金寶湯 (CPB) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, welcome to the Campbell Soup second 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, and instructions will be given at that time.

If anyone should require assistance during the conference, please press star then zero on your touch tone telephone.

As a reminder, this conference call is being recorded.

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

Sir, you may begin.

Good morning, and welcome everyone to the Campbell Soup company's second quarter fiscal 2007 conference call, post the St. Valentine's Day blizzard.

Our this morning call will have Anthony DiSilvestro, our Vice President and Controller, opening with discussion about our results for the second quarter.

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

We will follow that with a question and answer session, and joining us for that portion of the call will be Doug Conant, our President and Chief Executive Officer.

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

Both of those items are also posted now on our website www.campbellsoupcompany.com.

We will confine our call this morning to one hour, so 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's completed through midnight February 23rd.

The replay number is 1-888-266-2081 or 1-703-925-2533, with an access code of 1030255.

You may also listen by logging on to our website and clicking on the webcast banner.

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

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

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

These include statements concerning the impact of marketing, investments, and strategies, share repurchases, pricing, new product introductions and innovation, cost savings initiatives, quality improvements, and portfolio strategies including divestitures, impact 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, and its subsequent filings with the Securities and Exchange Commission.

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

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

We have provided a reconciliation of those measures to the most directly comparable measures.

This is available on our investor website, it is also attached to the earnings release.

Now to discuss our second 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 4% to 2.3 billion.

Sales growth for the quarter breaks down as follows.

Volume and mix added 1%, price and sales allowances added 2%, currency added 1%, gross margin increased to 42.9% from 42.1% in the prior year, as pricing and productivity gains exceeded cost inflations.

Marketing and selling expenses increased 4 million to 361 million, primarily due to higher selling expenses and currency, partially offset by reduced advertising and consumer promotion expenses.

Administrative expense increased 12 million to 155 million, primarily due to higher compensation costs, expenses rested to the implementation of SAP in North America, expenses to establish businesses in Russia and China and currency.

Research and development costs increased 1 million to 25 million.

Other income increased 21 million, primarily due to the gain on the sale of an idle Pepperidge Farm manufacturing facility in Connecticut.

Earnings before interest and taxes were 445 million, compared to 383 million a year ago.

Excluding the impact of the 23 million gain this year from the sale of the Connecticut property, EBIT for the second quarter was 422 million, up 10% versus the prior year.

Net interest expense declined to 39 million from 43 million a year ago.

The reported tax rate was 30%, compared to 29.7% a year ago.

Excluding the impact of the Pepperidge Farm plant site sale, with 9 million in taxes against the 23 million gain, the current year tax rate was 29.5%.

Earnings from continuing operations for the quarter were 284 million, compared to 239 million a year ago.

The current year includes a 14 million gain from the plant sale.

Excluding the gain on the plant sale, earnings were 270 million, up 13%.

Diluted EPS was $0.72 compared to $0.58 in the year ago quarter.

The current year quarter includes a $0.04 gain from the plant sale.

For comparability, prior year EPS requires an adjustment to reflect the pro forma impact of using 620 million of divestiture proceeds from the sale of our U.K. and Ireland businesses to repurchase 17 million shares, a benefit of $0.02 per share.

Adjusting for these items, EPS in the second quarter was $0.68, compared to $0.60 a year ago, an increase of 13%.

Earnings from discontinued operations in the quarter were 1 million, compared to 15 million in the prior period.

The current year earnings represent an adjustment to the gain on sale related to the final working capital settlement.

The prior year earnings of $0.04 per share reflects operating performance.

Now let's turn to year-to-date performance from continuing operations.

Net sales grew 6% to 4.4 billion.

Sales growth for the six months breaks down as follows, volume and mix added 2%, price and sales allowances added 3%, currency added 1%, gross margin increased to 42.7% from 42.2%.

The prior year's percentage includes a 13 million benefit, or 0.3 percentage points, from a change in the method of accounting for inventory, from LIFO to average cost.

The increase in gross margin is due to higher selling prices and productivity gains exceeding cost inflation.

Marketing and selling expenses increased 2 million to 677 million, primarily due to higher selling expenses and currency, partially offset by reduced advertising expenses.

Administrative expense increased 22 million to 290 million, primarily due to higher compensation costs, expenses related to the implementation of SAP in North America, expenses to establish our businesses in Russia and China, and currency.

Research and development costs increased 3 million to 51 million.

Other income was 18 million in the first half, compared to 1 million for the prior year.

The current year includes the 23 million gain from the plant sale.

Earnings before interest and taxes were 883 million, compared to 764 million a year ago.

The current year includes the 23 million gain just mentioned.

The prior year includes a 13 million gain from the inventory accounting change.

Excluding these items, EBIT increased from 751 million to 860 million, an increase of 15%.

Net interest expense was 80 million compared to 69 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, net interest expense declined 10 million, primarily due to lower net debt levels.

The tax rate was 31.1%, compared to 24.5% a year ago.

The lower tax rate in the year ago period was caused by two items.

A net non-cash benefit of 39 million recorded for the favorable resolution of the tax contingency, and an 8 million incremental expense associated with the repatriation of nonU.S. earnings under AJCA.

