金寶湯 (CPB) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your first quarter 2008 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.

Thank you.

Good morning and welcome to Campbell Soup Company first quarter fiscal 2008 conference call.

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

Bob Schiffner, Senior Vice President and Chief Financial Officer, will also offer some remarks.

A question-and-answer session will follow.

Doug Conant, President and Chief Executive Officer, will join us for this portion of the call.

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

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

The replay of our call will be available approximately two hours after it is completed through midnight, November 23.

The replay number is 1-888-266-2081 or 1-703-925-2533 and the access code is 1152446.

The call will also be broadcast over the Internet.

You may listen by logging on to our Web site and clicking on the webcast banner.

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

Our discussion will contain forward-looking statements that reflect the Company's current expectations about its future plans and performance.

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

These include statements concerning the impact of marketing investments and strategies, share repurchase, pricing, new product introductions and innovation, cost savings initiatives, quality improvements, and portfolio strategies, including divestitures, 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 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.

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

We have provided a reconciliation of those measures to the most directly comparable measures which is available on our investor Web site and is also attached to the earnings release.

Now to discuss our first quarter results, Anthony DiSilvestro.

Good morning.

First, let's look at our consolidated results for the quarter.

Sales grew 7% to $2.298 billion.

Sales growth breaks down as follows: volume and mix added 4%, price and sales allowances added 1%, increased promotional spending deducted 1%, currency added 3%.

Gross margin decreased to 41.5% from 42.6% in the prior year.

The decline is primarily due to cost inflation and higher promotional spending, which were only partially offset by productivity gains and higher selling prices.

Marketing and selling expenses increased by $32 million to $348 million, primarily due to higher advertising expenses, currency, and higher selling expenses, principally at Godiva.

Administrative expense increased by $17 million to $152 million, primarily due to higher compensation and benefit costs, including those related to the Company's North American business realignment and due to currency.

Earnings before interest and taxes were $431 million compared to $438 million a year ago, a decrease of 2%.

Net interest expense was $42 million, up from $41 million a year ago, primarily due to higher net debt levels.

The tax rate was 30.6% versus 32.2% reported in the first quarter a year ago.

The lower tax rate for the quarter was primarily driven by a tax rate reduction in Germany.

For the year, we project our full-year tax rate to be approximately 32%.

Earnings from continuing operations for the quarter were $270 million versus $269 million in the year-ago quarter.

Earnings per share from continuing operations were $0.70 compared to $0.66 in the year-ago quarter, an increase of 6%, reflecting a lower average number of diluted shares outstanding due to our share repurchase program.

Earnings from discontinued operations in the prior year's first quarter were $22 million, representing the gain on the sale of our U.K.

and Ireland businesses.

Now I'll discuss operating highlights by reporting segment.

U.S.

Soup, Sauces and Beverages.

Sales of $1.097 billion were up 4% from $1.052 billion in the year-ago quarter.

The sales increase breaks down as follows: volume and mix added 6%, increased promotional spending deducted 2%.

Total soup sales declined 1% compared to 10% growth a year ago.

Condensed soup sales in the quarter declined 2% driven by lower sales of eating varieties.

Ready-to-serve soup sales declined 2%.

Broth sales increased 8%.

Sales gains for Campbell's Select and Campbell's Chunky Soups in cans were driven by increased promotional activity and higher advertising.

Chunky also benefited from the launch of our new simple meal varieties labeled Chunk Fully Loaded.

These gains were more than offset by a decline in sales of a convenience platform, which includes soups in microwavable bowls and cups.

Across the soup portfolio, sales benefited from reduced sodium products, which continue to perform well.

Broth sales increased due to higher levels of advertising and the launch of additional sizes of aseptic varieties.

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

Beverage sales increased double digits with gains in V8 vegetable juice, V8 V-Fusion vegetable and fruit juice, V8 Splash juice drinks, and tomato juice.

Increased sales were driven by continued strong consumer demand for healthier beverages, increased advertising, and our new agreement with Coca-Cola North America and Coca-Cola Enterprises for distribution of our refrigerated single-serve beverages in the U.S.

and Canada.

Sales of Prego pasta sauces grew double-digits driven by increased advertising and promotional activity.

Pace sales declined due to strong competitive activity.

Operating earnings for this reporting segment were $310 million compared with $322 million in the prior-year period.

The decrease in operating earnings was primarily due to cost inflation and increased advertising and promotional spending, partially offset by higher sales volumes and productivity gains.

Baking and Snacking.

Sales for the quarter were $532 million compared with $484 million, an increase of 10%.

Sales growth breaks down as follows: volume and mix added 3%, price and sales allowances added 3%, currency added 5%, the divestiture of our Papa, New Guinea business subtracted 1%.

Sales increased for all Pepperidge Farm businesses which includes bakery, cookies and crackers, and frozen.

The sales increase in cookies and crackers was primarily due to growth of Goldfish crackers and higher sales of soft baked and 100-calorie pack cookies.

The sales increase in Bakery was primarily due to solid gains in whole grain products including bread, sandwich rolls, and bagels.

Arnott's sales increased double digits, primarily due to the favorable impact of currency and growth in biscuits, partially offset by declines in the snack foods business.

