributor to our success in this coming fiscal year.

We're then setting the table for continued growth in ready to serve premium soups in the aseptic package.

That is going to be a slower build.

It's a different form for the American consumer.

And as we've said all along, we expect that to be a slow build, but a build nonetheless.

And we're going to continue to nurture and support it as we go forward this year.

And we expect better this year than next year, but we quite frankly expect that to be a slower growth vehicle in the fullness of time, but still growing.

On the refrigerated soup front, we are completing the construction of our significant new plant in northwest United States in the state of Washington.

That will be coming online in the second quarter and we'll be able to start selling aggressively against to drive higher soup volumes in refrigerated this year.

I think all three of our strategic initiatives are on track.

The key deliverable this year is to get reduced sodium fully established as a leading new idea for the American consumer.

Okay.

Thanks very much.

Next question, Matt?

Our next question is from Eric Serotta of Merrill Lynch.

Your question, please.

Good morning, that's Eric Serotta.

Wondering if you could comment on the relative contribution of new products, particularly in soups, sauces, beverage in the U.S. shipping this year in the fourth quarter versus in the year ago.

Was that contribution greater? and what order of magnitude would that be?

Eric, it was not material.

Okay, even with the, the big push on the reduced sodium?

Yes, that's correct.

Okay.

And then more broadly, if you look at the contributions to sales growth for both the fourth quarter and for fiscal 2006, it was much more weighted toward price mix than it was towards volume growth, whether for both periods.

Wondering whether you could comment -- I realize you don't comment on particular future pricing actions, but given the plans that you have in place, do you expect a more balanced sales mix this year between price and volume?

I would say we expect a balanced profile.

And conceivably more balanced than this past year.

But quite frankly, Eric, we can't predict that finely in this area.

We'll really be driven by the costs we ultimately incur as we go through the year.

Okay, and on that note, Bob, can you give us an update as to what you're looking for in terms of what you're looking for for the full year?

Yeah, we're looking at a range between 4 and 5%.

Okay.

And if I remember, that's not really changed to what you were looking at previously?

A little higher, perhaps?

Well, it's actually probably maybe slightly below this year.

This year, we ended up the year probably at 5% or slightly higher.

So a range of 4-5% would indicate that maybe, we'll have slightly lower cost inflation, but, again, I wouldn't say it will be materially different versus fiscal year '06.

But three months ago you were also looking for 4-5% for the year?

Absolutely, yes.

Okay.

So that's not really changed?

Our outlook is not changed.

Thank you very much.

Eric, we also feel good that against that backdrop we were able to continue to build gross margins.

That was a strategic comparative coming into this year.

When we started to stare those costs in the eye, it was a concern.

But the organization really ramped up the productivity effort and successfully planted the pricing.

And feel very good about our ability to manage the margin and manage the cost structure.

Well, great, good luck with that, thank you.

Next question, Matt.

the next question is from Eric Katzman from Deutsche Bank.

Your question, please.

Good morning, everybody.

Hey, Eric.

Bob, let me start with you.

I guess the $1.73 pro forma adjustments you've made, you've given us some feel as to kind of how you got there, but are we supposed to take it that the difference between the $1.85 and the $1.73 that you're making a pro forma adjustment is essentially the impact of the dilution from the deal using some use of proceeds to buy back stock?

Is that --

No, first of all the $1.85, the equivalent to $1.85 is $1.83.

Okay.

On an apples to apples basis.

But in fact, Eric all we're doing is basically taking the income from continuing operations, which as you know excludes the U.K. and Ireland and all of the expenses associated with the sale of those businesses.

And basically, another way of saying it is we're adding $0.07 to that number.

Okay, which is reflective of the impact we will get from buying back shares.

So that's how the $1.73 base has actually developed.

Okay.

And then as a follow-up to that, I guess I don't understand, I guess the logic behind using a growth rate off of kind of an artificial pro forma.

So basically, like the $1.73 base, you're saying grow 5-7% off of that?

That's correct.

