金寶湯 (CPB) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-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, today's 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, and welcome to Campbell's second-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 our results for the second quarter. And Craig Owens, Senior Vice President, Chief Financial Officer and Chief Administrative Officer, will have some closing comments. Then we will follow with a question-and-answer session.

Our financial results, press release and supplemental schedule were issued earlier this morning and 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, March 2, 2009. The replay number is 1-888-266-2081 or 1-703-925-2533, and the access code, 1331351.

You may also listen to a replay by logging onto 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.

Our discussion contains certain forward-looking statements that reflect the Company's expected future business and financial performance, including statements concerning the 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 the Company's 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. That is available on our investor website. Now let's begin with remarks from Doug Conant.

Thank you, Len, and good morning, everyone. Despite a tough economic environment, we delivered a solid first half across most of our businesses, both in North America and international. In fact, our international businesses had a particularly strong quarter.

We also had a strong first half in US Soup and a good second quarter in the midst of retail inventory reductions that impacted the sales of US soups, sauces and beverages by about 3 percentage points. In particular, retail inventory reductions had a more pronounced impact on our condensed soup and sauce businesses.

From a consumer perspective, consumers have clearly responded well to our focus on wellness and quality and to our increased marketing spending behind soup. From a total Company perspective, in the first half, we modestly increased our marketing support beyond our typical target spending range as we launched major product initiatives such as Select Harvest, V8 Soup and Swanson Stock, and as we opportunistically increased our value campaign surrounding condensed soup.

Now, some of our businesses are clearly feeling more of an impact from the recession. Certainly, that is true of food service, beverages and premium breads. All that said, I expect that overall we will weather this storm better than most companies, given our focused portfolio and our relative brand strength. Most of our categories are growing, and our businesses are performing very competitively within those categories.

Bottom line, I believe that our portfolio continues to provide great value and, in particular, I am especially pleased to see the consumer response to our business propositions and our spending continues to hold up quite well.

Now I will turn the call over to Anthony for his detailed remarks.

Good morning. Before I begin, I would like to comment on the basis of presentation of our results and items impacting comparability. The results of our divested Godiva business are reported as a discontinued operation on the income statement. In the current and prior-year quarter, we recognize items associated with the divestiture which are impacting the comparability of our results. I will highlight those items.

In April 2008, we announced a series of initiatives to improve our operational efficiency and long-term profitability, including the divestiture of certain salty snack food brands and assets in Australia, closing certain production facilities in Canada and Australia and streamlining our management structure.

During the second quarter of fiscal 2009, we recognized $8 million, $5 million after-tax, or $0.01 per share, of accelerated depreciation and other exit costs in costs of products sold, bringing the first-half total to $15 million, $10 million after-tax, or $0.03 per share.

As discussed during our last call, beginning in fiscal 2009, unrealized gains and losses on commodity hedging activities are reported in unallocated corporate expenses, and the volatility associated with the unrealized gain or loss will be treated as an item impacting comparability. In the second quarter, there was no change in the aggregate of unrealized losses, which remained at $26 million, $16 million after-tax, or $0.04 per share.

Adjusted net earnings per share in the quarter were $0.65 compared to adjusted net earnings per share of $0.69 in the second quarter a year ago. For the first half of the fiscal year, adjusted net earnings per share were $1.41 compared to adjusted net earnings per share a year ago of $1.39.

Let's begin our review our continuing operations for the second quarter. Net sales for the quarter decreased 4% to $2,122,000,000. The change in sales breaks down as follows. Volume and mix subtracted 3%. Price and sales allowances added 9%. Increased promotional spending subtracted 3%. Currency subtracted 5%. Divestitures subtracted 2%.

Gross margin for the quarter was $837 million compared to $889 million in the prior year. Gross margin percentage for the quarter was 39.4% compared to 40.1% a year ago. The current year included $8 million of costs related to the initiatives to improve our operational efficiency and long-term profitability. After adjusting for this item, gross margin was $845 million and the gross margin percentage was 39.8%.

The decline in gross margin was primarily due to cost inflation and increased promotional spending, partly offset by higher selling prices and productivity improvements.

Marketing and selling expenses decreased from $319 million a year ago to $315 million, due to the effect of currency, partly offset by higher advertising, principally in our US soup and sauce businesses. Administrative expenses were $138 million compared to $141 million in the prior-year quarter. The decline was primarily due to the impact of currency, partly offset by increased costs to establish our businesses in China and Russia. Research and development expenses increased $2 million to $27 million.

Other expense was $2 million compared to $4 million a year ago. Earnings before interest and taxes were $355 million compared to $400 million in last year's second quarter. After adjusting for the previously mentioned items, EBIT was $363 million as compared to $400 million in the prior-year quarter, a reduction of 9%. Five points of this decline is due to the unfavorable impact of currency. The balance of the decline is due to higher advertising and lower gross margins.

Net interest expense declined to $25 million from $42 million in the prior year due to the significant decline in our short-term borrowing costs. The tax rate in the second quarter was 30.6% compared to 27.4% in the prior year's quarter. Excluding the rate impact of the items impacting comparability, the tax rate for the second quarter was 30.8%.

