金寶湯 (CPB) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Campbell Soup's second 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.

Instructions will follow at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host today, Jennifer Driscoll, Vice President, Investor Relations.

Please begin.

Thank you, Sean.

Good morning, everyone.

Welcome to the Campbell second 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 the primary speakers for today's call, while all three leaders will actively participate in our Q&A session here with me.

Doug Conant will begin our call with his perspective on the quarter and the first half, including a discussion of our US soup performance.

Then Craig will provide comments on our financial results for the quarter and the first half, as well as our outlook for the full fiscal year.

Following their remarks, we'll take questions from investors and analysts.

Similar to last quarter, we have created slides to acCompany our presentation.

You'll 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 are listening to the call as well.

As a reminder, our presentation today includes certain forward-looking statements that 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've provided a reconciliation of those measures to the most directly comparable GAAP measures as an appendix to the slides acCompanying this presentation.

These slides, including appendix, can be found on our website this morning.

And with that, I give you our CEO, Doug Conant.

Good morning.

Thanks, Jennifer.

Thanks to all of you on the phone and the webcast for joining Campbell's second quarter conference call.

I would like to start with broad observations about our second quarter and first half and then I'll discuss our US soup performance in more detail.

This morning, we reported that earnings per share increased 16% for the second quarter, a solid performance overall.

The quarter included strong cost management, productivity gains, and favorable currency.

In particular, our Baking and Snacking and International Soups, Sauces, and Beverages segments improved our earnings performance.

In the first half, adjusted earnings per share were up 14%.

Despite a very difficult operating environment for the half, we've increased margins, boosted EBIT, and improved cash flow.

We did all of this while continuing to advance our strategic initiatives, such as our SAP implementation in Asia-Pacific, a variety of important health and wellness innovations and the expansion of our efforts in emerging markets.

And while we're satisfied with our earnings performance, fully our focus remains on the volume and sales profile of our US soup business, as we have lapped a strong prior year performance.

This quarter, despite improved volume in condensed soup, we had an 8% decline in net sales of US soup, due to an 18% decline in ready-to-serve soup, primarily driven by our Chunky brand.

I'll talk more about that in just a minute.

To win in this environment, particularly in the simple meal category, where we compete with soup, we need to bring to market very competitive price/value propositions in each of our three key businesses -- condensed, broth, and ready-to-serve.

On the positive side, we delivered similar performances in condensed and broth, with very competitive propositions and we'll continue to support these brands in the second half.

Next year, we're going to build on the success by aiming our innovations squarely at our condensed soup business.

As I mentioned last week, firing up our condensed soup business is a broad initiative, spanning improved products and expansion of our health offerings, contemporary new labels, a change in marketing, and an enhanced shopping experience.

This initiative is perfectly in step with the current consumer focus on value.

Meanwhile, our price/value proposition in ready-to-serve soup this quarter was obviously less effective.

We saw the impact of intense competitive activity in the broader simple meals category in a quarter when our own promotional spending in ready-to-serve was reduced versus the prior year.

Our long-term confidence in ready-to-serve soup is as strong as ever.

As I mentioned last week, over the last decade, we've established ready-to-serve as a $2 billion category, growing net sales at a 6% compound rate.

We've grown our own net sales of ready-to-serve soup in nine of the last 10 years.

We've largely driven this growth through innovation and competitive pricing, and we see plenty of opportunity to continue to build our soup business over the rest of the season and the balance of this fiscal year.

We're taking the promotional actions necessary to improve our competitiveness in the second half, and we expect improvement in the trends of Chunky and our overall ready-to-serve soup portfolio.

In closing, we're very confident in our ability to address the challenges in front of us.

To that end, as you know, last week we reaffirmed our earnings guidance for the fiscal year and we adjusted our sales guidance.

We continue to forecast that we will deliver 9% to 11% adjusted EPS growth, 6% to 7% adjusted EBIT growth, and 2.5% to 3.5% net sales growth with all of these ranges, including the anticipated impact of currency.

Craig will elaborate further on our guidance later on the call.

Clearly, given our first half performance, this implies an expectation of step-up in net sales performance in the second half.

With that, I'll turn the call over to Craig for an expanded discussion of the second quarter financials, the first half, and our outlook for the fiscal year.

Craig?

Thanks, Doug, and good morning.

I will start by walking through the income statement with you and then provide color on our results by segment before briefly addressing our updated guidance.

For the quarter, we reported sales of $2.153 billion an increase of 1% versus the second quarter a year ago.

Organic net sales, which excludes the impact of currency translation, acquisitions, and divestitures, declined 3% in the quarter.

Organic net sales reflected declines primarily from our US Soup, Sauces, and Beverages segment.

Organic net sales were also down 3% for the first half.

Despite lower organic sales, EBIT gained 8% in the quarter, helped by lower marketing expenses, currency translation, and gross margin improvement.

For the half, EBIT increased 9%.

For the quarter, our earnings per share grew 16% to $0.74.

This performance was ahead of our EBIT growth, reflecting the benefit of our share repurchases.

