金寶湯 (CPB) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Campbell Soup first quarter 2007 earnings conference call.

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

Later we will conduct a question-and-answer session with instructions following at that time. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is being recorded.

And now, ladies and gentlemen, your host for today's conference, Vice President Investor Relations, Mr. Leonard Griehs.

Mr. Griehs, you may begin.

Thank you, Tyrone.

Good morning and welcome to Campbell Soup Company first quarter fiscal 2007 conference call.

On our call this morning Anthony DiSilvestro, Vice President and Controller will open by discussing our results for the first quarter.

Bob Schiffner, Senior Vice President and Chief Financial Officer will offer some perspective on the quarter and an update on our guidance for the remainder of the year.

A question-and-answer session will follow.

Joining us for that portion of the call will be Doug Conant, President and Chief Executive Officer.

Earlier this morning, our results were published along with a supplemental schedule for the quarter.

Both of these items are also posted now on our Web site, www.campbellsoupcompany.com.

We will confine our call this morning to one hour.

When you ask your questions I will ask you to limit yourself to one question and a follow-up so that all participants will have an opportunity to ask questions.

The replay of the call will be available approximately two hours after it is completed through midnight November 24th.

The replay number is 1-888-266-2081, or 1-703-925-2533.

The access code for the replay is 993507.

You may also listen by logging on to our Web site and clicking on the "Webcast" banner.

As 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, 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 as updated from time to time by the Company in its subsequent filings with the Securities and Exchange Commission.

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

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

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

It is also attached to the earnings release.

Now to discuss our first quarter results, Anthony DiSilvestro.

Good morning.

First, let's look at our results from continuing operations, which exclude the impact of our U.K. and Ireland businesses, which were divested in the first quarter.

Sales for the quarter grew 8% to $2.2 billion.

Sales growth for the quarter breaks down as follows: Volume and mix added 4%, price and sales allowances added 2%, decreased promotional spending added 1%, currency added 1%.

Gross margin increased 42.6% from 42.3% in the prior year.

The prior year's percentage includes a gain of $13 million, or .6 percentage points from a change in the method of accounting for inventory from LIFO to the average cost method.

Marketing and selling expenses decreased $2 million to $316 million primarily due to lower levels of advertising.

Administrative expense increased $10 million to $135 million primarily due to higher compensation costs and expenses related to the implementation of SAP in North America.

Research and development costs rose $2 million to $26 million.

Earnings before interest and taxes were $438 million compared to $381 million a year ago.

EBIT for the prior year included a $13 million gain from the change in the method of accounting for inventory.

Excluding the impact of this change, EBIT increased 19%.

Net interest expense was $41 million up from $26 million a year ago.

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

Excluding the impact of the settlement, interest expense declined $6 million primarily due to lower net debt levels.

The tax rate was 32.2% versus 19.4% reported in the first quarter a year ago.

The lower tax rate in the year-ago period was caused by the following: A net non-cash tax benefit of $39 million recorded for the favorable resolution of a U.S. tax contingency, and an $8 million incremental expense associated with the repatriation of non-U.S. earnings under AJCA.

The adjusted tax rate for the prior year, which excludes the items just mentioned and the impact of a change in accounting method for inventory, was 29.6%.

The increase to 32.2 % for the current year was primarily due to tax planning strategies and the favorable resolution of some outstanding tax audits in the prior year.

Earnings from continuing operations for the quarter were $269 million versus $286 million in the year-ago quarter.

EPS was $0.66 compared to $0.69 in the year-ago quarter.

Several items affected the comparability of first quarter earnings from continuing operations.

In the first quarter of fiscal 2006 the Company recorded a non-cash tax benefit of $47 million resulting from the favorable resolution of a U.S. tax contingency related to transactions in government securities in 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 for an after-tax effect of $13 million.

The aggregate non-cash impact of the settlement on 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 dividends under the AJCA.

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

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

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

After factoring these items into the fiscal 2006 reported results, earnings from continuing operations would be $226 million compared to $269 million in fiscal 2007, an increase of 19%.

Adjusted earnings per share for fiscal 2006 would be $0.55, however, one further adjustment to EPS is required for comparability.

In August we completed the sale of our U.K. and Ireland businesses for approximately $870 million.

As a result of that sale, we announced a special share repurchase program utilizing $620 million of the proceeds.

In order to provide comparability of our results, we have further adjusted our 2006 results for the pro forma impact of utilizing $620 million of divestiture proceeds to repurchase 17 million shares, an incrementally benefit of $0.02 per share.

This results in a fiscal 2006 first quarter adjusted pro forma base of $0.57 compared to the $0.66 for the first quarter of fiscal 2007, an increase of 16%.

Earnings from discontinued operations in the quarter were $22 million compared to $16 million in the prior year period.