So you're saying that on a kind of a normalized basis you're going to earn between $1.82 and $1.85 --

That's your math, but your logic is correct.

So that includes the higher tax rate that Bill Leach talked about.

That's correct, it does.

And some benefit from the share repo that you're going to go through.

Yes, that's correct.

Okay.

All right.

And then -- okay so I got that.

And the 600 million debt pay down, is that a net number for the year?

Or are you just swapping that into a, a different term or something?

No, Eric, what that is that we have long-term debt, okay, that is maturing in fiscal year '07 with principal value of $600 million.

Again, that's existing debt that is just maturing.

We're in fact going to take the cash that we've been accumulating on our balance sheet and in effect we're going to pay it off with that.

Okay.

And -- but just kind of quickly doing the math, doesn't that -- let's say you're paying, I don't know 6% on that debt, tax effected that's like $0.05 a share from lower interest expense alone, right?

It just doesn't seem like the earnings growth that you're assuming year to year is really, I guess -- it seems pretty conservative given that half of is going to come from a debt paydown.

I don't know exactly, the math of what you're doing.

But clearly we in fact will be foregoing the interest on that debt.

I don't disagree with that.

Interest will be lower next year, slightly, but again it is not the main determinant of the increase in EPS year on year.

Okay.

All right.

And then second.

Doug, maybe you could comment a little about international.

I guess the numbers you commented on were pro forma, so they don't include the drag that the U.K. business had been, and yet it was only 2% growth.

Is it fair to say that that's a bit lower than what you hope to get out of that division?

It seems a bit lower than what I would have expected on a pro forma basis.

First of all, are we making this interesting enough for you with all of the adjustments now?

Oh, yeah.

Okay, good.

All kidding aside.

The international piece is work-in-progress.

Clearly the U.K. and Ireland has been a drag.

It's diluted our performance, it's been below-average on performance for several years now.

And we made the strategic decision to clean it up.

Now we have -- it changed our look in Europe materially.

And we're reconfiguring how we manage Europe right now.

So I wasn't surprised that our European business had a mediocre performance during the fiscal year while we went through the decision to divest the U.K. and Ireland and executed it.

That was not a surprise to me.

Asia Pacific, we've dealt with some issues that need to be cleaned up and two specific ones in Indonesia and that Snack Foods acquisition we made a few years ago.

I'm basically comfortable on the Asia-Pacific front, that we're on the right direction, our biscuit business, which is by far the biggest business there.

Our soup business in Asia-Pacific was quite good.

So I think we have the fundamentals in place.

Be it was a rocky year as we had to reconfigure international given that we were taking a sizable chunk of it out of the operation.

I'm comfortable, but we still have work to do.

Okay.

All right.

Thank you.

Thanks, Eric.

Next question, Matt.

Our next question is from Todd Duvick of Banc of America, your question, sir?

Yes, good morning.

I had a question for you on your free cash flow for this fiscal year.

Cash flow is very strong and I think you indicated that you're looking to repurchase shares this year.

I'm wanting to know if you're planning to use the majority of your free cash flow for share repurchases and reinvesting in the business?

Can you comment on that?

If you look at our free cash flow, including the proceeds from the sale of the U.K. and Ireland, I would say that a, that a majority of the proceeds will be used to buy back shares in fiscal year '07.

But having said that, wherever there's a need to invest in the business to advance it, we're also investing.

Yeah, but that's not a -- right.

We expect to maintain a very competitive dividend.

As well as pay down some debt, but, you know, the answer to your question is that in fact a majority of the cash flow will be used to pay to in fact repurchase shares.

Okay.

And just, another comment.

You know, some of your peers have been using, actually more than their free cash flow to repurchase shares and increasing their leverage.

Is that something that Campbell would consider doing, as well?

That, that is something we are not considering at the present time.

Okay, thank you very much.

You're welcome.

Okay, next question, Matt?

Our next question is from of Pablo Zuanic of JP Morgan.

Your question, please?

Good morning, everyone.

The offsets for fiscal year '07, can you comment in terms of advertising marketing will be offset, where your percentage of sales will be higher, SAP, remind us on that front?

