金寶湯 (CPB) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Campbell Soup Company third quarter 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.

(OPERATOR INSTRUCTIONS).

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 of Investor Relations.

Sir, you may begin.

Good morning, everyone and welcome to the Campbell Soup Company third quarter fiscal 2007 conference call.

On our call this morning, Anthony DiSilvestro, Vice President and Controller, will open by discussing our results, he will be followed by Bob Schiffner, Senior Vice President and Chief Financial Officer.

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 the supplemental schedule for the quarter.

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

We'll try to 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 all participants will have an opportunity to ask questions.

The replay of our call will be available approximately two hours after it is completed, through midnight Friday, May 25th.

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

The access code is 452106.

You may listen to the replay 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.

The discussion this morning 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, 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 & Exchange Commission.

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

The 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 third quarter results, Anthony DiSilvestro.

Good morning.

I will be discussing results for continuing operations only.

The consolidated results, including discontinued operations, are detailed in the press release and in the supplemental schedules issued with the release.

Sales for the third quarter grew 8% to $1.9 billion.

Sales growth for the quarter breaks down as follows: volume and mix added 5%, price and sales allowances added 2%.

Promotional spending subtracted 1%.

Currency added 2%.

Gross margin increased to 41.4% from 40.9% in the prior year as higher selling prices and productivity gains were only partially offset by cost inflation.

Marketing and selling expenses increased 18% to $336 million primarily due to increased advertising in the U.S.

Administrative expense decreased 12 million to 135 million.

In the third quarter the Company recorded a pre-tax noncash benefit of $20 million from the reversal of legal reserves due to favorable results in litigation.

The remaining increase was due to higher incentive compensation costs, expenses related to the implementation of SAP in North America, currency and expenses to establish businesses in Russia and China.

Research and development costs were flat at $26 million.

Other income was $4 million compared to $2 million of expense a year ago.

Earnings before interest and taxes were $281 million compared to $248 million a year ago.

Excluding the impact of the $20 million gain this year from the reversal of legal reserves due to favorable results in litigation, EBIT for the third quarter was $261 million, up 5% versus the prior year.

In the third quarter, the Company recorded a tax benefit of $22 million resulting from the favorable settlement of a bilateral advanced pricing agreement or APA between the United States and Canada related to royalties.

In connection with this settlement, the Company reduced net interest expense by $4 million or $3 million after tax.

The aggregate impact on earnings from continuing operations was $25 million or $0.06 per share.

Net interest expense declined to $27 million from $40 million a year ago, primarily due to the reversal of interest accruals associated with the favorable resolution of U.S.

federal income tax audits as well as the $4 million impact of the APA settlement.

The tax rate was 14.6% compared to 29.8% a year ago.

Excluding the impact of the APA settlement, and the reversal of the legal reserves, the tax rate would have been 22.2%.

This lower rate in the third quarter reflects the reversal of income tax reserves in connection with the favorable resolution of our 2000 to 2004 U.S.

federal income tax audit.

Earnings from continuing operations for the third quarter were $217 million compared to $146 million a year ago.

Earnings per share were $0.55 compared to $0.35 in the year ago quarter.

The current year includes a $13 million gain or $0.03 per share from the reversal of legal reserves and the aggregate impact of $25 million or $0.06 per share from the APA settlement.

For comparability the prior year EPS requires an adjustment to reflect the pro forma impact of using $620 million of divesture proceeds from the sale of our U.K.

and Ireland businesses to repurchase 17 million shares.

The impact on last year's third quarter is an increase of $0.02 per share.

After factoring these items into reported results, earnings from continuing operations for the current quarter would have been $179 million versus $146 million in the prior year, up 23% and EPS would have been $0.45 versus $0.37, an increase of 22%.

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

Net sales grew 7% to $6.3 billion.

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

Gross margin increased to 42.4% from 41.8%.

The prior year's percentage includes a $13 million benefit or 0.2 percentage points from a change in the method of account accounting for inventory from LIFO to average cost.

The increase in gross margin is due to higher selling prices and productivity gains which more than offset cost inflation.

Marketing and selling expenses increased $54 million to $1.013 billion primarily due to higher advertising, higher selling expenses, driven mainly by Godiva, and currency.

Administrative expense increased $10 million to $425 million.

In the third quarter, the Company recorded a pre-tax non-cash benefit of $20 million from the reversal of legal reserves.

The remaining increase was due to higher incentive compensation costs, expenses related to the implementation of SAP in North America, expenses to establish businesses in Russia and China, and currency.

Research and development costs increased 4% to $77 million.

Other income was $22 million compared to other expense of $1 million in the prior year.

The current year includes a $23 million gain on the sale of an idle Pepperidge Farm facility recorded in the second quarter.

Earnings before interest and taxes were $1.164 billion compared to $1.012 billion a year ago.

The current year includes the $23 million gain from the sale of the Pepperidge Farm facility and the $20 million gain from the reversal of legal reserves.

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

Excluding these items, EBIT increased from $999 million to $1.121 billion, an increase of 12%.

Net interest expense was $107 million compared to $109 million a year ago.

The current year includes the $4 million reduction in interest associated with the APA settlement.

The prior year includes a noncash reduction in interest expense of $21 million from the favorable settlement of a U.S.

tax contingency related to transactions involving government securities in a prior period.