Earnings for the current year's first quarter reflect a $36 million gain, $22 million after-tax, or $0.05 per share from the sale of the businesses, while the prior year's earnings of $0.04 per share represent operating performance.

Now I'll discuss operating highlights by reporting segments.

Restated segments by quarter for fiscal 2006 to reflect the sale of our U.K. and Ireland businesses will be provided in the first quarter 10-Q.

U.S.

Soup, Sauces and Beverages.

Sales of $1.1 billion were up 8% from $970 million in the year-ago quarter.

This sales increase for the quarter breaks down as follows: Volume and mix added 4%, price and sales allowances added 3%, decreased promotional spending added 1%.

Operating earnings were $322 million compared with $288 million in the prior year period.

Operating earnings in the year ago quarter included $8 million gain from the change in the method of accounting for inventory.

The increase in operating earnings was driven by higher selling prices, increased volumes, and productivity gains, which were partially offset by cost inflation.

Total soup sales increased 10%, condensed soup sales rose 7%, ready-to-serve soup sales rose 15%, broth sales increased 8%.

Condensed eating soups delivered double-digit sales growth due to increased advertising and successful promotional activity.

Solid initial consumer trial of our new slower sodium soups also contributed to growth.

Sales of condensed cooking soups grew as a result of increased advertising focused on casserole cooking recipes.

Condensed soups benefited from additional gravity-feed shelving systems versus a year ago.

These systems are now in over 16,000 stores.

Sales of ready-to-serve soups increased 15% driven by significant volume increases.

In particular, Campbell's Chunky and Campbell's Select soups in both cans and microwavable bowls had strong growth driven by higher advertising and promotional activity.

As anticipated, sales of Select Gold Label soups declined in comparison to the introductory period a year ago, however, Select Gold Label is doing well in the marketplace behind higher levels of advertising.

Ready-to-serve soups also benefited from continued strong demand for portable packaging formats.

Campbell's Classic varieties in microwavable bowls continues to perform well, complimented by new varieties, vegetable beef and creamy tomato.

In aggregate, our convenience line of soups in microwavable bowls and cups achieved double-digit sales growth.

Both Campbell's Select and Campbell's Chunky benefited from strong consumer trial of seven new Healthy Request soup varieties.

Swanson broth sales increased from a strong year ago quarter as growth continues in aseptically packaged broth used in cooking.

Now I'll comment on our other categories in this reporting segment.

Sales of beverages grew double digits driven by V8 V-Fusion, which was introduced in the second quarter of the prior year and by continued growth of V8 vegetable juice.

Sales of Prego pasta sales declined for the quarter impacted by the timing of our promotional activities, while Pace Mexican sauces posted sales gains.

Now I will discuss our second reporting segment, Baking and Snacking.

Sales for the quarter were $484 million compared with $458 million, an increase of 6%.

Sales growth for the quarter breaks down as follows: Volume and mix added 4%, price and sales allowances added 2%.

Operating earnings were $68 million versus $50 million a year ago.

Operating earnings in the year-ago quarter include a $5 million gain from the change in the method of accounting for inventory.

Operating earnings were driven by significant gains at Pepperidge Farm.

These gains were primarily due to higher volumes and lower marketing compared to the prior year period which included spending related to the introduction of Whims poppable cookie snacks.

Whims were subsequently discontinued.

Arnott's had significant earnings growth due to favorable product mix, higher selling prices and productivity improvement.

Pepperidge Farm achieved double-digit sales growth with gains in each of his businesses of bakery, cookies and crackers and frozen.

In cookies and crackers double-digit sales gains were driven by significant growth of Goldfish crackers through effective promotional activity and new 100-calorie packs.

Expanded distribution of single-serve packages into convenience and drug channels and higher sales of Milano cookies also contributed to growth.

In bakery, strong sales gains were driven by growth of fresh breads which are benefiting from the continued popularity of whole grain varieties.

At Arnott's sales decreased slightly as solid gains in the biscuit business were offset by declines in the snack-foods business and the unfavorable impact of current.

Now I'll discuss our third reporting segment, International Soup and Sauces.

Sales were $346 million compared to $312 million, an increase of 11%.

Sales growth breaks down as follows: Volume and mix added 6%, price and sales allowances added 1%, currency added 4%.

Operating earnings were $48 million versus $35 million in the prior year.

Operating earnings were driven by double-digit increases in Canada and Europe and by the favorable impact of currency.

Let's review some highlights.

Canada sales grew due to currency and solid performance of the soup business.

Our European business is now focused in four geographies, France, Germany, Belgium, and the Nordic region.

For the quarter sales increased due to the favor impact of currency as well as volume gains in each of the businesses.

In addition, we continued to bring innovative products to market such as refrigerated soup in France and kids soups in Belgium.

Our final reporting segment reported as Other, includes the business of Godiva Chocolatier Worldwide, the business of Away From Home in the U.S. and Canada.