Adjusting for these two items and the impact of the change in accounting for inventory, last year's rate was 29.7%.

Adjusting for the impact of the sale of the Pepperidge Farm property, this year's rate was 30.9%.

We now expect the full year tax rate to be approximately 29%.

Earnings from continuing operations for the 6 months were 553 million, compared to 525 million a year ago.

Earnings per share was $1.38, compared to $1.27 in the prior year.

The current year includes a 14 million gain, or $0.04 per share, from the sale of property.

The prior year includes an 8 million gain, or $0.02 per share, from the LIFO conversion.

A 60 million gain, or $0.14 per share, from the IRS settlement.

And an 8 million expense, or $0.02 per share, from the AJCA dividend.

One further adjustment to the prior year earnings per share is required for comparability.

As previously discussed, the pro forma impact of the repurchase of 17 million shares associated with the sale of the U.K. and Ireland businesses, increased prior year earnings per share by $0.05.

After factoring these items into the reported results, earnings from continuing operations were 539 million, compared to 465 million in the prior year, an increase of 16%.

And earnings per share of $1.35, compared to $1.17 in the prior year, an increase of 15%.

Earnings from discontinued operations for the 6 months were 23 million, compared to 31 million.

The current year reflects a 39 million pretax gain, 23 million after tax, or $0.06 per share, from the sale of the U.K. and Ireland businesses.

The prior year's earnings of $0.07 per share represents operating performance.

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

I will primarily discuss the numbers for the quarter.

The supplemental schedule to the financial release contains 6 month comparisons.

I will offer some comments on the year-to-date numbers where they make comparisons more meaningful.

Restated segments by quarter and year-to-date fiscal 2006 and fiscal 2005 to reflect the sale of our U.K. and Ireland businesses, were provided in the first quarter 10-Q.

U.S. soup, sauces, and beverages.

Sales for the quarter were $1.028 billion, or up 1% from $1.018 billion in the year ago quarter.

The sales increase for the quarter breaks down as follows.

Volume and mix subtracted 2%, price and sales allowances added 3%, operating earnings were 274 million, compared with 242 million in the prior year period, an increase of 13%.

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

Total soup sales declined 1%.

Condensed soup sales were flat, ready-to-serve soup sales declined 6%, broth sales increased 15%.

In condensed solid gains of cooking soups were driven by new casserole focused advertising, and these gains were offset by declines of eating varieties.

In ready-to-serve soups, sales declined on both Campbell's Select and Campbell's Chunky Soups.

However, sales of select Gold Label premium soups, and sales of the convenience platform, which includes soups in microwavable bowls and cups grew in the quarter.

Sales of Swanson broth increased 15% for the quarter, driven by successful holiday promotional activities, and increased advertising behind a more effective campaign.

The consumer demand for aseptically packaged broth continues to be strong.

Sales of all soups were negatively impacted in the quarter, by lower seasonal inventory build at our customers in the current quarter, as compared to a year ago.

Therefore, we believe our year-to-date results are a better indicator of performance.

For the first half, soup sales increased 4%, with gains across condensed, ready-to-serve, and broth.

Condensed sales increased 4%, ready-to-serve sales increased 4%, and broth sales increased 11%.

In condensed, eating varieties grew due to higher levels of more efficient advertising.

Cooking soups also grew as a result of increased advertising focused on casserole cooking recipes.

In addition, condensed soups continue to benefit from the gravity feed shelving systems, now installed in approximately 16,000 stores.

Sales of ready-to-serve soups were driven by gains in both Campbell's Chunky and Campbell's Select Soups, in particular convenience platforms, which includes soups in microwavable bowls and cups, grew double digits in the first half.

We continue to be pleased with our efforts in lower sodium.

In condensed we introduced new lower sodium varieties, while in ready-to-serve we introduced 7 new varieties of healthy request soups, under the Campbell's Chunky and Campbell's Select brands.

Initial trials and repeat of these items have exceeded our expectations and are contributing to growth.

Lastly, sales of Swanson broth were driven by increased advertising, behind a more effective campaign and continued growth of consumer demand for aseptically packaged broth.

Returning to results for the second quarter, I will now comment on highlights of our other categories in this reporting segment. "V8" vegetable juice recorded double-digit sales increases, primarily driven by lower sodium varieties, which resonate with consumers who are increasing focusing on their health and wellness. "V8 V-Fusion," a 100%-juice beverage, that gives you a full serving of vegetables plus a full serving of fruit, which was launched in the second quarter of last year continues to be received favorably, as we introduced new varieties Pomegranate Blueberry and "V8 V-Fusion Light."

Sales of "V8 Splash" juice beverages declined in the quarter.

Prego pasta sauce sales increased double digits for the quarter, driven by effective advertising and promotional activities Sales of Pace mexican sauces fell slightly for the quarter, due to lower levels of marketing activities.

Baking and snacking.

Sales for the quarter were 454 million, compared with 429 million, an increase of 6%.

Sales growth for the quarter breaks down as follows, volume and mix added 1%, price and sales allowances added 3%, currency added 2%.

Operating earnings were 77 million versus 40 million a year ago, operating earnings in the current quarter include a 23 million gain from the sale of the Pepperidge Farm plant.