The growth in biscuits was due to gains in Tim Tam chocolate biscuits and sweet and savory products.

Operating earnings were $73 million versus $68 million a year ago.

Earnings increased primarily due to the favorable impact of currency.

Within Arnott's, gains in biscuits were partially offset by an earnings decline in the snack foods business.

In Pepperidge Farm, sales gains were offset by the impact of higher commodity costs.

International Soup, Sauces, and Beverages.

Sales for the quarter were $389 million compared to $346 million, an increase of 12%.

Sales growth breaks down as follows: volume and mix added 3%, price and sales allowances added 1%, currency added 8%.

Excluding the impact of currency, sales growth was driven by solid gains in our businesses in Canada, Mexico, the Asia-Pacific region, Belgium, and France.

Operating earnings were $51 million versus $48 million in the prior year.

Operating earnings were driven by the favorable impact of currency and improved sales performance, partially offset by increased expenses to establish businesses in Russia and China.

Other.

This includes the business of Godiva Chocolatier Worldwide and the business of Away From Home in the U.S.

and Canada.

Sales for the quarter were $280 million, an increase of 3%.

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

Godiva sales increased double digits due to growth in all regions and the favorable impact of currency.

As previously announced, the Company is currently exploring strategic options for the Godiva business.

Away From Home sales decreased as the favorable impact of currency was more than offset by sales declines in frozen entrees and refrigerated foods.

Operating earnings were $25 million versus $26 million in the prior year.

Unallocated corporate expense for the quarter was $28 million compared to $26 million a year ago.

That completes my discussion of the operating segment.

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

Cash flow from operations in the quarter was a source of $74 million as compared to a use in the prior year of $88 million.

The prior year included a payment of $83 million to settle foreign currency hedges related to our divested U.K.

and Ireland businesses.

The current year benefited from a lower increase in working capital, principally accounts receivable and inventory.

Capital expenditures were $40 million compared to $46 million in the prior year.

Our forecast for capital spending in fiscal 2008 remains at approximately $400 million.

Total debt at quarter end was $2.814 billion compared to $2.863 billion a year ago.

Cash and cash equivalents were $77 million as compared to $230 million in the prior year.

Net debt, which deducts cash and cash equivalents from total debt, was $2.737 billion versus $2.633 billion, an increase of $104 million.

We currently have two ongoing share repurchase programs.

Our strategic share repurchase program of $600 million which commenced in November of 2005 and runs through fiscal 2008 and our antidilutive repurchase program, which offsets the impact of shares issued under our incentive compensation programs.

Combining these two programs, we spent $78 million to repurchase 2 million shares during the first quarter.

That concludes my remarks.

Bob Schiffner will now make some closing comments.

Thanks, Anthony, and good morning, everyone.

Our results this quarter were mixed.

We were very satisfied with the overall performance of our Baking and Snacking business as we're able to deliver strong top line performance in both Arnott's and Pepperidge Farm and hold our gross margin in this segment, despite strong cost inflationary pressures.

Our International Soups, Sauces, and Beverages business also performed well, aided by a weaker dollar and strong volume growth in the major markets of Canada, Australia, Belgium, France, and Mexico.

And our U.S.

Beverage business remains on fire, delivering top line growth of 30%, as well as strong double-digit bottom line growth.

Also noteworthy this quarter is the kickoff of our single-serve beverage distribution agreement with Coke, which is off to a solid start and meeting our expectations.

Our U.S.

Soup business had a tough first quarter with net sales declining 1%.

Our performance was impacted by difficult comparisons with last year's strong first quarter, as well as by the extremely warm weather we experienced this fall.

Given the stronger than expected cost inflationary environment, we also did not have sufficient carry in pricing to preserve margins.

However, as we enter the key consumption periods of our soup season, we still believe that we have the products and programs to rebound in the balance of the year.

Consequently, we are maintaining our 2008 EPS from continuing operations guidance at 5 to 7% growth from the 2007 adjusted base of $1.95.

In closing, I would also like to acknowledge that our cost inflation has become a more challenging issue than we had originally anticipated.

We clearly share this issue with other food companies in our competitive set.

Given the commodity cost environment and escalating oil costs, we now expect cost inflation to fall within the range of 6 to 7% this fiscal year, above our 5% planning assumption.

Given this higher cost pressure, we are currently re-evaluating our pricing strategies for the fiscal year and probably will need to take a more aggressive stance in this area going forward.

Now I'll turn it back to Len for our question-and-answer session.

Said, you can begin the question-and-answer session, please.

Thank you, sir.

(OPERATOR INSTRUCTIONS).

The first question comes from Alexia Howard from Sanford Bernstein.

Hello, there.

Good morning, Alexia.

Hi.

Question on the margin outlook for the rest of the year and how quickly we might expect that to start to come through.

Clearly, I was, frankly, quite surprised to see the pricing for the Company overall to be fairly flat on a net basis for the whole company this time around given that most other companies are taking things up.

What we've heard from some of the companies is that contracts (inaudible) with retailers, the promotional price points, and sometimes delay all created a time lag before you can actually take pricing up.

Could you talk to me a little bit about how quickly we might expect to see the combination of better pricing and productivity improvements come through to start to help that out?

Well, as far as productivity is concerned, we should see fairly constant productivity improvements through the year.