Sales were $271 million compared to $262 million, an increase of 3%.

Sales growth breaks down as follows: Price and sales allowances added 4%, increased promotional spending subtracted 1%.

Operating earnings were $26 million, even with a year ago.

Godiva sales grew with increases across North America, Europe, and Asia.

Godiva is currently relaunching its Gold Ballotin Assortment with new, contemporary packaging, new chocolates and reformulated classic varieties.

Away From Home sales increased slightly on gains in frozen soup.

Now, let's turn to cash flow and the balance sheet.

Cash from operations in the quarter was a use of $88 million as compared to a source in the prior year of $113 million.

This change is the result of higher seasonal increases in working capital and the payment of $83 million to settle foreign currency hedges related to our divested U.K. business.

During the quarter we completed the sale of our U.K. and Ireland businesses for approximately $870 million.

Capital expenditures were $46 million compared to $38 million in the year-ago quarter.

We are maintaining our forecast for capital spending in fiscal 2007 of approximately 325 to $350 million.

Total debt at quarter end was $2.863 billion compared to $2.976 billion a year ago.

Cash and cash equivalents were $230 million as compared to $45 million in the prior year.

Net debt, which deducts cash and cash equivalents from total debt, was $2.633 billion versus $2.931 billion, a reduction of $298 million.

During the first quarter we executed our previously announced program to utilize $620 million of divestiture proceeds to repurchase shares.

This was accomplished via two accelerated share repurchase transactions totaling $600 million and open-market purchases of $20 million.

These purchases are incremental to our two other share repurchase programs, our strategic share repurchase program of $600 million which commenced in November 2005 and runs through fiscal 2008, and our anti-dilutive repurchase program which offsets the impact of shares issued under our incentive compensation program.

Combining all of these programs, we spent $751 million to repurchase 19.9 million shares during the first quarter.

That concludes my discussion of the first quarter.

Now here are a few comments from Bob Schiffner.

Thanks, Anthony, and good morning, everyone.

Obviously, I am pleased with the strong start to the year and the balanced performance across our portfolio.

Our bellwether U.S. soup business performed strongly across all segments, condensed, RTS and broth, while Pepperidge Farm had another strong quarter of solid all around performance.

Both our V8 business in the U.S. and our Arnott's biscuit business in Australia responded very well to stronger marketing support.

Lastly, the improved performance of our International Soups and Sauces business is cause for optimism although we are still in a very competitive environment in the markets in which we operate.

From a financial perspective, I am pleased with our profit margin performance as we continue to set tough productivity targets and attain them.

We've also effectively executed our accelerated share repurchase agreements using the proceeds from the U.K./Ireland divestiture.

As Anthony mentioned, in the first quarter we purchased nearly 20 million shares.

All of these repurchases have been accretive to EPS.

Now I'd like to take a moment to address the progress of our newly launched reduced sodium soups.

I know this is an important question because it is the first thing that many of you have asked about as we've met with you during the quarter.

While we are pleased with the initial trial we've seen, as well as the level of our early shipments, we believe that it is too early in the game to declare victory.

At this point, we do not have complete information on repeat purchase and incrementality, two critical factors of new product success, therefore, at this time it would be inappropriate to reach any conclusions.

We will keep you posted as the year goes on and we should have more meaningful information for our next quarter report and at Cagney.

In terms of earnings guidance, it is important to keep in mind that last year's first quarter was not an exceptionally strong one and we will have increasingly tougher comparisons as we progress through the year.

In addition, we still have three quarters and the majority of the soup season ahead of us as well as opportunities for brand-building investment.

Consequently despite our strong start, we are maintaining our 5 to 7% EPS growth rate target for the year.

I'll now turn it back to Len for your questions.

Okay.

Tyrone, you can start the question-and-answer session, please.

Thank you, sir. [OPERATOR INSTRUCTIONS] Our first question is from Chris Growe.

Your line is open, sir.

Thank you.

Good morning.

Morning, Chris.

How are you, Len?

I just wanted to ask a question first off on kind of the below gross margin items like the SG&A whether it's G&A or marketing and sales, with the marketing and sales line down in the quarter is there any kind of shift in the marketing for the year and should we expect that to kind of increase here through the remainder of the year?

Chris, we're not going to really talk about the year, but I can tell you that, in fact, the Whims spending in the first quarter of last year impacted comparisons, and if in fact you take out Whims spending our advertising specifically would be comparable year-on-year.

Okay.

That would probably presume then that marketing was up for soup overall given the low sodium launch this quarter?

I would say that would be a correct assumption, yes.

Okay.

And then I wonder if there's any kind of update you have with your cost inflation guidance, particularly, of course, we've seen some movement in the grains, here, which could inflict Pepperidge.

Anything that we can look for for the [inaudible] basket of costs?

