金寶湯 (CPB) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Campbell's Soup Company second quarter 2008 earnings conference call.

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

Later we will conduct a question-and-answer session, and instructions will be given at that time.

(OPERATOR INSTRUCTIONS) As a reminder, today's conference call is being recorded.

I would now like to turn the call over to your host, Mr.

Leonard Griehs.

Please begin.

Thank you.

Good morning.

Welcome to Campbell's Soup Company second quarter fiscal 2008 conference call.

On our call this morning Anthony DiSilvestro, our Vice President and Controller, will discuss our results for the second quarter and six months.

Bob Schiffner, Senior Vice President and Chief Financial Officer will then offer some comments, a question and answer session will follow.

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

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

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

A replay of this call will be available approximately two hours after it is completed through Midnight February 22nd.

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

The access code for that replay is 1195937.

This call will also be broadcast over the Internet, and you may listen by logging on to our website www.Campbellsoupcompany.com, and clicking on the webcast banner.

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

This discussion contains 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, portfolio strategies including divestitures, impact on sales, earnings, and margins, and other factors described in our most recent 10-K, and is updated from time to time by the Company in its subsequent filings with the Securities and Exchange Commission.

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

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

We have a provided a reconciliation of those measures to the most directly comparable measures, and that is available on the Investor website.

It is also attached to the earnings release.

Now to discuss our second quarter results, here is Anthony DiSilvestro.

Good morning.

Before I begin my review, I would like to make a few comments regarding the basis of presentation of our results.

In December, 2007, we entered in an agreement to sell our Godiva business.

Consequently, the result of this business are reported as discontinued operations on the income statement for all periods presented.

On the balance sheet at the end of the second quarter 2008, the assets and liabilities of this business are classified as held for sale.

In connection with the pending sale of the Godiva business, we are revised our allocation and methodology for corporate overhead expenses, and restated historical results of all segments.

In 2008, following the recent distribution agreement with Coca-Cola North America and Coca-Cola Enterprises, sales and earnings of certain beverage products now are reported in our U.S.

and International Soup, Sauces, and Beverages segments, were historically included in North America food services.

For comparability, we restated the historical results of these segments.

Additional historical information will be provided in our upcoming Form 10-Q.

Our review will begin with a discussion of results from continuing operations, while highlighting items impacting comparability.

I will then review the results of discontinued operations also highlighting those items impacting comparability.

From our combined total results including both continuing and discontinued operations, I will provide a detailed reconciliation of reported net earnings per share to our adjusted net earnings per share, excluding all items impacting comparability.

Adjusted net earnings per share in the quarter were $0.69, compared to adjusted net earnings per share in the second quarter a year ago of $0.68.

For the first half of the fiscal year adjusted net earnings per share were $1.39, compared to adjusted net earnings per share a year ago of $1.35.

Let's begin our review of continuing operations.

Sales for the quarter grew 7% to $2.218 billion.

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

Gross margin decreased to 40.1%, from 41.2% in the prior year.

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

Marketing and selling expenses increased $19 million to $319 million, primarily due to higher advertising expenses and currency.

Administrative expense decreased $4 million to $141 million, primarily due to lower incentive compensation costs.

Other expense was $4 million compared to Other income of $18 million a year ago.

The prior year includes a $23 million gain on the sale of an idle manufacturing facility.

Earnings before interest and taxes were $400 million, compared to $399 million a year ago.

EBIT in the second quarter increased 6% to $400 million, versus an adjusted EBIT of $376 million a year ago, which excludes the $23 million gain on the sale of the idle manufacturing facility.

Net interest expense was $42 million, up from $38 million a year ago, primarily due to a reduction in capitalized interest and higher net debt levels.

The tax rate was 27.4%, compared to 28.8% a year ago.

The current year rate includes a $13 million tax benefit from the favorable resolution of a state tax matter.

Excluding this item, the current year tax rate was 31.0%.

The prior year includes $9 million in taxes against the $23 million gain from the sale of the idle manufacturing facility.

Excluding the rate impact of this item, the prior year's tax rate was 28.1%.

Earnings from continuing operations in the quarter were $260 million, compared to $257 million a year ago.

The current year includes the $13 million tax benefit from the favorable resolution of the state tax matter.

The prior year includes the $14 million gain from the sale of the idle manufacturing facility.

