金寶湯 (CPB) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to your Campbell Soup Company first quarter 2010 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 follow at that time.

(Operator Instructions) And as a reminder this is being recorded.

I would now like to introduce Ms.

Jennifer Driscoll, Vice President of Investor Relations.

Please, go ahead.

Thank you, operator.

Good morning everyone and welcome to the Campbell Soup Company first quarter earnings webcast.

With me here today are Doug Conant, President and CEO, Craig Owens, CFO and Chief Administrative Officer, and Anthony DiSilvestro, Vice President and Controller.

Doug and Craig are our primary speakers for today's call, while all three leaders will actively participate in our Q-and-A session here with me.

Doug Conant will begin our call with his perspective on the quarter, then Craig will provide comments on our financial results for the quarter, as well as more color on our updated guidance for fiscal 2010.

Following their remarks we will take questions from investors and analysts.

Similar to last quarter, we've created slides to accompany our presentation.

You will find those posted on our website this morning.

As a matter of policy our conference calls are open to all interested investors.

Members of the media also are listening to the call.

As a reminder, our presentation today includes certain forward-looking statements which reflect the Company's current expectations about future plans and performance.

These forward-looking statements rely on a number of assumptions and estimates that could be inaccurate and which inherently 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 SEC 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.

Our presentation also 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 our presentation.

These slides, including the appendix, can be found on our website as well.

In our remarks we provide earnings comparisons with fiscal 2009 results.

As a reminder, this quarter we adopted and retrospectively applied new accounting guidance related to the calculation of EPS.

This resulted in a $0.01 reduction of diluted net earnings per share and a reduction in diluted shares outstanding for both the quarter and full year of fiscal 2009.

Our comments today are made in reference to the restated basis.

Last, there were no items affecting comparability in this year's first quarter.

And with that I give you Doug Conant.

Thank you Jennifer and good morning, everyone.

I would like to share with you my perspective on the quarter.

This morning we reported a significant increase in adjusted net earnings per share.

All four of our segments contributed to the increase.

I'm pleased with these results especially in light of the challenging environment and the difficult top-line comparisons we faced.

In last year's first quarter we had strong organic sales growth of a positive 6% led by exceptional US Soup sales growth up 12%.

Our strategy last year in US Soup was to get off to a fast start with our marketing spending beginning in August, our first month, to support the launches of Campbell's Select Harvest Soups, Campbell's V8 Premium Soups and Swanson Stock.

This year, our approach was to wait until October to step up our marketing support to very competitive levels.

For the full year we expect to have good soup sales growth behind solid marketing support, although sales will flow a little differently by quarter.

Our earnings increase in the first quarter was fueled by a significant improvement in margins led by productivity in our supply chain and some carry forward pricing.

On top of quality and productivity gains last year, we are continuing to advance our productivity efforts this year, leveraging them against a lower but still modestly rising cost inflation environment to improve our gross margin profile.

Importantly, we delivered this earnings growth while continuing to invest appropriately in all of our key strategic initiatives related to our brands, our innovation, and our geographic expansion.

Overall, we're off to a good start in fiscal 2010.

We're confident in our expectations for the Company over the coming year on both the top line and the bottom line.

In terms of sales growth, we have benefits from currency as well as strong product news, quality value propositions, and very solid well paced marketing support across the portfolio.

In terms of earnings growth, we expect to leverage our sales performance with an excellent cost management program.

As a result of our strong start, and our outlook for the coming three quarters, including currency, we're raising our adjusted EPS guidance for fiscal 2010 from our targeted long-term guidance of 5% to 7% growth to the 9% to 11% range.

We also increased our dividend last week reflecting our optimism for the long-term prospects of the business.

With that, I will turn the call over to Craig for a deeper discussion of the quarter's financial results and our updated expectations for fiscal 2010.

Craig.

Thank you, Doug.

Good morning.

I would like to start by walking through the income statement with you and then provide some color on our results by segment before addressing our updated guidance.

We reported first quarter net sales of $2.2 billion, down 2% versus the prior year.

Organic sales adjusted for currency, acquisitions and divestitures declined by 3%.

I will talk about this a bit more in detail in the segment discussion, but it's important to note that, as Doug mentioned, we had a difficult comparison on the top line.

Organic sales increased 6% in the prior year quarter.

Currency trends have been favorable and contributed about 1% to the top line this year.

The softness in net sales for the quarter was largely due to cycling the very strong results from last year which were driven by front loaded product introductions and exceptionally strong marketing spending to support those introductions.

We recognized the need for our top-line growth to be volume driven and we had planned activity and marketing support in response to the consumer's focus on value and in support of our strong brands across all of our businesses.

We expect to show positive top-line growth for the full year.

We have a broader than ever slate of innovation to support our growth plans.

Chunky is the second biggest brand in our soup portfolio and our biggest upgrade this year.

