金寶湯 (CPB) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to your third quarter 2009 earnings Webcast.

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

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

(Operator Instructions).

As a reminder, this is being recorded.

At this time, I would like to introduce Mr.

Leonard Griehs, Vice President of Investor Relations.

Mr.

Griehs, please go ahead.

Thank you, Mary.

Good morning everyone.

And welcome to Campbell's third quarter fiscal 2009 conference call.

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

Our speakers on the call will be Doug Conant, President, Chief Executive Officer; Anthony DiSilvestro, Vice President and Controller; and Craig Owens, Senior Vice President, Chief Financial Officer, and Chief Administrative Officer.

Then, we'll follow with a question-and-answer session.

Beginning with this quarter, we are changing the format of our conference calls.

Our financial results press release and supplemental schedule were issued last night and they're also posted on our website.

Our formal comments on the call will highlight quarterly results, rather than repeat what is detailed in our press release.

And we will only touch briefly on year-to-date results, where appropriate.

Now there are slides accompanying our presentation.

You find those posted on our website.

A replay of our call will be available approximately two hours after the call is complete through midnight, May 29th, 2009.

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

The access code is 135-9864.

You may also listen to a replay and view the accompanying slides 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 presentation contains certain forward-looking statements that reflect the Company's current expectations about future plans and 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 slide three in the presentation or to the Company's most recent Form 10-K and subsequent Securities and Exchange Commission filings for a list of the factors that could cause our actual results to vary materially from those anticipated or expressed in any forward-looking statement.

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

We have provided a reconciliation of those measures to the most directly comparable GAAP measures as an appendix to the slides accompanying this presentation which can be found on our website.

Now, to begin our comments on results, here's Doug Conant.

Thank you, Len and good morning everyone.

In an especially tough economic environment I'm very pleased that we delivered adjusted EPS growth of 12% this quarter.

And while our reported net sales declined 10% for the quarter, organic sales declined just 1% as we focused our efforts in the quarter on establishing pricing in key categories and on improving our gross margins.

In US Soup, sales declined 2% in the quarter with substantial strengthening towards the end of the quarter, most notably in April as value oriented merchandising activity gained traction.

However, today, I really want to emphasize our year-to-date performance in our US Soup franchise because the year-to-date perspective is an important perspective for a seasonal business, such as soup.

Year-to-date, we've delivered one of the best top line performances for US Soup in over a decade, leveraging very necessary pricing actions that addressed significant cost inflation, and have helped us reverse a negative trend in gross margin.

As a result, our adjusted gross margin for the quarter was up almost two full percentage points.

Condensed soup has had the best top line growth year-to-date in all of my experience with the Company, going on nine years, while simultaneously delivering improved EBIT and improved EBIT margin performance.

During this time, we maintained marketing support, although spending was heavily skewed to the first half by design.

In a nutshell, year-to-date I feel very good about our US Soup performance.

Admittedly it has been one of the toughest years we've experienced cost wise, but we've managed our way through this unusually inflationary environment with an increased focus on productivity, pricing and carefully managed cost reduction programs.

In particular, our employees have done a superb job in this very difficult situation.

I still believe our strategy of expanding our brands within the simple meals category is the right one.

Our soups provide consumers with a great price value relationship.

And the variety, convenience and inherent wellness benefits of soup make it an ideal, affordable, nourishing simple meal.

Our innovation program is on track and in just a few months we will relaunch our entire range of Chunky soups, behind an improved wellness profile.

Introduce our next round of reduced sodium products and launch an improved version of our already successful Select Harvest line.

I strongly believe that health and wellness will continue to be an important opportunity for us going forward.

Incidentally, sales of our wellness portfolio in US Soup are up double digits again this year, while also maintaining an accretive margin structure.

Also this year, we've experienced dynamic growth in condensed cooking soups where consumers are clearly looking for both value and help in meal preparation at home.

Visits to our recipe website have more than doubled this fiscal year and we expect the trend will continue as we exit this fiscal year and move into next year.

In other North American businesses, I'm particularly pleased with the results of our sauce businesses, where we achieved double-digit growth this quarter in both sales and earnings.

In baking and snacking, key brands such as Goldfish and Pepperidge Farm Milano cookies have delivered strong growth.

And in Asia-Pacific our year-to-date performance has also been quite solid.

I'm also pleased that we recently completed the acquisition of Ecce Panis, by our Pepperidge Farm unit.

While small, it will play a key role in establishing a Pepperidge Farm presence in Artisan breads, a category which is one of the fastest growing segments in the baking industry.

Finally, as Craig will discuss, as a result of our improving momentum we are raising our full year guidance for adjusted EPS.

Although the first nine months have had a lot of ups and downs, our year-to-date results are solid and we expect to finish the year in a good fashion.

In closing, we are a strong, resilient Company, capable of delivering quality earnings growth come what may.

Over the past six years, adjusted earnings per share have grown every year at an 8% compound annual growth rate, growing at a 10% rate the past three years.

We have substantial confidence in our ability to continue to deliver solid performance in our core businesses, particularly US Soup, along with promising prospects in the emerging markets of Russia and China.

I see no reason why our long-term guidance should not be maintained and possibly enhanced in the years ahead.

With that, I will turn it over to Anthony for a discussion of the quarter.

Good morning.