Excluding the impact of these tax settlements, net interest expense declined $19 million, primarily due to lower net debt levels and lower interest expenses associated with income tax matters.

The tax rate was 27.2% compared to 25.7% a year ago.

The current year includes the tax benefit of $22 million from the APA settlement.

Adjusting for the APA settlement as well as the tax rate impacts from the related interest adjustment, the Pepperidge Farm facility sale, and the reversal of legal reserves, the tax rate in the current year would have been 28.9%.

Last year's tax rate was impacted by two items, a net noncash benefit of 39 million recorded for the favorable resolution of a U.S.

tax contingency related to transactions in government securities in a prior period and an $8 million incremental expense associated with the repatriation of non-U.S.

earnings under the AJCA.

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

The lower adjusted rate in the current year of 28.9% is due to the favorable impact of tax planning strategies.

We expect the full year tax rate to be approximately 29 to 30%, comparable with the prior year.

Our tax rate in both years benefited from the impact of the favorable resolution of a number of income tax matters which will not continue at the same level.

We expect our tax rate next year to increase to approximately 32 to 33%.

Earnings from continuing operations for the nine months were $770 million compared to $671 million a year ago.

Earnings per share were $1.93 compared to $1.62 in the prior year.

The current year includes a $13 million or $0.03 per share gain from the reversal of legal reserves, the aggregate favorable impact of $25 million or $0.06 per share from the APA settlement, and a $14 million after tax, or $0.04 per share gain from the sale of the Pepperidge Farm facility.

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 related to transactions in government securities 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 mentioned, the pro forma impact of the repurchase of 17 million shares associated with the sale of the U.K.

and Ireland businesses increases year-to-date prior year earnings per share by $0.06.

After factoring these items into the reported results, earnings from continuing operations would have been $718 million compared to $611 million in the prior year, an increase of 18%.

Earnings per share would have been $1.80 compared to $1.54, an increase of 17%.

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

I will primarily discuss the numbers for the quarter.

The supplemental financial schedule attached to the financial release contains year-to-date comparisons.

U.S.

soups, sauces and beverages: sales for the quarter of $807 million were up 13% from $713 million in the year ago quarter.

The sales increase for the quarter breaks down as follows: volume and mix added 11%, price and sales allowances added 2%.

Operating earnings were $182 million compared with $171 million in the prior year period, an increase of 6%.

The increase in operating earnings was primarily driven by higher volumes, partially offset by higher levels of advertising.

Total soup sales rose 10%, condensed soup sales were up 4%, ready-to-serve soup sales increased 17%, and broth sales rose 17%.

Let's look at some highlights for soup.

In condensed, both eating and cooking varieties delivered solid gains driven by significant increases in advertising.

Cooking soups benefited from new advertising focused on casserole cooking.

All of condensed soups continued to benefit from the gravity-feed shelving systems.

In ready-to-serve soups, sales increased for both Campbell's Select and Campbell's Chunky soups.

In particular, Campbell's Chunky delivered double-digit gains driven by increased promotional activity and higher levels of advertising.

The convenience platform, which includes soups in microwavable bowls and cups, also continued to post solid gains in the quarter.

Across the soup portfolio, sales performance benefited from our efforts in reduced sodium products, including lower sodium versions of our most popular condensed soups and Healthy Request varieties for both Campbell's Chunky and Campbell's Select brands.

Sales of Swanson broth increased 17% for the quarter driven by higher levels of advertising and continuing strong consumer demand for aseptically packaged broth.

For the nine months, soup sales increased 6%.

Condensed sales increased 4%, ready-to-serve sales increased 7%, and broth sales increased 12%.

Now let's turn to the third quarter results for some of our other businesses in this reporting segment.

The U.S.

beverage business had an outstanding quarter with sales up significantly.

V8 vegetable juice, V8 V-Fusion vegetable and fruit juice and V8 Splash each experienced growth.

The brand benefited from higher advertising support and the Bop advertising campaign.

Prego pasta sauce sales increased on higher levels of promotional activity, while Pace Mexican sauce sales declined slightly as a result of increased competitive activity.

Baking and snacking.

Sales for the quarter rose 5% to $441 million.

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

Promotional spending subtracted 1%, currency added 3%, operating earnings were $46 million versus $35 million a year ago.

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

Pepperidge Farm continued its strong performance, driven by increased sales of cookies and crackers and bakery products, partially offset by declines in the frozen business.

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

These gains were partially offset by declines on cookies.

Bakery posted solid sales gains driven primarily by continued consumer demand for whole grain bread and the continued growth of sandwich rolls.

Arnott's sales increased due to currency.

Excluding the impact of currency, sales decreased due to higher levels of competitive activity.

For the nine months, Arnott's sales increased due to the favorable impact of currency and solid gains in biscuits, which were partially offset by declines in snack foods.

Now let's turn to our next segment, international soup and sauces.

Sales rose 6% to $340 million.

Sales growth breaks down as follows: volume and mix added 1%, price and sales allowances added 2%.

Promotional spending subtracted 2%.

Currency added 5%.

Operating earnings were $43 million, flat with the prior year.

Operating earnings performance was driven by the favorable impact of currency, which was offset by a decline in Canada.

Year-to-date earnings increased 8% to $150 million, driven by currency and gains in Canada and Mexico, partially offset by expenses to establish businesses in Russia and China and lower earnings in Europe, where we are investing in new product launches.