Repositioning this soup as a meal that's both hearty and nutritious addresses key consumer needs.

The Healthy Request upgrade of 25 SKUs also is a major initiative and is synergistic with the Chunky relaunch.

We're launching new Goldfish Cracker varieties with vegetables from Pepperidge Farm, new flavors and six pack single serve cartons of V8 V-Fusion, and Tim Tam line extensions in Australia.

In addition, we have several initiatives aimed at growing our categories by relating to the consumer's search for good value and nourishing simple meal solutions.

For example, we've relaunched our campbellskitchen.com website offering recipes ready in half an hour for $10 or less.

Last quarter the site attracted twice as much traffic as it did in the prior year same period.

The margin improvement noted in this morning's results was driven by excellent productivity in our supply chain and a modest cycling impact from pricing taken early in fiscal 2009.

Cost reductions from our supply chain productivity improvements contributed to our gross margin percentage, outstripping inflation for the quarter.

We're showing benefits from the work in supply chain supported by our improved systems infrastructure now that SAP implementation is essentially complete in North America.

Inflation is moderated significantly versus last year, rising at just under 2% for the quarter.

Rising cost for tomato paste and steel cans were partially offset by deflation and grain based commodities and energy costs.

Marketing and selling expenses were down as we activated programs related to the US Soup Business later in the year compared to the early activity against our three soup launches last year.

This represents a pattern more in line with our historical practices.

The decline also reflects lower media rates and reductions associated with a shift of resources from advertising to trade promotion in our Pepperidge Farm and beverage businesses in order to improve our promotional pricing.

Total marketing support, including trade spending, was comparable with that of last year's quarter.

Savings in administrative expenses enhanced our performance this quarter also.

Initiatives to reduce operating expenses began last year and are continuing.

In the quarter expenses were down 5% despite higher pension costs.

EBIT of $478 million rose 11% on an adjusted basis due to stronger results in all of our business segments.

Margin improvements were the driver of the gains in each segment.

Adjusted net earnings growth reflected the EBIT improvement as well as a 16% reduction in net interest expense as we continue to take advantage of the low rate environment.

Our tax rate was 32.6%, significantly higher than the 29.8% adjusted rate for the prior year when we benefited from the favorable resolution of federal and state tax matters.

Adjusted EPS growth was 14% on a 4% reduction in shares due to our repurchase program.

Next I would like to comment on the operating results of our reporting segments for the first quarter.

Our US Soup, Sauce, and Beverage business had a net sales decline of 5% against very robust comparisons from last year.

Sales growth was positive in the last part of the quarter as we activated our soup season marketing programs.

The 3% decline in sales in our US Soup business followed an increase of 12% in last year's first quarter.

Last year we had early introductory programs and shipped new SKUs in Select Harvest, V8 Soups, and Swanson Stock.

We supported these launches with robust marketing spending from the beginning of the quarter.

On a two-year basis we've delivered a 9% increase in Soup and we've held double-digit growth over the two years in condensed soup and broth.

Ready to serve soup sales are down 7% compared to the growth of 7% a year ago as this was the segment most impacted by the timing of our marketing and introductory initiatives.

Operating earnings for this segment rose 5% with gross margin gains and reduced marketing expenses contributing to profitability.

As part of that marketing expense decline, US advertising expense was lower, driven by comparisons with last year's first quarter, deflation in advertising costs, and a more efficient media mix.

Consequently we believe that we have a good support for our brands including the relaunch of Chunky Soup.

In Baking and Snacking, net sales for the first quarter grew by 4% due to currency and the acquisition of Ecce Panis.

Organic sales for Baking and Snacking were flat despite solid gains from Goldfish Crackers and from the Arnott's business in Australia, which had increased sales of Tim Tam biscuits.

Excluding the acquisition, a decline in Pepperidge Farm reflected higher trade promotional spending to improve competitiveness, partly offset by higher sales volumes.

Earnings for the segment rose 20% due to margin gains related to the deflation in grain based commodities and currency, primarily a stronger Australian dollar.

Net sales from International Soup, Sauce and Beverages declined 2% with organic sales adjusted for currency and a divestiture declining 1%.

Sales declines in challenging economies, particularly Germany, were partially offset by gains from Canada where we benefited from growth in soup, and Asia Pacific where we had strong results in Malaysia, Hong Kong, and Australia.

Operating earnings for the International segment rose 16% reflecting profitable growth in Canada and Asia Pacific as well as the currency benefits.

As we continue to advance our business building activity in emerging markets, we entered 22 Russian cities during the quarter, benefiting from our distribution relationship with Coca-Cola Hellenic Bottling Company.

In North America Food Service, productivity improvements drove significantly better operating results despite top line declines in a very weak away from home market.

In the face of the downturn last year, the business unit sustainably lowered cost and expenses.