Yes, I mean we're on record as saying 4 to 5% for the year.

Obviously, with the price of energy falling, we expect probably now that we'll probably be closer to 4 than to 5 for the year.

Okay.

That's helpful.

Thanks a lot.

Thanks.

Next question, Tyrone?

Our next question is from Terry Bivens.

Your line is open, sir.

Good morning, everyone.

Good morning, Terry.

Most of us get a pretty good look at the publicly available market share data, but could you guys characterize how well you did at the alternate channels?

Terry, this is Doug, and you know we don't comment on the-- any consumer take-away data.

I can just-- I can say, clearly, that our sales were strong and they were strong across all channels.

Okay.

And just one other quick one.

Productivity gains in the quarter on the margin line, can we get that now or should we wait until the Q for that?

We'll in fact talk about it in the Q, but, you know, Terry, obviously, productivity has been something that, you know, we take great pride in here.

You know, we've averaged probably for the last couple of years, well in excess of $150 million a year, and our expectations is that we will generate that kind of level of productivity savings in, you know, this fiscal year as well.

So again, all is well on the productivity front.

Okay.

Great.

Thanks very much.

Okay.

Next question, Tyrone?

Our next question is from Eric Katzman.

Your line is open, sir.

Hi, good morning, everyone.

Happy holidays.

Thank you.

Doug, I guess kind of as a follow-up to Terry's question and to some of Bob's comments, you had kind of lower promotional spending as a company, yet you had some pretty big product introductions and then Bob talked about still a very competitive market, but it seems like quarter after quarter now, you know, you put up very good soup numbers and so does your number one competitor, Progresso.

So can't you make some kind of comments as to what you think the category is growing because it just seems like if you're able to lower promotional spend and put up good volume numbers, you know, this kind of idea that the category is a zero-sum game is not accurate.

Eric, broadly speaking, I'll tell you I think soup is an ideally positioned category to deal with some of the concern the consumers have today.

On the health and wellness front it fits well particularly as we move forward with our lower sodium offerings and Health Request offerings.

On the convenience front we've cracked the code on that with the microwavable offering and on the quality front we're cracking the code with higher quality products as well.

And then even the most basic things such as helping consumers find it on shelf at retail with our IQ Maximizer shelving system, all those things are stimulating this category in the center of the store at a faster rate than other simple meals categories in the store.

So, you know, if we're targeting to grow 3 to 4% as a company long-term on sales, obviously, our soup business is going to have to be growing at that rate or better, and we think it's well positioned to grow that way for many years to come.

The one comment on the very competitive environment that Bob was talking about, that was linked to our European business and our International Soups and Sauces business, and that is a more challenging environment, but in the U.S. we think we're well positioned here.

Eric, I would just add that in fact one of the areas that in effect we do take great pride in, and that is in our trade promotion area.

As you know, we made a pretty hefty investment back when Doug came on board, and, you know, that is really starting to pay off for us.

We're extracting more and more dollars of unprofitable spend from our portfolio of trade spending and, in fact, some of the numbers you see are a direct result of that capability we've developed internally.

So as a follow-up is it fair to conclude even though this is, obviously, relatively early in the game that you feel that you can introduce these, the new products with the health approach, et cetera, without having to lift promo spend?

I think on a sustained, obviously, there's some introductory costs associated with it, but on a sustainable basis, we think we can create more value for our customers by getting the spending right on the consumer side and having competitive offerings on the trade side, and it's working.

Okay.

Thank you.

Okay.

Next question, Tyrone?

Our next question is from Jonathan Feeney.

Your line is open.

Hi, Jonathan.

Hey, Len.

Good morning, guys, congratulations.

I guess I just wanted to ask about specifically about aseptic soups and the Campbell Select Gold Label.

I know you had a tough lap there and I guess I just, it seems like this is a great opportunity for you guys to take advantage of what seems like to be working like crazy for you in broth.

Can you talk about the future of that brand and perhaps using that aseptic packaging mix, you know, aseptic packaging into other parts of your portfolio?

Jonathan, the key, you're right about the quarter we're lapping, it was the pipeline builds for the quarter.

Actually, our, we're very, we expect that we had planned sales to be down in this particular quarter, and we exceeded our expectations there and all of the other marketplace dynamics that we measure are very encouraging.

We just expect this is going to be a slow build because it is, while it was less of a consumer behavior challenge in broth, it is a bigger consumer behavior challenge in soup as we're discovering.

It takes consumers a while to get used to buying aseptically packaged soups.

We've seen the same challenge in Australia where we launched it and Canada and also in the U.S. now, in all the Anglo markets, it's about relatively only five years old or so.

And in each market we see a slow by steady build of the proposition as consumers get used to the new packaging format.

I think you're going to see it grow and prosper for many years to come here.

