金寶湯 (CPB) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Campbell Soup third 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).

As a reminder, this conference call is being recorded.

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

Please go ahead.

Thank you, Operator.

Good morning, everyone.

Welcome to the Campbell Soup Company's third quarter earnings webcast.

With me here today are Doug Conant, the President and CEO; Craig Owens, Senior Vice President, our CFO and Chief Administrative Officer; and Anthony DiSilvestro, Senior Vice President of Finance.

First, Doug and then Craig will provide perspectives on our performance for the quarter and the first nine months, as well as our updated outlook for the full fiscal year.

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

As usual, we've created slides to accompany our presentation.

You'll find the slides posted on our website this morning.

Speaking of our website we'd like to invite you to visit our newly revamped website for investors found at investor.CampbellSoupCompany.com where we offer you streamlined navigation and improved functionality.

We welcome your feedback on the site as we are always interested in improving it as a resource for you.

We also have scheduled an Analyst Day from 1 to 5 PM on Monday, July 12th at our world headquarters in Camden, New Jersey.

We will meet inside our new employee center which will be completed in June.

We will e-mail invitations to our investor list and also encourage participation via webcast.

Please keep in mind that as usual, this call is open to the media who are listening in listen-only mode.

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 statements.

Before I turn it over to Doug, I'd like to point out two items in our third quarter which impact the comparability of our results.

The first is a restructuring charge equal to $0.02 per share as we have now completed the restructuring program we announced in April 2008.

The second is a non-cash deferred tax expense of $0.03 per share to reflect the impact of the recently enacted healthcare legislation on Medicare Part D reimbursement.

The prior year quarter and year-to-date results also included items that impacted comparability such as restructuring related costs, adjustments on open commodity hedge positions and a tax gain recorded in Discontinued Operations.

Throughout this presentation we'll discuss the results on an adjusted basis, excluding the items that impacted comparability.

Since our presentation includes these 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 our presentation.

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

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

Good morning and thank you, Jennifer.

Thanks for starting us off and thanks to all of you on the phone or webcast for joining Campbell's third quarter earnings conference call.

I'd like to share a few broad observations about our performance in the third quarter and year-to-date.

I'm also going to introduce some new information about market share, as we have promised to do.

Then I'll turn it over to Craig for a more detailed discussion of results.

This morning we reported that adjusted net earnings per share increased 13% for the third quarter.

It was a strong performance overall, including benefits from volume growth, continued productivity gains, and favorable currency.

Our business in healthy beverages led the Company in sales and profit growth.

Our Beverages results benefited from compelling advertising, effective promotions and continued innovation.

Especially with V8 V-Fusion.

We also saw strength in V8 Vegetable Juice as consumers responded to our marketing efforts.

In addition, as anticipated, US Soup volume performance significantly improved.

We continued our advertising support and stepped up our trade activity in soup.

Our agility in executing course corrections and a strong consumer response drove a rebound in ready-to-serve soup while condensed soup and broth volume continued to perform well.

Our Sauces business also performed well, including gains from popular meal makers like Prego and Pace sauces which benefited from the continuing consumer trend of dining at home.

This combination resulted in a healthy increase in our total US Soup, Sauces and Beverages segment which clearly drove the Company's results.

Strong volume, combined with productivity improvements helped us expand gross margins with only a modest benefit from pricing.

Complementing these results was continued good performance from our Baking and Snacking business this quarter, which offset softness in food service.

Turning to year-to-date results, our adjusted net earnings per share rose 13%.

I would also highlight our good year-to-date cash flow performance.

It's worth noting that we delivered these results while continuing to invest in strategic initiatives including the roll-out of SAP in Australia, our ongoing innovation in wellness and nutrition and our product introduction efforts in emerging markets.

Today we also updated our earnings guidance for the fiscal year.

We now expect that we'll finish at the high end of our range for adjusted EPS.

While consumers remain cautious and very value-conscious and the competition is intense, our goal remains sustainable, profitable growth.

So we will continue to innovate, we will continue to build our brands and we will continue to position our Company for long-term, sustainable growth, as we work our way through this especially tough year.

Before I turn the call over to Craig, I wanted to briefly talk about market share and consumption data.

As many of you know, Campbell Soup stopped disclosing market share for soup shortly after I arrived here as the information then available excluded our fastest growing channels.