For the first half, our adjusted EPS rose a solid 14% to $1.61.

Looking at our second quarter sales performance, we had a 2 point decline from volume and mix and another 2 point negative impact due to higher promotional spending.

We increased our promotional spending in this environment, more than offsetting a 1 point increase in pricing.

With the weakening of the US dollar, currency translation contributed 4 points of sales growth to the quarter, bringing our reported increase to 1%.

In the quarter, our gross margin percentage improved 70 basis points.

The margin gain was driven by productivity initiatives in our supply chain, which continue to provide a significant positive impact on earnings growth.

These productivity savings were partly offset by promotional spending net of pricing and by cost inflation.

Cost inflation for the quarter increased at a rate between 1% and 2%.

It was largely driven by inflation in steel cans, tomatoes, and vegetable costs, offset in part by deflation in grain-based commodities and energy costs.

Marketing and selling expenses declined for the quarter and for the half, due primarily to lower advertising and other marketing costs, partly offset by currency.

We also shifted some of our marketing spending toward trade promotions.

While advertising costs on the quarter are down from a year ago, advertising impressions in the US, as measured by GRPs, are ahead of last year, as we are benefiting from deflation in media rates and we've used a more efficient media mix.

In the quarter, administrative expenses increased 8%.

Half the increase was due to currency translation.

The balance of the increase was primarily due to higher benefit costs, including higher pension expense.

We continue to tightly manage our overhead expenses and we see further opportunities in this area.

For the first half, administrative expenses also increased due to currency, partially offset by reductions from our cost management efforts.

I'll touch briefly on below the line items.

As we reported earlier, EBIT increased 8% in the quarter and 9% in the first half.

Interest expense rose slightly in the quarter.

While we began to lap the significantly lower short-term rates of a year ago, we continued to achieve very favorable commercial paper rates in the market, reflecting our strong credit.

We've had two successful long-term bond issues in the past year, slightly increasing our portion of long-term debt and our interest costs.

The tax rate declined 1.8 points to 29%, primarily due to lower taxes on foreign earnings.

For the half, the tax rate increased slightly, due to higher US state tax costs.

Average shares outstanding decreased 4% in the quarter and the half, as we continued to execute our strategic share repurchase program.

Across the P&L, currency contributed roughly 4 to 6 points of growth in the quarter and 3 to 4 points of growth in the first half.

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

It was a challenging quarter for US Soups, Sauces, and Beverages, including a decline in net sales of 5%.

Doug covered soup performance, so I'll comment briefly on sauces and beverages.

Sales of Prego pasta sauces increased strongly, continuing to benefit from their value positioning.

Overall, beverage sales were down slightly, as declines in V8 vegetable juice due to higher promotional spending were mostly offset by V8 V-Fusion.

This quarter, we've introduced Cranberry Blackberry and Acai Mixed Berry Light versions of V8 V-Fusion.

Primarily due to softness in ready-to-serve soup, segment earnings declined by 4%.

Soup sales declined 8% in the quarter, with condensed sales unchanged, broth sales up 1%, and ready-to-serve sales down 18% as discussed earlier.

Both our condensed and our broth businesses delivered volume growth in the quarter.

In our Baking and Snacking segment, organic net sales were steady and solid growth gains in our Pepperidge Farm and Arnott's business were offset by decline due to increased promotional spending.

In Pepperidge Farm, we continued to deliver strong sales gains from Goldfish snack crackers.

In Australia, gains in both savory and sweet biscuits added to sales growth in Arnott's.

Pepperidge Farm and Arnott's delivered strong earnings growth due to our cost reduction efforts, the deflation of grain-based commodities, and the stronger Australian dollar.

Organic sales in our international Soups, Sauces, and Beverage segment were flat as the benefit of carry-over pricing, net of increased promotional spending, was offset by lower volumes.

On a geographic basis, gains in Japan and Europe were offset by lower sales in Canada and Australia.

We achieved significant earnings growth, up 48% in the international segment, driven by gross margin gains from pricing and productivity savings as well as a benefit from currency translation.

Our North American food service business continued to be negatively impacted by sector trends.

Organic sales declined 4%.

By aggressively managing the cost side of the business, we were able to deliver positive earnings growth of 6% for this segment.

We were very pleased with our cash flow performance for the period, especially in light of the $260 million pension contribution made to our US plan in the first quarter.

Cash from operations of $496 million rose $78 million from a year-ago.

Working capital improvements and earnings growth more than offset the pension contribution.

Capital expenditures of $103 million were about the same as last year.

The amount funded continued work on our world headquarters building project, which is nearing completion.

It also funded increased capacity for Arnott's in the beginning of the implementation of SAP in Australia and New Zealand.

We spent $213 million in the first half to repurchase 7 million shares.

Net debt at $2.537 billion is about $100 million below prior year levels.

Our guidance of net sales growth of 2.5% to 3.5% anticipates a stronger second half following flat sales growth in the first half.

In the second half, we're cycling easier comparisons, and we have a strong calendar of marketing promotional plans, building on the strength and opportunities that we've identified in the first half.