I think, Doug, the other piece was just the, can you, the other parts of the portfolio where aseptic may be--

Well, right now the aseptic is limited to broth-like products and with small pieces.

We're the only people, we believe, in the United States that have FDA approval to do small vegetable pieces, and we expect our capabilities there to grow over time and, eventually, we'd like to have larger pieces, but right now this process in the U.S. only lends itself to, is only, you're only capable of using it for broth-like products or pureed products with small pieces, so it limits the appeal of the product right now.

I see.

And just as follow-up, I mean that technical hurdle with the small pieces, is that something where you could eventually, can that be overcome basically from what you understand?

Well, we believe that it can be overcome and will be, but no one's done it in the world yet, so it will be first in the world technology.

Okay.

Thanks very much.

Thanks.

Next question, Tyrone?

The next question is from Bill Leach.

Your line is open.

Good morning.

Hey, Bill.

Bob, despite what you say if you look at your EPS guidance for the full-year subtract out the first quarter, you're implying basically flat EPS for the rest of the year with about 4 or 5% fewer shares.

I mean realistically, isn't that very conservative?

That's your term.

You know, I, Bill, you know, my words are, you know, what I said.

You know, we always have the option of reinvesting more aggressively back against the business.

My sense is that that's the wild card at this point, and our, you know, we do have a number of initiatives that I think we would feel very comfortable spending back against.

So I'll just leave it at that.

Well, I'd be willing to bet you a dollar it's conservative.

Also, can you update us on some non-operating items like tax rate, interest expense and the number of shares outstanding we should use for the year?

Yes, I can help you there.

Our tax rate, again, you know, is a forecast, we don't expect it to be nearly as large as it was this quarter, but it will probably be in the area of 31%.

As far as diluted shares, we expect those to be under 400 million shares, probably somewhere between 395 and 400.

In terms of interest expense, roughly $165 million, and I think that answer all of your questions.

Right.

Thanks a lot.

Thanks.

Next question Tyrone?

Our next question is from David Driscoll.

Your line is open.

Great.

Good morning, everyone.

Hey, David.

Can you, typically in the past your first quarter and second quarter operating margins were actually fairly similar regardless of whatever level they were at.

Bob, can you give us a little guidance for second quarter?

Would it be reasonable to assume that the operating margin in the first quarter could be maintained next quarter?

Well, the only thing that I'll say is that our margins are always higher in the first half of the year versus the second half of the year, and a lot of that has to do with the operating leverage that in fact we have in our P&L.

And so I'll just, you know, I'll just leave it at that.

And then just to kind of follow on to Bill's question, I think the, you know, my read-through on the numbers today would just like you're effectively saying that Q1 was quite a bit stronger and maybe it's pulling out of Q2.

Do you believe that has happened given the timing of your promotions and your marketing or is that not a correct statement?

I don't think it's pulling from Q2 at all.

Obviously today it's pretty hard to shift well in advance of demand.

So I would think your statement, you know, is not true.

Okay.

Great.

Thanks a lot.

Okay.

Thanks.

Next question Tyrone?

Our next question is from Pablo Zuanic.

Your line is open.

Hi, Pablo.

Hi.

This is actually Reynaldo.

I'm on the line for Pablo.

Good morning.

Hey, Reynaldo.

So according, just couple of questions here.

According to the scanner data it appears that the Company has the become a little more pricing aggressive in ready-to-serve compared to last year and this is kind of surprising to us given all of the innovation with ready-to-serve and the new low sodium soups, and we feel that that may not somewhere been necessary, necessarily.

So, you know, we're just trying to get a sense of why was it so necessary to be so aggressive on pricing in ready-to-serve?

Reynaldo, I would first go to the point that in our U.S. soup numbers, in total, we saw, we actually had a benefit, if I go to my numbers here.

For U.S.

Soups, Sauces and Beverages as we reported it, which is largely soup, we had a decrease in promotional spending.

In total across our portfolio, we felt very good that we were very efficient with it.

Certainly we are competitive as we try to complete thoughtfully every quarter with what's going on in the marketplace, and I couldn't go beyond that.

We feel very good that our trade spending productivity and our pricing is competitive but not over the top.

Okay.

All right.

And just one follow-up

Last year you guys kind of admitted that you could have done more in terms of marketing promotion for aseptic soup when they were launched, and just looking at advertising and promotion this year, you know, I could be wrong, but it seems to us that you really haven't done that to the level that maybe we would like to have seen from you guys.

Can you just comment on how much advertising you have done to support these platforms in terms of the low sodium soups and aseptic, and could you also just try to quantify that as a percentage of sales?

I'm going to have, Reynaldo, Bob's going to address the issue on the spending and Doug will comment on the [inaudible].

Obviously, in fact we do not comment on numbers as it, in fact, relates to marketing spend, but I can tell you that our marketing support is in fact up on our select Gold Label aseptic soups for the quarter versus last year's first quarter.