Sales in Europe increased due to currency and double-digit gains in France, where the wet soup business delivered strong sales gains from the launch of new flavor varieties and two new summer soup varieties as well as higher sales of condiments.

Other.

Now let's turn to our final reporting segment which includes the business of Godiva Chocolatier Worldwide, and the business of Away From Home in the U.S.

and Canada.

Sales rose 3% to $280 million, that's compared to $271 million in the prior year.

Sales growth breaks down as follows: volume and mix added 2%, price and sales allowances added 2%.

Promotional spending subtracted 1%.

Operating earnings were $23 million, compared with $27 million in the year ago quarter.

The decline in operating earnings was driven by a decline at Godiva, where we have increased marketing spending in support of new product launches in Asia and North America.

Away From Home sales were up slightly behind growth of frozen and canned soups and beverages.

Godiva sales for the quarter increased, primarily from double-digit growth in Asia where we continue to open new retail stores.

Sales in North America rose modestly as Godiva same-store sales increased slightly.

Internet sales grew double-digits, and our new [Cocoa East self-treat] product line made its way into wholesale outlets.

A winter storm in the Northeast adversely impacted sales on Valentine's Day, which is typically Godiva's single biggest sales day of the year.

The final item of note on our supplemental schedule is unallocated corporate expense.

Unallocated corporate expenses for the quarter decreased from $28 million in 2006 to $13 million in 2007.

The decrease was primarily attributed to the reversal of $20 million of legal reserves due to favorable results in litigation, partially offset by higher incentive compensation costs and expenses associated with the ongoing implementation of SAP in North America.

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

Cash from operations for the nine months was $623 million as compared to the prior year of $977 million.

The reduction is primarily the result of the payments of $186 million to settle foreign currency hedging transactions and working capital changes, partially offset by higher earnings.

Capital expenditures were $187 million compared to $146 million.

We should complete this fiscal year within the range of our prior forecast for capital spending of 325 to $350 million.

Total debt at quarter end was $2.616 billion, compared to $2.947 billion a year ago.

Cash and cash equivalents were $274 million as compared to $530 million in the prior year.

Net debt, which deducts cash and cash equivalents from total debt was $2.342 billion versus $2.417 million, a reduction of $75 million.

During the first nine months of this fiscal year, we purchased 26 million shares for $974 million.

These repurchases included three programs.

First, utilizing $620 million of divesture proceeds to repurchase shares, second, a strategic share repurchase program of $600 million which runs through fiscal 2008, and, third, our anti-dilutive repurchase program.

That concludes my discussion of the third quarter.

Now Bob Schiffner will make some comments on our performance and the outlook for the remainder of the year.

Thanks, Anthony.

Good morning, everyone.

The third quarter was exceptionally strong, even after adjusting for our favorable tax rate.

Our business responded very well to the higher level of advertising spending, with strong performance from U.S.

soup, U.S.

beverages and Pepperidge Farm.

Our gross margins continued to expand as we balanced pricing and productivity gains to more than offset cost inflation.

The initial results of our lower sodium soup products continue to please us as we are seeing higher incremental purchases than originally anticipated.

We look forward to another strong contribution from lower sodium products this fall as we launch additional new products as well as improve the taste of our current offerings.

Our U.S.

beverage business deserves special mention for its stellar performance.

Although always in the shadows of U.S.

soup, it has been perhaps our best top and bottom line performing business this year, with gross -- excuse me, with growth across the entire V-8 product portfolio.

With three quarters of business performance behind us, we now expect adjusted EPS growth from continuing operations for the year to be in the 12 to 14% range versus the 10 to 12% we projected at the end of the second quarter.

This implies fourth quarter EPS below last year's fourth quarter.

These lower earnings will result from our plans to continue increasing advertising in the U.S.

and to continue spending at a higher level in the emerging markets of China and Russia.

In closing I would like to remind invited guests of our investor meetings scheduled for July 9 in New York City where we will share plans and you will taste our products for both China and Russia.

The purpose of this meeting is to share our enthusiasm about the opportunities we see unfolding in this part of the world.

Len will be giving you details about the meeting soon, and now I will turn the meeting back to Len to take your questions.

Okay.

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

Our first question is from Eric Katzman of Deutsche Bank.

Your question, please.

Good morning, everybody.

Good morning, Eric.

Bob, I guess my question goes to the anticipated spending levels both from an investment standpoint and from a capital expenditures standpoint regarding the emerging markets, and I am asking that within the context of otherwise it would seem that with SAP rolling out this summer that CapEx would normally kind of roll over and that the expensing of that would also kind of come to a close.

That's true, Eric, as we look down the road specifically to fiscal year '08, we in fact will spend less on SAP.

However, when you look at some of the other things on our plate, such as the growth of our beverage business, clearly we are seeing some capacity limitations on our ability to satisfy this very strong demand, so in fact that will impact capital next year.

We also see an opportunity to repatriate some products that are now being purchased on the outside, specifically our Swanson broth product in aseptic packaging and in fact we're also looking at building a new employee services building here in Camden, and we believe now as we look at fiscal '08, that our cap spending will actually be probably closer to $400 million as opposed to $350 million this year.

I hope that's helpful.

That's helpful.

I will pass it on.

Thank you.

Next question, Matt.

Next question is from David Palmer of UBS.

