金寶湯 (CPB) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the first quarter 2009 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, Investor Relations.

Sir, you may begin.

Good morning everyone.

Welcome to Campbell Soup Company's first quarter fiscal 2009 conference call.

Our agenda for this morning's call will be as follows.

Doug Conant, President and Chief Executive Officer will have some opening remarks.

Anthony DiSilvestro, Vice President and Controller will discuss results for the first quarter.

Craig Owens, Senior Vice President, Chief Financial Officer and Chief Administrative Officer will have a few closing comments, and then a question and answer session will follow.

Our financial results press release and supplemental schedule were issued earlier this morning.

These are also posted on our website.

Our call this morning will take approximately one hour.

It will be available for replay approximately two hours after the call is complete through midnight, December 1.

The replay number is 1-888-266-2081 or 1-703-925-2533 and use the access code 1305905.

You may also listen to a replay 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 certain forward-looking statements that reflect the Company's expected future business and financial performance including statements concerning impact of marketing investments and strategies, pricing, share repurchase, new product introductions and innovation, cost savings initiatives, quality improvements, inflation, commodity hedging, currency translation, and portfolio strategies, on sales, earnings, and margins.

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

Please refer to our most recent form 10-K and subsequent Securities and Exchange Commission filings for a list of factors that could cause the Company's actual results to vary materially from those anticipated or expressed in any forward-looking statement.

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

We have provided a reconciliation of those measures to the most directly comparable measures, which is available on our investor website at www.CampbellSoupCompany.com.

Now, to begin, here is Doug Conant.

Thank you, Len.

Hello, everyone.

Operationally we're off to a very good start to the fiscal year.

I'm particularly pleased we were able to have solid first quarter performance in an obviously very difficult economic climate, a climate which is the most challenging I've witnessed during my time in the industry.

The current crisis is impacting businesses and consumers all over the world.

Despite these challenges, I'm optimistic and confident in our ability to perform, and let me tell you.

First and foremost, Campbell's has strong fundamentals, and continue in large and growing categories with iconic market and segment leading brands that have strong track records of success.

Importantly, our brands provide both good value and comfort to our customers, and all things considered, that's a good place to be these days.

And over the past few years, by shedding assets like our UK business, Godiva and Snack Foods in Australia, we've sharpened our portfolio, focused on the three categories where we believe we can compete with anyone in the world and we can win.

Simple meals are in soup, baked snacks are anchored in biscuits and bakery and healthy beverages have been anchored in vegetable-based beverages.

The second reason I'm excited about our prospects is that I'm pleased with the performance of our US Soup business at the start of the year.

We have very strong top line performance in the quarter, most notably in our condensed soup and broth businesses, both of which have double digit gains.

Our innovations in US Soup are once again setting the standard and leading the industry.

Our reduced sodium soups continue [to grow nicely] and the introduction to Campbell's Select Harvest and Campbell's V8 ready-to-serve soup have also been very successful.

And our marketing to support these new products are paying off, especially with our strong advertising campaign for Select Harvest.

In addition, we've coupled the high impact marketing for Select Harvest and V8 with a campaign to remind people of the many reasons Campbell's Condensed Soups offer great value and great taste.

This message is especially relevant today as people are paying greater and greater attention to (inaudible).

Third, beyond our US Soup business other parts of our portfolio performed well to start the year, including our sauces business with Prego and Pace, Pepperidge Farm and Arnott's.

In Europe, our branded soup performance was all solid.

Fourth, we continue to be bullish about the emerging Markets of Russia and China.

These markets continue to represent a tremendous untapped opportunity for our Company, both for the long term.

Remember, Russia and China represent approximately 50% of global soup consumption and we are actively preparing to expand our businesses in both markets in fiscal 2009.

The final reason for my optimism has to do with the Campbell people.

In my opinion, we have built a world class organization over the past eight years, particularly in the categories and geographies in which we compete and to be clear, we are built to more than just compete.

We are built to win.

I'm confident that when the dust settles from this current market chaos, this team will have expanded our leadership profile on virtually all of the fronts.

Now, fiscal 2009 clearly does have its challenges.

The global economic crisis will provide a strong headwind for the food industry and consumers alike.

Despite the conditions, Campbell's a Company with strong fundamentals, a sharpened focus, iconic brands that people know and trust, strong leadership and a consistent track record for innovation.

Clearly, all of these qualities are evident in our first quarter results.

Now, before I turn the call over to Anthony to take you through the details, I'd like to mention that today marks the first investor call for our new Chief Financial Officer, and Chief Administrative Officer, Craig Owens.

You'll be hearing from Craig later this morning.

I'm absolutely confident that as you get to know him, you will recognize what a great addition he is to our senior leadership team.

Now, I'll turn the call over to Anthony for his comments.

Anthony?

Good morning.

Before I begin my review, I'd like to make a few comments regarding the basis of the presentation of our results and items impacting comparability.

As a reminder, in March 2008, we completed the divestiture of the Godiva business.

The results of this business are reported as discontinued operations on the income statement for fiscal 2008.

In April, we announced a period of initiatives to improve our operational efficiency and long term profitability, including selling certain salty snack food brands and assets in Australia, closing certain production facilities in Canada and Australia and streamlining our management structure.