And also overall we're well positioned with a good strong start to the year to maintain a healthy spending profile for the balance of the year on the consumer side-- advertising side.

And as far as the low sodium soups and reduced sodium soups, I think, you know, we were building distribution on them in the first quarter, expected the biggest spend to be in the second and third quarter so we will have a good, healthy competitive profile as we go through the year.

Okay.

Reynaldo, I think what you were referring to last year we had said we started a little bit later than we should have on the support for a aseptic, but that was the only extent of our comment.

It wasn't related to the spending level itself as much as it was on the timing.

Okay.

Great.

All right.

That's very helpful.

Thank you guys.

Okay.

Tyrone, next question?

Our next question from Edgar Roesch.

Your line is open.

Hey, Ed.

Thank you.

Good morning.

And nice quarter.

Thank you.

Just don't want to get ahead of ourselves here, but the low sodium initiative, if it proves ultimately to be a success, I'm just wondering if there's anything structurally that would make it tougher to expand beyond, I think you've introduced versions for soups that contribute one-third of your total soup volume.

Is there anything structurally that would make it tougher to expand that to the remainder of the portfolio?

I will say the way we've structured this initiative we have a vision over time of being able to touch the entire portfolio and there's nothing structural that gets in the way of that.

We just want to make sure we're thoughtful and smart about the way we do it and in terms of making sure the products perform at the highest level and that we're able to execute them in our supply chain in the most efficient way so we're not going to rush in with anything.

But in the fullness of time, we should be able to touch our entire portfolio with this relatively easily.

Great.

And then just one small follow-up.

In the fourth quarter, I think you had some expenses related to the reorganization of the European management structure there.

Was that contained all in the fourth quarter?

Yes, it was.

All right.

Thanks very much.

Next question, Tyrone?

Our next question is from Steven Kron.

Your line is open.

Hey, Steve.

Hi, Len.

Good morning.

Thanks.

A couple of questions.

First on the Pepperidge business it seems as though not only from new product introduction but you're also benefiting from the expansion of the distribution into more convenience and drug channels.

I know that kind of partnership distribution structure continues to evolve, but I was just wondering can you tell us where we are and how long we should expect that type of tailwind from distribution expansion?

We're just getting started with that initiative and I expect it will gather momentum over the next couple of years as matter of fact.

So this is very early days for that program.

And then one cash flow related question.

Bob, I know you talked about the change, or the cash flow from operations being negative, but after netting out the hedges for foreign exchange in the transaction that it would be probably roughly flat to slightly negative, but if I look back your cash flow from operations hasn't been negative for some time, so just wondering if there's anything in the payable or receivable lines that we should just be aware of?

That's a good question.

Basically, it's all working capital related, and if you look back, we always build working capital in the first quarter, obviously, as we build into the soup season.

This year, we, in fact, are not repeating some of the major programs we put in to place last year, so last year, we, in fact, did some things that really helped improve our overall working capital performance.

We, in fact, took the benefit of that one-time opportunity in last year's first quarter and its not, in fact, repeating itself.

We, in fact, are still, obviously, operating at a much higher level of efficiency relative to working capital in this year's first quarter but, again, we're just going up against a benefit that was generated in last year's first quarter, and that's the reason for the difference in performance.

So should we be thinking about working capital as kind of being, you know, flat from a source or use perspective?

Well, obviously we're spending a lot of time, as most companies are today, trying to become as efficient as we possibly can.

We believe we have opportunities on the inventory side.

We will continue to go after those aggressively.

So I wouldn't necessarily say that we won't generate improvements in working capital going forward.

My sense is, though, fiscal year '07 will be a year that will have a very tough comparison versus fiscal year '06.

Okay.

Thanks.

Thanks.

Next question Tyrone?

The next question from John McMillin.

Your line is open.

Good morning, everyone.

Congratulations.

Hey John, good to hear your voice.

Well I'm doing better than Donovan McNabb is.

You can't win them all but a good quarter.

Doug, you talk about health and wellness yet when I shop the soup aisle at Whole Foods, which might not be growing as fast as they have, but still, it's big and it's kind of the symbol of health and wellness, I still can't find Campbell Soup.

When are you going to crack that code?

That's a fair challenge.

We have cracked the code-- when I first started, we didn't have any V8, any Prego, any Pace offerings in there, we cam up with an organic, or Campbell's tomato juice.

We came with organic Campbell's tomato juice, organic V8, organic Pace and organic Prego and now we have good strong distribution there.

We will find our way into Whole Foods in a way that works for us and a way that works for them.

It's just taking a little time.

But we're doing fine without them right now, and they clearly are doing fine without us, John.

Well, and I guess this new rule that they don't want anything that's in Wal-Mart, you know, is leaving some others, the [inaudible] of the world with a little work to do to kind of organize it so it might be an opportunity for you.