Excluding these items, earnings from continuing operations in the current quarter were $247 million, compared to $243 million a year ago.

Diluted EPS from continuing operations in the current quarter were $0.67, compared to $0.65 in the year ago quarter.

The current year includes a $0.03 tax benefit from the state tax matter.

The prior year includes a $0.04 gain from the sale of the idle manufacturing facility.

Excluding these items, EPS from continuing operations in the second quarter were $0.64, compared to $0.62 a year ago, an increase of 3%.

Earnings from discontinued operations for the quarter were $14 million, versus $28 million a year ago.

The current year reflects $9 million pretax, or $5 million after tax, of cost related to the pending Godiva business divestiture.

The prior year reflects a $3 million pretax, or $1 million after tax, increase to the gain from the sale of the U.K.

and Ireland businesses.

Excluding these items, earnings declined in Godiva primarily due to lower retail sales in North America, and higher selling and marketing costs.

Net earnings per share for the quarter were $0.71, compared to $0.72 a year ago.

The current year includes the $0.03 tax benefit from the favorable resolution of the state tax matter.

The current year includes $0.01 per share of cost related to the Godiva business divestiture.

The prior year includes the $0.04 gain from the sale of the idle manufacturing facility.

Adjusting for these items, adjusted net earnings per share in the second quarter were $0.69, compared to $0.68 a year ago.

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

Net sales grew 7% to $4.403 billion.

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

Gross margin decreased to 40.4% from 41.5%.

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

Marketing and selling expenses increased $47 million to $615 million, primarily due to higher advertising expenses and currency.

Administrative expense increased $9 million to $282 million, primarily due to the impact of currency.

Research & Development costs increased $2 million to $52 million.

Other expense was $4 million, compared to Other income of $16 million a year ago.

The prior year includes the $23 million gain on the sale of the idle manufacturing facility.

Earnings before interest and taxes were $828 million, compared to $834 million a year ago.

EBIT increased 2% to $828 million, from an adjusted EBIT of $811 million a year ago, which excludes the $23 million gain.

Net interest expense was $84 million, up from $79 million a year ago, primarily due to a reduction in capitalized interest and higher net debt levels.

The tax rate was 29%, compared to 30.6% a year ago.

The current year rate includes the $13 million tax benefit from the state tax matter.

Excluding this item, the current year tax rate was 30.8%.

The prior year rate includes $9 million in taxes, against the $23 million gain from the sale of the idle manufacturing facility.

Excluding the rate impact of this item, the prior year tax rate was 30.3%.

Earnings from continuing operations for the six months were $528 million, compared to $524 million a year ago.

The current year includes the $13 million tax benefit from the state tax matter, and the prior year includes the $14 million gain from the sale of the idle manufacturing facility.

Excluding these items, earnings for the six months were $515 million, compared to $510 million a year ago.

Diluted EPS from continuing operations for the six months were $1.36, compared to $1.31 a year ago.

The current year includes the $0.03 tax benefit from the state tax matter, the prior year includes the $0.04 gain from the sale of the idle manufacturing facility.

Excluding these items, EPS from continuing operations were $1.33, compared to $1.28 a year ago, an increase of 4%.

Earnings from discontinued operations for the six months were $16 million, versus $52 million a year ago.

The current year reflects $9 million pretax, or $5 million after tax, of costs related to the pending Godiva business divestiture.

The prior year reflects a $39 million pretax, or $23 million after tax, gain from the sale of the U.K.

and Ireland businesses.

The change in Godiva earnings is primarily due to softness in North America retail and higher cost inflation.

Net earnings per share for the half were $1.41, compared to $1.44 a year ago.

The current year includes the $0.03 tax benefit from the state tax matter.

The current year also includes $0.01 of cost related to the Godiva business divestiture.

The prior year includes a $0.04 gain from the sale of the idle manufacturing facility.

The prior year also includes a $0.06 gain from the sale of the U.K.

and Ireland businesses.

Excluding these items, adjusted net earnings per share $1.39, compared to $1.35 a year ago, an increase of 3%.

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

I will primarily discuss the numbers for the quarter.

The supplemental schedule attached to the financial release contains six month comparison.

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

Restated segments by quarter and year-to-date for fiscal 2007 and fiscal 2006, to reflect the sale of our Godiva business, and the reclassification of our beverage sales will be provided in the second quarter 10-Q.