Operating earnings were driven by double digit gains at Pepperidge Farm and Arnott's.

Pepperidge Farm continued its strong performance, driven by increased sales of cookies and crackers, and bakery products.

In cookies and crackers, sales gains were driven by double-digit growth of Goldfish, which are benefiting from new packaging and 100-calorie pouches, and expanded distribution of single-serve packs, and higher levels of advertising featuring the animated character, Fin.

Bakery sales posted significant sales gains, driven primarily by continued consumer demand for whole grain bread.

Arnott sales increased significantly due to currency, and growth of chocolate cookie varieties, in particular the Tim Tam brand.

These gains were partially offset by declines in our snack foods business.

Now, I will discuss our third reporting segment.

International soup and sauces.

For the quarter, sales were 404 million, compared to 361 million, an increase of 12%.

Sales growth breaks down as follows.

Volume and mix added 6%, currency added 6%.

Operating earnings were 59 million, compared to 61 million in the prior year, a decrease of 3%.

Operating earnings performance was driven by declines in Europe, partially offset by currency.

The declines in Europe were due to higher levels of marketing expenses in support of new products, which were partially offset by currency.

For the first half, operating earnings increased 11% driven by a double-digit increase in Canada, and the favorable impact of currency, partially offset by expenses to establish our businesses in Russia and China.

Let's review some highlights of sales growth for the quarter.

Sales in Europe increased due to currency and gains, in Germany were successful due to promotional activities and expanded distribution aided "Erasco" sales.

Canada delivered solid sales gains behind growth of ready-to-serve soups and aseptically packaged broth.

The balance of our portfolio reported as other, includes the business of Godiva Chocolatier worldwide, and the business of Away From Home in the U.S. and Canada.

Sales were 366 million compared to 351 million, an increase of 4%.

Sales growth breaks down as follows, volume and mix added 1%, price and sales allowances added 3%, increased promotional spending subtracted 1%, currency added 1%, operating earnings were 70 million, compared with 69 million in the year ago quarter.

Away From Home sales grew slightly, behind strong growth of frozen and canned groups and beverages, partially offset by declines of refrigerated soup sales.

Godiva Chocolatier sales increased in North America, Europe, and Asia.

In North America, Godiva same store sales decreased slightly, offset by gains in wholesale and direct channels.

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

Cash from operations for the first half was 328 million, as compared to the prior year of 649 million.

The reduction is primarily the result of working capital changes, and the payment of 83 million to settle foreign currency hedges, related to our divested U.K. business.

In working capital last year, we realized the one-time cash benefit of improvements in our operating working capital management.

We have maintained this improved level of performance in fiscal 2007, reflected in our working capital levels being below the levels in the second quarter a year ago.

However, the current year seasonal increase in accounts receivable is driving higher working capital in the first half of this year.

Capital expenditures were 121 million, compared to 85 million.

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

Total debt at quarter end was $2.856 billion, compared to 2.906 billion a year ago.

Cash and cash equivalents were 483 million, as compared to 267 million in the prior year.

Net debt, which deducts cash and cash equivalents from total debt was 2.373 billion versus 2.639 billion, a reduction of 266 million.

During the first half, we repurchased 22.3 million shares for $842 million, these repurchases included three programs.

First, utilizing 620 million of divestiture proceeds to repurchase shares.

Second our strategic share repurchase program of 600 million which run through fiscal 2008.

And third, our anti-dilutive repurchase program.

That concludes my discussion of the second quarter.

Now here are a few comments from Bob Schiffner.

Thanks, Anthony.

And good morning, everyone.

Although U.S. soup sales were slightly below last year's levels in the second quarter, we are very pleased with this business's overall performance for the first half.

As Anthony briefly mentioned in his comments, we continue to believe that year-to-date performance is clearly the best barometer for measuring the strength of our U.S. soup business, given marketing timing differences, and the volatility associated with retailer inventory builds.

Our 4% topline growth for the 6 months to date indicates our strategies are working in U.S. soups.

In addition, soup profitability is strong and continues to improve as we drive gross margin benefits through favorable mix, strategic pricing, and a relentless focus on productivity.

Another major factor driving margin improvement in U.S. soup is the efficiency and effectiveness of our advertising spending, which has enabled us to spend less, without any measurable negative consumer impact.

Examples of this step-up in effectiveness and efficiency include, our convenience line being advertised in totality, creating better efficiency of spending, moving more towards 15-second television ads, which are much more cost effective than 30-second ads, while delivering the same message.

Shifting away from national TV, to more efficient magazine, radio, and internet advertising.

And lastly, our analytics have shown that our new cooking soup and broth advertising has been much more impactful in driving incremental volume.

Before closing my comments on our U.S. soup performance, I would also like to acknowledge that we are quite pleased with initial results of our lower sodium soup initiatives, as trial and repeat purchases, and the incrementally are exceeding our initial expectations.

Doug will have more to say about this next week at Cagney.

Shifting to our other businesses, a highlight of the second quarter results was the performance of Pepperidge Farm, Arnott's, and U.S. beverages, all of which stepped up and delivered strong results.