I will be reviewing our financial results for the third quarter of fiscal 2009.

My review will begin with our consolidated results and then I'll cover each of our operating segment.

My discussion will focus primarily on the quarter, however, I will reference the nine month results when it makes comparisons more meaningful.

As a reminder, the results of our divested Godiva business are presented as a discontinued operation.

In the third quarter of 2008, we recorded in Discontinued Operations the gain on the sale of the business.

Also in the third quarter of 2008, we recorded in Continuing Operations the restructuring charge associated with our initiatives to improve performance and long-term profitability.

We continue to incur restructuring related costs in 2009.

The results I will present have been adjusted for the impact of these and other items impacting comparability including tax items and adjustments for commodity hedges, which are detailed in the non-GAAP reconciliation attached to this presentation.

We will present organic sales results which exclude the impacts of currency, M&A activity, and from the 53rd week, as we believe this is a better indicator of our ongoing business performance.

In addition, we will present segment operating earnings adjusted for the items impacting comparability.

In the quarter, we reported net sales of $1.686 billion, a decline of 10% versus the third quarter of 2008.

Reported sales have been negatively impacted by the strengthening US dollar and our recent divestiture activity which I'll detail in a moment.

Organic net sales declined 1% in the quarter.

Adjusted EBIT of $281 million is up 11% versus a year ago despite an eight point negative impact due to currency translation.

The improvement in EBIT was primarily driven by lower administrative costs and a higher gross margin percentage.

Adjusted net earnings of $171 million increased 4% versus 2008.

Adjusted net earnings in 2008 include $11 million from the ongoing operations of Godiva, recorded in Discontinued Operations.

We utilized $600 million of the net proceeds from the Godiva divestiture to repurchase shares which offset the impact at the EPS line.

Adjusted earnings per share of $0.48 increased 12%, similar to EBIT growth, as the benefit of lower interest was offset by a higher tax rate in the quarter.

Our EPS result includes a $0.04 negative impact due to currency translation.

Our net sales decline of 10% is driven by the following factors.

Volume and mix subtracted 6%, price and sales allowances added 6%, increased promotional spending subtracted 1%, currency subtracted 6% and acquisitions and divestitures which reflects the divestitures of snacks foods in Australia and the cold sauces business in France, net of the impact from the acquisition of the Wolfgang Puck soup, broth and stock business, subtracted three points of sales growth.

In the quarter, organic sales declined 1%, as declines in Europe and North America food service were mostly offset by growth in our baking and snacking businesses.

For the quarter, our adjusted gross margin percentage increased from 38.6% in fiscal 2008, to 40.3% in the current quarter, an increase of 1.7 points.

Although inflation continues to run at a relatively high rate, about 7% in the quarter, our previous pricing actions and savings from productivity improvements were more than sufficient to drive positive margin performance.

Mix, principally the divestiture of our lower margin snack foods business, also contributed to this result.

Analyzing the other operating items in the P&L, marketing and selling expenses declined from $284 million in 2008 to $246 million in 2009, a reduction of 13%.

Currency translation accounts for five points of the decline.

The balance of the decline is primarily due to lower advertising in our US Soup, sauces and beverages segment, following a significant first half increase which supported the launch of our new soup items, Select Harvest, V8 Aseptic and Swanson Stock, and to support condensed which on a year-to-date basis are all performing well.

Administrative expenses declined from $158 million a year ago, to $129 million in the current quarter.

The reduction reflects lower administrative expenses as we aggressively manage costs in the current economic environment, lower long-term compensation costs, and a five point reduction due to currency translation.

Net interest expense declined 30% to $26 million in the quarter, as our strong credit has enabled us to benefit from a significant decline in rates on our commercial paper borrowings.

Offsetting the interest reduction in the quarter, our adjusted tax rate increased by 3.9 points from the prior year, to 32.9% as the prior year benefited from our tax planning strategies.

We expect the full year tax rate in 2009 to be in the range of 31 to 32%.

Diluted shares declined from 381 million to 354 million, a reduction of 27 million shares or 7%.

The reduction reflects the utilization of $600 million of net proceeds from the Godiva divestiture to repurchase shares.

In addition to shares repurchased as part of our ongoing strategic share buyback programs.

In our US Soup, sauces and beverages segment, sales on a reported basis of $808 million in the quarter compares to $811 million in the prior year period.

Organic sales which excludes the impact of the acquisition of the Wolfgang Puck soup, broth and stock business, were down 1% in the quarter.

Driven primarily by a decline in the sales of our ready-to-serve microwavable products, soup sales declined 2%.

Sales of V8 vegetable juice have been negatively impacted in the current economic environment and this has driven a decline in our overall beverage sales.

On the other hand, both sauce businesses, Prego and Pace, have performed extremely well, each achieving double digit sales growth in the quarter.

Operating earnings increased to $195 million from $172 million in the year ago quarter, an increase of 13%.

The increase in operating earnings was due to lower advertising, following significant increases in the first half, and also due to lower administrative expenses reflecting our cost reduction efforts.

As I mentioned, US Soup sales declined 2% in the quarter.

Sales of condensed soups increased 2%, driven by solid gains in condensed cooking, as these varieties provided consumers good value as they increased their at home eating occasions.

Sales of condensed eating varieties declined in the quarter.