The prior-year quarter included a $13 million tax benefit from the favorable resolution of a state tax matter. Excluding this item, the tax rate in the year-ago quarter was 31.0%.

Average diluted shares outstanding declined to 362 million from 386 million, primarily due to repurchases utilizing net proceeds from the divestiture of the Godiva business and our strategic share repurchase program.

Earnings from continuing operations for the quarter were $229 million or [$0.63] per share compared to $260 million or $0.67 per share in the year-ago quarter. The current year included $5 million of costs, or $0.01 per share, related to the initiative to improve our operational efficiency and long-term profitability. The prior-year quarter included a $13 million or $0.03 per share tax benefit from the favorable resolution of a state tax matter. After factoring these items into the reported results, adjusted earnings from continuing operations in the current quarter were $234 million compared to $247 million a year ago.

Adjusted earnings per share from continuing operations were $0.65 as compared to $0.64 in the year-ago quarter. Adjusted earnings per share from continuing operations for the quarter were negatively impacted by $0.04 from currency translation. The growth in adjusted EPS benefited from a significant decline in average diluted shares outstanding, which resulted from the repurchases utilizing net proceeds from the divestiture of Godiva and the Company's strategic share repurchase program.

Earnings from discontinued operations in the second quarter were $4 million or $0.01 per share, reflecting an adjustment to the taxes on the previously recorded sale of Godiva. This compares to earnings of $14 million or $0.04 per share in the prior-year quarter.

The prior-year earnings included $5 million or $0.01 per share of costs related to the sale of the Godiva business. After factoring this item and the current-year tax adjustment into the reported results, adjusted earnings from discontinued operations were zero compared to $19 million or $0.05 per share in the year-ago quarter.

Net earnings per share, which includes both continuing and discontinued operations for the quarter, were $0.64 compared to $0.71 a year ago. Excluding the items previously mentioned that impact comparability, adjusted net earnings per share in the second quarter were $0.65 compared to $0.69 in the year-ago quarter. Reflecting the strengthening of the US dollar, adjusted net earnings per share for the quarter were negatively impacted by $0.04 from currency translation.

Now let's turn to year-to-date performance, beginning with continuing operations. Net sales decreased 1% to $4,372,000,000. The change in sales for the six months breaks down as follows. Volume and mix subtracted 1%. Price and sales allowances added 8%. Increased promotional spending subtracted 3%. Currency subtracted 3%. Divestitures subtracted 2%.

Gross margin declined from $1,781,000,000 to $1,708,000,000. Gross margin percentage declined to 39.1% from 40.4%. The current year included $26 million of unrealized losses on commodity hedges. The current year also included $15 million of costs related to the initiatives to improve our operational efficiency and long-term profitability. After adjusting for these items, gross margin was $1,749,000,000, and gross margin percentage was 40.0%. The decline in gross margin percentage was primarily due to cost inflation in excess of pricing.

Marketing and selling expenses increased from $615 million a year ago to $622 million due to higher advertising, principally in US soups, partly offset by reductions due to the impact of currency and lower selling expenses.

Administrative expenses were $278 million compared to $282 million in the prior year. The decline was primarily due to the impact of currency, partly offset by increased costs to establish our businesses in China and Russia.

Research and development expenses increased $4 million to $56 million, reflecting increased new product initiatives. Other income of $2 million compares to other expense of $4 million in the prior year.

Earnings before interest and taxes were $754 million compared to $828 million in the prior year. After adjusting the current year for the previously mentioned items, EBIT was $795 million as compared to $828 million in the prior year, a decrease of 4%. Three percentage points of the decline is due to the translation impact of the strengthening US dollar.

Net interest expense was $57 million compared to $84 million in the prior year. The decline was primarily due to the general decline in our short-term interest rates.

The tax rate was 29.8% compared to 29.0% a year ago. Excluding the rate impact of the items impacting comparability, the tax rate for the first half was 30.2%. The prior year included the $13 million benefit from the state tax matter. Excluding this item, the prior year tax rate was 30.8%.

Earnings from continuing operations for the six months were $489 million or $1.34 per share compared to $528 million or $1.36 per share in the prior year. The current year included $16 million or $0.04 per share of unrealized losses on commodity hedges. The current year also included $10 million of costs or $0.03 per share related to the initiatives to improve our operational efficiency and long-term profitability. The prior year included the $13 million benefit from the state tax matter. After factoring these items into the reported results, year-to-date adjusted earnings from continuing operations were $515 million in both years.

Adjusted earnings per share were $1.41 as compared to $1.33 a year ago. The year-to-date negative impact of currency translation on adjusted earnings per share was $0.05 per share. The growth in adjusted earnings per share benefited from a decline in diluted shares outstanding from 387 million to 364 million, primarily due to repurchases utilizing net proceeds from the divestiture of Godiva and the Company's strategic share repurchase program.