During the first quarter of fiscal 2009, we recognized $7 million of accelerated depreciation and other exit costs related to this program in cost of products sold.

During fiscal 2008, we recognized $182 million of costs related to this program including restructuring charges and accelerated depreciation.

The Company expects to incur an additional $41 million of pre- tax costs related to these initiatives bringing the total up to $230 million.

As part of our business operations, we are exposed to market risks from changes in commodity prices.

We enter into commodity hedging transactions to reduce the volatility from fluctuations and pricing of commodities.

In the first quarter of fiscal 2009, we recognized in costs of products sold a $26 million unrealized loss on the fair value of open commodity futures contracts.

Beginning in Fiscal 2009, unrealized gains and losses on commodity hedging activities are excluded from segment operating earnings and are recorded in unallocated corporate expenses as these open positions represent hedges of future purchases.

Upon closing of the contract, the realized gain or loss is recorded in segment operating earnings, which allows the segment to reflect the economic effects of the hedge without exposure of quarterly volatility of unrealized gains and losses.

The volatility associated with the unrealized gain and loss will be treated as an item impacting comparability.

In prior periods, unrealized gains and loses on commodity hedges were not material.

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

From our combined total including continuing and discontinued operations i will discuss reported net earnings per share, and our adjusted net earnings per share excluding those items impacting comparability.

Adjusted net earnings per share in the quarter were $0.77 compared to net earnings per share in the first quarter a year ago of $0.70.

This began our review of continuing operations for the first quarter.

Net sales for the quarter increased 3% to $2.250 billion.

The change in sales breaks down as follows.

Volume and mix added 1%, price and sales allowance to debt at 7%, increased promotional spending subtracted 2%, currency subtracted 1%, and divestitures subtracted 2%.

Gross margin for the quarter was $871 million compared to $892 million in the prior year.

Gross margin percentage for the quarter was 38.7% compared to 40.8% a year ago.

The current year included a $26 million unrealized loss on commodity hedges and the current year also includes $7 million of costs related to the initiatives to improve our operational efficiency and long term profitability.

After adjusting for these items, gross margin was $904 million and the gross margin percentage was 40.2%.

The decline in gross margin was primarily due to cost inflation in excess of pricing.

Marketing and selling expenses increased from $296 million a year ago to $307 million due to higher advertising, principally in US foods.

Administrative expenses were $140 million compared to $141 million in the prior year quarter.

Research and Development expenses increased $2 million to $29 million.

Other income of $4 million included gains recognized on foreign currency hedging transactions.

Earnings before interest and taxes were $399 million compared to $428 million in last year's first quarter.

After adjusting for the previously mentioned item, EBIT was $432 million as compared to $428 million in the prior year quarter, an increase of 1%.

Net interest expense was $32 million compared to $42 million in the prior year, primarily related to the general decline in short-term interest rates.

The tax rate in the first quarter was 29.2% compared to 30.6% in the prior year's quarter.

Excluding the rate impact of items impacting comparability, the tax rate on the first quarter was 29.8%.

Average diluted shares outstanding declined to 365 million from 388 million primarily due to repurchases utilized net proceeds from the divestiture of the Godiva business and our strategic purchase program.

Earnings from continuing operations for the quarter were $260 million or $0.71 per share compared to $268 million or $0.69 per share in the year ago quarter.

The current year included the $16 million or $0.04 per share on a realized loss on commodity hedges and current year also included $5 million of costs or $0.01 per share related to the initiatives to improve our operational efficiency and long term profitability.

After calculating these items into the reported results, adjusted earnings from continuing operations in the quarter were $281 million compared to $268 million a year ago.

Adjusted earnings per share were $0.77 as compared to $0.69 in the year ago quarter.

The growth in adjusted EPS benefited from a significant decline in diluted shares outstanding, primarily due to repurchases utilizing net proceeds from the divestiture of Godiva and a Company strategic share repurchase program.

Earnings from discontinued operations in the first quarter of fiscal 2008 were $2 million or $0.01 per share.

Net earnings per share, which includes both continuing and discontinued operations for the quarter were $0.71 per share compared to $0.70 per share a year ago.

Excluding the items previously mentioned that impact comparability, adjusted net earnings per share in the first quarter were $0.77 compared to $0.70 in the year ago quarter, an increase of 10%.

US Soups, Sauces and Beverages, sales for the first quarter rose 9% to $1.198 billion, from $1.097 billion, in the year ago.

Here is a break down of the change in sales.

Volume and mix added 4%, price and sales allowances added 8% and increased promotional spending subtracted 3%.

Let's touch on a few highlights.

US Soup sales increased 12% with Condensed up 14%, ready-to-serve up 7%, and broth up 23%.

Sales of Condensed Soups increased double digits in both cooking and eating varieties driven in part by increased promotional activity.

Ready-to-serve soup sales increased due to the successful introduction of Select Harvest, partly offset by a decline on Chunky.

Sales for ready-to-serve soups also benefited from the introduction of V8 Soups.

The convenience platform, which includes soups in microwavable bowls and cups increased primarily due to gains in bowls.

Broth sales were driven by continued growth in aseptically packaged varieties and the introduction of Swanson Cooking Stock.

The Wolfgang Puck Soup, Stock, and Broth business acquired in the fourth quarter of last fiscal year, contributed approximately one point to Soup sales growth.