Sales of ready-to-serve soups decreased 7% primarily due to lower sales of the convenience platform which includes soup in microwavable bowls and cups.

Our new products, continue to perform well with significant gains in the sale of Select Harvest, ready-to-serve cans and in our premium Aseptic line, behind the launch of V8 soups.

However, these gains were offset by lower sales of Chunky cans as we prepare for a relaunch of the Chunky line in fiscal 2010.

Given the seasonality of the soup business, as well as the quarterly phasing of our marketing support, the nine month results are a better measure of the performance of our US Soup business.

For the nine months, soup sales increased 6%, with condensed up 6%, driven by double-digit gains in condensed cooking varieties, a 4% increase in ready-to-serve, driven by gains in Select Harvest, and a 10% increase in broth reflecting the successful introduction of Swanson Stock.

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 and nine months.

On a reported basis, baking and snacking sales in the quarter of $431 million compares to $502 million in the prior year quarter.

Organic sales increased 3%.

Sales increased in Pepperidge Farm, driven by double-digit sales growth of both Goldfish snack crackers and Milano cookies and the introduction of granola cookies, partly offset by declines in our bakery and frozen is businesses.

Sales in our Arnott's retail business in Australia increased in the quarter, driven by gains in both savory and sweet biscuit products, partly offset by a decline in private label biscuits and industrial chocolate associated with a plant closing in Australia.

Outside of Australia, our business in Indonesia achieved significant sales growth.

Adjusted operating earnings increased from $52 million to $58 million, an increase of 12% reflecting gains in both Pepperidge Farm and Arnott's, partly off set by the unfavorable impact of currency.

Sales in our international Soup, Sauces and Beverages segment of $297 million compares to $400 million in the prior year.

Organic sales declined by 5%.

We achieved strong growth in the Asia-Pacific region due to gains in the Australian soup business and in Malaysia.

These gains were more than offset by declines in Europe as consumer and customer reaction to our recent pricing actions as well as the difficult economy, negatively impacted sales volumes.

Sales in Canada were down due to lower soup sales.

Adjusted operating earnings declined from $46 million to $29 million, mostly due to currency translation.

Excluding currency, increases in the Asia-Pacific businesses on higher volumes and in Canada, reflecting the benefit of our recent pricing actions, were more than offset by a volume driven decline in Europe.

In North America food service, sales in the quarter of $150 million compares to $167 million in the prior year period.

Organic sales declined 7%, as the food service sector continues to be negatively impacted by the economy.

Reflecting our efforts to manage the costs in this business, adjusted operating earnings were comparable to a year ago.

Turning to the cash flow and the balance sheet, cash flow from operations of $806 million compares to $574 million in the prior year period.

The prior year cash flow reflects the negative impact of approximately $230 million of taxes paid in connection with the sale of the Godiva business.

Adjusting for the tax payment, cash flow from operations is comparable to the year-ago period.

Capital expenditures increased from $154 million to $176 million, reflecting higher spending in the US, as we complete initiatives to increase the capacity of our US beverage business.

We now expect full year capital spending in 2009 to be approximately $350 million.

In the first nine months of fiscal 2009, we repurchased 13 million shares at a total cost of $409 million, in connection with our June 2008 strategic share repurchase program, and our practice to repurchase shares to offset the dilutive impact of our stock compensation programs.

Net debt at the end of the quarter was $2.521 billion, compared to $2.066 billion a year ago.

The year ago balance reflects the proceeds received from the divestiture of Godiva, most of which were subsequently used to repurchase shares.

And now, I'll turn it over to Craig.

Thanks, Anthony.

Given the significant impact that product introductions earlier this year have had and the volatility that we've seen in inflation, we think it's important to assess our results on a year-to-date basis as that best reflects our performance.

Despite the challenges of the economic environment, we're very pleased with what we've accomplished.

Excluding the impact of currency, and divestitures, organic net sales increased 3% year-to-date, driven by gains in US Soup and sauces, and both of our biscuit businesses, Pepperidge Farm and Arnott's.

These advances more than offset declines in North American food service, and in Europe.

Adjusted gross margin percentage which improved significantly in the third quarter is now ahead of last year for the nine month period.

And while adjusted EBIT is down 1% it's been negatively impacted by four points due to currency translation.

And although selling and marketing in aggregate is down due to currency, our underlying brand support as measured by advertising is ahead of a year ago.

Adjusted EPS at $1.90 is up 4% including the impact of a five point headwind from currency, as the benefit that we have derived from lower interest cost and managing to lower levels of SG&A have offset the negative impact from currency translation.

Now let me turn to our full year guidance.

On a currency neutral basis, net sales excluding the impact of one less week and divestitures is expected to increase between 3% and 4%.

Adjusted EBIT, also currency neutral is expected to be slightly below our 5% to 6% long-term growth target due to one less week, higher marketing spending associated with our new product activity, principally in US Soup and higher spending in emerging markets.

Based on our third quarter performance, and improved outlook for the year, we're raising our full year EPS guidance.

We now expect adjusted earnings per share growth to exceed our 5% to 7% target on a currency neutral basis, versus our fiscal 2008 adjusted base of $2.09.

We expect sales, EBIT and EPS growth rates to be negatively impacted by about five percentage points for the year due to currency translation.

Before I turn back to Len for the Q&A, I want to acknowledge that Len will be retiring at the the end of July after nearly 20 years with Campbell.