Earnings from discontinued operations in the first half were $4 million or $0.01 per share, reflecting an adjustment to the taxes on the sale of Godiva. Earnings from discontinued operations in the first half of 2008 were $16 million or $0.04 per share. The prior year included $5 million or $0.01 per share of costs related to the sale of the Godiva business. After factoring these items into the reported results, adjusted earnings from discontinued operations were zero compared to $21 million or $0.05 per share in the prior-year half.

Net earnings per share, which includes both continuing and discontinued operations, were $1.35 per share compared to $1.41 a year ago. Excluding the items previously mentioned that impact comparability, adjusted net earnings per share in the first half was $1.41 compared to $1.39 a year ago, an increase of 1%.

For the first half, the negative impact of currency translation on adjusted net earnings per share was $0.05 per share.

US Soup, Sauces and Beverages. Sales for the second quarter rose 3% to $1,128,000,000 from $1,093,000,000 in the year-ago quarter. Here is the breakdown of the change in sales. Volume and mix subtracted 3%. Price and sales allowances added 10%. Increased promotional spending subtracted 4%.

Let's touch on a few highlights. US Soup sales increased 4%, with condensed up 1%, ready-to-serve up 7% and broth up 3%. US Soup sales, especially condensed, were negatively impacted by reductions in customer inventory levels.

Condensed sales increased due to gains in cooking varieties, reflecting the increase of in-home dining occasions in the current economic environment. Ready-to-serve Soup sales increased due to the successful introduction of Select Harvest and V8 soups, and gains in Chunky cans, partly offset by a decline in the convenience platform, which includes soups in microwavable bowls and cups.

The Wolfgang Puck soup, stock and broth business, acquired in the fourth quarter of last fiscal year, contributed modestly to soup sales growth in the quarter. Broth sales increased, reflecting the successful introduction of Swanson stock, partly offset by increased promotional spending in response to competitive activity.

Beverage sales grew slightly following double-digit growth a year ago. The increase was driven by continued double-digit growth of V8 V-Fusion juice and growth in V8 Splash, partly offset by declines in V8 vegetable juice and Campbell's tomato juice.

Prego pasta sauce sales increased, while sales of Pace Mexican sauces were flat versus the prior-year quarter. Both Prego and Pace sales have been significantly impacted by reductions in customer inventory levels. Growth in consumer takeaway of these products remained strong, driven by Prego Heart Smart varieties and Pace specialty salsas.

Operating earnings decreased to $270 million from $286 million. The decrease in operating earnings was due to higher costs, including advertising associated with the launches of Select Harvest, V8's aseptic soups and Swanson stock, partially offset by increased sales.

Sales for the first half rose 6% to $2,326,000,000 from $2,190,000,000 a year ago. Here is the breakdown of the change in sales. Price and sales allowances added 9%. Increased promotional spending subtracted 3%.

Let's touch on a few highlights. US Soup sales increased 8%, with condensed up 8%, ready-to-serve up 7% and broth up 13%. Sales of condensed soups increased in both cooking and eating varieties. Ready-to-serve soup sales increased due to the successful introduction of Select Harvest and V8 soups, partly offset by a decline in Chunky cans and the convenience platform. Broth sales were driven by the continued success of our base business and the introduction of our Swanson stock product.

The Wolfgang Puck soup, stock and broth business contributed modestly to soup sales growth in the half.

Beverage sales grew slightly following double-digit growth a year ago. The increase was driven by continued double-digit growth in V8 V-Fusion juice, partly offset by declines in V8 vegetable juice and Campbell's tomato juice. Prego pasta sauces and Pace Mexican sauces sales increased.

Operating earnings for the first half declined to $584 million from $595 million, as an inflation-driven decline in gross margin percentage and higher levels of marketing associated with the new product launches were only partially offset by higher sales.

Baking and Snacking. Sales for the second quarter declined 10% to $440 million from $491 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 9%. Increased promotional spending subtracted 2%. Currency subtracted 8%. Divestitures subtracted 8%.

Pepperidge Farm sales increased, driven by growth in the cookies and crackers business and the bakery business. Sales of cookies and crackers increased, driven by double-digit gains in Goldfish snack crackers and Milano cookies. Sales also benefited from the introduction of Baked Naturals.

Bakery sales increased due to gains in whole grain bread varieties and swirled breads. As reported, Arnott's sales declined due to the divestiture of certain salty snack food brands in May 2008 and the unfavorable impact of currency. Excluding these factors, sales increased due to growth in all segments -- savory, chocolate and sweet.

Sales of our biscuit business in Indonesia also grew strongly. Operating earnings decreased to $53 million from $68 million due to a decline in Pepperidge Farm and the unfavorable impact of currency, partly offset by significant growth in Arnott's.

The current quarter included $2 million in accelerated depreciation and other exit costs related to the previously announced restructuring programs.

Sales for the first half declined 7% to $949 million from $1,023,000,000 a year ago.

The change in sales for the six months breaks down as follows. Volume and mix subtracted 1%. Price and sales allowances added 9%. Increased promotional spending subtracted 2%. Currency subtracted 5%. Divestitures subtracted 8%.