Our earnings expectations have not changed since our upward revision at the end of the first quarter.

This range includes an assumption of cost inflation that will be close to flat versus a prior expectation of 1% to 2% cost inflation.

All the figures shown include the impact of currency, which at current spot rates would have an impact of between 3% and 4% for the year, which is the same impact we were seeing at the end of the first quarter.

This concludes our formal remarks.

Now we'll take questions from the audience.

Thank you.

(Operator Instructions).

Our first question comes from Alexia Howard with Sanford Bernstein.

Good morning, everyone.

Good morning, Alexia.

Hi.

Can I ask about the step-up in competitive activity in the other simple meals categories?

Two questions on that.

Which category specifically have you seen that deterioration in?

And when did that step-up in competition occur?

Well, Alexia, I think the way to view this in a broader context is that the most important thing we've noted related to ready-to-serve soup is that our own promotional spending was down versus the prior year quarter, and that had the most pronounced effect on our performance.

We also track an evoked set of roughly 10 categories where we have high interaction.

And within that set, we did see a step-up in our second quarter, and I think as we go forward, we'll be in a better position to enable you to get more visibility into it.

But we track 10 categories -- an evoked set, high interaction, and there was a step-up in promotional spending on that blended set.

I won't get into the specific categories.

The biggest -- the most notable change was that our promotional spending in the quarter was stepped back and is anticipated, obviously, to be stepping forward in the second half of the year, in the third and fourth quarter.

Okay, great.

Real quick follow-up.

The condensed initiatives for fiscal 2011, roughly how does that -- how does that break up in terms of the focus on condensed soup to be used as a soup versus using condensed soup as a cooking ingredient?

Basically, Alexia, cooking and eating are about 50/50 in our portfolio.

And I think you'll see that kind of relationship as we go forward with our activity.

Okay, great.

Thank you very much.

I'll pass it on.

All right.

Have a good day.

Thank you, Alexia.

Sean, next question?

Our next question comes from Eric Katzman with Deutsche Bank.

Hi, good morning, everybody.

Hey, Eric.

I guess my question is a little bit of follow-up on Alexia's question, but a little more pointed.

That basket of 10 categories has historically been by your estimate the price differential, including promotion, that that basket is running at today versus where you were on ready-to-serve?

Well, I think -- I would come back -- I believe the biggest single change is that we promoted less in the second quarter than we did in the prior year, and that's where we saw the most pronounced drop.

It explains the biggest part of the variance.

We are in the process of finetuning our history on this evoked set, so I don't want to -- I'm not going to get into it now.

Our sense is that if there was a step-up in this quarter, I don't have it going back as deep as I would want to right now.

Okay, and the -- I mean what -- I guess at the end of the day with this being an over $1 billion business out of your total of $8 billion in sales, and as you noted historically it's been a growth driver for the Company -- I mean what should give us confidence that the organization is ready to deal with what looks like a pretty significant change versus history?

Well, I would note that we have a history of competing in ready-to-serve soup that gives us a lot of confidence in our ability to compete in ready-to-serve, and in broth, for that matter.

And we have a tailwind, we believe, with condensed soup.

So you put it all together and we have high confidence.

Obviously in our performance, in our ability to perform in soup, obviously our guidance anticipates improved performance.

Our sales historically split about 55/45 as a Company.

And we basically have flat sales in the first half and we're providing guidance that's 2.5% to 3.5% for the full year, and we're saying there's really no change in currency.

So there's an expectation of very strong sales performance in the second half, and we're making a point that we expect very improved performance relative to the first half in US soup.

So I -- we can talk all we want about it.

Now the challenge is to perform.

And we have a lot of confidence in our ability to perform in the second half so that -- Eric, it's -- an 18% drop for a major category in any category typically, as you know, is due to some promotional timing changes.

Things just don't happen that quickly in terms of fundamental trends.

And we just have to get back on the horse again.

Well, I guess -- I mean I want to give other people a chance, but I guess I would say that things are changing.

I've -- so for example, I didn't expect the retailers to pull $1 billion to $2 billion of profit out of the milk category, and yet that happened.

And so I don't know if it's just due to promotional changes.

I mean the consumer's acting differently, given the pressure that they are under.

And I just don't know whether you and your team are ready to deal with if this isn't just a promotional issue, but a bigger challenge to $3 plus per can for ready-to-serve soup versus whatever Kraft is putting out mac and cheese at, for example.

Anyway, I guess the proof will be in the pudding.

My follow-up for Craig -- is there any way to get a sense -- because we talked about this over lunch at CAGNY -- is there any way to get a sense as to how much benefit from the 7% to 8% EBIT growth was due to the mix shift I guess to condensed versus, let's say, productivity?

In the margin line, you mean, Eric?

Yes.

Well, or dollars, however you want to answer it.

Well--?

Just trying to get a sense as to is it -- condensed was flat.

Right.

But obviously it's having some benefit given the ready-to-serve weakness.

And so I'm just -- is most of the EBIT growth a function of productivity, lower A&P and I guess some currency benefit, or is there a pretty big part of it due to the mix shift to the condensed?