Your question, please?

Congrats, guys, on the quarter.

David, hi.

Hi, guys.

The ready-to-serve soup volume was very strong, and I am wondering if any of that was a result of buying perhaps against price increases that are coming up in the near term?

David, this is Doug.

No, this is a fairly straight way consumer demand driven, and the magnitude of the pricing actions that we've been taking over the last few years is very nominal, and there is no real incentive to buy in against them.

This is more a result of a little rebalancing of the customer inventory levels and consumer demand.

I would imagine the ready-to-serve selling racks, they're going to going in over the off season during the summer.

Do you have a sense of what sort of placements that you'll be getting in the near-term on those?

We have some targets, but we're going to provide an update at year end, because what we've said is our practice is going to be to give you one number once a year at year end, so we'll give you an update then, but we are progressing.

It will be a slow process.

It will take us probably three years to get up to the levels at which we have condensed today.

And one last one.

I have heard that your low sodium Chunky -- a few lines in your Chunky are doing very well and perhaps not so well for some Select versions.

Could you give some learnings and in terms of hits or misses with regard to the low sodium rollout?

Thanks.

Well, sure.

Overall as Bob and Anthony characterized, we're very pleased with our lower sodium rollout.

We do -- that cuts across both our condensed versions, our Select versions and our Chunky versions.

What I would say is we do see opportunities to further improve the flavor profile of some of the varieties, and we'll do that, but overall we're very pleased, and there are no real glaring weak spots in our portfolio on any of our lower sodium items.

Okay.

Thanks very much.

Congrats again.

Next question, Matt.

The next question is from David Adelman of Morgan Stanley.

Your question, please?

Good morning, everyone.

Good morning, David.

On the issue of the incrementality of the low sodium products I think earlier in the year you talked about a 35 to 45% number in terms of their incrementality to your sales, but in this release you're talking about them continuing to exceed your targets, does that mean it is drifted up from that number, and if so, where would you estimate incrementality to be today?

It continues to drift up and it's north of 45%, and we'll give you a better feeling for that as we exit the year.

Thank you.

Thanks.

Next question, Matt.

Next question is from Jonathan Feeney of Wachovia Securities.

Your question, please.

Good morning, guys.

Good morning, Jonathan.

Just one question.

The substantial investments you're going to be making against the emerging market opportunity in this fourth quarter here does that -- is that coming at the expense at all of advertising against core soup and could you just update us on your plans?

Are you accelerating that?

Jon, no.

It is in fact not coming at the sacrifice of advertising spending.

These are basically P&L costs associated with developing the required infrastructure in those markets to do business, and they're basically well planned in advance and have been factored into our earnings forecast for this year.

Okay.

Thank you very much.

You're welcome.

Next question, Matt.

Next question is from Alexia Howard of Sanford Bernstein.

Your question, please?

Hello, there.

Question about the mix shift from -- well, it seems as though ready-to-serve soup has been growing pretty decently this last quarter, condensed soup still up but less so.

I imagine that as we go forward the rollout of the gravity feed shelving system on ready-to-serve is going to accelerate sales growth on that side and perhaps we won't see as much of an acceleration on the condensed soup side as that is largely completed now.

I believe the condensed soup is a lot more profitable than ready-to-serve soup, and therefore, are you worried about a negative mix shift coming in as that rollout takes place?

Alexia, this is Doug Conant, and I know Bob Schiffner will want to follow up on this.

We have to manage the mix shift smartly.

We have managed it well over time.

Basically we have better percentage margins in condensed soup, but better penny profit in ready-to-serve, and we can manage it in such a way that we are not concerned about our ability to -- as long as both are growing, we are not concerned about our ability to manage to the bottom line.

That was perfectly said.

Great.

Thank you very much.

Thanks.

Next question, Matt?

Next question is from Chris Growe of AG Edwards.

Your question, please.

Just wanted to ask you quickly, perhaps Bob could talk about input cost inflation in the quarter and perhaps looking forward, how you're looking there, if there were productivity savings related to those, and I am just curious if you have any pricing initiatives that have been announced at least for the trade where you're raising prices?

Let's talk about cost inflation.

I believe the last time we were together I mentioned somewhere between 3 to 4% for next year.

I think we're looking probably now a little closer at somewhere between 3.5 to 4%, so again I think that in fact reflects more of the commodity price movements we've seen over the last quarter, and as far as how it is going to impact the operations of our company, probably will hit Pepperidge Farm a little bit harder than it will some of the other business units just because of their dependence upon oils and sweeteners.

Again, this is not different than our overall broad planning assumptions, so I think we feel pretty good about where we expect costs to be going into fiscal '08.

Your other question --

On the pricing, Bob.

Was on pricing.

We have taken pricing in various lines of business.

We don't get into a lot of detail on that, but I don't think it is tremendously different from what we've seen in other years.

Chris, that price increase was taken last February at the end of February.

Yes.

Right.

And in fact, Chris, that is just in our U.S.

soups, sauces and beverage business.

We take price increases across our portfolio at various times in the year as well.

There's been no new pricing announced, is that right, Bob?

That's correct.

That's what I was getting at.

Do you have an input cost inflation figure for the quarter by chance?

Is that something you can get into?

No.

Well --

That will be in the 10-Q.

You don't have it today, though?

Yes, and it has been this year, probably closer to 4%, and year-on-year, and I don't think this quarter is very different than that.