I think from a pricing standpoint, it's fair to say that that impact will probably be more of a second half impact as opposed to a first half impact.

So sitting here today, I would tell you that we still expect to hold margins on the year.

I think it would be highly unlikely at this point to expect better margins, and we should start seeing that improvement more toward the second half of the year.

Okay.

Thank you very much.

Our next question comes from Eric Katzman from Deutsche Bank.

Hi.

Good morning, everybody.

Hi, Eric.

Hi, Eric.

I guess first, to kind of follow-up on that -- on Alexia's line of thinking, so basically now you're -- with higher pricing hopefully in the second half, assuming, I guess, private label and General Mills follow, you would assume that sales growth and EBIT growth are roughly the same?

Roughly the same.

Our forecast is roughly the same, yes.

Okay.

And then you get some benefit from the share repo and maybe some debt pay down or something like that to create the leverage?

More from share repo.

Okay.

And then I guess, is it mostly -- in terms of the inflation, is it mostly a function of fuel that's changed the outlook, Bob?

Well, I think we're looking at higher wheat prices.

I think to some extent, both dairy and our oils have also increased in pricing as well, but, clearly, diesel fuel is a big element.

Okay.

And then last question, I'll pass it on or maybe more of a comment.

I just -- I'm a little bit surprised that you chose to highlight weather.

I really think it's kind of a double-edged sword.

On the one hand, maybe it is -- maybe it was a factor, but to the extent that you're kind of calling that out versus what you said in the past, Doug, that I'm never going to highlight this.

Now it kind of makes me say, all right, well, if it's cold then you better really do well as opposed to kind of blaming it when it's warm.

So can you kind of just go through that a little bit?

And I guess to the extent that you can talk about the category, how has weather impacted the category overall as opposed to you maybe losing share or something like that?

Eric, I would have been disappointed if you hasn't raised that issue so thank you.

As you know, we've been doing this now for, going on seven years, 28 quarters, and have not highlighted weather as a significant issue, and I still don't believe it will be a significant issue for the year.

Every year, we have had warmer quarters, colder quarters, and overall we've been able to deliver our sales forecast as a result of that and ultimately our earnings forecast.

So what we chose to do was highlight the fact that in this fall, this autumn, the weather clearly had an impact on our fall plans, but I do not believe it will have an impact on our full-year plans.

So I'm very comfortable with our forecast, which basically, we're standing by our original forecast which said we would grow sales as a company 3 to 4%.

And you know if we're going to do that as a company, we need to do that in soup.

So we're very comfortable with our forecast for the year.

I will say we got off to a slow start and affected by weather more so than we have observed in the last 28 quarters since I've been doing this, but it will not be an excuse for the year.

And, Eric, I wish there was a perfect one-for-one correlation here, but quite frankly, when the weather's warm, significantly warmer, we do see a slight dampening in sales.

When we see it go from being cold to colder, we don't see the same kind of lift that's because it's cold enough already to have soup and if it's a little colder, it really doesn't drive soup consumption that much more.

The one other thing I would say about our U.S.

Soup business is, we are reporting that we are down a little less than 1%, but I feel very good about the way our Soup business is positioned.

We are down a little less than 1% versus a record high 10% growth last year and this first quarter in U.S.

Soup is the second best first quarter that we've had in at least ten years and it's $100 million above where it was only three short years ago.

So we've built -- we've lifted the whole performance level of our Soup portfolio to a new level.

We didn't grow as much as we had hoped for and I would say we just lost a little of the edge due to the weather and I think we'll get it back over the balance of the year.

So I'm feeling very good about the way we're positioned but we have our work cut out for us.

We have to do better and we know what we need to do and we'll do it and we'll lead the category to a higher performance level.

I do think, although we won't comment on any specific consumption or share information, you have seen and the customers have seen that this category was slow over the last three months and we expect that to pick up and in fact, we're already starting to see that in November.

So that's it from here.

Eric, let me just kind of embellish on a little bit of what Doug said.

We've done a lot of empirical analysis here around the impact of the weather and, basically, what we have seen over time is that weather patterns will impact the flow of volume within a soup season, okay?

When you look over many soup seasons, weather doesn't play hardly any factor at all, but within the soup season, it will in fact have an impact on moving volume around.

So again, this is what we've always said is that you have to evaluate us throughout a full season as opposed to one quarter and I think that's the point we were trying to make relative to the weather.

That's helpful and I think that's a fair point.

Are you seeing any, like, kind of recent lift in condensed because of consumer pressure out there in terms of disposable income, stress, or, let's say, recession-type movements?

Our experience with condensed in the fullness of time has been that when there is economic pressure on consumers, condensed is a good value offering and it should hold up reasonably well.

But as you recall, we had 25 straight years of a decline in condensed business and we're in year four of growing it again.

It'll be interesting to see how it responds in this situation, but we're optimistic about it.

Okay.

I'll pass it on.

Thank you.

Great.

Just to build on that condensed piece one, we have said that aspirationally, over the last three years, we've grown condensed soup sales at about a 4% clip and we've said aspirationally, that's what we would like to do.

The way we do the math on that is basically condensed soup sales should grow with population, which is around 1 to 2% and hopefully we expect to do a little better.