The performance of these businesses not only drove solid top line growth, but was instrumental in driving improved margins, as well.

Lastly, given our strong financial performance for the first half, we are raising our EPS outlook for the year.

We now expect adjusted EPS from continuing operations for fiscal 2007 to grow within the range of 10 to 12%, versus our previous forecast, and our continuing long-term goal of 5 to 7%.

The 10 to 12% forecasted EPS growth excludes the $0.04 gain on the Pepperidge Farm property sale recorded this quarter.

Our new outlook implies flat to modest EPS growth in the second half, resulting from first more difficult second half comparisons, as last year's second half was a very strong performance period.

Second, expected increases in marketing spending, primarily counter-seasonal soup advertising, as well as increases in spending in emerging markets, as we look to kick off market tests in Russia and China in early fiscal 2008.

These factors will be partially offset by a slightly lower effective tax rate forecasted in the back half.

Now, I will turn it back to for your questions.

Okay, Ben, would you start the Q&A session, please?

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

Hi, good morning, everybody.

Hey, Eric.

Congratulations.

I guess with the first question I'll ask, can you talk, Doug, a little bit about how the quarter progressed? and whether the retailers' inventory decisions were a function of weather, and any indication of what offtake was in the quarter for you or the category?

Well, I can tell you what we've observed, I can't tell you what the motivation for the retailer inventory management was.

We observed a significant reduction in retail inventory build in the second quarter, that one could hypothesize was due to mild weather in the better part of the first half of the quarter.

And then a rapid buildup with it as we hit the cold weather at the end of the quarter.

So it was an unusual quarter in that regard.

And we know that pretty clearly because we're driving, we measure these inventories right off of TRP.

So over half of our volume, we get the direct read from the customer.

So there was an adjustment in inventory build, no doubt about it.

What I would say is I think our, one has to look at our sales performance over the first half and I would say we are very comfortable with that sales performance, and we are not uncomfortable with our consumer take away, but we just don't comment on that.

Okay.

And then as a follow-up, somewhat unrelated, but to Bob, can you just say, it sounds like you are planning on spending 200 million in CapEx in the second half?

Is that right?

And what is that going towards?

That sounds like a pretty steep buildup.

That is our number, and again, I think if you track our CapEx spending, it's always higher in the second half, Eric, because the only time we can spend money on, is when our soup lines are down.

All right.

The other impact that's going on in the second half here, we are in fact finishing our new StockPot facility up in Washington state.

So in fact, that will contribute as well to the spending that we have forecasted in the second half.

Okay.

I'll pass it on, thank you.

See you next week.

Next, question, Ben.

Next question is from Chris Growe, A.G.

Edwards .

Your question, please?

Thank you, good morning.

Hi, Chris.

I just wondered.

Should we assume there's some retail inventory builds still to happen here, Doug?

Or do we just miss that opportunity in the quarter?

There was, our observation is there has been some retail inventory build at the end of the quarter.

And when you look at the average of the retail inventory, it's still very reasonable.

And I will expect it will be easily worked off in the second half.

Okay.

And then I just had a question relative to your soup sales for the year.

And you have some very tough second half comparisons as you have pointed out.

Do you expect soup sales to be up roughly in the range of the Company's sales growth, the sort of 3 to 4% range you have given for the year?

Or do tough comparisons make that pretty tough to get in the second half?

Typically, whenever we give guidance on top line, we expect our soup sales given that they're so significant to our Company.

We expect our soup sales to be at about that level.

So that would not be unreasonable.

Okay.

Thank you.

Thanks.

Our next question is from David Palmer of UBS.

Your question, please?

Hey, David.

Hey Len.

Question for not just fiscal '07, but looking forward and through fiscal '08, about your cost outlook, and what might drive your decisions with regard to price?

Thanks.

Our cost outlook is stable with, in fact what I said on our first quarter conference call.

We're, in fact, roughly looking at cost inflation of about 4%.

That has stayed at that level despite some increases and decreases in various cost elements.

And as far as '08 is concerned, I think it's a little bit too early to call it.

We haven't started our operating in process yet.

But again I would not be at all surprised if it's more in the 3 to 4% range, as opposed to 4%.

So again, don't hold me to that, because that is kind of a long-term forecast, but we do see some possibly softening of inflation going into next year.

In terms of our pricing, we're obviously not going to project pricing, but our philosophy that we continue to hold on to is the pricing plus productivity ought to offset any cost inflation.

And we continue to believe that we have the capacity to manage our business that way going forward.

Are there any specific learnings by the way with regard to your low sodium innovation, perhaps within the new soups, successes, failures, what worked, what didn't work, how your brands respond in terms of incrementality versus your competitor?

Any learnings you care to share?

We will cover that fully next week at Cagney, but going back to what we have expressed in the press release, our trial and repeats are well ahead of expectations.

And the incrementality is also ahead of expectations, and we will cover this in detail next week.

Okay.

Thank you very much.

Next question, Ben.

Our next question comes from Jonathan Feeney of Wachovia.

Your question, please?

Good morning, guys.

Morning, Jonathan.

Quick question for Bob.

You talked about, can you give me a little more detail.