Beverage sales grew slightly following the significant growth a year ago.

The increase was driven by continued strong growth of V8 Fusion Juice partly offset by declines in V8 Vegetable Juice.

Sales in the year ago period benefited from additional sales due to the distribution agreement with the Coca Cola Company and Coca Cola Enterprises Inc for Campbell's single serve refrigerated beverages in North America.

Prego sales increased double digits.

Sales of Pace Mexican salsas also increased double digits primarily due to the successful borrowing of specialty salsas.

Operating earnings increased to $314 million from $309 million as higher sales and productivity gains were partially offset by cost inflation and higher advertising.

Baby and snack sales for the first quarter decreased 4% to $509 million from [$532] million in the year ago quarter.

The change in sales for the quarter breaks down as follows.

Volume and mix subtracted 1%, price and sales allowances added 8%, increased promotional spending subtracted 2%, currency subtracted 2% and divestitures subtracted 7%.

Pepperidge Farm sales increased, primarily driven by growth both in cookies and crackers and bakery businesses.

Cookies and cracker sales increased, driven by gains in Goldfish snack crackers and the introduction of Baked Naturals, an adult favorite crackers partly offset by a decline in cookies.

Bakery sales increased due to gains in whole grain bread varieties and stuffing.

As reported, sales declined due to the divestiture of certain salty snack food brands in May, 2008, and the unfavorable impact of currency.

Excluding these items, sales increased due to the significant growth of crackers partly offset by a decline in chocolate biscuit varieties.

Sales within our biscuit business in Indonesia also grew strongly.

Operating earnings increased 15% to $83 million from $72 million as growth in Arnott's and Pepperidge Farm was partly offset by the impact of currency.

International Soups, Sauces and Beverages, sales for the quarter decreased 3% to $380 million from $390 million a year ago.

The change in sales for the quarter breaks down as follows.

Volume and mix subtracted 1%, price and sales allowances added 3%, increased promotional spend subtracted 1%, currency subtracted 2%, and divestitures subtracted 2%.

In Europe, sales increased as gains in France and Belgium were partly offset by the divestiture of the Company's sauce and in September 2008 and the planned exit from the private label business in Germany.

Across Europe, branded wet soup sales increased.

In the Asia Pacific region, sales increased primarily due to gains in Malaysia and in Australia.

In Canada, sales declined, primarily due to the unfavorable impact of currency and a decline in beverages.

Operating earnings decreased to $38 million from $51 million a year ago due to the incremental costs to establish businesses in Russia and China, a decline in Canada and the unfavorable impact from currency.

North America foodservice, sales for the quarter decreased 2% to $163 million to $166 million in the year ago period.

The change in sales breaks down as follows.

Volume and mix subtracted 6%, price and sales allowances added 6%, increased promotional spending subtracted 1%, and currency subtracted 1%.

Excluding the impact of currency, sales declined due to discontinuing certain unprofitable products and a weakness in the foodservice sector.

Operating earnings decrease from $24 million to $11 million.

The current year included $7 million of accelerated depreciation and other exit costs related to the previously announced restructuring program.

The remaining decline is primarily due to lower volume.

Unallocated corporate expenses increased from $28 million a year ago to $47 million in the current quarter.

The increase was due to a $26 million unrealized loss from commodity hedging in the current year, partly offset by lower SAP implementation costs and gains recognized on foreign currency hedged transactions.

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

Cash flow from Operations for the quarter was a use of $15 million compared to $74 million a year ago due to changes in working capital, primarily accounts payable and accrued income taxes.

Capital expenditures were $35 million, as compared to $40 million in the year ago quarter.

We expect capital expenditures in fiscal 2009 to be approximately $400 million.

During the first quarter, we repurchased three million shares at a total cost of $114 million.

Total debt was $2.756 billion, compared to $2.814 billion in the prior year.

Cash and cash equivalents were $63 million as compared to $77 million a year ago.

Net debt which deducts cash and cash equivalents from total debt was $2.693 billion versus $2.737 billion a decrease of $44 million.

This concludes my discussion for the quarter.

Now, Craig Owens will have some summary comments.

Thank you, Anthony and good morning, everyone.

Well my first week at Campbell Soup Company have coincided with the extraordinary dislocations of the financial markets and a rapidly deteriorating global economy, as well as volatile currency and commodity movements.

Under such unusual conditions, it has been actually quite encouraging to find the Company performing well in the marketplace with a portfolio of businesses recently sharpened and well positioned in all key markets and defining strong financial fund amount in place.

I'm really pleased to be here and I'm enjoying the chance to meet so many talented colleagues at Campbell's.

Also I look forward to meeting all of you who follow the Company closely.

My comments now will center around the guidance that we offered in September.

We said that we expected sales excluding the negative impact of one less week in the current fiscal year and our recent divestitures to grow in long term target of 3 to 4%.

We said we anticipated adjusted EBIT growth to be slightly below our long term target of 5 to 6%, reflecting impact of one less week, increased marketing spending, and increased investment spending in Russia and China.

And finally, we expected adjusted net earnings per share to grow between 5 and 7% from the adjusted base of $2.09.