Pepperidge Farm sales increased, primarily driven by growth in both the cookies and crackers and bakery businesses. As reported, Arnott's sales declined due to the snack foods divestiture and the unfavorable impact of currency. Excluding these factors, sales increased due to significant growth of savory cracker varieties. Sales of our biscuit business in Indonesia also grew strongly.

Operating earnings for the first half decreased to $136 million from $140 million, due to the negative impact of currency translation. Excluding currency, significant growth in Arnott's was partly offset by a decline in Pepperidge Farm.

The current year included $2 million in accelerated depreciation and other exit costs related to the previously announced restructuring program.

International Soup, Sauces and Beverages. Sales for the quarter declined 15% to $391 million from $458 million in the year-ago quarter. The change in sales for the quarter breaks down as follows. Volume and mix subtracted 5%. Price and sales allowances added 5%. Decreased promotional spending added 1%. Currency subtracted 13%. Divestitures subtracted 3%.

In Europe, sales declined, primarily due to currency, the divestiture of the company's French sauce and mayonnaise business in September 2008 and lower sales in Germany. In the Asia-Pacific region, sales increased, primarily due to gains in the Australian soup business and in the Malaysian business, partly offset by the unfavorable impact of currency. In Canada, sales declined, primarily due to the unfavorable impact of currency, partly offset by gains in the soup business.

Operating earnings decreased to $50 million from $61 million a year ago due to the unfavorable impact of currency. Excluding the impact of currency, operating earnings increased in Europe, reflecting the benefit of our cost savings initiatives, and in Canada, primarily offset by costs to establish our businesses in Russia and China.

Sales for the year in these periods decreased 9% to $771 million from $848 million. The change in sales breaks down as follows. Volume and mix subtracted 2%. Price and sales allowances added 4%. Increased promotional spending subtracted 1%. Currency subtracted 8%. Divestitures subtracted 2%.

Excluding the impact of currency and divestitures, sales increased, as gains in the Asia-Pacific region and Canada were partly offset by a decline in Europe. Operating earnings for the first half decreased to $88 million from $112 million a year ago due to the incremental costs to establish businesses in China and Russia, and the unfavorable impact of currency, partly offset by gains in Europe and the Asia-Pacific region.

North America Foodservice. Sales for the quarter declined 7% to $163 million from $176 million in the year-ago period. The change in sales breaks down as follows. Volume and mix subtracted 9%. Price and sales allowances added 6%. Increased promotional spending subtracted 1%. Currency subtracted 3%.

Sales were significantly impacted by weakness in the food service sector. Operating earnings decreased from $20 million to $10 million. The current quarter included $6 million in accelerated depreciation and other exit costs related to the previously announced restructuring program. The remaining decline was primarily due to lower volumes.

Sales for the six months decreased 5% to $326 million from $342 million in the year-ago period. The change in sales breaks down as follows. Volume and mix subtracted 8%. Price and sales allowances added 6%. Increased promotional spending subtracted 1%. Currency subtracted 2%.

Operating earnings decreased from $44 million to $21 million. The current year included $13 million in accelerated depreciation and other exit costs related to the previously announced restructuring program. The remaining decline was primarily due to lower volumes.

Unallocated corporate expenses decreased from $35 million a year ago to $28 million in the current quarter. The decrease was primarily due to lower expenses associated with the SAP implementation in North America.

For the first half, unallocated corporate expenses increased to $75 million from $63 million a year ago. The increase was due to $26 million of unrealized losses on commodity hedging included in the current year, partly offset by lower SAP implementation costs.

Now let's turn to cash flow and the balance sheet. Cash flow from operations for the first half was $418 million compared to $442 million a year ago. The decline in cash flow from operations is primarily due to lower net earnings. Capital expenditures were $98 million compared to $90 million in the year-ago period. We now expect capital expenditures in fiscal 2009 to be approximately $370 million.

During the first half, we repurchased 9 million shares at a total cost of $295 million. Total debt was $2,711,000,000 million compared to $2,756,000,000 in the prior year.

Cash and cash equivalents were $80 million as compared to $95 million in the prior year. Net debt, which deducts cash and cash equivalents from total debt, was $2,631,000,000 versus $2,661,000,000, a decrease of $30 million.

This concludes my discussion of our results. Craig Owens will now have some closing comments.

Thanks for that review, Anthony. While I'm pleased that we delivered slightly better earnings per share in the second quarter and first half than we had projected in December, the main reasons for that were a lower-than-expected tax rate and especially a favorable interest expense.

I want to specifically comment on our margin performance in the US Soups, Sauce and Beverage segment, as I know this is getting some very understandable attention. Consistent with our plans, margins declined in the first half due to several factors. First, our results to date reflect the significant cost inflation, which accelerated in the back half of last year. While we've taken pricing, this has not been sufficient to fully offset inflation year to date.

Second, we funded several major new product initiatives, including the launch of Select Harvest, V8 aseptic soups and Swanson stock. Marketing costs, including advertising and trade, as planned, negatively impacted first-half margins. These factors are temporary and we fully expect margins to recover going forward, beginning in the second half of this fiscal year. As we wrap the more significant inflation of last year and achieve the benefits of price realization, gross margins will improve.