We think we can stay in that model of growing with population this year and hopefully do a little better.

Okay.

Thank you.

Great.

Next question, Said?

Our next question comes from Terry Bivens from Bear Stearns.

Hey, Terry.

Good morning, everyone.

Hi, Terry.

Two quick things.

You know, Doug, traditionally, I guess, there have been times in the past where you haven't done this, but usually the pricing comes kind of near the end of the soup season.

Is there any risk to trying to get it a little bit earlier?

Terry --

Well, Terry, it's not really very practical because you have all your programming laid out with your customers already through the rest of the soup season and in all likelihood, it's going to be -- it would be difficult, if not impossible to move that around.

So it is what it is.

Terry, we really aren't projecting any kind of thing on pricing at this point.

I think what we said is we would think that we're going to have to revisit, but we're not making any forecast around pricing or when we're going to do it or anything like that.

Okay.

I thought I heard a hint there, but okay.

And just one other quick thing.

Why the need to be so promotional in the quarter?

That one surprised me a bit.

Well, we had set up our plans independent of what turned out to be a very warm autumn and we intend to fully compete.

As you'll note, our marketing spend was up significantly.

If we had wanted it to hit the consensus number, we could have cut it a little bit but we intend to compete fully and significantly.

We're in it for the long haul.

We thought it was appropriate this year to compete and manage our price gaps tightly with private label and the branded manufacturers, and so we did.

Okay.

Thank you.

Great.

Next question, Said?

Our next question comes from David Palmer from UBS.

Hi, David.

Good morning, Len.

Good morning, David.

Good morning, Bob.

Quick question just to lead off.

Your consumers, do you think they're pushing back a bit on your higher-priced items in a tough economic environment?

The reason I ask this, this might be out there, your microwavable platform, clearly, higher priced and then you have your Fully Loaded lineup and that was clearly priced at a higher level.

Is perhaps Fully Loaded not doing quite as well as you thought it might be because of that price point, or separately, that microwavable lineup, is that because of, perhaps, retailer and Progressive brand introductions in the microwavable bowls or perhaps do you think there might be something broader going on with the consumer trading down?

No.

Just a couple of points.

One, the microwavable platform is the most pronounced reason for that slowness in the first quarter is promotional timing and we expect it to be strong for the year.

The other observation I would make on our higher-priced items, they still offer great value relative to other simple meals and we know that, particularly with Chunky, we know that we're interacting more with other food alternatives than soup.

And actually, we do track our performance relative to other simple meals and we do know we're outperforming that category, and they're even -- most of them are higher-priced than soup.

So we like our price value proposition relative to simple meals.

And we like our price value proposition relative to all the alternates out there as we go into the year.

The microwave piece is more timing than anything else.

You also said in the release, and I think in your remarks, that low sodium is performing well.

Could you give us an idea of what that means to you, performing well?

Well, we continue to, on all the new items, we continue to track very healthy repeat rates, and that collection of SKUs continues to grow nicely above the average of the line.

And even though the competitive fray has gotten a little more intense, we're also now adding the lower sodium version, the Healthy Request versions to our microwave line and they'll be flowing in this quarter and getting into next year, I mean, later this year.

And so we've added, I think, 17 new sodium items on top of last year's launch.

Last year's launch is growing at an above-average rate.

And with the 17 on top of it, including taking it into microwave, we think we're going to have another very solid year.

And lastly on Godiva, you expect that to close by the end of the calendar year and you'll be using the cash proceeds if indeed this is what happens for share repurchase?

It would be premature to comment.

Yes, we're not going to comment on that.

Okay.

Thank you very much.

Thanks.

Next question, Said.

Our next question comes from Robert Moskow from Credit Suisse.

Thank you.

Doug and Bob, can you tell me how much, what kind of increase in consumer marketing do you think that you'll do this year, just on the advertising levels?

You said that you didn't want to cut in the first quarter, so you want to stay strong.

Can you give us a range?

Well, we have a plan to have solid growth in consumer A&C, advertising and consumer promotion for the year, but quite frankly, we don't give out forecasts for that.

But we are currently contemplating having a solid increase.

Okay.

And then spending in Russia and China, I noticed that profits are actually up in your international soup business.

Bob had said to expect some solutions from that spending in the next couple of years.

Was there heavy solution to profit growth from Russia and China?

Bob, why don't you take that?

We in fact did have higher spending in the emerging markets this quarter versus last quarter.

It's up approximately $3 million, so we would expect to have higher losses or more expenses depending on how you look at it over the full-year as well.

So, again, emerging markets will be a dilutive influence on us in fiscal '08.

The consumer spending, both markets, we now have products in market at retail.

Consumer spending is on full display in our China lead market and just rolling into our Russian market so you'll see the spending in these lead markets start to go up in the second quarter.

Okay.

One more thing.

Have you seen anything from your retailers, maybe specifically convenience store operators on their concerns about taking a lot of inventory in with pricing going up and with inflationary pressures and the lending squeeze?

I got to imagine the answer's no, since your beverage business so strong and that's got to be convenience store related.

Well, actually, we're just getting started with the convenience store piece with Coca-Cola Enterprises and Coca-Cola North America.

The bulk of our growth in this first quarter was out of our grocery business.