Let me ask Anthony to give us some facts.

But I -- as he's looking for the numbers, let me just say that broadly, yes, there is some positive benefit as we shift to condensed inside of the US business.

On the other hand, in that we had a strong delivery from our international business and from some of our businesses outside of soup, that's probably a slightly negative mix impact in the total.

And I think the primary driver, as we said, is really around productivity improvement across the whole segment and significantly lower growth in inflation.

I don't know if you want to add anything to that.

I would add within the US Soup, Sauces, and Beverage segment, there is a small benefit due to mix condensed relative to RTF, but it's not significant.

Okay.

Thank you.

I'll pass it on.

Okay.

Just as a reminder, we would like to request that callers limit themselves to one question.

Next question, please?

Our next question comes from Andrew Lazar with Barclays.

Good morning, Andrew.

Good morning, everyone.

Good morning, Andrew.

Good morning.

Doug, maybe it was about I guess a year ago or so where you had talked a little bit about maybe some more structural thoughts I guess around the industry and concerns within soup -- potentially questioning relevance of soup, center of the plate or not nature of the product, things along those lines.

I think then you really focused more on obviously innovation for this soup season we're in now and getting the value message and such.

So I don't know, I was wondering if there's been any other learning on that front that makes you feel more strongly one way or the other on those issues.

Because just some of the earlier questions, I think you get a sense that folks are trying to get a better sense of whether there is some larger sort of shift here with respect to consumers, how they view the category -- even more broadly than just ready-to-serve.

Sure.

That would be helpful.

Okay, Andrew.

First of all, and we covered some of this at CAGNY, we see soup as being highly relevant.

Per capita declines that had been pronounced in the 1990s have now fully stabilized.

I've been doing this now for nine years, and we've been able to bring enough innovation and relevance back to the category to make it very viable and competitive.

For nine years, we've been talking about condensed.

We have it today, and we are talking about a massive relaunch of condensed soup next year and solid performance of condensed soup this year.

We have good performance in broth and soup.

In over half of our soup portfolio, there is great news and great promise.

We have had a hiccup in ready-to-serve soup with a promotional timing shift.

And that's what I believe the issue is, and we have great visibility into promotional planning for the second half of the year.

If we had concerns about soup, we obviously would have probably had to change our guidance.

We don't.

So we see it being very relevant.

It's still the number two item at lunch.

It is still in the top 10 at dinner.

It's still is the highest unit volume in the entire center of the store for simple meals, and none of that has changed.

We focused on being very competitive within the soup category, as we would compete with privately label and other branded players.

Quite frankly, we're doing that pretty well this year.

If there's something that I would challenge us for, it's that we were so focused on competing within soup that we didn't adequately take into account the increased competitive activity beyond soup in this broader simple meal category.

We make that mistake once.

We won't make it again.

Because I don't want to have another call like this.

So--.

Right.

And then just any thoughts on -- anything you can share around what you see in -- that February is close to being close to completed, I guess would be helpful just the shift in strategy around promotional timing?

Well, obviously a way to think about our soup business, Andrew, is in the first half, second half, it's about two-thirds of our sales are in the first half.

A third of the sales are in the second half roughly.

And obviously there are more sales in the third quarter than there are in the fourth quarter, and obviously we're promising pretty good sales growth out of soup.

In order to have that happen, it has to probably happen in the third quarter.

So obviously we're pretty bullish about it.

We also have our -- we have a clear line of sight into the programming for the second half of the year.

So we're confident in our ability to compete in soup, in ready-to-serve, and we've got a great runway in front of us.

In fact, I could hardly wait till I have my numbers from the second quarter this year, next year.

You guys will all be calling us geniuses.

Thank you.

Thanks.

Thanks, Andrew.

Next question, please.

Our next question comes from Terry Bivens from JPMorgan.

Hi, Terry.

Good morning, all.

Doug, I guess my question goes on this whole thing of restaging and relaunching.

I mean last year, as we looked at going from Campbell Select to Select Harvest, I think you may have surprised the investment community with the degree of spending.

And now this year, as we restage Chunky, I guess I'm very confused as to why it was a timing issue with promotion.

I would think with the restage, that promotional spending would be up, certainly the marketing spending.

So I guess my question is really,to use Andrew's words, what are the learnings here with all of these restages?

If you think about ready-to-serve, we're in this for the long haul, and we needed to reposition our ready-to-serve portfolio for long-term growth.

And the way we focused on doing that was by improving the health and wellness credentials of that portfolio, and we did it in two stages.

We did Select to Select Harvest last year and we're doing it with Chunky -- and we did it with Chunky this year.

So we're setting the table for a strong health and wellness proposition in ready-to-serve soup.

Again, for the long haul.

Our promotional planning is not just our promotional planning alone, but we do that with customers.

Customers have different promotional plans as well.

And so the promotional plans we've put in place reflected the timing that our customers thought was most valid.

And our customers, quite frankly, as was noted on an earlier call, are really rethinking the way they are promoting.