We believe that continued solid sales performance and the management of elements of gross margin and operating expenses will deliver our planned results for sales, EBIT and EPS in local currency; however, approximately 25 to 30% of our sales and earnings come from non-US Operations, given the strength and volatility of the US dollar up against the major foreign currencies where we operate, mainly the Australian dollar, the Canadian Dollar and the Euro, it's impossible to forecast the impact of these currencies on our business accurately; however, the spot rates stayed at the same rate as at quarter end.

The impact of currency alone would negatively impact sales of EBIT and EPS growth rates by approximately five percentage points this fiscal year.

We're making efforts to improve our performance and to build on our good sales momentum in the Soup business.

We'll continue to focus on operational fundamentals, to deliver the results that are consistent with our strong track record.

With that I'll turn it back now to Len, and we'll take some of your questions, thank you.

Q & A process, please?

Thank you.

(OPERATOR INSTRUCTIONS).

Our first question comes from Alexia Howard of Sanford Bernstein.

Hello, there.

Hi, Alexia.

A question on the outlook for margins for the rest of the fiscal year.

I think on the last conference call, you were talking about flat gross margins for the full year.

It seems as though on an underlying basis they were down about 60 basis points this quarter.

Do you feel as though we're getting towards the turning point as we get into the second half?

Are you seeing a bit of relief on commodity cost inflation or is it the pricing and productivity might come through a bit more strongly?

How are you feeling about that?

Alexia, we do still feel we'll be about flat for the full year.

We're not seeing much relief on inflation, particularly given the commodity hedges that we have in place but as you say, we would expect to see pricing come through more strongly in the second half and recognize that we'll be cycling from last year somewhat higher inflation rates in cost of sales.

And just a quick follow-up.

It looks as though the price realization overseas in the international segment wasn't as high as in most of the other domestic areas.

Is that because of difficulty in Europe or Australia or might we expect to see stronger price realization in the back half of the year?

Yeah, I think the challenges have been primarily in Europe and given the competitive environment that it's difficult to realize significant price, although we have been more successful in Australia.

Okay, thank you very much.

Okay, thanks.

Next question, Devin?

Yes, sir.

Our next question comes from Chris Growe of Stifel Nicolaus.

Hi, good morning guys.

I just had two questions for you.

The first one was just to ask about shipments versus consumption, again you had very strong US Soup growth and we know IRI has not been as good a predictor of that recently and I know you control a lot of the inventory just what you see on the inventory front and how shipments compare to consumption in the quarter.

Yeah, and obviously we don't comment on consumption, Chris.

But our tracking of inventory shows that there's no material change and so we believe our sales are finding their way through to retail.

And then in this quarter we saw the promotions had picked up and offset some of the pricing, is that more of a short-term phenomenon or something you expect to continue?

Well, we are committed to supporting a brand.

We have a lot and we'll continue to spend against it, but the spending came in as expected as did sales so we're working on a plan.

Okay, and then so last one I had was relative to the EBIT growth.

The adjustments you've made to your guidance seem to reflect the foreign exchange, the obvious foreign exchange hit, but foodservice and the international division did come in weaker than I expected and it looks like those conditions could be persisting throughout the year so are there no adjustments to your EBIT growth for the reality of those two divisions or something to make up for that?

Well clearly, in the current economic environment, I think we'll see some segments of our business pressured more than others but the flip side of that is that the core business actually tends to do pretty well in a weaker economic environment, so our feeling is that again, ex the currency headwind that we should be able to deliver our projected EBIT growth rate.

Okay, well thank you.

Next question?

Our next question comes from Eric Katzman of Deutsche Bank.

Hi, good morning everybody.

Hi, Eric.

I'm just kind of clueless when trying to understand this quarter.

I mean, the variable margin on Condensed Soup is so high, I just don't see how the profitability on a consolidated basis within that segment isn't better.

I mean, you said SAP spending is down.

Advertising year-over-year is basically up as a percentage of sales, pretty flat.

I mean what am I missing that such strong Soup profitability or such strong Soup growth isn't translating into profits?

Eric, this is Doug.

There are several things going on here and you know we don't get into the specific Soup P & L discussion but I'll give you highlights.

First of all, Marketing spends is up substantially, not just modestly.

As we reported it's part of a whole segment but it's very much focused in US Soup.

Second of all, we are still lapping just huge cost increases and our pricing is not fully reflected to capture those yet.

As a result, we're right where we expected to be for the first quarter and we didn't expect to have significant Soup earnings growth in this quarter.

But you put through I guess it was 7% pricing on the top line, so can you tell us on a consolidated basis how much input costs were up that it didn't, that that amount of pricing didn't flow through?

Well, Anthony, I'm looking at you here.

Our increased cost in terms of commodities were up 9 to 10% in the quarter, and the pricing is not all reflected all the way through to retail yet, but Anthony do you want to build on that?

No, Doug, you're absolutely right.

Cost inflation if you look at it averaging raw materials and energy is up 9 to 10%.

It's having about a five point negative impact on gross margin and our pricing and our productivity does not fully recover that so obviously we have a gross margin percentage decline year on year which is negatively impacting our EPS growth.

I'm sorry, Anthony.

Did you say five points or 50 basis points?

On the inflation ?

These translate 9 to 10% inflation on a 60 point cost base, you can calculate the decline in gross margin percentage which is fairly substantial in the quarter.