Oh, good.

But we don't see any -- we're not unusually highly developed in the convenience channel.

It's an average development index for us and we don't see any issues there right now.

Okay.

Thank you.

Great.

Next question, Said.

Our next question comes from Jonathan Feeney from Wachovia Securities.

Hey, John.

Hi.

Good morning.

Thank you.

Bob, you gave us the net sales number for the U.S.

Soup business, specifically.

Could you give us a sense of what volumes and pricing were in just that U.S.

Soup franchise as the whole?

We don't break it down that far, John.

Okay.

Then maybe at 30% growth, it seems like Beverages are obviously a huge area of strength and just get started, maybe some reason to believe that might accelerate.

Is there a meaningful gross margin inflation or deflation that we're seeing from that business right now and might see in the future?

It's above average.

It's above average gross margin?

Yes, it is.

For the company?

For the company.

Okay, wow.

Just, I guess, correct me if I'm wrong, but the lower tax rate looks like something like a $0.02 positive impact, but I think the tax rate guidance used to be $0.32 to $0.33, so by cutting off that high end, you kind of, do you think you would have pulled $0.02 out of guidance had you not gotten that tax benefit, or would you do some sort of opportunistic sort of investing with that little bit?

The German tax rate reduction had about a $0.1.6 impact on EPS and, frankly, our guidance was 32 to 33%.

We're now pulling it down to more, closer to 32% for the full-year.

So expect to see higher tax rates for the last three quarters.

So I don't think it's going to offer us a tremendous amount of financial flexibility relative to our plan going forward.

If I could just ask one for Doug.

You'd called out in the release, the eating varieties of condensed soup as a disappointment.

I would assume the increased promotional activity has mainly been aimed at ready-to-serve.

Is this maybe a cannibalization you're seeing?

Is that the kind of way this business works?

No, actually, I think what happened, we called out a few areas where we felt we should do better.

We called out convenient, microwave and convenience.

That was more of a promotional timing issue.

Condensed eating, in my opinion, was softened a little bit by the weather impact and I think you're going to -- we'll see, but I believe -- I'm confident we're going to see a stronger performance in the next three quarters.

Looks like the weather's helping you today.

Thank you.

Next question, Said.

Our next question comes from Chris Sonopolis from Campbell Soup.

No, that's not a question.

Go on to the next one.

Our next question comes Eric Serotta from Merrill Lynch.

Good morning.

Hi, Eric.

Hi, Eric.

I was wondering if you guys could go into the category dynamics in RTS cans a little bit more?

If we take out the promotional timing impact in the microwave bowls and convenience platform, it still seems that your RTS performance was a little disappointing, especially considering the very strong performance that Mills has spoken about lately on Progresso in terms of both share gains and retail sales increases.

Could you talk about your performance there in a little bit more detail?

And sort of as a follow-on to that, could you talk about the overall trade inventories in soup, not just RTS, but condensed and RTS?

Well, the -- first quarter does not a year make, and the key quarters are the second and third quarters, and we like our outlook for ready-to-serve for the year.

We did -- it's difficult to tease out meaningful comparisons when you have -- we had a record quarter a year ago and so we had just an outstanding first quarter performance a year ago and then we're lapping that with some unusual weather that's affected the way we are planning and promoting.

And we also changed some promotional timing around our microwavable platform relative to our can platform, and we, on top of it, launched a new line, Chunky Fully Loaded.

So you have a lot of moving parts here.

What I would say is that, and I can't get into the ins and outs of that, but what I will say is, if we're expecting 3 to 4% growth in our soup business, we would expect that kind of growth from our ready-to-serve business, and I think we're well positioned for the year to deliver that.

Okay.

And then trade inventories, and I had a quick follow-up for Bob.

Eric, I would say that in fact, we are not seeing any major deviations from our expectations relative to trade inventories.

Okay.

And Bob, just to follow-up two quick items here.

In the past you've spoken about 150 to $180 million as sort of a bogey for ongoing productivity each year.

Given the increased pressures on the commodity side this year and maybe a little bit higher promotional spending, do you think you need to hit a higher number than that?

Well, the more we can generate, the better, that's for sure.

And we are working very diligently at trying to get as much cost reduced as we can.

But I think this year, we'll be very happy to stay within that range.

Hopefully, as we look out past fiscal year '08, we can generate a higher level.

But I think for this year, we're pretty satisfied that'll probably fall within that range that you've identified.

Okay.

Then lastly --

You know, we have the SAP implementation, which we're wrapping up this year.

It gives us visibility into ways to ramp up our productivity in 2009 and beyond.

But given that we're still rolling that out this year, it's just not going to give us the kind of lift that we think it will give us in '09 and '10.

And then finally, and I'll pass it on.

Just to follow-up on Alexia's question in turn, I think it was Alexia's, on the pattern of margin improvement throughout the year.

Without talking about the timing or possibility of pricing in particular, I seem to remember that you said -- that you made comments that the margin should improve in the second half relative to the performance that we're seeing in the first half.

At the same time, you're, given the seasonality of your business, about 68, 69% of your earnings are typically generated in the first half.

So could you just maybe help reconcile how improved margins in the second half will counterweight the margin pressure that we see in the first half to get you flat for the year?