But if I can just ask a Bob a question.

These numbers for the quarter are well above Street expectations.

Were they well above your internal quarterly expectations?

John, the only thing that I'll say is we were very, very pleased with the quarter.

It was strong.

It was well diversified across our portfolio.

So, you know, we are pleased.

And then the weather is not one of your wild cards.

Is that right?

I don't think so, barring any crazy weather patterns.

You know, the number one reason people don't buy soup is because they don't think of it and a lot of times the weather helps us out there, but if the weather isn't helping, our advertising spending is.

So now that we've our advertising spending levels up to competitive levels, we're less sensitive to the weather card than we were years ago.

Thanks a lot.

Next question, Tyrone?

Our next question is from Andrew Lazar.

Your line is open.

Good morning.

Hey, Andrew.

Just a quick one.

I know, I think, Bob, last quarter you'd mentioned that you'd hoped to be a little more balanced in the top line contribution this year between volume and pricing versus last year, and you certainly saw that in this fiscal first quarter.

If that plays out the way you hoped, just the difference mix on the top line in terms of where you get your top line growth from, if it's a little bit less pricing oriented, how does that impact sort of the profitability metric and then what's the offset given that you've got higher costs still coming in the fiscal year to get you to where you need to be?

How do you balance those?

Well, volume is certainly a friend us to.

We have strong operating leverage in our P&L.

I think you've in fact, even written about that in some previous work you've done so I'd feel, I'd be very happy if, in fact, we could continue the volume performance in the out periods as we had in the first quarter.

You know, in terms of the other balance between cost and pricing, we continue, Andrew, to manage our margins through both mix as well as productivity, as well as pricing, and, you know, historically over the last few years anyway, those have more than offset the cost element, and our expectations will be that that will be the case in '07 as well.

Thanks very much.

Okay.

Next question, Tyrone?

Our next question comes from Alexia Howard.

Your line is open

Hello there.

I have a quick question on the gravity-feed shelving system as it relates to both condensed soup and ready-to-serve soup.

It seems to me that in terms of year-on-year comparisons, the rollout on the condensed side is nearing completion, I guess.

Could you confirm whether that's indeed the case?

And also, could you let us know where you're at in the rollout of the ready-to-serve soup gravity-feed shelving system?

In terms of condensed we're pushing around 16,000 units and that is about as broad as we expected our large-scale effort to be, although we're creating now new ways to get into smaller stores, so we believe there's probably upside to that number.

Importantly, on the condensed side, we're also moving into our third generation of the shelving unit, which creates more consumer visibility into our offerings and even more clarity at shelf.

So we think there's upside in all 16,000 of those units to be more effective.

On the rest of our portfolio, we are rolling it out across all of the various parts of our portfolio.

We're rolling it out across our convenience portion, which is all of the microwavable packaging, also the canned ready-to-serve business and also across our aseptically packaged soups.

And we're in the early days of that.

We expect we've got a couple of years to go before we'll be up around the level that we're at with condensed.

We're not going to start reporting numbers, because we're very-- we'll report at the end of a fiscal year how we did, but we're very dependent on our customers to implement these programs, and they're constantly moving them around in terms of when they're going to start allowing installations in their stores.

So we'll provide an update at the end of the year.

But overall, we think over the next two to three years we can -- we're aspiring to be in all of those stores with a full gravity-feed system across the entire portfolio.

Thank you very much.

Next question, Tyrone?

Our next question is from Eric Larson.

Your line is open.

Hi, Eric.

Hi.

Good morning, everyone.

Congratulations.

Nice quarter.

One of the questions that I had and it was touched on a little bit earlier is, can you just talk about sort of your average deal pricing?

Over the last couple of years on ready-to-serve, two years ago when you went through traditional grocery stores you saw a lot of over the top type deals 10 for $10 and we even saw a lot of $1.50 price points and when you go to the traditional grocery stores today, I don't see as much.

Yet I think in the last year I think you've also taken a price increase on ready-to-serve so that if you try to get back to the price points on deal that you were a year ago, you had to actually deal back a little bit more so the IRI data is very misleading and it doesn't really tell the story.

Can you just, Doug, give us-- over the last couple of years talk about the trend, and in that, of course, what I don't be really see is the alternative channels.

How has the on deal pricing trends been for ready-to-serve?

It seems like it's been improving.

Well improving from our perspective, yes.

We have talked two years ago we did have that 10 for 10 war between ourselves and Progresso and it sort of felt like a gas war because each side was saying the other side started it.

But we pulled back that from last year, and we said we're going to go to a more sane pricing structure and we got hurt a little bit in the first quarter as a result in ready-to-serve.

But we believe, the way to move the category forward is to continue to improve the products and the offerings, add benefits around quality and wellness and communicate those benefits to the consumer in a compelling way, and that that should be the primary way to drive category growth, not through price promotions.