So we have to address that and move forward.

The other piece I would talk about in terms of this health and wellness platform -- if you were to look at our, as a lead indicator, our performance in an increasingly large segment of our business, Healthy Request, you would see that the Healthy Request Chunky piece is growing nicely.

So we see that as we get to the stronger health and wellness platform, we have several leading indicators that suggest we're on the right track.

We just have a huge portfolio that we have to move over time and we're doing it in pieces.

I don't think it's more complicated than that.

Well, just to follow up on that, though, are -- do you worry that given the competitive set now with the convenience meals that your retail customers come back to you and say, look, outside of promotional spending, the list price is just too high here for the ready-to-serve line.

Is that a concern to you?

I have absolutely no concerns about it.

And we're built to compete with any simple meal.

There's a clear reason that the soup category is the largest, fastest turning simple meal category in the store.

And we are the leaders of the category; we can compete with condensed, we can compete with ready-to-serve, and we can compete with broth.

We just have to get the right success formula as the market evolves.

And we have numerous opportunities in front of us to do that, and I have no concerns about our ability to compete.

To pick one quarter that's down 18% on ready-to-serve, when we could be celebrating that condensed is actually starting to show volume growth, which was a concern last year at this time, is just -- it's just premature.

We've demonstrated the ability of this category to grow and grow in a very healthy way for an extended period of time and there's insufficient evidence to suggest that it won't continue to grow.

But obviously we have to be more competitive and we will.

We've got the margin structure.

We've got the ability to compete.

We've got the products.

We've got the right category.

We just have to be more effective competitors in this broader simple mealframe.

As I said before, if we're guilty of anything, it was guilt -- we were guilty of focusing on competing in soup too much and not driving the category enough in this last quarter.

But that's -- if there's anything we're guilty of, in my opinion, that's it.

Okay.

Thank you very much.

Thank you, Terry.

Next question, please?

Our next question comes from Ed Aaron with RBC Capital Markets.

Thanks.

Good morning.

And thanks for taking my questions.

So I guess not to beat a dead horse on the ready-to-serve issue, but--?

Why not?

Let's go for it, Aaron.

I guess where we start a little bit, you put a lot of resources behind upgrading Select Harvest and Chunky, and obviously haven't yet really been paid for it.

And I guess my question is, if you have to pull back on consumer marketing to fund higher trade spending, how can we get more comfortable with your ability to really drive consumption going forward in terms of really growing the category?

I have two thoughts.

One is we've got -- I think we report our total marketing spend as a percent of [led] sales around 25% that -- I think I'm close.

We've got plenty of flexibility within the context of that budget to compete with anybody in the category.

We have great EBIT margins.

We have improving gross margins.

So we should certainly have a margin structure that's more than capable of enabling us to compete.

We also have a dramatically improved product line across the soup portfolio that gives us a lot of confidence in our ability to navigate these waters.

And we have a track record of ready-to-serve soup that is -- nine of the last 10 years, we've grown the category.

We've roughly doubled it in size over the last decade.

And there's no reason on the strength of one quarter with a shift in Chunky promotional timing to become alarmed about it, but we're built to react and respond and we'll respond and we'll get back on track again.

I think it's -- personally, I think it's a hiccup in a quarter.

What I'm most proud of is that we're delivering our quality -- our earnings growth, despite the hiccup, which shows the vitality of the balance of our portfolio, the strength of our productivity efforts, and the strength of our ability to manage our costs well, while we invest in all of our major strategic initiatives.

So on balance, I'm very proud of the way the Company has been able to post good earnings with a good earnings outlook, despite a hiccup in an important part of our portfolio.

Thanks for that.

One quick follow-up maybe for Craig, you mentioned the inflation outlook -- it sounds like it's coming in a little bit better than maybe what you had originally expected.

Where's that real delta versus what you thought six months ago when you first gave guidance?

I think we've seen -- actually I think we've seen small movements across a lot of categories.

Grain prices, while we knew they were going to be lower, are probably even lower than we had in our forecast at the time.

Directionally, as I said in the comments on the quarter -- vegetables, tomatoes, and canned prices are helping push inflation up a little bit in the quarter, but probably not at the same rate that we had in our original forecast.

So it's not some dramatic turnaround or directional shift, but really just somewhat more moderate numbers across the range.

Thank you.

Thank you.

Next question, Sean?

Our next question comes from Chris Growe with Stifel Nicolaus.

Hi, good morning.

Hi, Chris.

Just wanted to ask you, this is one of the rare times when the IRI data looks somewhat indicative of what actually happened in the quarter.

I'm just curious about the channel performance for ready-to-serve and condensed in the quarter.

Was it pretty balanced across the various channels, even the ones we can't see in IRI?

Well, as you know, we're not at a point where we talk about the channels, but I think we're just going to have to stick with net sales are the best indicator.

What I can tell you is that there's no evidence of any inventory build, either in our warehouses or in our retail warehouses.

So you're seeing a pretty clean read from the net sales performance.

Okay, and then I had a follow-up for you somewhat in relation to earlier questions, but if I recall, you had shifted the timing of your promotion in soup spending to more closely align with consumption.