We should see some further cost advantage late this year and in the next fiscal year as unfavorable commodity hedges mature. Marketing activity will remain fully competitive, but with the major product launch activity behind us, it will be lower in the second half.

Given our better-than-expected first-half EPS performance, we expect on an adjusted and currency-neutral basis, our EPS will be at the upper end of the range of the 5% to 7% from the adjusted base of $2.09. We expect sales growth to be consistent with our 3% to 4% long-term target, and we expect earnings before interest and taxes to be slightly below our long-term target of 5% to 6% growth.

At quarter-end rates of exchange, our sales, EBIT and EPS growth rates would all be negatively impacted by approximately 5 percentage points due to currency translation as a dramatic single-year impact that we have not been able to fully offset.

With that, I will turn the call back to Len and we will move to Q&A. Thank you.

Thank you. Devon, you can start the Q&A. And I would just like to ask one thing before we start. I'd like each of you asking a question, if you could limit yourself to one question and one follow-up on each of the responses, so we can make sure we get through everybody.

(Operator Instructions) Andrew Lazar, Barclays.

I think as of last quarter, you had been looking for flattish gross margins for the year. So I was just trying to get a sense of whether that still held. And given you had pricing that was very solid in both the fiscal 1Q and 2Q, I guess I'm surprised that gross margin improved a bit sequentially, given the significant shipment volume deceleration. So I want to get a sense of why volume deleveraging didn't hurt margins more -- or maybe it did, and there were some offsets that came up in the second quarter that helped you.

Andrew, at a high level, I will tell you we do expect to see gross margins very solid for the full year. So that implies we are going to continue to have growth in the second half.

Anthony or Craig, do you want to get at the -- a little more detail to it?

Sure. On a full-year basis, we expect gross margins to be ahead of the prior year.

And to your question about volume, we did actually see a negative impact on margins due to the volume related to the inventory reductions, and that is reflected in our US Soups, Sauce and Beverage segment results.

Was there something that helped offset some of that relative to the first quarter? Because you had good pricing in both first and second quarter.

No, there wasn't anything extraordinary underneath that.

Okay. Thanks very much.

Eric Katzman, Deutsche Bank.

I guess my question has to do with the trade deloading, Doug, and how much impact that had on Soup. I think you gave a 3% hit for the entire division, but can you be more specific as to what happened in Soup? And you also kind of suggested that that was below -- I guess your consumer offtake was better, and maybe you could give us some sense as to what that means.

Eric, the information we provided was that there was about three points of sale lost to this inventory reduction. And it happened in our warehouse businesses, which would land it squarely in our US Soups, Sauce and Beverage categories. It was most pronounced in our US Soup and Sauce businesses. And it was even more pronounced, surprisingly to me, in condensed soup and sauces, where consumer demand was actually increasing.

We have great visibility into this, because we have good consumer CRM capability in terms of consumer replenishment -- excuse me. And so we have visibility into the dynamics of the categories. The retailers simply cut back pretty much across the board, and then tried to respond -- if they had particular shortages, they tried to respond in a very surgical way. But basically, they made cuts across the board and it transcended any one particular customer; it happened in multiple customers.

So I know you have difficulty in kind of giving out the detail on consumption, but it seems to me that if there was ever a point in time to give it out, it would be about now. So can you give us some sense as to what -- assuming that you can now shift to consumption in the second half, can you give us some sense as to either how much better Soup should be on the top line, either Soup specifically or the division?

Well, the answer probably won't be fulfilling and it definitely won't be fulfilling enough for you. But I would tend to look -- I tend not to get into quarters too much, especially in the Soup business, because you sort of have the seasonal run there. But I would tend to look at the half and say, soup sales were up a solid 8% for the half. And I think whatever inventory reductions that have happened, it is about as low as we are going to go. So I would expect in the second half sales and consumer takeaway to be parallel, and we are optimistic about our second-half sales performance in Soup.

Vincent Andrews, Morgan Stanley.

Just a follow-up on Eric's question on the deload. Can you give us a sense -- it sounds like not very much took place in baking and snacking. Can you give us any sort of broad sense from a retailer perspective about how they are picking categories, or --? I know you noted that you were surprised about condensed, given the takeaway performance, but is there any rhyme or reason to what is taking place here as far as you can tell?

Just to expand a little bit, it is on warehouse delivered products. So if you have DSD products, which we have in our bakery business with Pepperidge Farm, that is never in the retailers' inventory, in their warehouses. So that fundamentally was not a part of their exercise. That is why Pepperidge Farm, being DSD, was excluded. Also, whatever DSD work we do with our venture with Coca-Cola Enterprises in Beverages is unaffected by what retailers are doing in their warehouses. That is why it was most pronounced in our Soup and Sauce businesses.