You talked about reduced advertising consumer promotion without sort of any kind of penalty from a revenue or consumer awareness standpoint.

Can you just explain the data a little bit behind that, and behind the decision to sort of pull back on that and is that going to be an ongoing feature of the margin structure here?

This is Doug, let me just jump in for a minute.

Absolutely.

And the way, I think the simple way to think about this is we've gone to more efficient media, where we're actually delivering the same or a little more GRPs, than we did a year ago at this time.

So the actual media delivery is comparable to last year even though the media dollars are down.

So we are comfortable with that.

By the same token, we are anticipating a significant marketing spend in the second half.

So we are going to keep the pressure on the category.

And I think you have got to expect that our job as the category leader is to drive the category to higher ground, and we think marketing spending is an important ingredient there.

I think you can expect to see strong marketing from this Company.

When we started, I think Bob, we talked about total marking has got to be in that 20 to 22% of sales range, in order to, of list sales, in order to make the proposition work for the brand.

And we continue to cling to that philosophy.

But Bob, go ahead.

Yes, the only thing I would add to that is that we like most other major consumer products companies, do a lot of analytical work, where we are trying to understand the impact of advertising on driving incremental sales.

And all of our analytics that, in fact we constantly perform, are in fact indicating to us, that even though our advertising dollars are down slightly, that we are driving incremental volume from that spend.

So again it just reinforces the fact that not only are we being more efficient, but also more effective.

That's great.

One follow-up detail question.

Your marketing and selling expenses, increasing like 4 million, is there some away from the advertising consumer promotion, is there some increased efficiency around selling or your major other noise in that sort of pulling that number down?

No, I wouldn't say so.

Okay.

Thanks very much.

Next question, Ben.

Our next question comes from Terry Bivens, Bear, Stearns.

Your question, please?

Good morning, everyone.

Hey, Terry.

Doug, good to hear the low sodium apparently is off to a pretty good start.

So I would imagine that that should progress over the second half.

But the one I wanted to talk about a little bit is Chunky.

I was a little bit surprised that that did decline.

How does that fit in with some of the new shelving for RTS?

I frankly was expecting a little bit of a better performance there.

Can you kind of help me out on that one?

Just a couple observations.

One is that we felt good about the half on ready-to-serve in total up 4%.

With Chunky, we were lapping a particularly strong quarter a year ago, so we were not very surprised at the performance of Chunky in the second quarter.

In terms of the maximizer, we are now rolling out IQ Maximizer across ready-to-serve, all the cans, and we are going through the arduous process with every customer, of trying to find the best way to do it for them.

And our goal over the next few years is to get the entire section set as it is with condensed, with the IQ Maximizer.

Right now with condensed we are around 16,000 stores.

And over the next couple of years, we're going to put a big push on to have IQ Maximizer established across the entire section.

Our observation around performance in IQ Maximizer of both regular serve cans and our convenience products, is we see similar lifts to stores with the IQ Maximizer, as we did with condensed.

So it has a positive impact on sales.

We continue to be bullish about ready-to-serve.

I am bullish about Chunky.

IQ Maximizer is part of it, and we will cover other elements of our Chunky plan when we get to Cagney next week.

Okay, and just a quick follow-up.

How about the low sodium Chunky entrees?

What did you observe there?

I just want to go on record that my favorite item in our entire Chunky line is our Healthy Request Chicken and Sausage gumbo.

You struck gold there.

I recommend everybody online and on this broadcast try it.

We are pleased with the performance of our lower sodium proposition across the entire portfolio.

And I will talk more about that next week.

We will have, incidentally Doug, that chicken and sausage gumbo is going to be served at lunch next week.

You guys are going to love it.

I have already got several cans of that in my cupboard.

I am a fan of that as well.

You know what I'm talking about then!

I absolutely do.

Thank you and we will see you next week.

Our next question is from Pablo Zuanic, JPMorgan .

Morning.

I have to say that I also like the gumbo, but the problem is that I'm not eating more soup.

I guess my question for you would be, in terms of when we think of low sodium, and we think of aseptic, are they being incremental to sales, or are they just getting consumers to shift from one soup to another?

What can you tell us in that regard?

Our observation is that there's there.

The observation is there is incrementally there.

I will talk more about that at Cagney.

But the observation is there is incrementally there The other observation would be that even if we are getting consumers to trade up, as well to higher quality, higher priced items, higher margin items as well.

So that is good for the category, as well.

But we feel good about these initiatives.

As we have said before, though, these are long-term builds, we are trying to influence consumer behavior for the long-term.

And people are gradually going to take, we believe to the lower sodium proposition, they are gradually going to become comfortable with the aseptically packaged soups, as they have with the aseptically packaged broths.

We are very comfortable with where we are there, and we are just going to keep pushing ahead.

It will be a long, slow build, but it will be a build and I believe it'll be incremental.

And just a follow-up, Doug.

In condensed soup, you've taken in my view significant pricing, looking at the standard data.

And apparently above cost inflation.

Before you were giving us count to Campbell, the Company got in trouble by taking pricing above cost inflation.

When do you start hitting a wall in condensed soup, or do you see low hanging fruit there, in terms of low price elasticity, for condensed soup to actually have better pricing than what it is right now?