That's great.

Thanks a lot.

Next question is from Edgar Roesch of Banc of America Securities.

Good morning.

Congratulations on the quarter.

So you've termed the activity in China and Russia to this point as a market test so that would imply that there are products on the shelf and you're measuring the results, is that right?

No.

No?

We are teeing it up for some lead market activity.

We will cover that in our July 9th meeting.

We do anticipate products going onto the shelves early next fiscal year in the fall.

Okay.

Thank you.

And then switching gears a little bit, I just wanted to check on your advertising.

Are you still using more of the 15-second spots and if you combine that with the higher dollar spend, can you give us an indication of what your GRP or whatever measure of images that you use is up at this point?

I don't have that right now, Ed, for the quarter.

It is up materially because the spending is up materially and we continue to use more 15s.

I think that's something as we exit the year we'll try and be in a position to characterize for you as we wrap up the year and look at next year.

All right.

Thanks very much.

Yes.

Okay, next question, Matt?

Our next question is from [Lane Laroff] of J Goldman & Company.

Your question please.

It was already answered.

Thanks.

Thank you.

Next one, Matt?

Our next question is from David Driscoll of Citigroup.

Your question, please.

Good morning, everyone.

Hi, David.

Congratulations on a very nice quarter.

Thank you.

Doug, can you -- I want to go back to Alexia's question and just try to go at this a different direction.

Can you give us now with 4% growth I think U.S.

condensed soup grew at 4% for both the quarter and the nine months.

I think that's right.

Then the question really is given that type of performance, what is your expectation of a sustainable growth rate for U.S.

condensed?

I think it is realistic for us to aspire to that kind of growth rate going forward, and we're never satisfied and we're always looking at ways to actually accelerate it, and we have a few on the drawing board.

As we make it more relevant and all of a sudden introduce these benefits around lower sodium and a variety of other things in our pipeline, we have plenty of tools to keep it relevant and keep it growing and possibly even accelerate the growth slightly, but it is reasonable for us to target that kind of growth at 4%.

And the principal driving factors for next soup season would be, number one the low sodium and number two, where do the shelving systems fit into that growth profile?

It is a bundle of benefits.

Because you have the lower sodium alternatives, but you also have the shelving, some new varieties, increased spending, different targeted spending, it is a bundle of benefits, and it is hard for me to tease out which one will be the more significant driver, but I think if you had to pick, we already have fairly full coverage with the gravity-feed shelving systems.

It continues to help us, but the differentiating factors will be the innovation against wellness and our overall spending level.

Great.

Thanks a lot, everyone.

Yep.

Next question, Matt?

Our next question is from Eric Serotta of Merrill Lynch.

Good morning, everyone.

A couple quick questions for you.

First of all the original growth algorithm you laid out if I remember correctly was based upon condensed stabilizing and being about flat.

Now you're looking at aspiring to 4% growth in condensed.

You haven't changed your long-term growth algorithm.

What has changed that wasn't in the initial algorithm?

Were China and Russia not -- spending on China and Russia not on the plan that you laid out -- not in the plan that you laid out a few years ago or was it something else?

China and Russia were not in that plan that was laid out a few years ago, so that is obviously at least in the short-term going to impact the bottom line.

I don't think we ever thought that we would have been happy with flat condensed growth.

I think again you probably would have been very happy with flat condensed growth.

We have always believed that in fact we could bring that product back to some kind of growth profile which I think we've proven to do.

Again, that's about what I would say based on your comments.

Okay.

And could you just comment briefly on the evolution of U.S.

soup inventories throughout the quarter?

Talking about trade inventories.

I know you ended last quarter a bit higher than normal.

Where did we end this quarter relative to a year ago?

Yes.

Inventories have in fact come back to more or less expected levels, and as Doug said earlier, that has had only a very small impact on our soup growth this quarter.

As you know, we've in fact reported 10% growth in soup sales, and we figure about 1 to 1.5 points was the impact of the soup inventory returning to normal levels.

Bob, it was actually our inventories were lower at the end of the second quarter, not higher.

That's right.

Okay.

Some of the shipments went to higher inventories which in fact generated just a small portion of the 10% growth.

Okay.

Thanks.

Eric, what's also encouraging there is it is 10% sales growth this year in the third quarter on top of 15% sales growth last year in the third quarter, so we're really ramping up our soup growth engine here.

Great.

Thanks again.

Next question, Matt.

Next question is from Robert Moskow of Credit Suisse.

Your question, please.

Good morning.

I wanted to dig into the productivity a little bit.

You've done such a good job of it over the last two years, but I am wondering if the number of projects you have, the low hanging fruit starts to get picked a little bit.

Can you tell me what drove the productivity in the quarter here and what do you think the big ideas are for next year?

And then as a follow-up, interest expense, your interest expense is way down compared to what you thought in the beginning of the year.

Can you give us some guidance going forward?

Thanks.

Let's in fact first talk about interest expense.

We'll give you some guidance on that for next year in September when we talk about our expectations for fiscal '08.

Obviously though in fact we do continue to pay down a little bit of debt year-on-year, so my sense is that once you adjust for the income tax issues this year, we'll have a modest positive impact on interest for next year, but again we'll get into more detail on that in September.

The first part of your question was on productivity, and, yeah, we've done, I think a very good job of generating productivity savings over the years.