So I guess I'm just trying to understand, do -- we knew this quarter would be lower in spending, is that right?

And it picks up into Q3.

Is that the way the spending shifted for the year?

Well, we knew that promotional timing was going to shift because we have major promotions with certain customers which have to go at their schedule, not ours.

And so we knew the promotional timing was going to shift.

But we don't provide any other guidance on--.

I think maybe your reference point is, particularly as we've talked about maybe the first quarter versus prior year, we talked about the fact that in the prior year, we had relatively front loaded spending because we were introducing three new lines.

And that so relative to the prior year that we were -- that our spending had in fact shifted farther into the end of the season and less at the very beginning of the first quarter.

And in relation to that, Craig, that is correct -- so if you kept your spending levels the same and Q1 was down, we knew that year-over-year it was I think expected, it was -- at least I thought Q2 would be a little higher.

I think you're calling Q2 spending levels -- were they down versus the prior year, your overall spending?

I -- the answer is yes, the spending, overall spending was down.

But as we reported, impressions, advertising impressions were up because we got the benefit of the deflation and media rates and the benefits of our media mix.

So we were -- we spent less, but we got -- we had more impact.

Okay.

Thanks for the time.

Next question, please?

Our next question comes from David Palmer with UBS.

Hey, guys.

Hi, David.

Hey, Doug.

It sounds like broadly speaking there's been a reduction in promotion spending, some increases in consumer impressions through advertising.

So there's been perhaps less push at retail, and it feels like everyone on this call, and I think broadly, is wondering about your insights around consumer pull.

Obviously you were focused on that and continue to be focused on that through a heavy advertising budget.

What -- in your research about attitudes and behaviors, what if anything is holding back consumer demand or pull for this category in your opinion?

Well, I think you have to look at this.

When we get into advertising spending, you have to look at it beyond a quarter.

We just --- have a major relaunch with Chunky, where we're repositioning it beyond the NFL to a broader audience with a new message, and we never expected this program to have immediate traction in the first eight weeks of the advertising.

It takes time to take a soup eating habit and help it evolve with our consumers.

So we still have a lot of heart for what we're doing with Chunky in particular, but we just have to give it time for the repositioning to get traction.

And we're comfortable that it will.

At the same time, we have to recognize that while we're trying to get traction with the advertising, we also have to be appropriately competitive with the promotion.

It's pretty clear to us that in the second quarter we weren't.

So that's what we have to address in the back half of this year as we go forward.

It's just a question of recalibrating ourselves to deal with the competitive realities of the day, mostly in categories beyond soup, because we have full visibility -- as broad visibility as one can have within the soup category and feel very competitive on that front.

In fact, Chunky, as we see it, is the best performing ready to serve soup outside of private label, which is up only modestly.

So the issue is not within soup.

It's beyond soup, and we just have to lift our game up, which we'll do.

You think there is maybe even a way to slice this demographically, like that core male consumer for that brand may be going to other things or maybe even economic -- socioeconomic status, there's certain income groups that are maybe switching?

I think -- quite frankly, I think we're reading too much into this.

We didn't have the right promotions.

We weren't at the right price.

Other things were.

They bought other things during the holidays as they were focusing on getting great values from in-store circulars, and we didn't have a presence there that was adequate.

There's no reason that we can't.

It's that simple.

It really is.

To read anything more into it in the quarter, we ought to talk about it at the end of the year and see how we hold up and look at it in the fullness of time here.

But I'm comfortable we'll find our way through this.

I believe that simply we didn't have the right promotional profile in the quarter and other items did, and so we have to recalibrate and move on.

Okay.

Thanks very much.

Next question, please?

Our next question comes from Vincent Andrews with Morgan Stanley.

Thank you.

Good morning, everydody.

It might be helpful for me at least if you just, Doug, walked us back through the strategy, the thought process coming into this season in terms of changing the promotional timing, just remind us what that was again?

That might help us understand things better.

Thank you.

Well, we -- it starts with a very unusual year-ago, when we had the financial meltdown and everyone was concerned about what's going to happen in the economy in consumer products and in consumer foods, and in our case, in soup.

And we were in the middle of a major relaunch of really the weakest part of our ready-to-serve portfolio, which was our Select portion, where we competed directly with Progresso, and we needed to relaunch that business last year.

We had a major relaunch of Select as Select Harvest in the first quarter, and it carried on into the first half, and our focus was on getting that part of our portfolio well positioned on the health and wellness front versus other alternatives within soup, and we successfully did that.

Incidentally, Select is well above, in double digits, where it was two years ago before we did that relaunch.

So we're holding onto a lot of those gains.

That was the focus last year.

This year, it was to improve the health and wellness credentials and get the largest part of our portfolio in ready-to-serve well positioned to compete in the long-term.

And that was Chunky, where we went to a stronger wellness positioning, which was broadened a bit to still target men, but also to target families with teens.

And so we planned on spending early to establish the awareness of that program, and we did that in the second quarter with advertising.