Well, we look at this obviously very closely, Pablo.

And we are comfortable with our strategic pricing model across all of soups.

We do the way we are taking price, we are taking price selectively on certain elements of the line.

And then we are allowing that price to get bedded down over a few years, and that strategy seems to be working.

Although at times, at moments in time, there will be a larger price gap, it then closes fairly quickly.

We are comfortable with the pricing model.

And we learned lessons in the 1990s about price.

And taking price without adding any value.

What we feel good about with our condensed soup in particular, is the value addition formula is greatly strengthened through the improved products, the easy open lids, the better marketing, the IQ Maximizer, increased levels of advertising over time.

So we feel very good about our marketing model and our pricing model on condensed.

But we have to watch it closely, and we can't get too greedy.

Great.

Last question, in terms of promotions, you are going to start doing in China and Russia in the second half?

Well, we are just building capabilities to go forward with some market tests, as Bob mentioned in the script, in fiscal year 2008.

We will talk a little bit more about that at Cagney, and then we'll talk more substantially about it near the end of the fiscal year.

Thank you.

Next question, Ben.

Next question from David Driscoll, Citigroup.

Your question please?

Great.

Good morning, everyone.

Hi, David.

First off congratulations on some very nice results, and the guidance raised!

Thank you.

Can you comment a little bit more on what has driven the margin improvement in soup?

And then, Bob, I'd really like to hear your thoughts about the sustainability of it.

I know the quarterly pattern is awfully volatile.

But would we expect to see the similar type margin improvement as we did this quarter?

David, there really isn't anything that is absolutely remarkable about our performance, other than that as Doug said, we are very focused on driving productivity.

We are, in fact taking the right amount of strategic pricing, and those things are basically offsetting cost inflation.

I wish I could give you a more detailed and elaborate view than that, but it's pretty straightforward.

It's what, in fact we call here blocking and tackling, and staying very, very close to all of these areas to make sure, that in fact, one is not getting out of hand versus the other.

I think it's good management and that's what, in fact, we have been practicing.

As far as how far this margin improvement can go, obviously we, in fact would like to believe our gross margin can in fact continue to increase, as we manage mix, manage these elements.

Every year is a new year, every year presents slightly different challenges.

This Company is, in fact, focused on margin improvement.

And hopefully we can continue it.

Our intention is to continue to modestly improve our gross margins.

We may hit bumps in the road in any quarter, or any half.

But our intention is to modestly improve gross margin.

Well, gentlemen, if this is blocking and tackling, we certainly want to see more of it.

I love the guidance raised.

Can you comment, then on if this is extraordinary times, and you have got guidance now for 10 to 12% earnings growth on the year, why not make a revision to your long-term earnings guidance, which obviously is substantially below what you have talked to us now about '07?

Can you match the two up, and really just talk to us a little bit about why you would really not see this type of performance continuing?

Well, I'll tell you, David, and I know Bob will chime in.

What is really healthy about our performance over the last few years, is that we have top line growth going, across our portfolio in a very healthy way.

And as we lift up our business to new heights, we are determined to make sure that we can sustain that top line growth.

And so we are willing to spend behind our business aggressively to maintain and hopefully improve it.

And also we are willing to go pursue growth in new opportunity areas.

One of which is some emerging market work we are doing in Russia and China.

Now we will talk more about this as we end the fiscal year, but our commitment is to keep the top line going, and be in the position to be a clear, strong performer relative to our peer group.

And when you get the 5 to 7%, hopefully with some upside in a good year, and you get a good dividend payout ratio, you create shareholder value 10 to 15%per year, and you do that over a decade, and you are the best performing food company in the world.

That's our model.

That's how we're going to manage it.

The only thing I would add, and this is again being, taking a CFO view of this thing --

We want you to do that, Bob. [laughter]

We have experienced some pretty low tax rates over the last couple of years as you know, roughly 29 to 30%.

And as we look forward, it's going to be, I think reasonably difficult to keep our tax rate at that low level.

Now that is a specific reason as to why we don't get more aggressive with earnings going forward, but again, that is something that should be taken into consideration.

I appreciate the comments, thanks a lot, everyone.

Next question is from David Adelman, Morgan Stanley.

Good morning, everyone.

Hi, David.

Doug, I wanted to ask you a few quick things.

The flip side of the question on pricing, and your comment about not being too greedy, is obviously the operating margin in the core business.

Is it getting at a point where you worry a bit from a competitive perspective that you're leaving, it's too great an opportunity.

I think in the quarter it's about 27% through the first half, about 29%.

I realize it's structurally a high margin business, but can it get too high?

Does it get to a point where it concerns you?

Absolutely.

We are going to manage the core soup business very carefully.

I think the key is for us to drive category growth with advantaged propositions that are difficult for competition to duplicate.

But we have to be very careful on the margin side, both because we can invite more private label activity, and we can create room for our branded competition to compete.

We are sensitive to it, we will manage it.

We are structurally disadvantaged in a way, in that while condensed private label is well developed, it is not yet well developed in ready-to-serve.

And so that's something specifically we have to watch out.

And we also, and the other thing we have to watch out in ready-to-serve is the branded competition.