My sense is -- and you would have to ask the retailers this -- that they made some pretty broad cuts in their warehouse businesses, with specific inventory goals in mind, as they ramped up their year-end. And then they surgically responded when they had to, only when they had to. My instinct is there was more out-of-stocks than we have experienced in the past, especially in Soup, especially with the inclement weather we realized in January. But we don't have great data on that yet. We will.

Okay, thanks.

David Palmer, UBS.

Thanks. You guys seemed to get very good trial from Select Harvest. I'm wondering if you might be able to give us some numbers in just your overall judgment about repeat on Select Harvest, therefore helping us get a feeling of your confidence on the sustainability and future profitability of that brand. Thanks.

You are right. Trial has been quite good. Repeat is also very much on our projections. So we expect Select Harvest to continue to contribute incrementally to our growth. It is right in the sweet spot in terms of the consumer interest in wellness, particularly women 35-plus, and it is also delivering on the value proposition with that target.

So we are ahead of the curve on trial. We are meeting expectations on repeat. And we are continuing to support the brand. So expectations are that it will grow and become an increasingly meaningful part of the portfolio.

And just a technical question. Your implied interest rate, I had that somewhere a little bit below 4% in the quarter. Maybe that is right or wrong, or you can tell me what you think yours was. But whatever rate you calculated at, is that sustainable for Campbell? Does this number include some currency impact? Perhaps there is a significant portion of floating rate debt. Any color would be helpful. Thanks.

David, we all missed the beginning of that sentence. Somehow there was a glitch in the line.

The beginning is, I calculated your implied interest rate at a little below 4% for the quarter. Basically, just trying to get some color around the interest cost for Campbell. Does it include some currency impact in hedges, significant portion of floating rate debt -- any color about interest costs going forward would be helpful.

The biggest impact there is just the really low commercial paper rates that we are realizing, David. I don't think there is a significant movement related to currency in that number.

And so including CP, what percent is effectively floating rate? Do you have that at your fingertips?

We've got about $800 million in commercial paper out of the total.

Okay, thanks.

David, just a reminder -- we refinanced that $300 million during the quarter that we had in commercial paper. So that did impact -- gave us the lower rates too in the quarter.

Our average floating rate debt in the quarter would be a little higher than it was at the end of the quarter, given the refinancing.

Thank you.

Alexia Howard, Sanford Bernstein.

Question on the outlook on promotional activity and volumes going forward. It seems as though, I guess quite naturally, there has been a step-up in pricing. That has been matched to a certain -- or not matched, but there has also been a step-up in promotional spending over the last couple of quarters. How are you thinking about the back half and on into fiscal '10 with regards to those two factors?

Clearly, we are going to be -- as we expand our gross margin, we are going to be getting more traction with our pricing. And it does put some of the volume growth at risk. And we are just going to have to manage that very carefully as we go through the back half. We do expect to see -- we are confident in our margin expansion. We expect to hold onto the volume, but we are going to get our margins right in the back half.

Okay. Thank you very much.

Judy Hong, Goldman Sachs.

Good morning. In terms of your guidance for the full year, it sounds like your sales growth outlook is a little bit lower than before, and I presume that that is all just because of the inventory destocking in the second quarter. But you've also talked about improved margin outlook for the full year.

So I was hoping if you can just kind of clarify how you are thinking about guidance, because you are taking the 5% to 7% now up to the high end of that range. And is that mostly interest expenses, or is the margin also improving at the same time?

Judy, you are right. The top-line guidance is slightly lower, and it is largely associated with the retailer inventory destocking that we saw in the second quarter. The fact that we've been able to move the bottom-line guidance up is really sort of the same dynamic that we saw in the quarter. We had some better below-the-EBIT-line dynamics related to the interest costs and taxes.

In the press release, though, you called out improved margin outlook as part of the increase in guidance. Is that just -- is it just mostly interest expenses?

No, that would go to the operating performance. As you noticed, we pulled the sales guidance down a little bit, but maintained the EBIT guidance. Therefore, by definition, those margins come up a little bit, as a result of some cost-saving initiatives that we have undertaken. And the EPS outlook also does reflect some favorability on interest expense.

Yes, Judy, we have taken an incremental cut at our overhead expenses and done some significant belt tightening that was not in place in the first half of this year that will be reflected in our second half performance. That is giving us increased confidence on the EBIT margin performance.

And then the softness that Anthony alluded to, relative to our earlier discussions, we were just trying to be realistic about the performance of our food service business in the back half, our Pepperidge Farm bakery business and our V8 beverage business. So we are calling down rates of growth there slightly. And as we tighten the margins, we are also trying to tighten the range around our expectations for sales.

So as you step down through the three elements of our guidance, slightly softer at the top line, offset by the time you get to EBIT by tighter expense control and slightly better margins, and then improvement at the EPS guidance because of the better interest (technical difficulty).

Got it. Thanks.

(Operator Instructions) Terry Bivens, JPMorgan.

Good morning, everyone. Doug, just from our numbers, it looks like you are doing a pretty good job outperforming the competition at Wal-Mart. I'm just trying to get a handle there on how -- Wal-Mart's trade practices, their trade inventory practices. It seems you are doing so well there, I am just wondering how big a factor were they in the de-loading versus some of your other big accounts here domestically?