U.S.

Soup, Sauces and Beverages, sales for the quarter of $1.093 billion, were up 6% from $1.030 billion a year ago.

The sales increase for the quarter breaks down as follows, volume and mix added 6%, price and sales allowances added 1%, increased promotional spending deducted 1%.

Total soup sales increased 4%, compared to a 1% decline in the year ago quarter, and for the first half, soup sales increased 2%, compared to a 4% increase a year ago.

Condensed soup sales declined 1% for the quarter, and 2% for the first half.

Ready-to-serve soup sales increased 8% for the quarter, and 3% for the half.

Broth sales increased 18% for the quarter, and 12% for the half.

The following comments for soup apply to both the quarter and the first half.

Sales of condensed soups decline canned primarily due to a decline in cooking varieties.

Healthy Request condensed soups and the three icon varieties, Chicken Noodle, Tomato, and Cream of Mushroom performed well, as did Lower Sodium condensed soups.

In Ready-to-serve, sales gains in Chunky and Select soups in cans, were partly offset by declines in the convenience platform, which includes soups in microwavable bowls and cups.

Sales of Chunky soups benefited from increased advertising and promotional activity, and the introduction of Chunky Fully Loaded.

Growth in sales of Select soups was primarily driven by higher advertising and promotional activity.

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

Broth sales increased due to a strong holiday season, and the first quarter launch of additional sizes of aseptic varieties.

Returning to second quarter performance, I will now comment on highlights of our other categories in this reporting segment.

The Beverage business recorded strong sales growth, primarily due to gains in V8 V-Fusion and V8 vegetable juice.

V8 V-Fusion introduced two years ago continues to grow, as we have introduced new varieties.

V8 vegetable juice reported strong sales gains, primarily driven by lower sodium varieties, which resonate with consumers, who are increasingly focused on their health and wellness.

Sales of V8 Splash juice beverages also increased in the quarter.

Prego pasta sauce sales increased in the quarter.

Sales of Pace Mexican sauces increased in the quarter, due to the launch of the new specialty salsa line.

Operating earnings for U.S.

Soup, Sauces and Beverages were $286 million, compared with $274 million in the prior period, an increase of 4%.

The increase in operating earnings was driven by higher sales and productivity gains, partially offset by cost inflation and higher advertising.

Baking and Snacking, sales for the quarter were $491 million, compared with $454 million, an increase of 8%.

Sales growth for the quarter breaks down as follows, price and sales allowances added 4%, currency added 5%, the divestiture of our Papua, New Guinea business subtracted 1%.

Operating earns were $68 million, versus 77 million a year ago.

Operating earnings in the prior quarter include a $23 million gain from the sale of the Pepperidge Farm idle manufacturing facility.

The remaining increase was primarily driven by double-digit gains in Pepperidge Farm and currency.

Within Arnott's, gains in biscuits were offset by declines in the snack food business.

Returning to sales highlights in the quarter, Pepperidge Farm continued its strong performance, driven by volume gains in all businesses, cookies and crackers, bakery, and frozen.

In cookies and crackers, sales gains were driven by continuing growth in Goldfish crackers, and growth in Distinctive varieties and 100-calorie pack cookies.

Bakery posted significant sales gains, driven primarily by continued consumer demand for whole grain bread, and growth in sandwich rolls.

Arnott's sales increased, due to favorable impact of currency, partly offset by declines in our snack foods business.

International Soup, Sauces and Beverages, sales were $458 million, compared to $404 million, an increase of 13%.

Sales growth breaks down as follows, volume and mix added 3%, price and sales allowances subtracted 1%, increased promotional subtracted 1%, and currency added 12%.

Operating earnings were $61 million, compared to $58 million in the prior year, an increase of 5%.

Operating earnings performance was driven by the favorable impact of currency, partly offset by cost to launch products in Russia and China.

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

Sales in Europe increased primarily due to impact of currency, and gains in Belgium and France, partly offset by a decline in Germany, due to our exiting the private label business.

Canada sales increased due to the favorable impact of currency, and gains in beverages.

North America food service, sales were $176 million, flat versus a year ago.

Components of sales break down as follows, volume and mix deducted 1%, price and sales allowances added 1%, increased promotional spending subtracted 2%, and currency added 2%.