Okay and just as a follow-up, Doug, let me understand this.

So if promotional spending is up a bit in the quarter in the US Soup, Sauces and Beverages and Marketing and selling is basically up only slightly as a percentage of sales, where is that extra advertising that you're talking about flowing through?

Well, it is in the mix of North America and Soup, Sauces and Beverages, and it's increased in Soup but not in the other parts of that portfolio so it's a mix change within the category, within that reporting segment.

I just, I don't know, I guess maybe when you meet with us in a week or two maybe we can get a better explanation because everybody on the planet knows that that US Condensed business has got to be one of the highest margin businesses in the world.

Now Eric, remember, we said we were spending back heavily and you saw in July when we talked about all of the new programs we've got going on and our advertising and US Soup was up substantially in the first quarter and we expect it to be up significantly for the year too, so I think that --

And we can create a road map as we go forward that will make this more helpful.

The other piece of it as I'm reflecting on the discussion is we also had a high new product launch cost in this quarter which are probably finding their way in here but we can create a road map on it.

This is unfolding exactly as we anticipated, so this is something that we can walk you through.

Okay, well I'll pass it on but I just think that this point deserves more explanation.

I mean your stock is down 7% today because I think people are just aren't feeling or aren't understanding this dynamic given how profitable Soup is on a kind of run rate normalized basis.

I'll pass it on.

Thanks.

Okay, next question?

Thank you.

Our next question comes from Eric Serotta of Merrill Lynch.

Hi, Eric.

Good morning.

Just to pick up on something I heard in your answer to Eric 's previous question, did you say that pricing is not fully reflected at the shelf yet and if I heard you correctly on that, why is that the case?

As I remember correctly, you announced this price increase towards the tail end of last Soup season.

It was supposed to be fully in place by the beginning of this Soup season.

So why, if I heard you correctly, was that pricing not fully reflected and do you expect it to be reflected over the next few quarters?

Eric, let me just say one thing.

Don't forget we had two price increases.

We had the one in March that you're talking about and we also implemented one in September, and that's the one we're talking about.

Okay, so the March increase was the 7% across US Soup, Sauces and Beverages?

No, it was only 4%.

Okay.

And we said the similar one we had in September, but that's the one we're talking about this not fully reflected yet but I'll let Anthony --

I think the point is that the September pricing is fully implemented; however, we don't have a full quarter's worth of benefits on our results in Q1.

We will in Q2.

Okay.

And then just to get to a little bit to touch upon Eric's question, if you're not, if you didn't deliver the profit growth that a lot of us were expecting in the fiscal first quarter, could you give us some idea as to how you expect profit growth to unfold over the remainder of the Soup season?

It seems given the seasonality of your business that you'd need to see a big fiscal second quarter in order to deliver meaningful profit growth for the year.

Yeah, well, as you know, --

In US Soup, Sauces and Beverages.

We don't forecast profits specifically but I think broadly, you should expect to see us continue to invest heavily against the brands in the second quarter and that in the second half of the year, as we begin to cycle much higher cost of sales from prior year and pricing comes fully through that we would expect to see a stronger second half than first half.

A stronger second half than first half, okay.

Yes.

And then one more and I'll pass it on.

I believe on the last call, it was either Doug or Bob mentioned that you spent about a nickel a share for China and Russia investments last year, and that could be most double that this year.

Given the changed global macroeconomic environment, have your plans for the overall level of spending changed?

We continue to be very excited about Russia and China.

Those programs are well on track so right at the current time, we're holding our plan for expanding in both Russia and China in fiscal '09 time frame.

Okay, I'll pass it on.

Thank you.

Okay, thanks.

Next question?

Next question comes from Robert Moskow of Credit Suisse.

Hi, thank you.

I would like a little bit more color on Russia.

We're hearing that retailers are pushing back very heavily on price increases.

You are increasing your investment there.

You're putting manufacturing on the ground there and you're going into more geographies but consumers there, 10 to 15% of them aren't even getting their paychecks now and track record says that things could get worse, so I'd like to know what you're seeing in terms of the retail environment in Russia, whether the conditions have really deteriorated and then secondly on the second half of fiscal '09 being better than the first half, I mean, your fourth quarter in fiscal '08 had a huge increase in operating income, 40% and you had the benefit of a 53rd week, so is fourth quarter going to have another increase on top of that even though you don't have the 53rd week this year?

Thank you.

I'll take, well, I'll take the Russia one and then we'll get to the next one.

As you'll recall, we have a very modest presence in Russia right now.

We're in the Moscow region and we've in a limited sales profile area, and the business there continues to do well as per point of distribution.

We are seeing that the middle class is continuing to grow and we are seeing this very very small basis that our Soup brand has vitality.

We intend to expand it as we go forward.

We haven't announced specific expansion plans in Russia but we will take all of the things you mentioned into account; however, we are seeing in the small geography we're in continued traction for the program, so we don't have a large exposure there, nor will we for the whole fiscal year, but we still believe we can expand and we can do it smartly and we'll post you on that when it's appropriate.

In terms of the second question, Anthony, do you want to share anything?

Craig kind of alluded to it earlier.