The benefits of our plant closure in Canada, improved plant performance at our refrigerated soup facility and lower administrative costs all contributed to the better operating earnings.

Before turning to our guidance I would like to comment on cash flow.

In the quarter cash from operations was a use of $36 million including a $260 million contribution to our US pension plan.

Better performance in working capital, largely driven by inventory, contributed to cash flow.

We repurchased 3 million shares in the quarter, a total cost of $94 million.

We also invested $44 million in capital expenditures and paid a dividend totaling $88 million for the quarter.

Last week, we were pleased to announce an increase in our dividend of 10% to $0.275 per quarter based on our long term outlook for the business and our focus on total shareholder return.

In summary it was a good quarter for us.

We entered the second quarter with momentum and we're confident in our ability to deliver top line and bottom-line growth over the course of the year.

While much of our fiscal year depends on our performance during the next two quarters, our first quarter performance and favorable currency movement give us an improved outlook for the year.

In light of all those factors we now expect net sales growth of 4% to 5% and adjusted EBIT growth of 6% to 7%.

Our revised guidance for adjusted net earnings per share is for 9% to 11% growth versus our original guidance of 5% to 7% growth.

In addition to the benefit of higher EBIT, our improved outlook for interest and taxes is reflected in this guidance.

All of our guidance includes the impact of currency.

And while we don't explicitly guide against a currency expectation, at quarter end spot rates, currency would have had a 3% to 4% favorable impact on net sales, adjusted EBIT and adjusted EPS for the full fiscal year.

On that note we will conclude our formal remarks and take questions from the audience.

Thank you.

At this time we will conduct a question-and-answer session.

We would like to request that our callers limit themselves to one question, and if necessary one follow-up question.

This way we hope to respond to more callers and still end on or before 11:00 eastern.

Operator?

Thank you.

(Operator Instructions) Our first question comes from Eric Katzman of Deutsche Bank.

Good morning, everybody.

Happily holidays to you and your families.

Thank you.

Doug, I hope you're feeling better.

Yes.

He's getting better all the time.

I guess my first question has to do with -- I guess that's my only question.

My first question has to do with kind of the timing of the new product launches last year.

You went into that in some detail, but I think that's why the stock is kind of flattish versus a very strong market today.

And maybe could you just go a little bit more detail as to kind of how some of the timing worked on the products.

And then when you mentioned that the growth in the business is stronger as the quarter ended and as it's moved into November, can you quantify that a little bit to give some comfort to folks that, in fact, the top line in the core soup business is as strong as you say?

That's quite a first question, Eric.

Got to start it out somewhere.

Just reflecting on last year's first quarter first, we had several -- many new SKUs that were associated with our launch last year where we were cutting into the shelf at the end of July and going into the first week of August, in Select Harvest, with our new Swanson Stock entry and with our V8 Soups.

So there was a real emphasis on getting cut into the shelf early and establishing a beachhead there at the very beginning of the quarter.

This year we're basically flowing in inventory against -- into Chunky, replacing the existing items with stronger entries, and we were simply waiting for that flow-in to take place, so that we could have at least 65% of the ACV established with the new Chunky items at retail.

Our estimate was that flow-in would be activated by the end of September, the first of October.

So we focused our spending against that anticipated flow-in of product, and it has worked out that way.

We have had a exceptionally strong -- we had a very strong October on top of a strong October a year ago.

I want to say soup sales were up about 10%, and we see momentum continuing into November.

So we feel like we are now on track in terms of the soup performance for the year.

Another benefit is that when we do our ROI analysis against our spending profile in soup, we get a higher ROI the closer we get to the actual soup season.

So we learned last year while we did get off to a good start, we didn't get the kind of returns in August and September from soup spending that we expect to get from October, November, December, January, and February.

So we think we're doing it smarter.

We think we'll get a better return on our investment.

And we clearly have some momentum going into the second quarter.

Okay.

That's helpful.

And then just as a follow-up, on a somewhat unrelated, I guess is the -- for many years, you talked about SAP as a capital item, and then obviously as an expense, as you were rolling it through the P&L in the US and Canada.

And I think this is now two conference calls in a row where you've highlighted that actually SAP is a benefit, has been a benefit to margins and productivity.

Can you give a little bit more detail on that, and then I will pass it on.

Well, Eric, we've been talking about a lot of the work that we have going on in the supply chain.

We talked last year at CAGNY.

We talked at the analyst day in July, and I guess while we do some analysis around what SAP is bringing directly, and we feel very confident that we're getting a pay back on a pretty substantial investment that we did, the real power of SAP is as an enabler against some of these other things that we're doing in the supply chain.

It gives us better visibility.

It gives us more standardized reporting.

It gives us a more agile system.

So as time goes on, it becomes harder and harder to tease out is this an SAP benefit per se, or is this a benefit that's enabled by SAP, but really has to do with some of the initiative work we're doing around continuous improvement programs that we've got in the plant.