Eric, you can, clearly, you can do the math.

Obviously, I don't want disagree with the fact that our profits are weighted more to the front half than they are the back half, although, I'm not so sure that I ultimately agree with the numbers that in fact you're using.

But again, it's obviously a mathematical issue.

We expect to have -- if we expect to hold margin for the full-year, we're going to drive higher margins in the second half relative to the first half.

And the weights, I think, will not be as dramatic as you have just communicated.

So that's how we get there.

Okay.

Thanks a lot.

I'll pass it on.

Next question, Said?

Our next question comes from Christine McCracken from Cleveland Research.

Christine, hi.

Hi, Christine.

You there, Christine?

If you have your phone on mute, can you unmute your phone, please?

Yes, I'm here.

Okay.

Great.

Just wanted to follow-up on a quick -- an earlier question on your eating soup volumes.

You mentioned, I think, in the fourth quarter that you actually had a big increase.

I'm just wondering if you thought it was possible that you had any pantry loading that could have maybe affected that quarter?

Not in the, no, Christine, we don't really, the customers don't take inventory in any meaningful quantity going into the summer.

So, no, that was not an issue at all.

Christine, I can add to that.

We do get now panel information on pantry loading for our consumers and, frankly, the pantries look, if anything, slightly below where they are historically at this point.

So pantry loading as it relates to the consumer is not an issue.

Good to hear.

And then just on the commodity cost outlook, it seems like the bulk of the delta in where you've seen the changes essentially are affecting your base in Baking and Snacks segment.

I'm wondering, when you look at what you can do to offset that in terms of pricing versus kind of taking weight out, it seems like you have a little bit more flexibility relative to soup.

I'm just wondering, one, if you expect the commodity cost pressure to really hit that segment.

And then secondly, are you considering all of your alternatives in terms of offsetting that cost increase?

The answer is yes, we are looking at everything possible.

We do expect cost inflation to be much more aggressive in our Baking and Snacking business that's starting in the second quarter.

We were pretty much hedged throughout much of the first quarter.

So that's going to be a challenging segment for us going forward and so we are looking at doing a number of things there to offset that impact of cost inflation.

I'll leave it there.

Thanks.

Thank you.

Okay.

Next question.

Our next question comes from David Driscoll from Citi Investment Research.

Great.

Thanks a lot.

Good morning, everyone.

Hi, David.

Bob, you mentioned wheat as the number one commodity cost increase, however, margins were hurt the worse in Soup, Sauce, and Beverages.

Can you just tell me what cost hurt that particular line because that seems to be the area that we should be focused on?

When I've talked about those commodities that we expect to hurt the most, I'm giving you kind of an annualized view of that.

Obviously, this quarter we have not been hit as hard in the Baking and Snacking business as we will be going forward.

In fact, when we do look at the Soup business, it's safe to say that in fact we do get impacted somewhat by wheat, okay.

We do have flour that is an ingredient to thicken some of the soups.

Dairy has hurt us with our creamed soups.

We do also have some oil that is an input into our soups as well.

So those are the items that in fact are driving the soup inflation.

The other piece that I wanted to follow-up on was, the last conference call on early September, wheat prices were actually higher than they are today on nearby futures.

You mentioned that you've raised your commodity cost expectations for the full-year.

Can you help me understand what appears to be a little bit of a differential between those comments?

I would have actually expected you to say that versus where wheat prices were when you did your last conference call, were slightly better.

Well, I think again, timing plays a very important role in terms of when you expect those prices to hit and where you're covered and where you're uncovered.

So you could look at spot prices in September and, frankly, those are not very meaningful in terms of how they ultimately will hit our P&L going forward.

So I'll just leave it at that.

It's more of a coverage issue than what you see in the market, David.

Okay.

But my question is, that from what I can tell is that a couple months ago when you did your call, you had a 5% commodity inflation expectation, you knew what the coverage was.

The wheat prices haven't worsened.

Certainly they're bad, but they haven't worsened.

And it looks to me like there's a big delta, a big increase in commodity cost inflation expectations, and I would assume that the only reason why your plan would change is if the spot market changed related to that uncovered stuff.

So I'll chat with you guys, I'll call you offline on this one.

There's something I'm missing here.

Thank you.

David?

Go ahead, Bob.

Let me just comment.

I think the one piece you are missing is in fact the run up on diesel.

Also, in fact, the run-up on dairy prices as well.

So, again, it's hard just to look at spot prices and say, hey, this is the impact, because, as Doug just mentioned, it's really the areas where we're covered and uncovered and, frankly, the longer-term prices as opposed to current spot prices.

So I'm looking forward to your phone call.

Great.

Thank you.

Next question?

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

Good morning, everybody.

A couple of things and most of my questions were asked.

In the microwavable soup thing, just a clarification, you said it's more timing related.

Is that just promotional timing?

Is that what you said?

Well, promotional and advertising and how we're managing the portfolio of opportunities we have quarter-to-quarter.

So obviously we think it'll be stronger in the last three quarters than it was in the first.

Did --

Without tipping our hand on any one specific thing.

Okay.

Was the percentage, I guess I should ask, what is the percentage if you give, of, like, microwave and your convenience platform outside your grocery and mass channel?