We have now developed a solution using IRI data and Company estimates that gives us a fuller picture of our soup results across measured and non-measured channels.

Craig will be sharing the data with you in a moment as part of his segment discussion.

As the data shows in the past 52 weeks we outperformed branded competitors in soup.

Private label penetration in soup increased, yet remains low relative to most well-developed categories.

The 52 week trend shows a loss of market share, although underneath that is a one quarter trend that is much stronger, reflecting the recent rebound in ready-to-serve soup.

For this morning my main take-aways are that volume results this quarter are encouraging but that we still have work to do.

Our opportunity is to translate great competitiveness in soup into leadership growth for the whole category and this is our focus going forward.

With that I'll turn the call over to Craig for a more detailed discussion of the quarter and year-to-date performance.

Thanks, Doug.

Good morning.

I'll take you through the financials, then provide some color on our results by segment including the US Soup marketplace performance and then briefly address our guidance.

For the quarter, we reported sales of $1.8 billion, an increase of 7% versus the third quarter a year ago.

Excluding the favorable impact of currency translation, organic net sales increased 2%, primarily due to the improved performance of our US Soup, Sauces and Beverages segment.

For the nine-month period, organic net sales declined by 2%.

EBIT increased 8% in the quarter due to an improved gross margin performance, the growth in sales and favorable currency translation, partly offset by higher administrative expenses.

For the nine months, EBIT gained 9%, also reflecting an improved gross margin performance in currency as well as lower advertising expenses, partly offset by lower sales volumes and increased administrative expenses.

We achieved an EPS of $0.54 in the quarter, and $2.14 for the nine months.

Both numbers represent an increase of 13% from the prior year periods.

This EPS growth is ahead of EBIT growth as it reflects the benefits of utilizing our positive cash flow to repurchase shares.

In the third quarter, our organic sales growth reflected a 4 point contribution from volume and mix.

This gain, and a 1 point increase due to carryover pricing, were partly offset by higher promotional spending.

The gains from volume and mix were primarily driven by the strong gains in our US Soup, Sauces and Beverages segment where volume and mix contributed 8 points of sales growth.

Double-digit volume gains in Beverages and gains in both Soups and Sauces contributed to this performance.

Currency translation, primarily the Australian dollar and the Canadian dollar, contributed 5 points of sales growth to the quarter.

Bringing our reported sales increase to 7%.

In the quarter, our gross margin percentage rose 90 basis points to 41.2%.

We continue to generate significant productivity improvements from our supply chain, and these gains contributed more than 200 basis points to our gross margin performance this quarter.

Higher productivity and negligible inflation have enabled us to step up our promotional spending to remain competitive and drive volumes while delivering increases in our gross margin percentage.

Cost inflation continues to moderate and was relatively flat for the quarter, driven by deflation in grain based commodities, vegetable oil and energy.

For the nine-month period, Inflation increased at a rate of approximately 1% to 2%.

Currency and higher selling expenses increased our marketing and selling expenses for the quarter.

This was partly offset by lower expenses for advertising and consumer promotion.

In several of our businesses we have reduced advertising expenditures and shifted resources to fund promotional activities.

While advertising costs are down from a year ago, advertising impressions in the US as measured by GRPs are ahead of last year thanks to buying efficiencies.

In the quarter, administrative expenses increased from $129 million to $156 million.

This was primarily due to higher benefit costs, including equity based benefit expenses and pension costs as well as currency.

For the nine months, the same factors drove an 8% increase in administrative expense.

I'll comment briefly on the below the line items.

As I noted earlier, EBIT increased 8% for the third quarter and 9% in the nine months.

Interest expense increased slightly in the quarter, reflecting higher costs associated with our long-term debt issuance in the fourth quarter of last year, which extended the duration of the debt portfolio.

Those costs were partially offset by the favorable impact of lower short-term rates.

For the nine months, the benefit of lower short-term rates exceeded the higher cost of new debt issuance, leading to an overall decline in interest cost.

The tax rate was steady for the quarter at 32.9%.

It was up 70 basis points for the nine months primarily due to higher state tax costs.

Net earnings increased 9% for the quarter and year-to-date.

We continue to execute our strategic share repurchase program, leveraging our strong cash flow.

As a result, average shares outstanding declined by 3% for the quarter, 4% year-to-date, lifting EPS growth for both the quarter and the nine months to 13%.

Next I'll comment on our segment results in the quarter.