And Bob in terms of your guidance, an improvement, what are you assuming on SG&A and margins?

An increase year-over-year?

If you can comment on that, please.

Yes, let me just take all of your questions.

When, in fact, we look year on year, we do expect a fairly significant increase in our marketing spend as Doug said earlier, obviously, this is the first year of low sodium as well as continued efforts in both the refrigerated and shelf stable premium areas.

So, yes, clearly we expect to spend much more aggressively in '07 on the marketing front.

As far as SAP is concerned, we still have a very large P&L investment as well as capital investment planned for fiscal year '07.

And, it will be a few million dollars lower in terms of implementation expenses, but still well in excess of $10 million a year.

In terms of your other questions, can you help me?

Gross margin.

Gross margin.

We expect to be up versus F '06, not as much as in fact we grew this year, but still expanded.

Okay.

And so SG&A --

SG&A we expect to to hopefully stabilize.

Our cost reduction efforts and -- in international will be a primary driver of that.

Okay.

Next question for you, Doug.

And as you face in this low sodium strategy as we've discussed before.

It's mostly a forced change for the consumer.

It's more than alternative.

Are you worried about a backlash?

The typical Coke Classic example?

What are you getting from consumers so far?

I think on the low sodium in particular, there's great enthusiasm.

I think the secret is that we providing it as an alternative of their favorite varieties.

If we had gone aggressively on a replacement strategy, we might have had to suffer a backlash.

Now we have this clearly teed up as an alternative.

And the initial response has been extremely good, but we don't have any consumer data yet.

But for children, it is a replacement, right?

For children, it is a replacement and all of our testing indicated it wasn't an issue when we tested with kids ages 6-11.

So we expect that moms are going to be very excited about it and that kids are going to find it fully satisfying.

Okay.

And one last question.

In terms of international business, you keep saying your business was dilutive to your growth, but obviously it wasn't dilutive to earnings.

It was much more profitable than the rest of your European businesses.

Should I conclude that maybe we should expect other divestitures in Europe because those were less profitable than the U.K. business?

I wouldn't -- I don't think there's any reason to conclude that at all.

Those are very solid businesses in core categories for us.

In the U.K., we were in 13 different categories and didn't have a necessarily strong position in any of them.

We were the number 5 wet soup player in the U.K..

In our core geographies of Germany, Belgium, and France, We are the leading soup competitor, we can leverage all of the technology investment we have in the U.S. there in the fullness of time.

In continental Europe and elsewhere.

So we're very comfortable with our position in continental Europe.

Pablo, let me just also remind you that in fact the reason why we divested those businesses were not because of margins because obviously those businesses had some very good margins.

We felt that our ability to grow those businesses, in the future were -- was in fact going to be greatly, reduced.

Partially due to the size of the margin.

Right.

Okay, thank you very much.

You're welcome.

Matt, how many questions do we have left in queue?

At this time I'm showing ten more questions.

Okay.

Let's go to the next one.

Our next question is from Edgar Roesch of Banc of America Securities.

Your question, please?

Thank you.

Good morning.

Just wondering the spending you had in the fourth quarter on realigning Europe a little bit, is that largely done?

It's largely completed.

Okay.

And did you give a CapEx outlook for fiscal '07?

Yeah, we're expecting somewhere between $325 million and $350 million.

Okay, thank you.

Just two more.

I'm assuming, you've seen oil prices improve a little bit, but I would assume that's not included in your cost outlook, is that correct?

Well, obviously, in the recent weeks, that has, helped our overall outlook for the year, but, again, we view it as highly volatile and I would say that hopefully we'll be able to cover whatever happens on the oil front within the 4 to 5%.

Okay, thanks.

And then last question, looking at your price contribution of the U.S. soup business of 6% in the fourth quarter here, or actually for the fiscal year, and I'm just wondering does it help to get price in getting price realization as more sales are coming from newer platforms?

Is that going to be a nice driver there? the coming year at all?

Well, mix has been helpful to us as we've introduced more value-added products at higher prices.