The favorable impact of currency was offset by sales declines in our refrigerated soup business.

Operating earnings were $20 million, compared with $25 million in the year ago quarter.

This decline was primarily due to cost inflation and higher promotional activity, partly offset by productivity gains and higher selling prices.

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

Cash from operations for the first half was $442 million, as compared to the prior year of $328 million.

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

and Ireland businesses.

Capital expenditures were $90 million, compared to $121 million a year ago.

Total debt at quarter end was $2.756 billion, compared to $2.856 billion a year ago.

Cash and cash equivalents were $95 million, as compared to $483 million in the prior year.

Net debt, which deducts cash and cash equivalents from total debt was $2.661 billion, versus $2.373 billion in the prior year, an increase of $288 million.

We currently have two ongoing share repurchase programs, our strategic share repurchase program of $600 million, which commenced in November 2005 and runs through fiscal 2008, and our anti-dilutive repurchase program, which offsets the impact of shares issued under our incentive compensation programs.

Combining these two programs, we spent $203 million to repurchase 5.7 million shares during the first half.

That concludes my discussion on the second quarter, now here are a few comments from Bob Schiffner.

Thanks.

Good morning everyone.

Given the unprecedented increase in commodity and energy costs, I am actually quite pleased with our overall financial performance for the second quarter and half year.

Although our gross margins were unfavorably impacted by cost inflation and insufficient carry pricing, our strong top line growth and effective spending controls, have enabled us to generate first half adjusted EPS growth from continuing operations of 4%, which is just below our annual growth target.

Going forward, I believe we are well positioned to generate stronger second half earnings performance, since the pricing actions taken this fiscal year should enable us to generate significantly improved second half margins.

Although it is not likely that we will achieve flat gross margins for the full year, we will enter fiscal year '09 in a position to achieve further margin improvement.

Given the expected improvement in second half earnings performance, we are keeping our full-year EPS guidance at 5 to 7% growth in adjusted net earnings per share, from the adjusted fiscal 2007 base of $1.95.

Note that we expect that the second half earnings improvement will be skewed very dramatically to the fourth quarter.

Given the pending sale of Godiva, we will update our guidance once the sale is complete.

In closing, I would like to highlight some of the bright spots in our business this quarter.

As Doug mentioned in the press release our U.S.

Soup business rebounded in the second quarter, led by strong broth and ready-to-serve soup performance.

Our Low Sodium varieties continued to perform well, and be highly incremental.

Pepperidge Farm, despite battling significant increases in ingredient costs, continues to produce a high level, generating double-digit earnings performance in the first half.

This business is growing significantly with key customers, and is benefiting from consumers preference from whole grain products.

Our U.S.

Beverage business also continues to be a stellar performer.

Beverage sales were up 20% in the quarter, and are up 25% year-to-date.

While we don't expect this kind of sales increase in future quarters, due to more difficult comparisons, we expect this business to once again be our best performer for the year.

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

Amy, could you start the Q&A session please?

Certainly.

(OPERATOR INSTRUCTIONS) Our first question comes from Robert Moskow of Credit Suisse.

Your line is open.

Thank you.

You used to have a guidance of 7 to 9% EBIT growth for the year.

I didn't see that in the press release.

Are you withdrawing that?

No, we are just going to update it at the time of the Godiva sale.

Okay.

And how are you, the numbers are getting pretty confusing, as far as to how the first half is going.

Where would you say you are in terms of the first half, in terms of EBIT growth, compared to the original 7 to 9?

Our EBIT growth for the first half is up about 2%, and obviously we are behind that estimate for the year.

We also expect that in fact EBIT growth will in fact pick up in is second half, but we are just going to withhold commenting on the total year until the Godiva sale is past.

We think it will just be a much clearer discussion at that point.

Okay.

And then Bob about the pricing you are pushing through, can you be specific on where the pricing is coming?

Is it all in soup, and then since the soup season is mostly over, how much soup price realization can you really get in this fiscal year?

Well, the pricing is really across the board.

Okay.

There are very few businesses or segments not taking some kind of price, you know in this fiscal year.

As far as U.S.

Soup pricing is concerned, I can't specifically comment on that, but in terms of our overall U.S.