We announced this morning that Jennifer Driscoll, currently VP of Investor Relations at BestBuy will join Campbell in June as our Vice President of Investor Relations and we're very pleased that Jennifer will be joining us.

You'll all have the opportunity to meet her in the near future.

We hope that Len may listen into the call every now and then as a happy shareholder but today's marks his last quarterly earnings call as Campbell's Vice President of Investor Relations..

That's 76 quarterly earnings calls in a row, three CEOs and six CFO's.

Through good times and challenging one's earned a well deserved reputation as a straight shooter.

He's ablely represented Campbell's with integrity, honor and humor.

And he's been a leader in the Investor Relations profession.

Len, thanks for all you've done for Campbell.

You've been a vital member of our management team.

On a personal note, I want to thank you for taking the time to break in your sixth Campbell's CFO, particularly delaying your retirement until we were able to identify a successor.

You're going to be missed on these calls.

But before you bow out, you've got to lead us through one more Q&A.

Thank you.

Thank you Craig, very much.

Before we open to Q&A, I do want to alert people that may drop off before the call is over that our next investor event will be a field trip, July 15th to our Maxton Soup facility in North Carolina.

If you're interested in that trip and have not signed up for it, please give me a call or my assistant, Robin [Depetro], and we'll make sure that you get the information.

Mary, I'll ask you to open up for Q&A.

And what I'd like to request everyone, at least, when you ask your questions, if you could limit yourself to one question and one follow-up so that we make sure that we get through the round.

And we will end this call no later than 11 o'clock.

Thank you.

(Operator Instructions).

Our first question comes from Alexia Howard from Sanford Bernstein.

Good morning.

Hi, Alexia.

Hi.

I guess I have to jump into the sales growth question for this quarter.

I know that you talked a lot about being pretty comfortable with the outlook but given that in soup, particularly, sales were down by 2% this time, I think that was against a 3% down last year.

So the comp was pretty easy.

What gives you the confidence or what was it that you saw in the April data and what are you seeing going forward that gives you the confidence that the organic sales growth is going to bounce back up to that sort of 3% to 4% level over the next few quarters?

Thank you, Alexia.

What a surprising question.

Obviously, this is Doug.

First of all, as we've really discussed all year, admittedly in a circumspect way because we're competing with people in the marketplace and don't want to explain our strategy before we've executed it, we focused the first half of this year on launching our new products behind aggressive marketing programs.

While we had to deal with a very difficult cost environment and we weren't able to set our long-term pricing to manage that cost pressure until we ended the soup season.

And it ended at the end of the second quarter.

So basically, we took February and March and reset, and had our prices properly set to prepare us to go into next year to improve our gross margins.

And then as we went into April, we were able to start activating against the new price points.

And that activation has been largely successful and as you'll see with the -- in the upcoming data, you're going to see an uptick in sales.

So basically we had two soft months while we were focusing on building gross margin, getting the prices set for next year.

There's one other piece that relates to it and that's particularly related to our Chunky business.

Where we're preparing to relaunch Chunky in a sizable way next year which I articulated at the CAGNY presentation.

So we've been easing back on that business and expected that to be down as we went into the end of the year.

So all those things combined, this is playing out largely as we expected it to play out and see it as being very manageable.

We've consistently grown our US Soup sales.

I believe, as long as I've been here, for nine years.

They've grown anywhere from 2% to 6% per year.

We know how to drive this category and how to grow it.

This year was unusually difficult, but we navigated through it.

We've got the gross margins we need to compete long-term and we've got solid sales performance over the year-to-date basis.

Which is the way we view a soup season.

Okay.

And then just a quick follow-up.

You commented that China -- or okay you commented that the Asia-Pacific growth was particularly strong this time around.

Can you talk about the soups, how much the or whether the contribution from the Chinese soup sales was significant or is that -- ?

Well, actually, that's in a separate segment.

Asia-Pacific was strong largely you because of our -- we have great biscuit performance in Arnott's and great soup performance in Australia, as well as strong performance in Indonesia and Malaysia.

We keep China separate.

China and Russia are performing basically as expected, as we gear up for further expansion efforts going into next year.

But still small enough that they're not having a significant impact.

Next question comes from Jonathan Feeney from Janney Montgomery Scott.

Good morning.

Thanks very much.

I want -- just a quick question for Craig, actually.

I wanted to understand the advertising reduction sequentially in the context of a flat year-over-year, Craig.

Were you talking about flat dollars that went to advertising brand support or are you talking about some other measure like impressions or something?

Year-to-date, our advertising spend is actually up.

So --

It is?

So through the nine months, advertising spend is positive, right.

And would you expect that -- you expect that to be the trend for the full year, when we're finished in July?

I don't know if it will be the trend for the full year.

I think the point is that we feel very comfortable that we've got the right kind of brand support behind the brands.

It's been a little lumpy in the way that it's played out across the year because we had three big introductions that we wanted to support at the front end of the year.

And we're cycling a year when we were up in total marketing, I know about 5%, and I think up in advertising very significantly, Q3 last year.

So if you look at it quarter-to-quarter, it's kind of hard to pick out the story.

Jon, just building on it, we view marketing, total integrated marketing which would include advertising, consumer and trade and typically we look to spend 22 to 24% of our list sales against our business.