Is it a significant -- did that have weakness as well, or was it really a grocery and mass issue?

We don't break out the channels, but what I would say is that the convenience channel has got a lot of upside for us.

We're not that well developed there yet.

Last question is, were there any growing pains in the quarter related to V8?

You were sort of tapped out on capacity.

Was there any sort of meaningful costs there associated with that?

No.

Okay.

All right.

Thank you very much.

All right.

Take care, Mitch.

Next question, Said?

Our next question comes from Edgar Roesch from Banc of America.

Good morning.

Hi, Ed.

Just on the Baking and Snacking, I want to understand a little bit more because your press release mentioned that Pepperidge Farm saw costs that offset the sales increases in describing, I guess, what sounds like flat profitability.

So first of all, a lot of that is fresh bakery.

I would have thought the pricing would be relatively easy to come by in offsetting costs there.

And then your outlook is for the margins in that segment to improve as we go throughout the year.

Is that right?

No, we didn't say that, Ed.

We just said that, in fact, our margins were up basically flat for the quarter.

Our gross margins.

Okay.

In the Pepperidge Farm business -- or in the Baking and Snacking.

In the Baking and Snacking segment.

That's correct.

Okay.

And didn't you mention in the release, though, that Pepperidge Farm, it sounded like you were getting pinched on your margins because of cost increases.

Is that right?

Pepperidge Farm had solid top line growth for the quarter, relatively flattish when you look at operating profit and that's due to more than anything, higher marketing and some cost inflation, but not nearly as much as we expect going forward.

Oh, okay.

That makes -- that's very helpful color.

Thank you.

And then one last question for you.

You know the Gold Label Select, I'm seeing it more in some of your marketing messages, you're highlighting it with your ready-to-serve portfolio.

Can you just give us an update on kind of how that initiative is going?

Thanks.

The aseptic soup initiative is going well globally and it continues to be solid in France, Australia, Canada, particularly doing well in Canada, and we see a very slow build here in the U.S., as we've expected.

It's a major change in terms of packaging format for consumers.

Repeat continues to be very good.

The challenge for us is to find the best way to market that proposition within the context of our full portfolio and we're very comfortable we'll find our way there.

It continues to be highly differentiated with great repeat and we just have to find the right way to take to it a higher level, but it's fully satisfactory for now.

Thanks.

And do you have the same number of SKUs this year, pretty much flavors and varieties that you had last year?

We added one or two.

We added southwest corn chowder and one other.

So it's slightly -- a slightly bigger line.

I'll be sure to try those.

Thanks.

Next question, Said?

Our next question comes from Andrew Lazar from Lehman Brothers.

Good morning.

Hey, Andrew.

Good morning, Andrew.

I know, Doug, on the fourth quarter call, you had highlighted retailer inventories looked very good, very comfortable and lean heading into the fall.

So I'm trying to get a sense of, with, I guess, the fiscal first quarter being, to some extent, a lot more about sell-in out of the retailer and getting them all set for the fall season.

I guess was there any shift in what you might call market share or mind share kind of at the retail level in the quarter, or on the shelf that we haven't seen play out yet in any market sort of place data?

Andrew, I'm sorry, I'm not sure exactly what you mean.

I guess, if the first quarter, and maybe this is not the way to look at it, but if the first quarter is more about selling into the retailer, and making sure you've got the proper levels of inventory and product there and on the shelf for when the weather gets cold, and your inventories coming into this first quarter were in very good shape and very lean.

Was it more just the items you've discussed, weather and year-ago comps rather than any shifting of, let's say, any space allocation on the retailer's shelf, or retailers, were they just less willing to take on typical levels of seasonal inventory because of the warmer weather, or what have you?

I believe that's probably the single biggest difference.

We have a pretty effective and efficient inventory process, management process with our customers and we didn't see the kind of order patterns that we would have expected to see in a normal fall.

So we also expect those to obviously come in the second quarter instead of the first.

Okay.

And then I know that a couple of quarters ago, you had talked about condensed growth and some of the possibilities going forward.

And some of this might, frankly, have been more aspirational in nature on your part.

But I think you had talked about being able, perhaps, to continue some of the levels of growth on condensed that you've seen over the past couple of years, 3, 4% levels.

Today you talked about still being able to grow it, which is obviously admirable for condensed, which was not the case years ago.

But I'm just getting a sense, has anything sort of changed that perhaps has maybe dampened your outlook a bit on condensed possibilities, or is it just those were more aspirational in nature when you made those comments?

Well, I think we have to find the right balance between reality and aspiration.

And starting slow in the first quarter makes it hard to imagine delivering at the high end of our 4% level that we had delivered the last three years, but we do still expect to grow it in this year and expect it to be very competitive.

We have great programming, we have continued progress with our IQ shelving system, and we see another solid year, but we've clearly got off to a slow start.

Thanks very much.

That's all that's reflected in that comment.

Got it.

Thank you.

Okay.

Said, how many more questions in queue?

We have two more questions, sir.

Okay.

We'll take those and then we're going to stop.

Our next question comes from Vincent Andrews from Morgan Stanley.

Thank you.

Good morning, everyone.

Good morning, Vincent.

Just looking at the weather issue from another angle.