Let me tell you, we have got all that competition directly in our line of sight, and I'm comfortable we can compete there.

And secondly, this soup season, could you characterize in general the degree of competitive price promotional activity in the soup season, versus what you've typically seen over the last few years?

Well, as soon as I say something, something will happen here.

I feel like whenever you ask me a question like this, I feel like the gopher in the game at the carnival, where you lift your head up and you get hit by a mallet.

So far, we have had a modestly competitive, but not a remarkable soup season, in terms of our competitive pricing and promotional activity.

But there is still time.

So we will see.

Okay.

And then just a quick question for Bob.

Can you help us understand, Bob, where within the context where you ended the middle of last year, last fiscal year, where trade inventory levels are now?

In other words, if the phenomena that it built up in a higher than normal level in Q1 and then came down, is that a normal level now, or are you at below normal levels?

Again, understanding the seasonality of the business is that as our retailer inventories grow first quarter to second quarter, and they in fact decline third quarter to fourth quarter.

The point that we are trying to make that even though retailer inventories grew in the second quarter, they did not grow as much as we expected them to grow, and in fact what they have normally grown in the past.

So we ended the quarter with a situation where, in fact retailer inventories were lower in absolute terms, than what we had expected and, in fact, what they in fact should have been versus prior years.

So as we go into the third quarter, that has to be obviously taken into account.

Right now, we have seen some improvement in the level of inventories, but the prices say that they are still not back to where you would expect them at this time in the year.

Okay.

That's helpful.

Thank you.

Next question, Ben.

Our next question is from John McMillin, Prudential Equity.

Your question, please?

Good morning, everybody.

Hi, John.

I don't know if I'm consuming more soup, but I will admit I am eating more Goldfish.

We will take it, John.

I'm not sure you are going to beat [Denon] 5 to 7%.

I wouldn't go the global food companies, you're not going to beat them with that number.

Thank you.

Hey, John.

Yes?

What is good is when you put the Goldfish with the soup.

I will keep it in mind.

Okay.

Just, I'm trying to get this advertising message that you are more efficient.

If these numbers are good, but if you wanted to just look at category market shares, and I know the category has expanded, soup has become more relevant, and that's a tribute to you.

But if you just look at market share now at 62% in the last 4 weeks, and look at 2 years ago where it was 66%, and even on dollars, 63 to 58.

I just the idea of spending less that you have gotten more efficient in marketing.

Are we at a situation here, where you want to spend to hold share, private labels gained?

I'm just trying to understand the dynamics of how you have conquered the advertising efficiency code, when the share trends don't look that great for what we see, excluding Wal-Mart and other stuff?

John, I wouldn't say that we have conquered the efficiency.

What we are doing is getting more efficient.

And I think the story, if we just look, if you just look at the half, you don't have the full story.

I think when we close the year and we look at the spend, we ought to have this discussion again.

And I think you will see that there is a strong commitment to spending, a very strong commitment to spending.

We just had an unusual situation in this soup season, where we were managing our spending smartly during the mild weather, and making sure we got a lot of good efficiency out of it, and sufficient impact.

But when the year is done, I think you'll see that our commitment to spending and our commitment to share leadership is sort of unmistakable.

I just say the story is only half written for this year.

Okay.

I will follow instructions, thanks a lot.

Okay, next question.

That would be a first.

Next question, Ben.

Our next question from Ed Roesch of Banc of America Securities.

Congratulations.

I wanted to ask you something related to pricing.

The scanner data suggests that the percentage of sales coming on promotion was down in the last month.

And can we chalk that up to the vagaries of the promotional calendar?

Is it related to more sales coming from some of the new platforms?

If you could speak a little bit to that, please.

Well, we can talk to it, broadly we have been getting more efficient with our promotions, and the amount of and our promotional spending has been down as a percent of sales for the last couple of years.

So broadly we are managing it more smartly.

In the quarter, I think you can chalk it up to both of your observations.

There are vagaries in promotional planning.

We are getting improved take away on our value-added products, which are promoted at lower levels.

Okay.

Thanks.

And one question on the international side of things.

If you could just talk about some of the drivers of sales there.

It has been a nice performance as we peeled away the U.K. and Irish business.

We are definitely seeing some strength.

Are you gaining share, or are the categories trending well?

Can you speak a little bit to that?

Thank you.

I think we have had some pockets of very strong performance.

Canada has been a very strong performer for, we have had some success in Germany this last quarter, Australia has been, in fact relatively successful too from a soup standpoint.

Again we have had very strong pocketbook performance.

I think the good thing is that our innovation has been stepped up, and hopefully we can continue the performance going forward.

At this point, our international portfolio is very focused, at this point, with the divestiture of the U.K. and Ireland, very focused on simple meals and baked snacks, in particularly soup and biscuits.

And we are leveraging our abilities in those two areas better in international, than we ever have before.

So I think the outlook is we ought to continue to modestly improve our performance in both those areas.

All right.

Thank you.

Ben, how many more questions in queue?

At this time, I'm showing another 6 participants in queue.

Okay, we will take those, and then we're going to quit.

Our next question is from Todd Duvick, Banc of America.

Your question, sir?