We've committed to doing that every year.

And to my knowledge, in the eight years I've been here, we've never gone below 22% and we're typically always in that range.

We'll be in that range this year and probably for the foreseeable future.

Our next question comes from Judy Hong from Goldman Sachs.

Thanks.

Doug, can you maybe help us bridge the gap between what we're seeing in the measured channel and this is on US Soup, versus the -- your reported sales growth?

And I understand that limitations on obviously the IRI or Nielsen data, but just how much of the gap is kind of the channel shift versus maybe whether there's any changes to the inventory level, especially coming out of the last quarter where you saw significant destocking?

A couple observations on both.

On the inventory levels, we don't see any -- there's no evidence that there's been an inventory build-up as a result of our strong April finish.

And we also have not seen any dramatic customer reductions in inventory beyond what we saw at the end of last quarter.

So there's really no inventory situation to report.

I think the sensitivity we have to have around the measured channels is quite frankly the channels that are growing are the channels that the data doesn't have visibility into, which is -- and it's much more than just mass merchandisers.

It's also the club stores, the dollar stores, and unfortunately that's where a lot of growth is happening.

So I can't comment on it, but I can say these sales have not changed.

Our sales performance year-to-date has not -- there's no inventory build-up anywhere in the system.

In fact, they've been adversely affected by an inventory reduction that we reported last quarter.

So what we're selling is selling through.

And you're just going to have to -- you know our sales.

You know your measured channels, you can back into the rest.

Okay.

And then just in terms of the competitive dynamics, Doug, I mean you look at some of the data, seems like private label share growth has accelerated a little bit and ready-to-serve your share's been a little bit weak there.

How would you sort of broadly assess the competitive situations?

And you talk about ad spend you feeling comfortable with where you are with respect to ad spending.

From a share perspective, what sort of things you have to see to see some better maybe share momentum going forward?

First of all, in the data I see, we're hitting our share targets.

Second of all, private label is -- we have to take into account the branded competitors and private label.

Private label is growing share in soup, as it is in most of the simple meals categories right now.

But I would say, it's still at much lower share levels, absolute share levels in soup, than it is in most other edible categories.

And that's on a dollar growth basis.

Actually, private label soup falls into the bottom quartile of all edible categories.

And on a unit basis it's second to last in terms of unit volume growth.

So we take it seriously.

We take private label very seriously.

But as we continue to upgrade our portfolio, strengthen our offerings, we believe we can compete.

So I guess that's where I land on private label.

The other thing, maybe just to build on that, you talk about ready-to-serve.

A lot of the negative impact there is related to the convenience formats, the microwavable and soup in hand formats.

And particularly if you look at the piece of ready-to-serve that was involved with the Select Harvest restaging and launch this year.

We're hitting our targets and very pleased with our performance.

Yes, that's a good point.

The convenience platform's got some premium pricing in the market and that's being more adversely affected.

The canned businesses are holding up better across the board in ready-to-serve.

The other piece, in addition to feeling good about Select Harvest, we're also managing down our current Chunky business as we get ready to relaunch so we also anticipated that coming down as well.

So between the pullback on Chunky as we get ready for relaunch, and the natural challenges that we're facing in the convenience platform in a tough economic time, I think that probably explains most of the change in ready-to-serve.

Okay.

Next question, Mary.

Our next question comes from [William Wister] who is a private investor.

I don't think that's a question.

I don't think that should be in the queue.

We'll take the next question.

Our next question comes from Ed Aaron from RBC Capital Market.

Great.

Good morning, thanks for taking my questions.

Good morning, Ed.

Just wanted to ask about the emerging market investments.

Do you still plan to spend the full $0.10 this year?

And then how -- with the changing economic environment, how are you thinking about that prospectively like looking at maybe into next year?

And then as a final follow-up to that, when you compare Russia and China, do you kind of view those equally in terms of being good candidates right now to add more investment spending?

With respect to our spending, we are still on target to spend about $0.10 this year.

And as we have said, I think that will be the high point of negative spending or the low point of the profitability out of the emerging markets.

We still have a tremendous optimism about the long-term opportunity that we've got in both Russia and China, two very different markets.

We're developing a little bit differently in each of the two places, but I think we still see -- recognizing the size difference between the two, we still see the same kinds of upside in both countries and we intend to continue pursuing that and continue investing.

Okay.

And one other question if I could, just on inflation, I think it would probably moderated to about 7% in this most recent quarter.

What do you expect the cadence of the cost inflation to look like on a quarterly basis over the next two or three quarters from here, just roughly?

Yes.

I think we'll reserve comment on F 2010 until we talk about guidance and F 2010 more fully at the next Earnings Release.

We would -- you're right, about 7% for the third quarter and I think the fourth quarter probably won't be much different from that.

That's -- some reduction from what we were seeing in the first half of the year, but not dramatically so.

We'll finish the year around 8% or 9%.

We still have challenges in a couple of key commodities, while some of the grains have come back to us, we still have cost pressures in tin and tomatoes, so --

Good.

Next question, Mary.

Our next question comes from David Driscoll from Citi Investments.

Great.

Thanks a lot.

Good morning everyone.

Hi, David.

Doug, soup, sauces and beverage volumes are down 2% for the nine month period.

Given the low price point here and the rise in the unemployment rate, this number feels a little disappointing to me.