Terry, as you know, we don't comment on specific customers. I would say that this was across several major customers. It was not specifically identifiable with one particular customer. I would also say that any customer that has a value-oriented proposition, as they are taking to market, we've had good success with in the first half from a sales and a takeaway perspective. So it transcends any one particular customer.

Okay, and just -- I'm sorry, just a quick follow-up on inventories. As we look forward into the third quarter, do you anticipate further de-loading or do you think inventory levels are about where they should be now?

We expect inventory levels will not appreciably change.

Okay, thank you.

Chris Growe, Stifel Nicolaus.

I just had a question for you, somewhat of a follow-up before. But on your ready-to-serve business, just looking at your market share using IRI data, it shows that it is sort of flat from when you started the soup season. And I guess as I think about it, you've gotten a lot more promotional during the quarter and you've, of course, had a couple new products.

So in the second half as you anticipate kind of pulling back on some of those promotional levels and maybe a bit on the advertising, is there a risk there? You've seen your price points get down pretty close to Private Label and Progresso. And as you pull back, is there some risk to your market share? It sounds like you are figuring perhaps some weaker volumes in that period. I wonder if you could speak to that, please.

First of all, Chris, we expect to be fully competitive on the spending side in the second half. We are just calling it down from the introductory levels that we had in the first half.

The second piece, I would expect us to be very competitive in terms of consumer takeaway in the second half. We are continuing to get trial of Select Harvest, and we see that proposition actually strengthening in the second half as we continue to get trial and leverage a strong repeat base.

And then Chunky came out with a very solid second quarter, and the outlook for the second half is very competitive. So we expect that we will be fully competitive in the back half.

The way you report your sales, you give the pricing, you give the promotion. Would that promotional factor kind of -- given what you've signaled so far -- likely be less negative?

Yes, I would say intuitively, yes.

Okay, thank you.

Eric Katzman, Deutsche Bank.

Thanks for allowing me a follow-up.

You just can't get enough, can you, Eric?

You haven't even got me started yet. Honestly, there are certain times for a company to kind of play offense and there are other times to play defense. And outwardly at CAGNY last week, you kind of dismissed General Mills as being that much of a factor, and you kind of gave what I thought was a pretty positive outlook.

But I don't know, internally, I would think that you would be kind of upset at this situation. Because you control condensed. You are 80% of the category. It seems to me that it is your job to -- or Denise's job -- to really convince the retailer that this is the product you don't want to deload. This is the product that should be selling off your shelves like crazy, probably without any promotion even associated with it, because consumers are so pressured.

So I just -- I guess I am just, like you said, you were surprised at the consumer deload or the trade deload here. And I guess I just want you to kind of react, like do you feel that you were unsuccessful in convincing the retailer? Did they talk with you about this decision? Because it seems to me that if there is ever a time for Campbell Soup to be playing offense with its highest-margin product and most-well-recognized product, it is like right now.

Eric, I think you make very good points. We were intimately in dialogue with all of our customers as we went through the heart of the soup season. It is reflected in very strong performance. Consumer takeaway was very strong through the entire soup season. And some of our retailers, while they were managing their inventories, chose to take a risk on out-of-stocks, as they were even more committed to managing their working capital.

And it was a frustrating experience. I think we all learned from it. And I think both retailers and we would have done it differently in hindsight. But the reality is we had a good season with the consumer. We were up 8% in the first half. And quite frankly, it should have been more. I wish it was, and it wasn't. So we just regroup and we move on from here. But I am not embarrassed by 8% growth in the first half.

I think any time the retailer is trying to take inventory down really across the whole dry grocery segment, that it is the pieces of business, the SKUs that are doing best that they are going to sort of inadvertently deload the most. I think it was the strength of the condensed business that caused us to have the biggest gap there between consumer takeoff and inventory.

And it is what it is. Now we've just got to pick up and go forward.

Okay. Thank you for taking my second question.

I'm not sure I want to do it again, just to be clear.

Robert Moskow, Credit Suisse.

This is kind of a longer-term question, but you have a bunch of restagings planned for 2010, Chunky and whatnot. It is actually a question about BPA. It seems to be finding its way into the public press. It's a concern that a lot of consumers have about the lining of steel cans and the attributes of it. Have you explored different types of packaging yet, and what would be the impact of restaging if you were forced to do packaging without BPA?

We are totally in touch with expectations on this front. And we are -- I think we are at the front edge of understanding of what the options would be. We don't see any near-term or mid-term risk on this front, and we are quite confident that we can adjust to whatever comes our way over the next 12 to 18 months. And so what I would say is in the near-term, over the next 18 months, this is a nonissue, and we will be prepared to deal with anything beyond that.

Okay. I'll leave it at that. Thanks.

Jonathan Feeney, Janney Montgomery Scott.

Thank you. Doug, do you have any way of -- I'm not sure if you've been asked this before -- but of giving us an aggregate sense of how much retailer inventory is carried in Soup and how many -- in terms of weeks of sales, and how far that is off its peak?