So I think as we move through time, the score keeping on SAP specifically becomes less and less meaningful.

And we just look at our enabler number.

Our enabler number this year, this quarter, was about 100 basis points ahead of the inflation number.

And that's partially, of course, because the inflation number is down a little bit from where it was last year.

But I think it also reflects the momentum we're gaining in the supply chain with the work that we're doing across a broad front.

Building on that, we do review all of our significant investments, and SAP is certainly one of those.

We do a regular review of how we're performing versus our original plan.

And I can assure you, in that last review, we were very pleased that we were actually exceeding our savings expected from SAP.

So we're well on the right track there.

But Craig's point is dead on.

The going forward proposition is going to be to see that reflected in our enabler number going up and up over the next couple years.

Okay, thank you, Eric for the question.

And Doug and Craig for your response.

Next question please.

Our next question comes from Andrew Lazar from Barclays Capital.

Good morning, everyone.

Hi, Andrew.

I guess as you mentioned, at current exchange rates the implied benefit on your top line, at least at this stage for the full year, is around 3% to 4%.

Does that imply that organic sales are expected to be somewhat lower than initial guidance suggested, if I'm reading that right, or are you just kind of taking a conservative view on that?

Well, I will start, and I'm sure Craig or Anthony will want to chime in.

Andrew, in my nine years this is the first time I've ever raised guidance in the first quarter.

We have the two big quarters ahead of us, second and third quarter, and we have yet to see that play out.

It would be premature, in my opinion, to take the sales guidance up any higher.

I would say there might be upside versus that number.

But we have to prove that we can deliver against it.

So I think you could view this as a conservative assessment of our sales potential, but it's early in the year.

And I wouldn't take -- I wouldn't read anything more into it than that.

Got it.

Then just a quick follow-up.

You made some pretty conscious decisions going into this year around value messaging for soup.

And I'm trying to get a sense how that's playing out, if there's maybe some specific examples you've got or metrics to sort of point out if that's having the desired impact.

Because a lot of other food companies have, of late, started to raise promotional spending, as you would expect, given some input cost flexibility.

But it doesn't seem like that's really had -- or that volumes, generally speaking in the industry, have really responded favorably to that.

So I'm trying to get a sense if you are seeing something different in soup specific to your value messaging.

Well, on that front, it's a little early, because we start -- the key will be our second and third quarter performance.

We didn't start our fully integrated programming until October, where the value messaging was coming across in a 360-degree way with the consumer.

The only thing I can say is, we had a very strong October response, and November is continuing to look promising.

I think that -- ask that question -- I shouldn't suggest this, but ask that question of me next quarter, and I better have a pretty good answer for you.

Our next question comes from Chris Growe from Stifel Nicolaus.

Good morning.

Happy early holidays to you guys.

I just had a question for you regarding the promotional environment.

I guess what I'm curious about is the extent to which, if that's picking up at all.

Again, you're going against a period a year ago where you had some heavy initial launch spending.

I guess related to that I'm curious if you are seeing more of your money pushed to ready to serve versus condensed, if you could maybe address that, if could you, please.

What I think you will see as the year unfolds is that we will be competitive across ready to serve, condensed and broth.

We have a very competitive program in place for all three.

We believe that condensed is particularly well positioned in a value oriented environment to be very competitive.

And personally I'm optimistic about our value proposition and promotional proposition in condensed, particularly our cooking soups, leveraging the Campbell Kitchen activity that we see, campbellkitchen.com.

So I would say you can expect that we'll be competitive across all three fronts.

And we are seeing very aggressive promotional activity, not just in soup, but in the broader simple meal arena, where we're competing with the likes of frozen entrees, side dishes, and dinners -- dry package side dishes and dinners.

And so that whole arena is competing pretty ferociously for that at-home meal consumption dollar that tends to be rising as people are drifting back into home, away from out of home.

So it's very competitive and we view it not just through a soup lens, but through a simple meal lens.

Yes.

Outside of soup you will see increased promotional spending in our beverage business as well as Pepperidge Farm as we're trying to cater to the more value conscious consumer that is out there.

Yes.

It does go beyond soup.

That's a good point.

The private label market share gains in condensed, you're doing relatively well there, especially against a tough comp a year ago.

But is that something that's requiring you to put a little finer point on those price gaps, or are you addressing that some way, or does that share gain bother you in any way?

Well, Chris, not going to get into the share discussion.

We're doing fine on condensed.

But what I would say is that we're very attentive to price gaps.

And we'll manage the price gaps to a place where we can compete with anyone in the category.

Okay, thank you, Doug and also Anthony.

Next question, please.

Our next question comes from Rob Moskow from Credit Suisse.

Thank you.

I just want to also make sure I understand the guidance.