And I would have thought the simple meal thesis would have played out much stronger on the volume side.

What are your thoughts on that statement?

And how do you put the simple meal in context of what's happening in US unemployment?

Well, David, I'll try and be helpful here.

That's a mouthful to answer.

But as we look at the simple meal universe here, there are about 90 categories.

I'll talk primarily about soup.

Soup is sort of ranking in the middle on dollar growth.

And I think what has happened is we were hit by substantial inflation.

We lead the pricing in the category so we in a sense lead with our chin here to take prices up.

And as we had to take pricing to cover cost, I think that probably softened what could have been a good year, an even better year in the near term.

But we did set -- I feel very good that we set the pricing and we've got the gross margins in place to move forward.

We knew it was going to be a push.

The other thing thing to think about, you're mixing soups, sauces and beverages.

Beverages have come back somewhat.

And come down and we know that our beverage business is adversely affected.

The whole category is adversely affected in tough economic times.

And so that's depressing that total unit number a bit.

That having been said, units have not grown that much but we've had to take unprecedented pricing to deal with the unprecedented cost inflation.

So we're just managing a very challenging environment.

I feel good that we've held on to everything that we're delivering sales growth and we're delivering earnings growth in the midst of a real chaotic market.

Maybe just one quick follow-up.

If 2010 is going to be the year of the economic rebound and things are going to get better in the United States, does that pose a challenge to the simple meal thesis that seemingly should have been very strong in 2008 and 2009?

Well, what I would say, it was strong before the -- we've performed well, I would argue that we performed well in simple meals before the difficult year and we'll perform just fine afterwards.

When I look at the large simple meal universe and the major competitors in that simple meal universe, they've all lost share.

Private label has gained share.

We haven't lost in that larger simple meal universe.

We haven't lost any more share than any of the major people that play in there.

So I'm very comfortable that -- I'm very comfortable that we're going to be able to fully compete next year as we continue to innovate and continue to move forward and spend against the business.

Okay, Mary, next question.

Our next question comes from Eric Katzman from Deutsche Bank.

Hi, good morning everybody.

Hi, Eric.

I guess my question, first question is on the admin expense and it was kind of roughly I guess averaging kind of in that $140 million to $150 million range and it's kind of been trending down.

I want to give you some credit for that.

And I'm wondering how much does kind of leveraging SAP figure into that?

Well, honestly, SAP doesn't figure very significantly into that.

Most of the benefit that we're seeing in the early days from SAP is going to be showing up in cost of sales.

If you look at SG&A, we are happy that in a really difficult environment and dealing with lots of headwinds from various quarters, that we've been able to manage our SG&A effectively and manage it down.

Now, you've got some currency benefit of course in there and you've also got some benefit from our long-term incentive programs, but we've taken significant spending out of our planned levels of SG&A this year in response to the more difficult environment.

Actually, Eric --

Go ahead.

Just to amplify on the SAP comment.

In fact, our administrative costs are up as a result of SAP because the benefits from SAP will manifest themselves more on the comps line.

Good.

That's exactly where I was headed, Anthony.

And the other piece is, Eric, the tight management of SG&A I'm convinced is not compromising any of our strategic spending and/or any of our consumer customer spending.

It's just been good old fashioned belt tightening and it was needed.

And Doug, as a follow-up.

Can you just talk a little bit about the advertising deflation that you're seeing and how that's maybe affecting the spending level, as you went through the year?

I think a lot of other companies in the industry have discussed that they're getting as many or more impressions for the same dollar, maybe you could kind of go into that a bit?

Well, we'll get into that I think a little more fully when we start talking about next year, because most of those companies are getting the benefit beginning now, going into the next advertising season in the fall.

And we are seeing benefits there benefits there as well.

I do know that our impressions are up this year as well as our spend.

Okay.

I'll pass it on.

Thank you.

Thanks, next question, Mary.

Our next question comes from Chris Growe from Stifel Nicolaus.

Hi, Chris.

Hi, good morning.

I wondered first if I could ask about the -- some of the weakness that we've seen in these categories, not to belabor the point but it's been in the ready-to-serve category.

And also we've seen some -- a little bit of weakness and a little share decline in condensed.

It sounds like you have some clear new product and kind of the restaging of Chunky for ready-to-serve, but what do you think as we look ahead that will help condensed soup?

Again, it's been a little soft from a category standpoint.

Chris, I'm not sure the time frame you're talking about.

It would help me if -- are you talking about --

I'm just --

Last 13 weeks or 12 weeks?

Yes, I'm just looking at like the last 12 weeks.

As I look forward I know you've got some things going on in ready-to-serve.

What about condensed.

Well, condensed, I think you have to interpret the -- condensed is obviously our value brand, right?

And as I mentioned earlier, the first two months of this quarter, we were setting prices, holding back merchandising activity and trying to get the right pricing structure and margin structure so we could go forward into the next soup season.

And as a result, our prices went up, our merchandising was basically moth-balled for two months and it didn't come in until the second half of April and then it responded again.

So I think it -- my opinion is, it's a tactical issue and that's why we tend to look at this on a long-term -- I mean, on a year-to-date basis.

Now, unfortunately, when we're in the midst of doing that, we can't call the analysts and say hi, we've got a tactical game plan here and here's what we're doing to compete with private label and here's what we're doing to compete with Progresso.