Soup, Sauces and Beverage business, our price increase is roughly 5% and so, it is again across the board including soup products, and you know, we expect to generate reasonably strong price from those actions in the second half.

Okay.

So you think a lot of it will flow through in the second half?

Yes, and also, in fact remember that in fact we also have an extra week in the second half as well.

Okay.

Thanks, Bob.

Robert, building on that, this is Doug.

The price will flow through more fully in the fourth quarter than it will in the third quarter, as it is just in the process of being implemented now.

Okay.

Thank you.

Okay.

Next question, Amy.

Our next question comes from Vincent Andrews of Morgan Stanley, your line is open.

Okay.

Good morning, everybody.

Previously you have given guidance in terms of input cost inflation as a percent.

I think that was just updated in the release.

Would you care to comment on that?

Yes, we think it is about what we have historically said, 6 to 7%.

Is the lack of change due to hedging, or does just your particular input still fall within that band?

I would say it is a little bit of both.

Okay.

In the last quarter you called out the weather as having an effect on your performance.

Do you think that is an issue now?

Do you want to comment on that at all during the quarter that you just reported?

No, and the callout on the weather was just it affected the quarterly inventory build for our customers.

But we don't see any impact of weather on our performance.

Okay.

And then lastly, on low sodium, previously you have talked about how incremental it has been.

I forget the exact numbers that you have given.

Is there any update to that incrementality?

It is highly incremental.

I will give a full update at Cagney next week.

Okay.

Lastly, just any update on your performance in China and Russia, or how the implementation is going?

The execution of the start up of the elite markets is going well.

We have only been shipping for four months in southern China, in lead market, and only, just a few months in Moscow, Russia.

I will give a full update at Cagney.

Okay.

Last one, on the microwavable bowls this is the second quarter you have called out some weakness in that performance.

What do you think that is due to?

Do you think there is any sort of shift, due to a weakening consumer away from convenience, or a negative mix shift, is that what it is?

Not particularly.

We are lapping a huge first half a year ago when the sales were up 14% on microwave products.

And some of this is promotionally driven.

Our promotional spending is down a little down in the first half.

It is planned to be up in the second half.

We have other plans that should keep microwave going over time at the category average, if not better.

Okay.

Thank you.

I will pass it along.

Okay.

Next question, Amy.

Our next question is from David Palmer of UBS.

Hi, guys, I was going to ask about that microwavable platform a bit.

You made that general comment that you were going to be do something in the future to make it grow as fast as the category, but I am wondering, maybe you can give a little more color as to why that segment, it seems like a problem at this point?

It has been declining so rapidly.

Is there any commentary you can offer?

Well, in the first half, it is just lapping big numbers, 14% sales growth, and we have some promotional spending shift, which is going to be more pronounced in the second half than in the first half.

We are also in the process of rolling out our gravity-fed shelving system in a significant way over the next couple of years, which should help dramatically get, help us lift that segment up pretty significantly.

But, I would say now it is more of a timing issue than it is a consumer issue.

And have you, I have heard from channel checks that the promotions have been stepped up at some retailers, a little bit more in the 10-for-10 type stuff out there.

Could you comment on that ,in terms of your strategy, the competitive environment with regard to value and kind of the steamier deals?

Well, I am not going to get into specific trade promotion strategy, but I will say we have tried to moderate our competitive posture there.

We intend to be competitive, but not to be overly aggressive.

All of our marketing mix modeling suggests that the opportunity to revitalize the category and to grow it, is to connect with the consumer, not through trade promotions.

So that is our intent, and that is why you see our advertising going up.

One last one, did you disclose in this release, because I missed it, about the Godiva's same-store sales?

Is that appropriate at this point to ask about that?

Well, they were down just like other high end retail.

They were down, and North America is our biggest market.

So that was the primary concern.

Actually our wholesale business was up a tich.

So it was really the retail environment in our stores in the holiday season.

Okay.

I will stop there.

Thanks again.

Thanks.

Next question, Amy.

Our next question comes from Pablo Zuanic of JPMorgan.

Hi.

Just trying to think here about condensed and broth.

Because we are dropping in cooking and condensed, is that being picked up by broth, and maybe should we think of looking at the two categories on a combined basis?

Is that what is going on?

Is that what explains the drop in cooking condensed soups?

First of all, broth is on fire and has been for several years, and I will are cover some of this at Cagney.