The impact of currency is quantified as 3% to 4% across sales, EBIT, and EPS.

But your guidance raise on the EPS line is a lot more than the guidance raise on the sales line.

So it can't be currency providing any leverage there.

Can you tell us, Doug, is it the productivity that's coming in better than you expected, and is that why we have an outsized increase on the EPS line?

Then again if I could just get you to comment on your core sales guidance for fiscal '10.

Has your core sales guidance changed at all for fiscal '10 versus three months ago?

I'll just offer a brief comment, then I'm going to turn it over to Craig.

As I mentioned earlier, this is the first time we've raised guidance in the first quarter ahead of the heavy soup season quarters in my nine years here.

We're hopeful there's upside to it, but in terms of delivering, our EPS guidance is heavily reliant on a solid sales performance but on aggressive cost management and some benefit from interest, taxes, and currency.

And on that I will just turn it over to Craig.

Yes.

Well, I think that hits the highlights.

The difference between the EBIT increase in guidance and the EPS increase in guidance is all related to tax and interest assumptions.

I do just want to say on currency, just to get us all level set at the same place, our original guidance we said had an assumption in it of between 1% and 2% beneficial currency, and while we're not going to get in the business of specifically guiding against the currency assumption, if you look at spot rates at the end of the quarter, and project those out across the full year, it would have a 3% to 4% impact.

So as we're trying to analyze the top line here, we're within a half a percent or so of reflecting currency difference into guidance difference.

And I think as Doug points out, it's awfully early to be changing guidance, period, particularly at the top line as we enter soup season.

All right.

Just a quick follow-up.

People have been pretty disappointed with the soup category performance over the past year or so.

Do you think 12 months from now, Doug, that given where soup is positioned today, from a value offering, compared to other convenient meals, do think that the soup aisle is looking well positioned overall compared to everything else that's out there?

I think so.

I'm cautiously optimistic -- I'm very optimistic on that front.

The key for the last 52 weeks in our category, we had to lead unprecedented pricing to cover unprecedented inflation in our category.

And we knew it was going to create some dislocation in the category in the near term.

And the category growth slowed as a result of that pricing.

We think we have that well behind us now, and we think we can manage in a more predictable fashion.

So I think the pricing is right.

I think the benefits the category offers are going to be very clear as we go through the year.

So I'm optimistic about our -- the soup category for the next 52 weeks.

Not only here, but globally.

Thank you, Doug.

Next question, please.

Our next question comes from Bryan Spillane from Bank of America Merrill Lynch.

Good morning.

Just a clarification on the cash from operations.

I just want to make sure I heard this right.

It was a use of $36 million, but then there was a pension contribution of $260 million in the quarter?

That's correct.

So it really would have been a source of $224 million in the quarter if the wasn't for the pension contribution?

That's right.

And the favorable difference, as you look at last year, was all in better working capital performance primarily in inventory.

And so as we're looking forward in terms of just thinking about cash flow balance, and it's a pretty good start to the year.

Just looking back, it looks like that's the strongest first quarter of cash contribution you've put up in a while.

So is there anything that we should think about going forward that -- will inventories build or any other negative change in working capital, or is there a chance you could see maybe an upside in terms of cash in the balance of the year?

Well, I think, if you look back historically, last year was actually not a very strong year for us in terms of our working capital management, and so we do have an expectation that across the full year we're going to do a better job with working capital this year.

Okay.

And just in the inventories in the first quarter is that reflective of a smaller new product pipeline, or is it currency?

Is there anything else there that was impacting inventory in the first quarter?

Nothing that -- not really.

Not anything that we'd call out that was peculiar or unusual about the quarter.

Thank you, Craig.

Next question, please.

Our next question comes from David Palmer from UBS.

Hi, good morning.

This is Jeff Birnbaum actually here for Dave.

I just had a question.

Could you discuss the sales decline from last year in Select Harvest?

And possibly if you could quantify that and how much that concerns you.

I guess a quick follow-up to that also would be, to what extent does it concern you regarding a possible year two follow-through from this year's Chunky restaging?

Are you concerned at all about the sustainability of these initiatives?

No, we feel very good about both Select Harvest and Chunky.

On the Select Harvest front, we had a significant inventory build, and a very strong trial oriented program in the first quarter last year that started in August.

And this year, the spending profile and the support program for Select Harvest is going to be spread differently through the fiscal year.

Without getting into spending by quarter, we believe that in the fullness of the year, Select Harvest is going to have a very good year.

So I think you see more of a quarterly phenomenon than anything else.

On the Chunky restage, this is very much of a flow-in program with very few new SKUs, and we don't expect the kind of inventory build we experienced with Select Harvest so we expect a steady growth profile with Chunky.

So we feel like we're well positioned.

We have the woman 35-plus targeted with Select Harvest, the men targeted with Chunky.