But we did -- for a variety of reasons, we didn't have the right promotional profile to work with the advertising to make that proposition strong enough to be competitive in the second quarter as some of our promotional partners were choosing to pursue promotions of our products in other quarters.

And so we just are in the process of navigating that now, and obviously expect a much better third quarter than we had second quarter.

And I -- as we ramp up the third quarter, I think we'll be having a different conversation and we'll be looking at this on a year-to-date basis in a much more comfortable way.

But we just missed the promotional boat on Chunky in the second quarter.

And that's the key challenge.

As I said, Select Harvest versus two years ago with the relaunch is up.

Our Healthy Request portfolio versus two years ago is up.

Our reduced sodium and lower sodium products continue to have good traction in the market.

They are up.

Our condensed portfolio is showing its strength.

It's up.

Our broth portfolio is showing its strength over two years ago.

It's up.

And so overall we feel very good about soup, but it has been an unusual two years.

And we just have to play through a hiccup in the second quarter on ready-to-serve.

Overall, we feel very good about the performance of the business.

Okay.

Maybe just as a follow-up, at your analyst day back in July -- of course you obviously weren't there, maybe I'll ask you.

Do you feel like the category's at all structurally disadvantaged because of a lot of the growth in the sector is coming from people coming back from restaurants into the supermarket and soup is a very small percentage of what's on a restaurant menu?

And therefore that consumer that's trying to replace an out of home meal isn't necessarily thinking of soup when he's in the store?

So it makes it harder for you to get that incremental occasion relative to some of the other categories, maybe like a frozen or something where that frozen represents what they were going to have outside of the home that they can't afford it anymore?

I have not seen any of evidence that that's the case.

The soup category continues to be larger than any of the other simple meals categories in the center of the store.

If that was the case, our condensed soup volume wouldn't be up, our broth volume wouldn't be up.

It's maybe specific to ready-to-serve then?

Well, I think it's too early to call on the back of one quarter.

Our Chunky business was up in the first quarter.

Our Select Harvest business is up versus two years ago when we relaunched it.

Our broth business is up, which plays into ready -- interacts with ready-to-serve as well as condensed soup, which also interacts with ready-to-serve.

I just think it's way premature to make any judgments on the ready-to-serve category based on one quarter.

All that having been said, clearly we got to have cold eyed reality here, and it was a bad quarter.

We expect it to be significantly better in the back half of the year, and I think somebody talked about beating a dead horse.

I think we're pretty well there.

I wish I could say more.

I'm very comfortable -- our soup business is very solid, very strong, and growth is very promising.

We're the only ones with condensed soup in the -- only branded condensed soup alternative, and we're well positioned to really drive the growth in that business, continue to drive the growth in broth and get back on the horse in ready-to-serve.

We're very comfortable with where we are.

Okay.

Thank you very much for your response.

You're welcome.

Thanks, Vincent.

Operator, Sean, another question?

Our next question comes from David Driscoll with Citi Investment.

Thanks a lot.

Good morning, everyone.

Hi, David, do you have a question on ready-to-serve soup?

Doug, I actually did want to ask you just a general question on soup.

Good.

But the question really refers to -- I hadn't heard you mention this yet and I was hoping you could touch on pantry trends with the consumer.

I know you guys have the proprietary data and it lags a good bit behind the actual answer.

So even though you probably don't have an answer in hand, you didn't make any mention of the fact that the consumer may simply have stocked up less on soup for maybe economic reasons or something like that and there could be somewhat of a pantry answer going on in the quarter.

Maybe I'm reaching, but I would really like to hear your thoughts on that.

Well, we don't have good visibility in the pantry action for the quarter.

The pantry information we do have suggests that there's not a lot of change.

I don't expect there's going to be a lot of change in the quarter.

I think we just have a hiccup on promotional timing.

We'll see.

There's no evidence that they are shopping dramatically different in soup, out of their pantry.

So -- but we'll see.

It -- by the time we have our third quarter call, we should have our second quarter pantry information pretty well in hand and be able to talk about it in a fact-based way.

That would be great if you could do so at the time.

Just one follow-up.

Last year in the fiscal third quarter, Soup, Sauce, and Beverage volumes in that segment, they were down 7%.

I think at the time on that call, and I didn't look at the transcript this morning from that call -- but I think at that time on the call, you had -- there was a debate about whether or not it was inventory destocking from the retailers or if it was just simply lower consumer demand.

I kind of think of one of those as a one-time issue and one of those as maybe an ongoing issue.

That was the -- if I remember correctly, that was the worst volume performance of any particular quarter in fiscal '09.

What was the post-mortem on that one?

Was the minus 7% Soup, Sauce, and Beverage volume -- was it more of an inventory issue with the retailers or a consumer issue?

It was an inventory issue.

That would be reason then why you are particularly optimistic about this coming third quarter, because the comp, I hate to use these words, but for clarity, it's an easy comp?

Absolutely.

And -- absolutely.

Thank you.

And quite frankly, the comps for the next four quarters are comps we ought to be able to perform.

And we're going to go one at a time and we'll see what happens next quarter.