But I don't think it's going the be materially different this coming year than it's been the last few.

Okay.

All right.

Thanks very much.

Okay, next question, Matt.

Our next question is from Jon Feeney of Wachovia, your question?

Good morning, guys.

First question would be, you mentioned 16,000 retail locations for gravity feed, could you talk about the pace of that expansion?

Is there a target number of retail outlets in which you expect when all said and done that will be installed?

I think it's reasonable to assume that we're going to be in the 16-18,000 range which will be covering all of the major opportunities for us.

So we're -- we're in a mature process here.

The key opportunity for us is we are now rolling that the same gravity feed shelving system out into all of the ready to serve soups right next to condensed.

And so that opens up 16-18,000 opportunities for us to have really transform the entire soup section as opposed to just the condensed soup section, so our focus now is to get ready to serve shelving into all the outlets where we have it for condensed.

That's the focus this coming year.

And just thinking longer term, Doug, I mean, you're having so much success with Gold Label and with Swanson broth migrating to aseptic packaging.

At the risk of asking a dumb question here, what's holding up from migrating consumers towards aseptic in your core Chunky products?

Well, first of all, we are having good success, but it's the beauty of low numbers.

We're growing at nice rates on relatively small numbers.

The American consumer has not really adjusted to this aseptic style.

We intend to lead the way.

That's the first observation.

We believe this will be a slow build.

The second observation is right now there is no -- we are the only soup -- only company that has FDA approval to make aseptic soups with particulates in them, and even then, we can only make aseptic soups with very small -- right now this process is not approved in the U.S. for Chunky or Select-style soups.

So we -- and we have a ways to go to get it approved.

Separately, I think maybe the bigger opportunity for those thicker chunkier soups is in the refrigerated area, and that's why we're working on that, as well.

And just finally, one for Bob.

You've made some impressive reductions in working capital, do you expect cash flow from operations to stay as meaningfully ahead of net earnings in the years to come, and if not, what's kind of driving that?

Well, it's going to be difficult.

But we do still have some room to improve our inventory turns.

We're starting to spend a lot of time on that area of the balance sheet.

So, I would never say never, but it is going to be challenging for us because we have done a good job over the last three years anyway in terms of managing working capital.

But, there is still, still some opportunity to improve.

And Bob, is it kind of SAP that's driving that?

No, SAP is not driving it because right now it's only in Canada.

But my expectation is that it will be a -- a prime driver of our inventory reduction abilities in the future.

That would be '08 '09, '10.

I would ask the questioners, if you could give me one question because we need to speed up a little bit.

I'm going to limit everybody to one question.

So that we can get through this queue before we have to close.

Our next question from Mitchell Pinheiro of Janney, Montgomery, Scott.

Your question?

Figures I get to the one question cutoff.

Sorry, about that, Mitch.

I'll abide by your rules.

How do you, how do you expect the advertising and marketing support to be staged in '07 relative to your new products?

Is it going to be first half heavy first quarter heavy?

Could you talk about that?

Mitch, we expect it to be pretty balanced.

We will have strong support coming out of the blocks here as we get into the fall season.

But one of the learnings we had that contributed to our success in the fourth quarter was condensed soup advertising in the fourth quarter.

So we are finding that basically consumers have these products at home on the shelves year round and that advertising triggers the thought for consumption.

So I think you're going to see in the fullness of time that it's going to be spread pretty broadly.

Certainly you're going to see solid advertising in the first, second, and third quarters with a plan to continue it into the fourth.

Okay, thanks.

Matt, next question.

Our next question is from Alexia Howard of Sanford Bernstein.

Hello there and quick questions on commodities.

Could you talk about how you anticipate that rolling out across the year? to see that being a little bit tougher in the first couple of quarters and maybe easing off again in the later part of the year?

I would expect that it would be, pretty much equal throughout all the -- all the quarters of the year.

We're not, we're in fact not really viewing any skewing of that, any material skewing of those prices.

Our next question is from David Adelman of Morgan Stanley.

Your question, please?

Hi, David.

Bob, I had a question for you.