Well, it is a very tricky seasonal build and deload. So we get into -- we can talk averages.

Yes, that would be great.

But then it wildly fluctuates quarter to quarter. Anthony, do you want to give them just a broad --?

Yes, I think on average, we would be at the high end of two to three weeks. And Doug quantified earlier what the sales impact was in the second quarter of the deload, which implies, if you do the math, it is about three days of inventory.

That's very helpful. Thank you. And just one follow-up, if you wouldn't mind. You mentioned year-over-year change in operating profit in Soups, Sauces and Beverages being -- the first factor you mentioned was cost and then chiefly advertising. I guess is there any way you could tell us roughly how much incremental year-over-year change in advertising compressed that segment operating margin?

I guess if we just took the three launches that we are talking about, Select Harvest, V8 aseptic and Swanson Stock, most of the operating profit decline in this segment is attributable to the increase in advertising.

Thank you very much.

Ed Roesch, Soleil Securities.

So I had a question about Baking and Snacking. Just trying to get a little more color on the profit decline there. Is it fair to say then that the divestiture, which was 8 points negative to the top line, didn't have much profit impact? Then you've got the FX. And then if you could give a little more color on Pepperidge Farm, on the decline there, whether it was the main factor in the overall segment decline.

I guess if you looked at the Baking and Snacking segment, I guess first is the significant decline due to the currency translation, which is about two-thirds of the operating profit decline. And then the balance of the decline is due to the lower profit at Pepperidge Farm, and it does reflect the significant cost inflation that they experienced beginning in the back half of last year.

Okay, so then looking at the second half, you signal a little bit of caution on Pepperidge with at least the premium breads maybe slowing down in volume. But yet your pricing, up 9 in the quarter, should compare pretty favorably to the year-over-year cost increase in the second half. Is that a fair way to characterize the second half there?

Yes, there will be competing pressure in the back half there. One is the pressure on volumes and sort of the economic environment, offset by the year-on-year improvement in gross margin performance as we begin to lap the more significant inflation that occurred in the back half of last year.

Terrific.

The other -- and we are talking about a slowing of growth. We are not actually necessarily talking about a decline in sales. We have been on quite a roll with Pepperidge Farm for the last five years, and what we are seeing is a slowing of growth in the category and a slowing of growth with Pepperidge Farm, as opposed to a significant decline.

Okay. Thank you.

David Driscoll, Citigroup.

Thanks a lot. Good morning, everyone.

Hi, David. How is the new baby?

Thank you for asking. Wonderful. Both baby and mom are doing great today. Thank you.

Doug, I wanted to try my hand just a little bit at this inventory deloading. Very surprising comments. And certainly I agree with almost entirely what Eric was saying earlier. But I wanted just to say and ask you this question.

I thought the whole concept of the vendor inventory management system was to reduce the inventory levels at the retailers. You guys have insight as to what their levels are and you do automatic replenishing. So this was completely off my radar as a possibility, because it seems like if there is good takeaway, then you see the reduction at the retail level, you replenish and everybody wins because the retailer is doing what they are supposed to do, which is make sales.

I really am -- I don't understand this. How could this possibly be an issue -- how can this come up and what do these retailers say to you guys? Do they just say, hey, we just didn't want the sales? Because it seems to make zero sense.

Well, broadly speaking, these retailers made executive decisions across their whole network that they were going to reduce inventories as they hit the end of their calendar year. And that was done largely across all their major dry grocery categories. We are not the only organization that has talked about this. And this was somewhat of an executive decision that enabled them to significantly reduce their inventories. And some of them delivered very solid performance on the strength of that decision at a high level.

However, some categories and some individual businesses might have been adversely affected. And we were one of those. Our growth was slowed as a result of this. The good news was that our consumer takeaway held up very well, and our performance for the half was solid. We missed an opportunity there. We missed it. The customer missed it.

But this transcended any relationship we have with a category manager or a buyer. This was an executive decision.

Can you comment on whether or not you perhaps lost any shelf space?

There is no evidence that we've lost shelf space. In fact, there is evidence that we've held or gained shelf space with virtually every customer.

And final question, are you seeing any trade deloading in Europe?

No.

Great. Thank you.

Alton Stump, Longbow Research.

Thank you. Good morning. Just a quick question on the input cost front. Sorry if you mentioned this in your opening remarks, and I missed it. But are you still looking for a 9% to 11% input cost inflation number for this year?

Yes, about a 9% inflation rate for the full year.

Okay, thanks. And just one quick follow-up from that. There has been some word on pretty hefty metal can cost increases going through at the first of the year. Is that factored into your updated guidance overall cost front?

Yes, it is factored into the updated guidance, and it is true that there is some pretty significant upward pressure on tin plate costs.

Okay. That's all I have. Thank you.

Lisle Henderson, Campbell Soup.

No, that's not a question. That one is not a question. That is just one of our participants.

So that will wrap it up for us, then. Okay, you can conclude the session, Devon.

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.