So broth has been growing at a nice rate, as we have been growing cooking soups as well.

So they have both been growing until this first half.

And so there was no, it is not like this is a long-term trend.

We had a few tactical missteps with our cooking soups in the first half, and we have addressed them, and expect them to get back on-track.

So I don't see a relationship there.

Although we do look at them, and we look at total cooking behavior internally.

We see opportunities for growth here.

The broth product is used in many applications but not heavily in casseroles, and our cream soups, our cooking soups are heavily casserole-oriented, and that casserole business is going to continue to grow as well.

So they ought to be able to grow in parallel with one another.

Just a follow up for Bob.

In the first quarter soup margins, or Soup, Sauces and Beverages margins were down about 230 basis points year-on-year.

In the second quarter, they are down only 40 basis points, although as you said there was no price realization.

So I am just trying to understand what explains that?

Is it just a scale issue, that sales were down in the first quarter, and now you have better sales?

What else is going on?

You are spending more, the pricing is flat, yet the margin trend it is a lot better.

I am just trying to get a sense of what explains that?

We had improved SG&A, cost performance which is one thing.

And you always get shifts in trade promotion, and some shifts in mix.

All of those things come together to generate the performance that you have mentioned.

Pablo, you almost have to look at it across the half, and then we have to look at it the second half, once our pricing gets traction in the second half.

Right.

Just one quick follow-up, to be clear, the base of 195, that is not adjusting yet for Godiva, right?

We still don't know whether it is dilutive or accretive, can you shed of light on that?

You are right, the $1.95 still includes Godiva, and we will get into the accretion dilution issue when we close Godiva, and we update our guidance.

One last one.

Inventory of the trade by the end of the second quarter, would you say they were balanced, or were there some achievements or take-aways in the second quarter?

They were balanced.

Fairly equivalent to what they were in the prior year.

Okay.

Thank you,.

You are welcome.

Next question, Amy.

Our next question comes from Mitchell Pinheiro of Janney Montgomery.

Hey, good morning.

Hi, Mitch.

In terms of pricing, Bob, you talked about 5% pricing in the U.S.

soup and sauce beverage.

Can you talk about what we should expect in pricing on the other lines, in Baking and Snacking and International?

We will have pricing in Baking and Snacking, and I would expect some pricing in International Soup, Sauces and Beverages as well.

But probably not as much.

Not as much as Baking and Snacking or not as much as--?

As the other segments will show.

Mitch, the Baking and Snacking pricing has been going along at a fairly steady pace during the course of the year.

Our soup pricing basically had to be held back, because we had a promotion scheduled where we had to wait until February to take it.

So it just has a different profile than the Baking and Snacking pricing.

One would think with 4% soup growth and double-digit V-8 growth, clearly two of your highest margin businesses, would have expected a little better operating margin performance despite the heavy cost inflation.

Is it that your pricing lagged here?

Is that it?

Absolutely.

So that is the primary issue there?

Yes.

Mitch, the way to think about it as a company anyway, we delivered 7% sales growth.

If we has just held our gross margin, which we have demonstrated the ability to do when we forecast prices correctly, we would have delivered $50 million more in EBIT, it would have been an 8% EBIT growth, and an 8% EPS growth, with 7% sales growth.

And we just missed the call.

Okay.

One last thing.

Have you seen any, with condensed, usually condensed is viewed as a good recessionary product.

Are you seeing any trends along that line?

I know we are talking cooking and eating, and those habits, but is there any return to value at all here, you are seeing in the numbers?

We think there is a latent opportunity for that.

Obviously we haven't tapped into it yet, otherwise I would be reporting better numbers.

But we think we are well-positioned here, and we expect better things in the first, in the second half than we had in the first half.

Okay.

Thank you very much.

Next question, Amy.

Our next question comes from Jonathan Feeney of Wachovia Securities.

Good morning.

And thank you.

Could you update us on, I think we talked a little bit about some of the capacity constraints you might have in that beverage business right now, I know that CCE deal has been huge for you.

Are we capacity constrained, and when will new capacity come on to fund this growth?

This, one thing, Bob will talk to you about the capacity piece in a minute.

We are putting some in, but the important thing is that we are just getting going with the Coke and the CCE deal.