The back half performance operationally is expected to come from an improved gross margin percentage performance in the back half relative to the first half for the reasons he suggested, where we have some significant cost inflation which ran through fiscal 2008 and with the full benefit of our pricing initiatives, the back half of those margins will be better than the first half.

All right, well thank you.

Next question?

Our next question comes from Ed Roesch of Soleil Securities.

Hi, Ed.

Yes, good morning.

Ed, you got to know, last name is tough to pronounce and the Company is tough to pronounce.

That's exactly right.

Double whammy.

I want to touch base with you, you indicated that you had $26 million in losses or unrealized losses I guess related to hedges.

There were, that showed up in the first quarter there.

I mean, does that suggest then that your hedging, I mean of course it's all hindsight now but does that suggest you would have been better off without those hedges in Q1 and then does that mean that going forward as commodities are lower for the entire quarters of the second and third quarters does that mean that negative impact is even worse on your P & L?

Ed, this is Doug and I'll turn it over to Anthony and Craig in a minute, but obviously, firstly all of our peer companies, we were hedged through the first quarter and prices came down precipitously, and we're going through the mark-to-market exercise.

We'll find our way through this year but the hedging practices in this year are going to be challenging for us if the spot prices stay down as low as they are.

Anthony do you want to expand on that?

The point is valid and clearly with the benefit of hindsight, with the decline in commodity prices we would have been better off had we not hedged.

That being said, the hedge loss in the first quarter relates to purchases that are going to have a balance of the year.

For our full year, our commodity prices will be as we expected, most of which were locked in through these commodity hedging transactions and we'll see this unrealized loss reverse itself through the balance of the year.

Okay, could you remind us on what you had guided for your input cost increase for fiscal '09?

We had said about 9 to 10% and that still looks like a good number.

And that was basically with packaging and raw materials.

Okay.

And energy component.

Right.

Okay, and then switching over to foreign currency, you suggested that you're doing some things that maybe could improve the impact there?

Did I read that right and could you expand a little bit on that?

Well, it's not our policy to hedge against translation adjustments, so to the extent that we're doing something what we're doing is operationally looking for everything that we can, recognizing that it's going to be a very tough year in foreign currency for us.

Okay, understood.

Thank you very much.

Okay, next question.

Yes, sir.

Our next question comes from Christine McCracken of Cleveland Research.

Hi, Christine.

Good morning.

Just to follow-up on Ed's question, you know, we've been hearing a lot from the retailers lately that they are going to be pushing back now on the food companies given that the deflation that they're seeing in the commodity markets so i'm just wondering how do you respond to that given that you've taken this hedge position and may not be seeing that same kind of deflation?

Well first of all that dialogue is going on across the food industry with most of our peer group as well Christine, but we have a very frank and candid dialogue with our customers and they have visibility into our gross margins as you do.

They see our gross margin, we aren't flying high on gross margins right now, and so that they understand that we're not necessarily taking advantage of the consumer in this case, we're just trying to manage our business responsibly.

The other observation is that our products tend to provide great value for the consumer at the current price points and they clearly see that with Condensed Soup for example, so we believe it is a manageable situation, although we have to be very sensitive.

It's not an easy time but clearly on the first quarter our sales held up just fine, despite the challenges from the customer side in terms of offering value.

Do you get the sense that any of your competition would be better advantaged, may not have gone out on commodities or packaging the same way that you may have and that might create kind of a more competitive environment?

Is there any indication that that might be the case?

Well, the general sense is that all of the major peers tend to lean out a little bit to protect their supply but we'll just have to wait and see.

We're very comfortable with our competitive plans.

We'll just have to wait and see Christine.

And then just one quick question.

The one area that doesn't seem to be as well positioned maybe from a value perspective is cookies.

That's a premium product that has obviously a very well established client base and I'm just wondering, as you look ahead in this economic environment, how do you position those products given that kind of premium angle relative to some of your other products?

Well, Pepperidge Farm cookies are certainly more challenged than Condensed Soup, but we find we have a pretty good price value proposition.

We are focused on the premium segment and we'll have to see.

We have a very somewhat narrow consumer base in cookies and we'll see how these economics affect their purchase plans, but the good news is even if we're a little challenged in cookies, it's a very small part of our portfolio.

All right, thanks.

Next question?

Thank you.

Our next question comes from David Driscoll of Citi Investment.

Good morning everyone.

Just wanted to ask a few more questions on the commodity side.

So we heard from Heinz last week, they indicated that their spot commodity basket again, not hedged just their spot basket for the quarter was up 15%.

Doug, can you give me some understanding here on what did the spot basket of your raw materials do and so it's everything.

It's not just these mark-to-market hedges here because I think that's just a fraction of the overall bucket, so the question is, when do you actually expect to see deflation within the raw material bucket?

Obviously I think you said '09 is hedged.

Would '10 be logical given spot prices today?

The answer at a high level is yes, and it gets better at the end of '09.

Anthony, could you maybe give a little color on the market basket?

I think it's fair to say that the basket for our first quarter is close, it's in that 9 to 10% inflation range.

Looking out further, I think that it's hard to say.

I think that the baking businesses will see a little bit of deflation and it's a little harder to say, the baking businesses will see a little bit of deflation, and it's a little harder to say, under the other businesses, given the broad mix of commodities and raw materials that are utilized in that business.