In the past you guys have stated that the number one reason that people don't buy soup in kind of warmer weather is that they're not thinking about it and that goes towards your marketing or your communication message to consumers.

In the fourth quarter, you talked about reviewing some of your counter-seasonal advertising.

So I just was wondering if you could update us on what you think happened in the quarter from a marketing perspective.

Is there anything you want to do differently, is there anything you should be doing better, or where are we in terms for that?

You're talking the fourth quarter or the first quarter or just general lessons learned?

I'm sorry, I really kind of meant more the first quarter, but maybe just take us through the fourth quarter and the first quarter and kind of what you are willing to tell us on a go-forward basis.

Well, the key here is that we still -- the number one reason people don't consume soup is they don't think about it and there's a clearly indication to us when it's warmer out, they think about it less than when it's colder out.

And then we try and layer in our marketing activity to optimally kind of work with weather and find the right balance that lifts the category.

What we've found is that advertising and consumer alone are insufficient to drive, change the awareness levels with consumers.

And we do have to work -- we have to acknowledge that at times, in a quarter or in a month or two, weather patterns can affect volume, although we don't see any impact over a full soup season.

We also have to recognize that we learned in this counter-seasonal advertising, is we can increase our marketing spend but we have to make sure we're executing well at retail, so that when the consumer comes in, we're winning the war at retail as well as the war in terms of share of voice.

So we have some fine-tuning to do to get fully integrated marketing plans that win the share of voice battle in terms of advertising and also that win at the point of purchase.

And we didn't execute that particularly well in the fourth quarter.

Would you say the same about the first quarter then?

Well, the first quarter I, fundamentally, I believe it was more weather-related than anything else.

And we expect our marketing programming to lift us up in the second quarter substantially.

Okay.

That's very helpful.

Thank you very much.

All right.

Last question, then, Said.

Our last question comes from Pablo Zuanic from JPMorgan.

Hey, Pablo.

Good morning, everyone.

Hi, Pablo.

Just briefly, I guess my main question is on the (inaudible) front.

I mean you could make the argument that pricing's down 2%, in soup's it's pretty bad.

The last time we saw that was in October 2004.

That's an issue with gross margins, it's not just cost, it's a promotional effort.

And I'm wondering, despite all the innovation that has been successful until now, you're still having to be promotional.

That's a comment more than a question.

Here's my -- my question --

Pablo, I would just mention that the reason we said that is because last year our soup was up 10% in the first quarter.

So I think that's important to understand.

We did have significant growth last year in the first -- in that first quarter.

That's fair.

But I don't think despite a comp, I don't know why you would think to promote.

But anyway.

But the argument this year, when I look at segmentation of the market and I see Chunky Fully Loaded and still advertising with the NFL, I think that's nice and obviously it's a segment that you've captured well but what about other segments?

And I see General Mills targeting, obviously, the female market with a light soup platform.

I wonder how easy or difficult will it be for you to copy that or to promote what you may already have in the portfolio?

Then I look at the ethnic section of the supermarkets, all these cup soups and chicken noodle that are different from the well you sell and I don't see Campbell's targeting that segment.

Here' you're trying to serve soup in China and Russia but I wonder what are you really doing to target those segments here in the U.S., which are not small?

So I'm just wondering, again, aseptic, off to a slow start, you've said that.

Reduced sodium has its own crowd, let's see how that goes.

But what's next?

I mean Chunky Fully Loaded, to me, it's more of the same for the NFL crowd.

But what else?

I mean there are other segments out there that Campbell's could be targeting.

Can you comment on that?

I will comment on fully on that at Cagney, Pablo.

We've already released our programming for this fiscal year.

We feel as if we're doing quite a lot with quite a lot of segments between kids with condensed, adult males with eating, premium quality soups with both our stock pot initiatives as well as our aseptic initiatives and, certainly, competing with the other branded entries in light or ready-to-serve soups.

General Mills is doing a great job and I think they're to be commended for that.

And we can do better and we will do better.

And we will have more to say in terms of our plans going forward and targeting as we go into the next soup season, but we're very satisfied with the portfolio of opportunities we have here in front of us.

I must say, just as a small nugget of -- in terms of Russia and China, the markets we compete in in the world today account for a whopping 6% of all soup consumption in the world.

Russia and China alone account for 50%, eight times that of all the markets that we compete in today.

That is a big opportunity that this company needs to address and we will and that's where the big opportunity is.

Not to say there aren't wonderful niche opportunities in our own backyard and good for you to call us on it and we should do better against them.

Just a follow-up, if I may, and thanks for that answer.

In terms of the rollout of the gravity feed shelves at Wal-Mart, I hear that you are doing that now, but I expected to see a better number on the condensed soup side.

Maybe it's comp.

But how is that going and how quickly should we expect to see gravity feed shelves throughout the Wal-Mart network?

We don't comment on any specific customers.

What we have seen with the rollout with all consumers is that it's difficult to get that implementation in the fall during the soup season.

They tend to not reset shelves then.

So -- and not -- some customers will cut in and make the change more abruptly, but I don't think you should expect to see any, with any customer, any significant change overnight as we go through the soup season.

Thank you.

Okay.

That will conclude our call then, Said.

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

This concludes our program for today.

You may all disconnect and have a wonderful day.