I talked about that a lot to all of you, and we've been pretty consistent in generating roughly somewhere between 150 and $180 million of incremental productivity each year.

There is a lot of projects that are involved in those numbers, but again that's part of the Campbell Soup culture to manage a lot of projects in this area, and obviously we in fact feel it is an absolute must if in fact you're going to maintain and grow gross margins in our industry and we are quite proud of the -- of our performance in this area.

Building on that, as we look forward, the pipeline continues to develop.

We're at about a stage where I would say it is on par with prior years in years in terms of the number of projects.

The two big opportunities as we go forward, though, are going to be leveraging of the SAP and getting the full benefit of the SAP installation as we exit next year and go into the following year, and then the other initiative that we have that is getting traction is a total delivered cost initiative where we're changing the paradigm with the way the plants and the entire organization manage the cost structure so we can get some fresh thinking, and both those projects are on track, so I think the outlook is that we ought to be able to sustain it.

Are you doing that with keeping the quality of your ingredients the same or can you continue to increase the quality or --?

Well, the quality of our products are actually getting better.

Yes.

This is just fine tuning, and we're actually improving product quality.

We've had four years in a row where our consumer complaints are down meaningfully as we've been lifting up our productivity activity, so we're very pleased with our ability to do both.

Great.

Thank you.

Okay.

Matt, next question.

Next question is from Steven Kron of Goldman Sachs.

Your question, please?

Good morning, guys.

First question, Bob, can we go back to the operating cash flow for a second?

I think if you back out the foreign exchange settlement from last year, I think your guidance is the operating cash flow will still be down in the order of about $150 million.

You mentioned working capital.

Can you maybe flush out a little bit what's going on there and in light of CapEx scheduled to go up again next year, how should we be thinking about free cash flow generation?

You know, I believe we in fact talked a little bit about this at the end of the second quarter as well, and basically what we've done is that F '06 was a year that in fact we drove substantial amounts of working capital out of our organization, which means that in fact we started fiscal year '07 with a very low working capital base, because obviously the end of July, early August, is in fact a working capital low point for our company, so what you are seeing now is the fact that we are in fact growing normally, seasonally, off of that lower base which is in fact showing up as a positive change in working capital.

When I look at our absolute levels of working capital, let's say at the end of the third quarter of '07, versus the absolute levels at the end of the third quarter of '06, those levels are about the same.

Again, I think that is pretty good given the fact that our business has in fact grown more in the third quarter and more in the month of April than it did in the prior year.

So at the end of the day, we feel pretty good about where we are relative to working capital, and I believe as I said at the end of the second quarter, we still have opportunities there as well, and our inventories are a little bit higher than where they should be in my opinion, and we are in fact working very hard internally on bringing those down as well.

That will be another form of productivity improvement as we go forward.

So just to close that thought out, if we think about looking into next year, you would expect that the net income impact from your operating cash flow would more than offset any draft from working capitol or stabilization working capital?

I think that's probably a fair statement, but we are clearly not through with our operating plan, and before I say specifically that's the case, I in fact would like to complete that first.

Okay.

If I could just ask one quick follow-up on the international business.

If you back out kind of the currency, it looks like sales were relatively flat and operating earnings were probably down a little bit.

I know you talked about spending for the expansion in Russia and China.

Can you talk maybe a little bit about the stepped up brand support there and how is the base business doing excluding some of these moving pieces?

Well, we stepped up spending, particularly in France.

We launched a chilled soup line there under the Liebig brand, and we are spending against it and we've achieved share leadership in that segment already.

That is a significant step up in spending.

We are also spending back against our Arnott's biscuit business as well and improving our share performance there, so those are probably the two biggest spends we have going on, one in Europe around chilled and one around our large Australian biscuit business, and we're going to continue to increase our spending profile in international in a smart way just like we're doing that here in the U.S.

Thanks a lot.

Next question, Matt.

Next question is from Christine McCracken with Cleveland Research.

Your question, please?

Good morning.

Good morning, Christine.

Just to follow up on an earlier question on your commodity cost outlook, you suggested that you're really not expecting a big bump up in your cost inflation in fourth quarter and into fiscal '08, and yet we're looking at 30, 40, 50% increases in several of the commodity categories.

Tomato paste, dairy, oils, proteins.

I am wondering, do you anticipate some commodity cost relief going forward, or is it that you've been able to contract or somehow manage that commodity cost exposure to offset that?

I think it is a little bit of everything you've said.

Number one, and in fact this is something that I've said, that in fact we have a pretty diversified cost base here at Campbell's, and where we get hurt, there is probably always something that seems to offset it.

We do have some long-term contracts that in fact cover our conversion costs on a number of key commodities, which obviously tend to be helpful in controlling overall price creep, but again, I think it is more our diversification of cost base than it is anything else that allows us to overcome some of the volatility that in fact we're seeing today in most commodity markets.

To be clear, you're expecting some cost relief in some of these areas or is it that these contracts protect you?

I wouldn't say we're expecting cost relief.

If in fact you mean do we see declining costs in certain categories, I don't think that's the case, but obviously some of our long-term contracts do shield us from heavier cost inflation, and we in fact will rely on that in fiscal '08.

And then just one follow up.

Do you source a lot of ingredients out of China?

I know this has been generally amongst a lot of food companies this has been an increasing trend, and it may make it more difficult to perhaps ensure quality going forward.