We sort of have to play the hand and then talk about it.

And that's sort of where we are on condensed.

And condensed was most substantially affected by -- especially the eating varieties, by the strategy we had to get the pricing right and get the gross margins right.

And so we went for volume and then we went for gross margins and profit over the course of the last three quarters, in that order.

And then could you explain then how the pricing architecture then changed in like February and March?

Was it more about promotional changes or how much in the way of list price changes have you made?

Yes.

It's both.

And we had to get the right price, every day retail price set and we had to get the right merchandising prices locked in which were different than we had in the fall.

And I can't generalize because it's on a customer by customer basis.

Next question comes from Terry Bivens from JPMorgan.

Good morning.

Good morning.

Hi, Terry.

Doug, I wanted to get your impression of this.

Both the publicly held competitors in soup, I mean, they've looked at what they think are pretty disappointing results, kind of starting in January and they both point to the decision to do a lot of advertising behind the MSG as one of the reasons that maybe the category has not done as well as expected.

What do you think about that?

That's a lot of mumbo jumbo, Terry.

We've looked at this seven ways from Sunday.

We studied it before we launched our Select Harvest activity.

We watched it every week in every market to see what kind of impact it was having on the category.

There is no evidence that I'm aware of that can directly link the MSG advertising that was tactically executed in certain markets at high levels and other markets at average levels; there is no evidence that says that's had an impact on the category.

It certainly had a positive impact on our Select Harvest business.

It certainly is making it difficult for those other competitors.

It's easy to point to.

But in all the evidence that I've looked at, I just don't buy it.

I just don't buy it.

Okay.

Well, that's pretty clear.

And as my follow, one of your goals has been to kind of smooth out soup seasons over time.

But it looks like given the volumes, given the way things are unfolding, that we're kind of back in that pattern where we go up against really strong quarters and then there's weak quarters.

It's kind of that saw tooth comparison thing, similar to several years ago.

You how do you feel about that?

I mean, is there any way -- just seems like we're back in that.

I'd like to get your idea on that.

Well, Terry, you're right.

And we have tried to even this out.

I think over time, we are beginning to even it out from a consumer perspective.

But quite frankly, it may just be the pursuit of the holy grail here, Terry, in the sense that we're in the most difficult economic environment that we've been in for 70 years.

We have unprecedented inflation and we've had to take unprecedented pricing to deal with the inflation, while we're in a very competitive environment where private label is trying to come in and brands are trying to compete for advantage in the near term.

And so it has migrated into a real tactical battle that doesn't neatly fit into quarters.

But I think that's the key point is that this year, because of the inflationary roller coaster that we went through and because of the product introductions, you've seen more volatility than we would normally expect to see, Terry.

Our next question comes from Robert Moscow from Credit Suisse.

Rob.

Hi, Rob.

Hi.

Thank you.

I guess what I recall about Campbell and how you reward yourselves at the end of the year or categorize the year is that you do give out bonuses based on quality of results.

And that does depend on marketing spending and whether you've cut it or not.

How are you thinking about your quality of earnings this year?

And is that going to be -- I guess you're talking about the year in a much more positive tone than I expected, Doug.

I mean people who have talked to you recently have come away with a much more pessimistic outlook for the Company.

Are you saying that the first nine months have been quite good and, therefore, this is a good year and that's how you're going to be compensating everyone?

Well, Rob, I don't feel like I've been overly pessimistic.

I've tried to be responsive to questions that we've had from people about what's been going on during the course of the year, but I have always been bullish about the Company and always been bullish about our ability to compete and win in soup.

The quality of our earnings, that's a fair challenge and we are rewarded on quality of earnings.

We basically -- our compensation system measures four areas.

And one is financial performance, another quadrant is marketplace performance which includes consumer take-away and share across all of our major categories.

A third area is operational performance, implementation of key operational objectives like the timely implementation of SAP.

And a fourth bucket is strategic objectives that we agree to with the Board, like going into the emerging markets on a certain timetable and a certain way.

And the Board looks at all fourth of those quadrants and assesses how we've done versus our objectives and that's how we are rewarded.

In the financial area, we do look at the quality of our marketing spend and we will be rewarded on that appropriately.

We feel like we are going through an incredibly challenging environment here.

We've held it together well.

We've managed our costs well.

We continue to spend against the business on a year-to-date basis.

We've managed against unprecedented pressures in terms of costs.

And we are delivering.

And so overall, I feel very good about our quality of earnings.

If we didn't have the headwinds we have, I'd feel even better.

But we're delivering very solid performance here and we're setting the table for the future.

And so I feel very good about where our Company's positioned now.

Okay.

Well, I appreciate the candor.

But what about for next year, Doug?

You've -- I guess I'm a little surprised to see you effectively raise guidance this year and then how does that -- does it make you just as confident about next year's growth rate as you were before or -- I guess I assume that it would?

Rob, I wish I -- obviously, I can't get into providing guidance for next year.

As much as I would like to, I've got Len and my CFO looking at me like don't you say a word.

But I can't help myself.

I still feel very good about this Company.

We can find ways to deliver quality results in the face of real adversity and we've done it again this year.

I think going forward, we will find ways to move this forward.

We have headwinds next year.