Very good value propositions in both of them.

We think we're better positioned than any of the competition.

We think it's starting to show.

And so we're optimistic about the full year performance of ready to serve.

Thank you, Doug.

Next question, please.

Our next question comes from Alexia Howard from Sanford Bernstein.

Hello, guys.

Hi Alexia, how are you?

Good, very well.

Thank you.

I have a couple of quick questions.

Productivity improvement.

I noticed in the 10-K that you released, I think in last fiscal year you got about 180 basis points of productivity improvement.

That's been running, I think, at that kind of level, for several years.

Do you envisage that that's going to continue this year as well?

As we have said, our goal with the enabler program is broadly that we want to offset the inflationary cost of our various inputs.

We're considerably ahead of that in the first quarter.

We had about 170 basis points of gross margin contribution from the enabler program, and that's roughly in line with 180 that I think you're referring to from the prior year, and that would be on the order of what we would expect for the full year.

And then on commodity cost inflation, I think in broad terms, we were talking about a slowdown from very high single digits last year down to very low single digits this year.

Has that changed over the last quarter, and can you actually quantify what the increase is likely to be this year at this point?

I think we have said we thought we'd be between 1% and 2% for the year.

That still looks like about the right number.

You've got on the unfavorable side or the increase side, tomato paste and tin cans; and we're benefiting from actual deflation in some other commodities, particularly grains.

And that compares to, Anthony, what was that last year?

It was high single digits.

Yes.

It was 8% to 9% last year.

So it's down versus last year, but still up versus last year overall.

And those answers were from Craig and then Doug.

Next question, please.

Next question comes from Terry Bivens from JPMorgan.

Good morning everyone.

Good morning, Terry.

Doug, if you go back over time, hopefully our figures are somewhat accurate, it looks like the cannibalization rate, if you look at Chunky versus Select Harvest, and going back Campbell's Select, you know, looks pretty close to one on one.

But going forward here, what we're looking at more recently shows that it's much better from your point of view, that if there is cannibalization indeed, it seems to be lower this time around.

So my question is, do you look at it the same way, and is there something you've done this time to kind of minimize what might be a trade-off there?

Well, Terry, when we relaunched Select Harvest, we focused on a very different product proposition targeted at women 35-plus with all the benefits that those women were looking for, and we advertised it directly to women.

And drew a sharp distinction between what we were offering with Select Harvest targeted at women, and Chunky targeted at men and larger families.

And we're seeing that play out in the marketplace.

So we're seeing, if you will, greater incrementality through better segmenting of our marking proposition.

We expect that to continue.

Okay.

You're making me a little bit nervous, though, over the fact that I actually like Select Harvest quite a bit, but I guess I'll leave that alone.

I'm not going to go there, Terry.

The other thing, as you look at the general soup category, I guess this gets to Andrew's question about the value messaging, it seems to already be taking place in the market share from what we can see in the sense that condensed seems to be gaining overall market share within the total soup category.

Is that what you're seeing as well, and if that is the case, how do you look at that?

Is that something you would expect to exploit going forward?

Terry, it just makes sense.

Condensed is the best value proposition.

You get the same number of servings.

You just add your own water instead of us shipping it to you.

Condensed is far and away the best value proposition in the category.

It dwarfs RTS value proposition.

And the products are improved and delivering against the health and quality benefits consumers are looking for, plus they're also leveragable in cooking, which is a growing at home experience.

So condensed is perfectly positioned in this market to be the ultimate value proposition, and if we market it smartly, we should have a good run here, and it should be advantaged versus ready to serve.

Okay, thank you, Doug.

Next question, please.

Our next question comes from Vincent Andrews from Morgan Stanley.

Thank you.

Good morning, everyone.

You guys have talked a little bit about price gaps already, but I'm wondering if you can talk a little bit about price points.

I've heard not just food companies, but a lot of staples companies recently talking about the need to hit certain price points from a value proposition perspective to the consumer.

I kind of get the sense that's definitely happening within the broader simple meals category.

So can you just talk a little bit to that issue?

Vincent, we're well positioned on condensed soup to -- depending on what our customers choose to do, whether they choose to have a loss leader or not, but we're well positioned to be offering condensed soup under a dollar, with good promotional price points.

So we're a natural in the simple meal arena.

In fact, I don't think you're going to find a much better proposition in simple meals than condensed soup.

On the ready to serve side, there's easy opportunity for that to be attractive under $2.

Still it's twice as much as condensed, which is why we think condensed is such a great value.

And occasionally we have our customers choosing to use ready to serve soup as a loss leader, and promoting it very aggressively at their expense.

And the reason for that is that the soup category is still the largest, fastest turning, most profitable category in the center of the store.

So it's very compelling for a customer to want to promote aggressively in that category to draw people into the center of the store.

So we're well positioned.