The $1.73 number pro forma for the year that just transpired, obviously predicated on $620 million in repurchases that you have not yet accomplished, were you trying to lead us to believe that perhaps the Company would enter to a forward purchase agreement to quickly execute that coming into the new fiscal year?

I'm going to leave that up to you, David.

What I said is that in fact, we hope to get accelerated recognition and, obviously there are some tools out there in order to do it, but I'm not going to specifically, I'll comment on the tool.

Our next question is from David Palmer of UBS.

Your question, please?

Hey, guy, a question on the gravity feed racks.

You mentioned the 16,000 for condensed.

You've got the rack placements for ready to serve soup and microwavable bowls.

Wondering if you might give us numbers as to where you think those racks could go in terms of numbers, where are they today?

And lastly with regard to your major competitor, it's my understanding they have to pay most of the time to -- the retailers to get on the racks, what percentage of the time are they doing so?

And is this whole rack placement something that's adding linear shelf space for Campbell?

Thanks.

Overall, as we've said we've got around 16,000 condensed racks.

We have less than 2,000 convenience platform racks right now.

And we literally only have in the hundreds of gravity serve racks at the present time.

So I expect first of all, this rollout to be slow as it was with condensed even though we know condensed worked.

Now the retailer has to go work with everybody that's in the -- ready to serve section and come up with the optimal design for their stores in ready to serve and we're going to go through the same paced approach that every retailer is going to take that they took with condensed.

So this is a long term build.

Probably three years before we can start seeing significant impact.

This year it's all going to be about learning and executing.

We're paying to be in these racks, so anybody else who is going to participate probably is going to be asked to pay to be in these racks too.

That's up to the individual retailer.

I can't comment on how they manage their shelf space.

But it will put pressure on competition to participate in this program and it will -- it will be interesting to see how competition responds.

And to be clear, we're talking about just hundreds of racks now, not even 1,000.

So we're very much at the front-end of this effort.

Okay, next, Matt?

Next question from Eric Larson of Piper Jaffray, your question, please.

Yeah, good morning, congratulations on a good year.

Eric.

Question for Bob.

Working capital related again.

In your balance sheet you show, you just lump all your current assets together, it was a big increase.

Is the big delta there, the buildup of cash?

Yes.

Thank you.

Okay, great.

Matt, we should have two more questions?

Our next question is from David Driscoll of Citigroup.

Your question?

Hi, David.

SAP in the introduction, I believe you guys said that this was the big year of the rollout in the United States.

Can you tell us about the progress?

And Bob if you can quantify the cost on that?

If you could quantify I would appreciate it.

Yeah, this year we spent about $20 million on the P&L for implementation costs and roughly 24-25 million in terms of capital costs.

It is a big year for us.

We intend to roll it into our U.S. thermal business starting sometime in the third quarter.

And we will in fact then roll it throughout our thermal system, from that point.

We'll do plant by plant.

We're also in fact planning for a roll to Pepperidge Farm, which is now planned for the first quarter of fiscal year '08.

So it clearly is a big year for us with SAP.

We've been very pleased with the performance of it in Canada.

It has gone very smoothly, obviously our expectations are that it will go smoothly in the U.S., as well.

And as far as P&L impact in '07 as I said, we're in fact looking for roughly something under 20 million, but well in excess of 10.

So that's -- that's how I'll leave it.

Thank you.

Matt?

The last question we have is from David Nelson of Credit Suisse.

Up 9%, is there a different seasonality now we should expect for FY '07 versus FY '06?

Well, I think one quarter does not a trend make, David.

But we were very encouraged by the consumer response to the advertising.

So, I think we have a chance -- we have an opportunity to take a little of the seasonality out of the business.

I don't think you can forecast it based on one positive quarter, but we are encouraged.

Okay, thank you, everyone.

And I do apologize for having to accelerate a little bit there, but I will be in my office, please feel free to give me a call to discuss anything on the numbers that you didn't get an answer for.

And thanks very much for joining us this morning.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes the program.

You may now disconnect.

Good day.