In US Soups, Sauces and Beverages sales increased by 5% due primarily to the 13% growth in Beverages.

Beverage sales reflected significant gains in V8 V-Fusion, benefiting from the increased marketing support, and successful new launches including Cranberry Blackberry flavor and 8-ounce slim cans in a range of flavors.

We also achieved volume driven sales in both V8 Vegetable Juice and V8 Splash.

We increased our competitive activity behind our US Soup business, driving a 5% increase in volume.

After reflecting the increased promotional spending, US Soup sales increased by 2%.

Sales of Prego Pasta Sauce and Pace Mexican Sauces grew in the quarter as these products continue to benefit from increased in-home meal occasions.

Reflecting the higher sales and improved gross margin performance, operating earnings increased by 10% for the segment.

Soup sales increased 2% for the quarter with condensed sales declining 1%, ready-to-serve sales rising 4% and broth sales posting a 9% gain.

As I mentioned previously, Soup volume increased 5% with each of the three soup formats ahead of the prior year.

Now I'd like to discuss our view of the US category wet soup category and dollar share performance.

These disclosures are based on IRI panel data and Company estimates which we believe fairly capture approximately 90% of retail sales.

The figures I'm sharing are based on a rolling 52 week period, in this case for the period ended April 18th.

Overall, we estimate a $1 decline in retail sales of the US wet soup category of 2.7% driven by lower volume.

Campbell's had a decline of 3.6% in wet soup retail sales.

Our ready-to-serve soup business contributed the most to our decline while our condensed and broth formats both outperformed the category.

Our Soup performance compared favorably with a deeper decline, 4.3%, for all other branded players.

Private label retail sales rose by 6.7%.

Again, these are 52 week dollar results.

On a 13 week basis our dollar share results were stronger and our results were even better on a volume share basis for the 13 weeks.

The next slide, number 17, shows dollar share within the US wet soup category for Campbell's, all other branded players and private label.

Campbell has a dollar share of 63.4%.

All other branded players collectively hold 24.6% of the dollar share, and private label's dollar share of wet soup finished at 12% which is lower than its share in most other well-developed food categories.

In Baking and Snacking, organic sales increased 1%, as volume gains in both Pepperidge Farm and Arnott's were mostly offset by increased promotional spending.

Goldfish Snack Crackers continued to have very strong growth.

The favorable impact of currency as well as margin driven gains from our cost reduction efforts and from deflation in grain-based commodities drove a 31% improvement in operating earnings.

Organic sales in our International Soup, Sauce and Beverage segment declined by 2% primarily due to lower soup sales in Canada.

Within Europe, organic sales gains in Germany were offset by declines in France, as the competitiveness in that marketplace intensified.

Despite the lower organic sales, operating earnings increased 28%, driven by the benefit from currency translation, and gross margin gains from productivity savings.

Reflecting continued weakness in the food service sector, organic sales for the North American Food Service business, declined 6%.

The segment's earnings declined by $9 million due to higher manufacturing costs and lower sales.

We're very pleased by our year-to-date cash flow performance.

Cash from operations of $859 million rose $53 million from a year ago, more than offsetting a $260 million pension contribution in the first quarter.

Significantly improved working capital performance, especially inventory reduction, and higher earnings both contributed to these results.

Capital expenditures of $177 million were about the same as last year.

Capital expenditures this year included expansion of our world headquarters, a capacity increase for both Arnott's and Pepperidge Farm and the ongoing implementation of SAP in Australia and New Zealand.

We spent $315 million in the first nine months to repurchase 9 million shares.

Net debt at $2.4 billion is $114 million below the prior year level.

With respect to our guidance, we continue to expect growth in net sales of 2.5% to 3.5%.

And growth in adjusted EBIT of 6% to 7%.

Given our third quarter performance and our outlook for the remainder of the year we expect growth in adjusted EPS to be at the high end of the previously announced 9% to 11% range.

That concludes our formal remarks.

Now we will take questions from callers.

Thank you.

Thank you.

(Operator Instructions) Our first question comes from Alexia Howard from Sanford Bernstein.

Hello, everyone.

The question around innovation as we look out into the next season, I think a number of folks that I'd spoken to were somewhat worried that given the presentation at CAGNY it was really all going to be focused on condensed soup as we go into the next year.

I wonder if you could give us any commentary about plans that you have in ready-to-serve or broth, just to give us an idea of how you see the balance of innovation playing out over the next year or so.