Largely what is driving our performance is our base business and our marketing efforts right now, against V8, V8 V-Fusion, and V8 Splash.

The best is yet to come on this deal, as we just started shipping in September.

Good deal.

As far as capacity is concerned, we are nearing capacity constraints, but we are planning this looking forward, and we will be spending capital starting this year into next year, to add additional capacity in beverage.

Okay.

And just, Doug if you would allow me to follow up on Mitch, you had mentioned latent possibilities for soup to be sort of, I guess a recession buster, counter-cyclical product.

It would seem to me that prepared meals in general, and I think soups offer a tremendous amount of value, would be the first place maybe people rotating from food away home to food at home in some tougher times would look in the grocery store.

Did that happen in the early 90s?

I don't know on a granular basis.

It is hard for us to tease out those kinds of nuances, because soup in season is much more responsive to promotional activity, than it is those kinds of trends.

And so it is just hard for us to tease out the nuances, but your instincts are right.

I would encourage you to go out and tell your neighbors, that this is the perfect recession food.

I have been doing all I can.

Alright, I am counting on you.

(laughter) Thank you.

Next question, Amy.

Our next question is from Terry Bivens, Bear Stearns.

Good morning gentlemen.

Morning, Terry.

Back on condensed, I guess there is still a theory out there that as condensed goes, so goes the company.

As you look back over the past three quarters though, it has been kind of tough sledding in condensed, and yesterday Tree House pointed to what they called the warm weather in terms of the private label piece of it.

You guys are addressing more of the cooking soups.

My question is what seems to have caused what had been a pretty good performer for you guys, to have gone into the tank a little bit here over the last three quarters?

Well, first of all, there is a great observation you had is, obviously our condensed soup has been a little softer for a few quarters, but our Company has done quite well.

So the first observation is that we are not a one-trick pony, and that the rest of the company can deliver in a quality way.

The second observation I would have around condensed soup, is that we have demonstrated the ability when we innovate on the product, and when we have news we have driven up nearly a 4% compound annual growth rate in condensed soup over the last three years, and 3% over the last five years.

We believe that as long as we maintain our innovation momentum, and don't have any tactical missteps, we ought to be able to continue to aspire to that kind of sales performance, because it does fit into consumer trends and life styles.

Now our invasion has not been as robust the this year.

We did have a tactical misstep or two along the way, which caused us to have a soft first half.

I believe we will have a stronger second half, and will be well-positioned for next year as we lap the weak first half we had this year.

I am feeling okay about it.

I wish we had done better, but we will.

The same question to RTS.

There is a bit of a feeling out there that maybe they caught you a bit off guard this year, with things like Progresso Lite, et cetera.

What is your feeling about that going forward, vis-a-vis the competitive dynamic there with Progresso?

We just need to do better.

We are the 800-pound gorilla in this category, we dominate all of the segments, whether it is condensed, ready-to-serve, or broth.

We have all of the capability in the world.

We just need to do better, and you saw we did better in the second quarter, and I expect we will continue to do better, and we will highlight some of the initiatives we have going forward.

at Cagney But we just need to do better.

We have done okay.

We need to do better.

Okay.

Fair enough.

Just one last thing.

I think Bob you mentioned 5% on the North America soups and sauces.

Price increase, that is.

Would we be able to assume that maybe it was a little more in-line with your overall 6 to 7 inflation rate, when we look at just the soup side of things?

First of all, it wasn't the North America it was the U.S.

Soup, Sauces, and Beverages.

Okay.

Sorry about that.

Okay.

And I mean clearly as we go into the second half, Terry, this price increase wasn't taken until earlier this month.

So, obviously we expect a better matching of cost and price in the second half, and that is what our expectation is.

Okay.

Very good.

I will see you guys at Cagney.

Next question, Amy.

Our next question comes from Alexia Howard of Sanford Bernstein.

Hi.

A couple of things, picking up on on the theme of macroeconomic jitters out there.

Can you just speak to the food service segment, given that I guess sales growth was pretty stagnant this quarter, it seems as though margins are down.

Are you seeing a bit of a slow down, or are there other things going on for you that is causing that deterioration in performance?

In our case, I don't think there are any fundamental trends that are affecting us.

The food, the away from home segment is a little bit soft overall in the economy.