There's a reason for the customer to really want to push this category in a value oriented marketplace, especially going into soup season.

So we think the prospects are very good for very competitive price points versus other simple meals, especially during the soup season, through February, March.

As you get outside of soups, some of the shift of resource that we've seen from below the line marketing to trade promotion is exactly directed at that in Pepperidge Farm and beverage, our attentiveness to both price gaps and price points that we think are important.

Right.

Thank you very much.

I will leave it there.

Thank you Doug and Craig.

Next question, please.

Our next question comes from David Driscoll from Citi Investment.

Great.

Thanks a lot.

Good morning, everyone.

Hi.

Craig, could you answer a couple of questions, specific questions?

First, the pension contribution.

What's your estimate of what the benefit to EPS will be this year because of that contribution?

It's worth about $0.03, and it's been part of the expectation from the time that we gave our first guidance.

Okay.

That's helpful.

On interest expense and on share count, I assume that interest expense, it came in more favorable than I thought, and I think -- I can't remember exactly what your guidance was, but I thought it was roughly flat, but you look like you're going to be down for the year.

Can you give us anything more specific?

We don't give a specific guidance against the interest number for the full year.

We continue to see some benefit to the really low rate environment.

On the other hand, we have termed out some of our debt.

So my expectation would be that for the full year, interest may be up very slightly versus prior.

Okay.

And I think we lost David, but hopefully that answered his question.

If not, he can call you back.

That's right.

Next question please, operator.

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

Good morning.

Glad to hear you're feeling better, Doug.

Thanks, Eric.

Just wanted to circle back on the question of your overall organic sales guidance.

I know it's early in the year, but this sort of gets back to the question that came out earlier of, if your overall guidance went up by, I think it's about 1 to 2 points, and your currency -- the currency contribution went up by -- you had something in there originally.

Let's say it's 2 to 3 points.

Does that not imply that your overall organic guidance, ex-currency, is down?

Well, again, Eric, the original guidance we specifically said that we were between 1 and 2 points of currency in the original guidance, and what we've said now is that we are improving our guidance, and that at current spot rates the currency impact would be between 3 and 4.

So even if you assume that we are mechanistic in the way that we're approaching the currency impact implied by the spot rate, we're only talking about a half a point of difference, right.

And actually that's not precisely the way we're looking at it.

I think Doug was pretty clear earlier that at the end of the first quarter is not typically when we would even relook at our guidance, given that we're really just entering the soup season.

So yes, there may be a little bit of conservatism in there, but I think we're spinning around an awful lot over what really amounts to about a half a point here.

Okay.

And then I think you or Doug made a comment that you expect that overall soup sales would be up for the year.

Could you give -- since you do have a fairly sizable contribution from price, given the timing of the increase last -- of the price increase last year, could you comment a bit about your volume expectations for soup for this year?

Well, it would be premature to talk volume on soup for the year.

But obviously we will get into this as we get into the soup season.

The benefit of pricing really only hits this first quarter, in any sizable way.

And that was anticipated in our original guidance.

So I just think we're going to have to let the year play out.

What I would say is, my experience in this, on this front, has been -- given that soup is so essential to our performance as a Company, if we give Company guidance that says we expect the Company to be up 4% to 5%, typically that suggests that soup should be up 4% to 5%.

And we're not relying that much on price this year.

So we'll have to wait and see.

Okay, thank you, Doug.

Next question, please.

Our next question comes from Judy Hong from Goldman Sachs.

Thanks, good morning.

Good morning, Judy.

Doug, I guess I'm trying to get some perspective on if you are seeing any change in trend in your premium part of your portfolio.

I guess the Microwavables platform is still pretty weak.

The Pepperidge Farm cookies and crackers were flattish this quarter.

Are you seeing consumers even getting weaker on the premium part of your business?

And as you think about the Microwavable platform longer term, does this weakness sort of change your long-term strategy on that part of the business?

We are seeing value conscious shopping.

And some of our premium categories have been -- growth has slowed.

We see the beverage category, the value added healthy beverage category that we compete in, particularly in C-stores and small stores, we see that adversely affected by the economy.

So our growth in V8 has slowed during this period of time.

We've also seen slower growth in Pepperidge Farm in a couple of key areas as well.

But overall, I think we've got a portfolio that's largely anchored in value offerings, which is why we expect our overall performance to be above average.

On the Microwavable front.

I think it's a very viable proposition on a couple of fronts.

And it's up to us to market it more effectively.

First of all, I know it has brought in other generations of consumers that were lost to canned soup, particularly college students and young adults who are living in the microwave, not in the kitchen, per se.

And we know we've picked up incremental consumption with the Microwavable proposition.

It is at a premium price, so it has seen a slowdown as we focus very aggressively on our value offerings with cans.