So we are trying to be intelligent about our competitive pricing, but we're really focused on trying to get the consumer proposition right, and that's-- as long as we have been working on that, we're seeing increasing traction.

So I think you're going to see a very sane approach to promotional spending in ready-to-serve.

Now as soon as I say that, competitively, we will feel challenged in some way, and, you know, we're always prepared to react if we have to.

Sure that obviously makes sense.

Then I guess I get one follow-up question.

Bob, I assume that your tax rate for the first quarter is your best guess for the full-year?

No, we in fact believe it's going to be a little bit lower than that.

Best guess right now is roughly 31%.

Okay.

Thank you, everyone.

Yes.

Tyrone, how many more questions do we have online?

You have five more questions online, sir.

All right.

We'll take those and then we'll stop.

Our next question is from Mitchell Pinheiro.

Your line is open.

Hi, Mitch.

Hey, good morning.

Couple of things.

Most of the questions have been answered and asked.

But the international soups and sauces 11% sales growth 37% operating profit growth.

Is that representative of the type of growth we should expect for the remainder of the year?

No.

No, I would not, you know, I would say we've had a very strong quarter.

About one-half of that growth, Mitch, came from FX that is clearly something that could change over time, you know, but the bottom line is, it is a much more focused portfolio.

We are starting to drive some innovation, but I think the rest of the year will clearly be tamer than the third quarter results.

Just as a follow-up, does lower sodium apply to international soups at some point?

Yes.

Absolutely we're-- the whole wellness initiative, which goes beyond lower sodium, applies to international soups as well but there's a different definition of what wellness is in every county and, but there's opportunity there.

All right.

Well thank you.

Great.

Next question, Tyrone?

Our next question is from David Adelman.

Your line is open.

My question was answered.

Thank you.

Thanks.

Next question, Tyrone?

Our next question is from David Palmer.

Your line is open.

Hi, David.

Thank you very much.

Hi, David.

Hi.

It seems, you know, I'm down to one question, and it's really kind of a general consumer question, and I'm wondering if maybe some of your analysis could shed some insights into this and, you know, more details are welcome, but this is about that whole issue of convenient meals.

You talk about soup being part of that and it seems that many convenient meal categories are growing more quickly these days, and I'm wondering if there's some sort of invisible hand there kind of pushing convenient meal usage, particularly those with a little bit of health and wellness halo?

And perhaps you can talk about that and also within that, if you think that soup's gaining share, perhaps from where?

Thanks very much.

Yes, well, I'll try and, I'll answer that in a broad sense, David.

I think simple meals, as we call it, is a growth category.

It touches several dimensions around health and wellness, convenience and quality and as technologies and capabilities improve, we find that soup can be viewed by the consumer as a superior simple meal.

The other observation I'd make is that, actually, in terms of the number of eating occasions at home versus away from home, they actually peaked a couple of years ago.

And at home is starting to come back a bit, as you know, people [inaudible] popcorn termed the word cocooning, people are starting to either get it carry out to carry into their home or making it more frequently at home.

And we're just well positioned to compete there because in the average household, in 98% of U.S. homes, we have about eight cans in the pantry ready to go every day, so when people are staying home more often and eating at home more often, we're just well positioned to compete there.

So I would offer that broader perspective that would suggest that convenient meals at home could be a growth opportunity in a broad sense for the next few years.

Great.

Thanks.

Congrats on the quarter.

Thank you.

Good.

Next question, Tyrone?

Our next question is from Lloyd Connor.

Your line is open.

Hi, Lloyd.

Lloyd, are you there?

I guess he left, Tyrone.

Our next question is from Terry Bivens.

Your line is open.

Thank you.

Couldn't get enough of us, huh, Terry?

Just two quick things.

Inventory-- soup inventories now relative to where they are normally at this time of year?

And Doug, you know, I don't want to pressure you on though Wal-Mart thing, but would it be directionally correct to say that your business is growing more quickly at non-Nielson measured outlets?

I'll let Bob talk about the inventories.

I don't think there's a big difference there other than maybe some inventory build around our lower sodium soups, but I think that's pretty balanced.

You can answer that in a minute, Bob.

But the, you know, we feel very good about our growth in all channels, and that's where that conversation will begin and end.

Okay.

Terry, as far as the inventory question, as you know, we do have visibility to well over 50% of our sales and we're not seeing anything that in fact would suggest any change in what would be a normal seasonal pattern.

Okay.

Great.

All right.

Thanks again.

Tyrone, I think that's going to wrap us up by my calculations so we'll end it here.

All right.

There are no further questions in the queue, sir.

Thank you.

Thank you, everyone, for joining us this morning.

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

This does conclude the program.

You may now disconnect, and everyone have a wonderful day.