I am wondering, not specific ingredients, but is that something that Campbell's does on a regular basis.

No.

That's good to hear.

Thanks.

Next question is from Andrew Lazar of Lehman Brothers.

Your question, please.

Good morning, everyone.

Good morning, Andrew.

Just thinking a little bit about the 18 to 19% EBIT margin level that you chatted about at [Cagney], as a longer term goal or maybe more of the right place for Campbell to be over time, and I guess with SAP integration moving ahead seamlessly as you talked about in the release and started thinking about the opportunities to use that tool more efficiently, assuming you can achieve the top line growth target within your sort of 3 to 4 range, I am trying to get a sense of how do we view a reasonable timeframe maybe that you could -- that your plan would suggest you get there?

You have a lot of things you want to do.

I know there is a lot of moving parts, costs, reinvestment, emerging markets and such.

I guess broadly is it a two, three-year timeframe or are we talking more sort of six/seven?

I am asking because it has obvious implications around rate of earnings growth that we can look for over time.

Andrew, we'll characterize that -- or we will characterize that as we have our July 9th meeting and really give you a full feeling for our emerging market strategy.

You're right.

There are a lot of moving parts.

If we manage this smartly, which I would assert we will, there is upside to the growth profile, and we just want to get there in a smart way, and we'll talk about that in more detail on July 9th.

Got it.

Thanks very much.

Next question, Matt.

Our next question comes from Terry Bivens of Bear Stearns.

Hi Terry.

Good morning, everyone.

Hi, Terry.

Just a comment and I had a question.

The comment is, Doug that's about as bold a statement as I have heard from Campbell lately, the 4% condensed growth.

I understand that if we get some of this from the developing markets, it comes in at probably a lower margin, but good luck on that.

If you get it, it's got to be party time in Camden, I would think.

Onto the question, though, here is one thing that surprised me a bit.

I know you had a tough comp with ready-to-serve.

You did very well there this quarter obviously.

You look at some of the Nielsen data, our friends over at General Mills apparently did exceedingly well at least on volume.

Could you spend one second, why was RTS up so much, and what is your view right now of Mills' promotional aggression or lack thereof maybe?

Well, obviously I can't comment on General Mills performance.

I would say it is interesting to me that General Mills is claiming to have done well.

We're doing well.

It really speaks to the fact that soup operates in this broader simple meal universe where soup is becoming an increasingly relevant alternative versus other simple meals.

That is why the whole category is growing at a higher rate.

What I would tell you is there is plenty of room for growth for the category of ready-to-serve as well as the category of soup, and I think there is no reason for us to believe that we can't continue to prosper, and competition may or may not prosper, but I see a clear path forward for us.

Specifically in the quarter, I think the biggest single change was our spending profile.

Our counter-seasonal spending is working.

It is showing that the ROIs we expect from our spend in counter-seasonal advertising hold up, and so we spent aggressively behind Chunky during the quarter, and it is the first time we've done that in a meaningful way and certainly in my time here if not ever, and so I would attribute it to good consumer spending and also good solid blocking and tackling on the merchandising front where we promoted it but not -- we promoted Chunky and Select, but not at an unusual level.

It is just combined with the advertising we were very effective.

I would also highlight that Select continues to do well and has indeed performed extremely well all year.

We feel good about Select.

We feel good about the strengthening of Chunky and the outlook for next year is very good.

I can't get into the consumer takeaway information as we've talked before, but overall I am very bullish on the opportunity for ready-to-serve in this broader simple meal world.

And could you just give us a quick update on the aseptic, the high quality aseptic?

Actually we've characterized, that's the one piece of our portfolio that's just roughly flat, and/or down slightly, and it is more of a timing and a positioning issue in my opinion than anything else.

We have -- just north in Canada we have a very vibrant and healthy growing aseptic platform which has achieved nice market share results, it's the leading aseptic premium soup, and I think we have the opportunity to take a few lessons from Canada, apply them here in the U.S., and I expect that will start growing again, too.

Okay.

Great.

Thanks very much.

Matt, how many more questions in queue?

At this time I am showing six more questions in the queue.

All right.

We'll take those and then we're going to quit after that.

Thanks.

Next question is from Todd Duvick of Banc of America Securities.

Your question.

Good morning.

Hi, Todd.

I would like to ask kind of a big picture financial policy question.

You're coming on with very strong performance.

You've got a healthy dividend, good share repurchase including the one-time share repurchase based on the divesture and you've also paid down debt this past year.

From a leverage and kind of a credit rating standpoint, can you just kind of speak to your rationale for moving to the mid-eight category?

Is A-1/P-1 commercial paper rating important to you, or are you wanting dry powder for acquisitions or is it something else?

You've asked a lot of questions there.

Let me just try to give you a broad view of our priorities for cash, and I don't think that in fact they are any different than in fact what we've told you before.

We in fact do want to pay a very healthy and competitive dividend.

I think right now we are fairly satisfied with our level of debt, and so as we look down the road obviously, we still do take a look at acquisitions and in fact that could be always a random variable as we go forward.

I would expect that in fact we would continue to also buy back shares similar to the program that in fact we announced a couple of years ago, so that's how I would characterize our overall financial policy at the present time, and of course that can always change.

It is always something that we discuss at a strategic planned time and operating planned times, so I think we have to be fairly flexible on this as we look down the road.