Yes, good morning.

Quick question, just to clarify, I think you had indicated before that you plan to repay the $300 million note that is due March 15th, and it looks like you have ample cash to pay that off.

Is that still the plan?

Yes, it is.

Okay.

And then just quickly, with respect to the cash priorities going forward, obviously first and foremost to invest in your business, you are paying a decent dividend, and you have got share repurchase activity going on.

Do you plan on just continuing down that path?

And would you consider increasing debt at any point in the near future to increase your share repurchase?

I would say we are leaning more towards going down our current path.

Okay.

Thank you very much.

Okay.

Next question, Ben.

Our next question is from Alexia Howard, Sanford Bernstein.

My question has been answered.

Thank you, Alexia.

Our next question is from Christine McCracken from [Cleveland] Research.

I just want to follow up on the earlier cost question.

It's been awfully cold out here in California, and we have a number of freezes affecting the fruit and vegetable crops.

Do you have any exposure to that?

I know you said you didn't expect a significant rise in commodity costs.

We don't really have a lot of exposure to it.

Our vegetables which we source a lot of from California, they are obviously planted, you know in the spring out there.

So we are pretty much for the most part not impacted by what happens in California.

All right.

I'll leave it there, thanks.

Thanks.

Next question from Robert Moskow, Credit Suisse Your question, please?

Thank you, congratulations.

The back half, did I get this right that the tax rate guidance is like around 25% for the back half?

That's a pretty fair estimate, yes.

Okay.

And Bob, so what's driving that down?

And then why would you then say that longer term you think it's unsustainable and probably going to go up above 31?

That's a good question.

Obviously, there is a lot of vagaries in terms of estimating tax rates.

And as you know at any point in time, we have a lot of tax controversies going on, relative to state, federal, and foreign taxes.

And we are in the process of, in fact going through a number of audits.

And we just have an expectation that, in fact, some of those may be settled in favorable terms in the back half.

Now again, I want you to understand that that obviously is a very hard thing to call at this point.

But where we stand right now we are expecting that effect, a favorable settlement will be negotiated.

Okay.

And then regarding your headquarters' expansion in [Canada], Bob.

Does that provide a favorability to your tax rate going forward?

It's really not tied to any income tax benefit.

So the answer is no.

Okay.

Thank you very much.

Hey, Ben, next one.

Next question is from Steven Kron of Goldman Sachs.

Your question, please?

Thanks, good morning.

I just had a quick question, switching gears a little bit on the Pepperidge business.

And certainly you've had some, a lot of success with certain products, but beyond product what seems to be a consistent theme in your prepared remarks, is that of kind of expanding the distribution a bit.

I guess if you you could just help for some context as to what type of lift you might be seeing from this expanded distribution?

Is it going to be a material tail wind going forward?

Maybe to the extent you could quantify it, like you did when you were rolling out gravity feed shelves in the soup business to certain retailers.

Where are we now, compared to what you planned for?

We don't have a good model to explain that at this point.

What I can say broadly and we can deal with this in future calls is that the model we do have is expanding our points of availability with Pepperidge Farm.

But we do it on a one at a time basis.

And so it's not easily forecasted.

We don't expect to have any problems on that front, and we do see a little upside from increased points of availability.

I think maybe in the future we can create a better way of articulating it.

Okay.

Thanks.

Okay.

This will be our last question.

Our final question if from Andrew Lazar, Lehman Brothers.

Your question, please?

Good morning.

Hi, Andrew.

Bob, just a quick one on productivity.

It seems like that's an area, that's sort of been very strong, continued to kind of accelerate.

I think last quarter you said it was going to be about 150 million in savings this year.

Is that still the case?

And more importantly, what's your visibility around the pipeline going forward?

I know you haven't done the OE plan yet, but just as you think ahead, are there still some pretty rapid payback kind of projects that you can sort of see?

Well, I think the 150 million is probably a pretty good estimate.

And obviously, Andrew, our focus is trying to improve that number every year.

And there are hopefully some fairly strong capital projects that, in fact we do every year that support that.

And we have no reason to believe that in fact, we are going to run out of those opportunities.

But the other thing that, in fact we are emphasizing is that we have a strong program, that's tied to what we call flat total delivered cost.

And that has been kind of a rallying cry, and it has energized, I think the company quite a bit to achieve some of the goals we set for ourselves in that area.

And hopefully that will be something that we can leverage, and even get that number higher than 150 million going forward.

Andrew, also we are 11 days, I think 11 days away from go live with SAP in North America world headquarters.

Right.

And we will be rolling that out across our system all our plants in the next year.

As we do that, that is going to create a new wave of opportunity in productivity.

So we have something between the total delivered cost initiatives and the SAP initiative.

We have a pipeline of opportunities that I think makes us reasonably comfortable that we can aspire to that $150 million level.

That is very helpful.

See you all next week.

Thank you, everyone for joining us.

And as a reminder, we will be presenting next Wednesday at 10:45 Mountain Time at the Cagney conference.

We hope you are able to join us there, or tune into the webcast.

Thank you very much!

Ladies and gentlemen, thank you for participating in today's conference, this concludes the program.

You may now disconnect.

Good day!