We're going to just like everybody else, we'll have to deal with pension expenses and other things.

But let me tell you, the fundamentals of our businesses are very solid and the prospects in emerging markets are very real.

So for long-term guidance, I feel very comfortable with where we are.

And as I mentioned earlier, I don't see why in the fullness of time we can't be expecting more from this Company.

Okay, thanks.

Next question, Mary.

Our next question comes from Vincent Andrews from Morgan Stanley.

Hi, Vince.

Hi, thank you, good morning everybody.

Doug, kind of a big picture question.

You've talked in the past about maybe I think it's the number one reason why people don't eat as much soup as they might is because they're not thinking of it.

So if we've gone through a year where there's been some pantry deloading and so forth and buying was down in the quarter, does that present any sort of challenge on a go forward basis that there's less soup around in the house, there's less thinking about soup and how do you think about that?

Well, I'm not that concerned about it in the sense that we have seen people shopping their pantry's more aggressively.

And we know that's happening.

But there's still soup in the pantry.

It may be a little less, but there's still soup in the pantry, so I'm not concerned about that.

And I also have a lot of confidence in our ability to keep soup top of mind.

We've been doing it year in, year out, in store and through our advertising and promotion activity.

And we have very healthy levels of spend against the business and there's no reason to expect those levels of spend to go down significantly.

So I think we can keep it top of mind awareness.

You are right, that is the number one reason people don't eat soup is they don't think of it.

So we do have to keep it top of mind.

We know that.

A lot of our advertising is testing suggests the more we can spend, the better off we are and that's our intention over time.

We have the research that we've got doesn't show any significant decrease in pantry inventories.

What we're seeing is that people are shopping a lot closer to use levels and not stocking up.

Right.

Okay.

And just as a quick follow-up, the volume -- I assume volume was down in the convenience platform.

Where did those usage occasions go?

Did those people migrate to another part of your portfolio?

Did they not eat soup?

I mean how are you -- what do you think happened there?

There's no elegant answer.

I think two things happened.

One, a percentage of them went to the canned product because it was a better price.

I'd say that's about two-thirds of it.

But there's clearly a group of people who are looking for convenient alternatives that might have gone out of soup for a specific occasion like at school or at work, when our pricing wasn't as competitive as it could be.

But I think that will come back as well.

Mary, how many more questions in queue do we have.

I'm showing that we have one question.

Okay.

We'll take that and then I think we'll end.

Our next question comes from Eric Serotta from Consumer Edge Research.

Hi, Eric.

Good morning.

Thanks for taking the question.

Last but not least, Eric.

Thanks.

Doug, could you talk a bit about the year-to-date profitability and operating leverage that you've realized in soup?

You commented that soup would be -- that condensed profits were up year-to-date.

Could you help dimensionalize that somewhat?

You had 6% overall US Soup sales growth and I think 6% condensed sales growth.

And yet your operating profit for US Soup sauces and beverages was I think year-to-date only up about 1.5%.

So could you help put that into some context and was the lift on the margin or on the profit line what you expected, given all of the headwinds that you've spoken about?

Well, as you'll recall, Eric, back in the fall our plan was to aggressively launch -- advertise and compete with condensed soup.

And there was some concern that we were driving sales growth at the expense of earnings growth and margin.

We corrected that in the second quarter in terms of our communication.

That was always our plan.

And I'm -- I simply wanted to make the point as we exited the third quarter that we did -- that plan is working.

We did -- we are growing condensed soup nicely.

We are growing our EBIT and our EBIT margins nicely in soup.

What's really driving that and it's been part of the plan has been the aggressive support of our cooking varieties where we have real advantage in the marketplace.

They don't compete directly with ready-to-serve soups as our eating varieties do and they place very nicely into more at-home meal occasions.

And so we're bullish about condensed soup going into next year, as we start to leverage the momentum we have in cooking soups and have some very exciting news on our eating varieties.

Most notably with tomato and some of our more -- our other eating varieties, we won't get into.

In the segment, the sauce businesses have performed extremely well, benefiting from additional at-home eating occasions, both Prego and Pace being up double digits in the quarter.

Yes.

So in our soup and sauce portfolio, you kind of have to put beverages to the side, the real home runs have been in condensed cooking, in Prego sauce and in Pace Mexican sauces.

And that all connects back to more at-home eating occasions.

It's a meaningful part of our portfolio where we've got good margins and great growth prospects.

If you look at us year-to-date, top line and EBIT growth in that segment is pretty balanced.

If you're looking for more leverage, you have to look back at the way that the year has unfolded.

And in fact we were through the first two quarters, we were still at levels of gross margin that were a little bit lower than we normally like to be.

And levels of advertising spending that were high relative to what we were doing with the introduction.

So I mean the third quarter has helped sort of bring us back into balance on that.

Okay.

Okay.

And briefly, as a quick follow-up, with the relaunch of -- or restaging of Chunky for next year, should we expect to see further promotional activity in the rest of this year to reduce retailer inventories or clear the shelves ahead of the restage?

Typically, we go through a process where we wind down inventories and then we start to build them.

I don't think there's going to be an appreciable change in that pattern this year.

It just may be on different brands but in total it should be about the same.

Okay, everyone.

That will end our session today.

Thank you everyone for coming in and enjoy your holiday weekend.

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

You may all disconnect and have a wonderful day.