Okay, and then just one question on Soup in Condensed.

Doug, can you give me an update on what you think of the competition with private label and how strong is it in this economic environment relative to your products and brands?

Well, we feel very good about our ability to compete with private label in Condensed Soup.

We think we still have a great value offering and there's no evidence that private label has hurt us and hurt our growth, so we think we got a great value proposition and we pay attention to it but quite frankly, in this case, our customer is our competitor and we are just putting the best proposition out for the consumer and so far, we're doing just fine.

Can you make a similar comment on Pepperidge Farm?

Pepperidge Farm?

Evidence suggests that in periods of recession kind of environments, bakery and breads do better, and as a category.

Unfortunately, it tends to be the lower price varieties and that's where Pepperidge Farm is going to be challenged in bakery this year.

We're focused on continuing to add value around health and wellness and as we report, we had decent traction in the first quarter.

We'll see how it sorts itself out over that three quarters and there will be a more challenging spot for us but we're prepared to manage through it.

Great.

Thank you for all the comments.

Okay, next question?

Our next question comes from Vincent Andrews of Morgan Stanley.

Thank you.

Could you just confirm, you don't need any more pricing in FY 09, the September '08 price increase you took is sufficient to cover your 9 to 10% for this year; is that correct?

Well we don't forecast, we don't comment on any possible future pricing, so I can't comment on that.

Okay.

And I guess my next question would just be just to clarify on the pricing that has yet to hit the shelf, I just want to make sure I understand your clarifying comment earlier, was that September price increases in place, the issue is more of a timing issue of having a full quarter with it rather than there are actual places where it is not in place yet; is that correct?

That's correct.

Okay.

And I think that is, or I guess the other question I would ask you is on the kind of issue that's been out there competitively on MSG, and I apologize if you touched on this before I had to hop off the call but what effect do you think that's having broadly on ready-to-serve Soup, if anything?

Ready-to-serve Soup is growing at a good clip and I don't see it having any effect on the category.

It is having an effect on brand choice, on consumer choices, but not on the category.

So you don't think it's distracting demand at all?

No.

Thank you, I'll pass it along.

Okay, next question?

Our next question comes from Judy Hong of Goldman Sachs.

Thanks, good morning everyone.

Good morning Judy.

I just wanted to ask you about the marketing spending in Soup and clearly, we saw significant increase in the quarter and I'm just wondering how you think about that spending in sort of what you're trying to get out of.

Is it more launch cost related to some of the new products?

Is it trying to be more competitive from a share perspective ?

Or is this sort of in this economic conditions where Soup really is viewed as a product providing value to consumers or trying to really attract more consumers into the category ?

I'm just wondering how I should think about

Judy, I don't mean to be, I'm not trying to be funny but the answer is D, all of the above.

We did have planned launches for Select Harvest and our V8 aseptically packaged foods and for our Swanson broth stock and all of those launches were targeted to be launched in the first quarter and we had major spending against those launches.

We also encountered an opportunity to really step forward on our Condensed Soup business, and expand its footprint and its share of voice in these economic times and to establish some momentum for that business which we took advantage of as well.

We also had some planned promotional spending against the anticipated pricing that we took.

We also raised our spending profile, so you put it all together and you have a trifecta effect of marketing spending as we launched all these things into the market at one-time which is why food sales were up 12% and why Condensed Soups were up 14% and sales were up 7% and broth sales were up 23%, so we spent aggressively.

Okay, and then just on the V8 beverages, I know you had some capacity shortage of that business and sales were relatively soft.

I know you're lapping up pretty tough comparison but how much of kind of the softness is sort of again the capacity issue or is just the timing issue as opposed to just the overall weakness that we're seeing in the broader beverage category?

First of all, we did have a capacity issue and we on allocation for awhile with our V8 V-Fusion product.

We are off allocation now and that's back on a nice growth trajectory and we are growing with V8 Fusion and V8 Splash.

The area that was a little soft was V8 Red which is lapping our year ago, the first quarter of our breakthrough distribution agreement with Coca Cola Enterprises and Coca Cola but we had a phenomenal first quarter on V8 Red.

We are lapping that, so it was down but also, we do see in times of again recession type environments where our premium red juice, V8 juice, the category softened so we're watching that very closely.

Okay, thank you.

Next question?

Our next question comes from Terry Bivens of JPMorgan.

Hi, Terry.

Good morning, everyone.

Well two things this morning.

First of all, just no one said much about foreign currency, but it's steeper than I expected and here is my question there.

If you look at your overseas margins, they're significantly lower than what you have in the US, so can you help me understand why a 5% hit on the top line is equally damaging to EPS?

Yeah, I think if you look at the currency, you have to look underneath it to some of the mix that we have within our businesses.

We are overindexed to the Australian dollar and the Canadian Dollar, two very profitable businesses for us, and to a lesser degree, the Euro so we look at the mix of those, in terms of what the currency has done and again some profitability respectively of each of those businesses for us, you get into that close to whether you're looking at sales or EBIT.

Well I'll take another look at that.

Doug, if you look at clearly everyone is disappointed, myself included, with the level of profitability generated by those sales.

As you look into the second quarter which again is another big quarter for Campbell, easy comps in Condensed I would think, ready-to-serve and broth are going to be tougher.