Okay.

Thank you very much.

You're welcome.

Next question, Matt.

Our next question is from Alton Stump of Longbow Research.

Your question?

Good morning.

A very quick question on the low sodium launch, and obviously it is still fairly early in this process, but just wanted to get an idea if you have any sort at this point a read as to what sort of top line boost this is providing for the overall category, whether at this point it is maybe something in the 200 to 300 basis point range or if it might be more or less than that.

I think, Alton, we'll characterize as we wrap up this fiscal year, we'll characterize the impact of the reduced sodium effort, but right now we're still in the early days of trial curves and repeat, and as we wrap up the year we'll be in a better position to characterize it at the end of our fourth quarter.

We're not going to get into it other than to say it is well above our expectations and the incrementality on the specific SKU sincerely tracking north of 45% for us right now.

Okay.

Fair enough.

Thank you.

Great.

Next question, Matt?

Next question is from Eric Larson of Piper Jaffray.

Your question, please?

Good morning, everyone.

Congratulations.

Hey, Eric.

I will make it quick.

Probably a question for Bob.

Bob, you adjusted your tax reserves in the quarter for your 2000 to 2004 audit.

I guess first question, do you have any other major outstanding audits, and two is with the adjustments of your tax reserves, will that be adequate to support a 32, 32% tax rate for the year or two out going forward?

I think Anthony said in his comments as we looked standing here today looking out to next year, we're in fact forecasting 32 to 33%, and I think we feel very comfortable with that, and as far as big income tax audits, the IRS has made a push to stay very current.

We're in fact caught up through '04 which basically leaves '05 and '06, so I think there is less opportunities relative to '05 and '06, and I would say that we are not in fact counting on any major benefits from future income tax audits plus the fact as you know starting with next year's fiscal year, we in fact will be adopting FIN 48 which in my opinion will in fact further take away opportunities to benefit from reserve reversals in the future.

Okay.

Thank you.

Yep.

Thanks.

Next question, Matt.

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

Real quickly, Doug, you talked about the lower sodium initiative having three stages I guess last year or the year we're in as stage 1, and is '08, is there a stage 2 like lowering sodium levels further in '08, and B., is it necessary with the amount of incrementality you've had is it necessary the healthy request Chunky is already at the healthy levels obviously.

Do you need to bring everything down?

In the fullness of time we expect to have the full line of all of our soups down below 480-milligrams, and we're going to keep pushing until we get there, so I think you can expect the items that are down to 480 to be improved in their taste profile, maybe reduced modestly further, and also more items to be down at that level as we go forward, so we've got a few -- as we characterized it, I think as three ways, and wave two will be coming in next fiscal year, and I think it will be as significant in my opinion as this wave one was.

Thank you.

Our final question today comes from Pablo Zuanic of JPMorgan.

Your question please.

Good morning, everyone.

Just to follow up on the last question, Doug, in Canada you're able to probably think an association there and have you labels and that says soup is good for your heart there.

I imagine the requirements here will are different, but walk us through the claims you can make from a labeling stand point beyond going below 480 that could spice up even sales that are really quite good right now?

First of all, we do have a different -- there is a different profile in Canada.

The threshold there is 670-milligrams to be able to position soup as good food and to have a heart healthy positioning, and we're actually probably nearing that kind of positioning north of the border in Canada right now, so we'll be able to see some of the benefit of it.

Unfortunately here in the U.S.

we have to get the sodium level down to 480-milligrams.

We have work to do.

What we'll be able to do is talk about the -- we can talk about heart health.

We can talk about other side benefits to soup that relate to vegetable goodness, protein, and some other health benefits that I am not going to get into in great detail.

It would be premature.

That would allow us to talk about soup the way cereals talk about healthy cereals and the way teas talk about healthy teas.

If you look around the store at categories that don't have this burden and you see the way those categories are positioned, you can see great opportunity in soup.

Thank you.

Just to be clear, on those categories for 480 mg can you make those claims or not yet?

We can't make those claims across our full soup portfolio.

That's our goal is to get the full soup portfolio to a level where we can make those claims, and an advantaged way versus competition., and we'll get there in the next three years.

We ought to get there.

One last one if I may for Bob in terms of the headwinds that I should be factoring in my model for '08, one would be a tax rate, two, dilution for the investments in China and Russia strategy and three, competing in marketing spending growing ahead of sales?

Is that correct?

Are you talking, Pablo, about fourth quarter?

Are you talking about --

I think in tax rate guidance for '08, and I am just wondering what other headwinds?

I imagine the China and Russia investment as part of your whole investment there I don't imagine is accretive to earnings.

I think in fact when you look at '08 versus '07, I think obviously the tax rate will be a factor as well as continued investment in the emerging markets.

The last thing you said I didn't -- I don't think I quite understand what you mean.

The marketing spending is a brand building or brand support is growing ahead of sales, right?

Yes.

Is that something we should expect in '08 also?

I would not expect that would be a consideration over the long-term.

All right.

That's good.

Thank you.

You're welcome.

Everyone, thank you for joining us this morning.

We'll be -- our next opportunity to talk will be our July 9 meeting in New York where we'll be discussing our emerging market strategy and our next release of earnings will be in September.

Thank you for joining us this morning.

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

This concludes the program.

You may now disconnect.

Good day.