But we think there's a big marketing opportunity with Microwavable to position it as the ultimate brown bag lunch, where you can have a terrific and healthy lunch in an on the go kind of format.

And so we've got some -- what we think are very promising marketing plans for that line.

I think it's forever going to have a place in our portfolio.

As we get the value propositions right across our portfolio, I think Microwavable is going to be just fine.

Okay.

And then in terms of your distribution agreement with Hellenic in Russia, could you give us a little bit more color?

I think you said you've rolled out to 22 cities.

What's the plan in terms of looking out over the next 12, 18 months, and whether you're getting a meaningful contribution on the volume side as you've gotten this relationship up and running?

Well, we're still very much in the formative stages of the relationship.

We don't expect meaningful sales volume that's going to move the dial on this business on our overall Company profile this year at all.

We're just establishing distribution and learning to work together to market the brand.

We have only a few SKUs in place at this point, three.

We have a pretty robust expansion plan over the next couple of years that will take that -- those three SKUs and make them 10 to 20 SKUs, and take these few cities and make them 100 cities over the next two years.

But this is very early days, and again, we don't expect any meaningful sales contribution from Russia this year.

I think in the coming two to three years, we do expect meaningful sales growth.

But it's early days.

Thank you, Doug.

I think we have time for one last question and follow-up.

Our last question comes from Jonathan Feeney from Janney Montgomery.

Good morning.

Thanks very much.

I wanted to dig in a little bit more on advertising.

Just two facets of it.

The marketing and selling expenses specifically.

Within marketing and selling expenses, can you sort of parse out that reduction for us?

How much of that was advertising expense year-over-year, and what the trend has been for the past year there?

And within advertising, Craig, you mentioned a reduction in rate.

I guess I was just wondering if you could quantify that and if you feel like the impressions you're getting, as far as advertising spending, not the shift to promotion and the price points you have talked about, but just thinking about that core advertising spend.

Are you getting the same level or more impressions this year than you were last, if it is, in fact, a lower level of spend in this first quarter?

Thanks.

Jonathan, I will touch on the impressions, but I'm going to leave it to Craig and Anthony to answer more completely your question on the advertising spend.

We are -- there's certainly been media deflation on the order of low double digits.

And as a result, between that deflation and our improved mix, we think our impressions in the first quarter, although our spending was way down, our impressions are only slightly down.

And we expect favorable impact from impressions in the second and third quarters.

So overall, we think the spend is much more effective and much more efficient than it's been in the past.

But Anthony, can you take the spend question?

Sure.

As you saw, selling and marketing expenses are down versus the year-ago quarter, and that is primarily due to lower advertising expenses.

As we've talked about in the year-ago quarter, we had significant spending associated with the launch of the new soup items.

I would point out that if you compare it to two years ago, our advertising expense is actually up double digits in soup compared to that period.

So the first quarter is a bit of an aberration compared to the very heavy spend of a year ago.

Thank you.

And just one follow-up.

This is probably more for you, Doug.

If we go back to three years ago, which I guess was the last real bit -- the October '06 quarter, that would be Q1 fiscal 2007, looks like marketing and selling expenses were $316 million.

I guess when we think we go forward, seems like most of the sort of -- we have sort of cycled high commodity costs and low commodity costs.

You kind of priced that back.

It looks like that is what has happened in gross profit.

Yet the growth in terms of absolute dollars in operating profit has largely been a kind of reduction in marketing and selling.

And I wonder, have we reached a level now -- you talked about efficiency -- that you're comfortable with?

Like there will be no more reductions on an ongoing basis?

Or is there more of a decline in relative marketing and selling to come that's going to expand margins?

Thanks.

I don't think -- the nature of this business is that there are quarterly moves, depending on the timing of new product introductions and the competitive activity.

I think the way to look at it is over full years, not over quarters.

And on a full year basis, I think you are going to see that we've had a pretty consistent level of spend against our total portfolio and against our soup business, which is a well rounded, fully integrated, total marketing spend, at a very competitive level as a percent of list sales, and that includes our trade spend and as well as our advertising and consumer promotion spending.

I don't think -- I wouldn't begin to suggest that you want to start reading the tea leaves on the quarters, because they vary greatly as they do this quarter versus last quarter as it did versus three quarters ago.

I mean, three years ago.

So I think you've just got to look at the total soup business as a full-year business, and on that basis, our spending has been very consistent at a high level and very competitive with any other simple meal offerings.

That's the way I would look at it.

Okay, and with that we will wrap it up.

Thank you, Anthony and Doug for your answers there, and Craig for joining us and providing many answers as well.

As a reminder, a replay will be available beginning in approximately two hours.

If you are a reporter and have questions, please contact Anthony Sanzio at the number 856-968-4390.

Investors and analysts may call me, Jennifer Driscoll, at 856-342-6081.

This concludes today's program.

You may disconnect, and have a great Thanksgiving.