But our initiatives are more linked, our performance is more linked to the initiatives we have taken, and I think we just, you just have to view it as a soft second quarter.

We are very optimistic, I will cover about our food service business.

I will actually cover that at Cagney next week.

Okay.

Great.

Just one more.

The roll out of the gravity-feed shelving system in the ready-to-serve segment.

I know that had a bit of a false start, it was getting going, but perhaps not as quickly as you would like.

Can you give us an update on where that is, and is it picking off?

Are you seeing incremental sales from that at the moment?

Well, I will give a more complete update at Cagney next week, but the overall story is that the ready-to-serve rollout is going as we planned it.

We are seeing the change in performance when it is implemented that we expected to see.

And so we are pleased with the way it is going.

It just goes a little slower, because several more competitors have to be involved in the decision making in the category, for the customer to install it.

It is just a slower process.

But it is going as we planned it to go.

Okay.

Great.

Thank you.

Next question, Amy.

Our next question comes from Andrew Lazar of Lehman Brothers.

Morning everyone.

Hey, Andrew.

Doug, you had mentioned sort of what could have been, in terms of EBIT and EPS growth, if you were able to have held gross margins flat in the quarter.

Even with the minimal pricing you have gotten, gross margin dollars were still up a couple of, 4% or so.

The pricing that you are now taking, thinking ahead kind of to next soup season, is that meant to try and maintain, or grow your gross margin dollars, or is that actually attempting to get back to point to keep your margin stable?

If it is the latter, that would suggest if it flows through the way you had hoped, obviously it could be a pretty powerful driver around the EBIT and EPS line.

The comment I had was around first half.

Got it.

Not the quarter.

The second, I would step back and look at our philosophy is that pricing and productivity ought to be offsetting our costs.

They didn't in the first half, and our margins were troubled.

Our pricing now is designed to position us, to get back on a margin growth track.

When you couple it with our productivity initiatives starting in F'09.

We have miles to go before we sleep here.

We underestimated costs coming into this year, and we have got to make sure that we are right on top of our game as we go into next year.

That is what I am trying to get at.

The game plan is as we see it is believe we can take pricing and productivity, to improve our percentage gross margin going into next year.

That is our goal.

That is the goal.

Okay.

That is helpful.

Then a number of other companies not surprisingly have said, hey with this type of inflation and these types of pricing increases, the age-old kind of volume sensitivity and elasticity models might not prove overly helpful.

Do you feel like that same sort of level of risk around this type of pricing as others might, or is your sense from past experience, and given your own specific category dynamics in what you are seeing competitively, give you a level of comfort that this type of pricing works through the way you would like?

Well, it is a lot of price.

We are anxious about it, we are going to manage it.

We wouldn't have taken it if we didn't think the net impact would have been positive.

But this is something we have got to manage very carefully.

The good news is that if we are just talking about soup, the soup category is well-positioned relative to other simple meals.

Due largely to our innovation initiatives over the last five years, we have got the soup category growing at a faster rate than other simple meals.

We have got good momentum over time in this category I think it can hold the pricing relative to other simple meals, but we have to prove ourselves.

Okay.

Just a quick one.

This may be more, you know, Cagney related, and that is fine.

In terms of how you think about, in soup specifically, kind of innovation, you have tended to say, what are the big platforms, whether it is low sodium, or more broader, the way you think about health and wellness, and what have you.

Others maybe have gone for more depending on their own business, more niche opportunities here and there.

Do you still think the broader platform is the way to go, or is there an opportunity to keep doing that, but also be more aggressive in some of the niches, given you are the 800-pound gorilla, and should own every different consumer occasion or desire in soup that is out there?

Over time we intend to do that.

I still believe that the three platforms we have established corporately have a lot of runway on them.

And when I talk about wellness, I talk about convenience, and I talk about quality and premium.

Those are the three primary platforms, and I think there is a lot of upside there, and I will hit this pretty hard when we get to Cagney next week.

Good.

See you then.

Next question, Amy.

I am showing no further questions, sir.

Okay.

Very good.

Thank you, everyone.

We hope that if you cannot attend Cagney next week, that you will listen on our webcast.

We will be on Wednesday morning before lunch, and invite all of you to attend.

Thank you very much.

Ladies and gentlemen, this does conclude today's conference.

Thank you for your participation.

Have a great day.

You may now disconnect.