What's your degree of confidence that as we meet early next month that there can be a better picture portrayed of your profitability on the Soup business?

Well first of all, Terry, we don't provide quarterly guidance.

I guess our point would be that operationally we're very comfortable with our plan for the year and we do have this currency headwind that we have to sort through, so I just comment on a full year basis we're very comfortable with our guidance.

I'm not going to get into the quarters.

We continue to spend against our business in the coming quarters particularly in the second quarter which is the big quarter for us, so I would just leave it at that and say that we continue to maintain our guidance and, this is, I want to say, I don't know how many I've done of these, Len, it's got to be about 28 earnings calls and we've basically hit our guidance every time for a year and I think we'll do that again this year but certainly in a challenging environment.

One other thing on this currency piece, and we've benefited from currency in the past, only to the tune of a penny or two at times, but if you look at it over the last, we deliver our operational plan and we get with this five point drop, we will have delivered 8% compound annual growth rate over the last four years in EPS and the 10% we delivered in the last three so we're giving some of it back but I feel very good about this that we have in place to compete in Soups, Sauces and Beverages, North America and international so I'm very comfortable with the guidance.

Okay, thank you very much.

Next question?

Our next question comes from Todd Duvick of Banc of America Securities.

Hi, Todd.

I had a quick question for you on the refinancing plans.

I think last quarter you mentioned that you would plan to term out a portion of the $1 billion dollars of short-term debt and the debt capital markets at some point, and I know the credit Markets have been extremely difficult but there have been companies with this high quality credit ratings as Campbell that have been issuing debt so I just wanted to see if you could provide us an update on how you're thinking about debt markets and potential for terming out debt here in the near term.

Sure.

We continue to have the intention to term out some of our debt.

I mean, the good news is that with the strong credit rating we've had, we have not had any kind of liquidity problem or difficulty accessing the commercial paper market and in fact accessing it at very favorable rates as everybody has sort of run to the short end of the market but it would still be our intention.

As you know we had a $300 million bond that rolled off at the first of October.

It really was not possible to go back to the market at that point in time.

You're right, some people have begun to get back into the market since then.

The new offer rates have been a little bit punitive but we're watching the market carefully.

We don't expect that rates will get back down to where they were a year ago, so we're not waiting for something that's not going to happen but we will go back to the market ultimately.

Okay, that's helpful, thank you.

How many more questions in queue?

In queue, we have two, sir.

Okay, we'll take those two and then we'll have to end.

Yes, sir, our next question comes from Andrew Lazar of Barclays Capital.

Hi, Andrew.

Good morning.

I guess one thing I'm hearing all of the discussion and explanation around Soup profitability and such but I guess there's part of me that almost feels like I should be viewing this fiscal year as one where after a weaker Soup season last year, Campbell's getting more competitive needs to establish market shares, better momentum in soup, almost at the expense to some extent of profitability and obviously from your commentary Doug, I guess that's not the way you want us to view it but perhaps you could comment on that.

It almost seems like it's going to be an off year from a profitability perspective, but more of an on year from spending and gaining share back perspective which I don't know how great that is.

How would you respond to that?

Well, I think, if you go back to our original guidance, we talked about delivering above average sales, above normal guidance sales north of 3 or 4%.

We also talked about delivering modestly softer EBIT down about slightly below our guidance of 5 to 6%, and then targeting to deliver in that historical range of 5 to 7% EPS growth, and Andrew, basically we're working that plan.

Now we had some curveballs thrown at us in terms of the fluctuations with currency and commodities and we're sorting through all of them but basically we're still working that plan.

Okay, and then just more mundane, the tax rate and interest expense came in lower than I had expected.

I was wondering if you could give us perspective on what you're looking around a full year tax rate and interest at this point.

The tax rate guidance which I think was around 32% may come down very marginally.

We were low this quarter because of the settlement of some outstanding audit issues, so it doesn't change the full year prospect very much, and on interest, as I said earlier we've actually benefited from some very low commercial paper rates that we've had through this quarter and as we had the $300 million that rolled off the long term rates and into the commercial paper program so we've had some benefit in the interest line but again I wouldn't take that as a run rate for the full year.

Okay, thank you.

Okay and the last question?

Our final question comes from Mitchell Pinheiro of Janney Montgomery Scott.

Hi, good morning.

Two quick questions.

First what percentage of your raw material input costs are hedgable?

We're working on that.

Why don't you ask the next question and we'll have an answer.

Okay, next question is, pardon me if I missed this but have you quantified the earnings per share impact that emerging market spending has this quarter?

Not per quarter.

We just said for the year.

We said for the year it was usually double than what it has been $0.10.

But so was there an earnings per share impact negative impact in this quarter?

From emerging markets?

Yeah, we had about $0.02 from emerging markets compared to $0.01 a year ago.

I'm sorry I missed that.

We had about $0.02 of EPS cost in emerging markets compared to $0.01 a year ago.

Okay.

And on your first question, probably around 25% of input costs are hedgable via commodities.

25% are hedgable?

Of commodities.

Of total input costs, 25% of total input costs are hedgable.

Okay, all right, thank you very much.

Okay, I think that we'll have to end the call there.

Yes, sir.

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

This concludes the program.

You may all disconnect.

Thank you and have a nice day.