But I totally understand where you're coming from.

Thank you, Doug.

Sean, next question, please.

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

Good morning.

Getting back to that dead horse again, Doug, you've done a good job of establishing the what happened in terms of the timing of promotional activity, but I guess I'm still a little bit confused on the why and the when.

Given that your retail partners are planning promotions sometimes two, three quarters in advance, when did you realize this and what kind of discussions did you have with the retailers that, hey, maybe it's not a good time to be shifting the timing of promotional activity when we're undergoing a major relaunch of Chunky?

Let's step back a bit, and we're still holding our earnings guidance for the year, which we took up at the end of the first quarter and we're holding that for the year.

We're playing through a hiccup on promotional timing, but we've had visibility into how the year was going to unfold for quite a while, and we're managing it accordingly.

The important thing about soup is we still have, as I -- as I think I mentioned earlier, we do about two-thirds of our business in the first half in soup, but then we do one-third in the second half and most of, a lot of that's in the third quarter.

So from time to time, our promotions will shift from one quarter to another, and obviously they weren't in ready-to-serve, they weren't well established in the second quarter.

So I would say that it's sort of naturally evolving.

What I would say, though, is that the customers are behaving a little differently, and they are scrambling, as are all the manufacturers who you heard at CAGNY last week, to find a way to hit their consumers at the right time, at the right way.

And they are scrutinizing their promotional plan and changing things more frequently, as everybody is scrambling in a real tough economic environment.

We're all trying to feel our way through this.

But I don't think it's anything that's structurally different.

It's just a little more phonetic than it usually is.

And I continue to believe we'll be fine at the end of the year.

We've -- at least -- I'm going on my 10th fiscal year here, and we've hit our numbers every year for the last nine, and I believe we'll hit it for the 10th and we'll be set up to have a very good year next year.

So I'm very comfortable with our outlook.

I take the issue of performance in the second quarter on ready-to-serve soup very seriously, but we'll manage through this.

Okay, and then back at CAGNY, you talked a bit about addressing the price value proposition in RTS.

It seemed that your comments then were a bit broader in scope than just related to the timing of promotion for the second quarter.

It seemed like it was a bigger strategic question.

Wondering first of all, did I read that correctly?

And second, when do you expect the promotional changes that you talked about at CAGNY and that you've alluded to today to start to take effect?

Is that in the third quarter, or is third quarter more of the tactical timing type issues, and next year is the larger strategic repositioning that I think you alluded to at CAGNY at least, or I interpreted you as such?

Absolutely.

The whole CAGNY discussion was really about the strategic direction of the portfolio and the Company.

It wasn't about -- it wasn't to discuss the second quarter.

And we view this as a journey to improve our competitiveness with ready-to-serve and with our whole soup portfolio versus other simple meals.

And so the conversation at CAGNY was all about improving both the numerator and the denominator in that equation.

We have to have the bundle of benefits stronger and we have to have them available at the right price point in order to make this work.

And so what we talked about at CAGNY was continuing to improve the health and wellness benefits of both Chunky and Select Harvest and in fact broth as well, as well as condensed soup.

And as we improve -- we believe as we improve the health and wellness benefits and improve our cost structure, we're going to be able to also improve our competitiveness in terms of our price points.

So this is a long-term journey to make ourselves more competitive beyond soup.

We're actually very competitive in soup.

The challenge now is to make the soup category more attractive long-term, with stronger benefits, stronger positioning, more competitive pricing, and with the wherewithal to do that.

So that the speech at CAGNY was all about the long-term vitality of the category.

And as to when it starts, it starts now.

We've strengthened the numerator in terms of our benefits with Select Harvest, with Chunky, with Healthy Request, with our broths, with condensed.

Now we got to make sure we've got it available at the right price point to compete in this broader simple meals frame of reference, which we will do.

And it will start now and it will continue as we go forward.

Okay, thanks.

I'll pass it on.

We still have a few in the queue, but we're coming up on our hour.

Let's just take one more.

Our next question comes from Bryan Spillane with Banc of America.

Good morning.

Just one clarification and one question.

Doug, when you're talking about the promotional calendar in ready to serve, you're talking about frequency or depth that had to be adjusted?

Depth.

Depth.

That's too -- I'm trying to give a short answer, but that's not right.

It's depth and frequency.

Both are important.

We've got to hit the right price points and we have to have them paced to be frequent enough to compete with this broader simple meals arena.

To be clear, we have the depth and frequency necessary to compete in soup.

It's not like private label's shooting the lights out in soup.

It's not like any of the other branded competitors are either.

It's not a within-soup issue where we're very competitive.

It's beyond soup.

And so we're having to redefine where we compete here, and we will.

It's depth and frequency versus other simple meals, not depth and frequency versus other soups.

Okay, and then just on condensed in the quarter, was there any change in promotional timing there, or was it really just on ready-to-serve?

The most pronounced change was by far on ready-to-serve.

Okay, all right.

Great.

Thank you very much.

Okay.

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

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

This concludes today's program.

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Thank you.

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

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