Alexia, we highlighted some of that at CAGNY but clearly the focus at CAGNY was on our focus to what we call fire up condensed soup.

We have a full platform of marketing and sales initiatives and innovation going against both Chunky, Select Harvest and Swanson broth and Swanson stock.

I'm not going to get into the specific details of it, but I can assure you, we will be fully competitive in terms of our innovation with any and all players in the segment, and we will also be fully competitive from a marketing expense perspective, and from a selling perspective.

So we will compete vigorously.

Not to worry.

Okay.

And then just a real quick follow-up, on the pricing outlook, obviously we saw a little bit more intense promotional activity this time around.

As I look at the comparables going forward, it looks as those might get a little bit easier going forward.

Do you anticipate that we're going to see continued more intense step-ups in promotional spending as we go through the next few quarters or are you expecting that you might ease off the accelerator pedal relative to where you are today?

The principle is that we will compete vigorously and we believe in our capacity to compete at a level that the competition would find challenging.

Witness some of the comments by both the private label suppliers and by competitors.

But I was encouraged in this period because we actually competed vigorously in this last quarter, registered good volume gains and were actually able to manage it within the context of our overall portfolio in a way that allowed us to hold our EBIT margin.

So we have the capacity to compete as is necessary and we're going to be very vigilant and not let anything get away from us as it did in the second quarter.

So we will compete and it's hard to say any more than that.

Okay.

Great.

Thank you very much.

I'll pass it on.

Thanks, operator, if we could, please ask one question.

We'll keep you on the line for clarification but follow-ups will have to wait for round two.

Next question, please.

Our next question comes from Eric Katzman from Deutsche Bank.

Hi, good morning, everybody.

Thank you for providing the market share data.

I know that's been a struggle with everybody.

So I appreciate that.

Doug, the question I would ask is you did relatively well in Soup this quarter.

Last quarter was a struggle.

You commented last quarter that it was the timing of promotion and to a certain extent trying to analyze the competition versus simple meals.

Even though it's just been a couple of months, can you give us a sense as to how you're thinking about the simple meals competition and what seems to be hurting ready-to-serve versus the shorter term need or efficacy of promotion, maybe just go into that.

Sure, Eric.

I'll do it at a high level but I will say that when we have our analyst meeting in July, when we have an opportunity to amplify on the conversation, we'll have a very clear articulation of that on July 12th.

What we're finding is we know what the key price points are to drive soup volume and sales and we don't need to become overly obsessed with the myriad of simple meals alternatives out there.

We do have to be informed by the way they're promoting their products.

But our key challenge is just to execute against the soup category in an intelligent way, be alert to what's going on in the broader simple meal arena.

And, quite frankly, at this point I'm just focusing on growing soup and I think we can do that with competitive price points that allow us to continue to build the business and do it in a margin neutral to enhanced way.

It's not going to be helpful on this call to get into a detailed discussion of simple meals.

We know what it takes to win in soup and we just simply need to do it.

We missed an opportunity in the second quarter.

We weren't concerned about it.

We were concerned but we knew we could course correct.

We have.

We're not overly thrilled with the performance.

I think it's solid and it's about what we expected.

So we're just going to focus on growing the category and being better informed about what the simple meal activity is.

Okay.

Thanks.

I'll pass it on.

Next question, please.

Our next question comes from Andrew Lazar from Barclays Capital.

Good morning, everyone.

Doug, some of the promotional moves you made this quarter perhaps show us that consumers are still interested in buying ready-to-serve, as an example, but as you mentioned are price sensitive versus other simple meals and things of that nature.

While what you did this quarter around promotions was far more tactical in nature, with the whole compete vigorously piece and understanding you've got to keep certain key price points in mind, it sounds like some of this will also be more normalized heading into next soup season and beyond.

So I'm trying to get a sense of if that's the case how that jives with your comment around margin neutral or enhanced way.

What are the issues around the economics of soup and specifically ready-to-serve Campbell in this new, very price point sensitive environment that you've got to be keyed in on?

Andrew, the notion of competing vigorously is largely dependent on where the broader industry is going.

As you know, shopping trips are down.

The consumers are incredibly value conscious and we just know that we have to be competitive with our other soup players, with private label and with all other branded soups.

And when I talk about competing vigorously, it's against other soup players, while being informed by what's going on in this broader simple meal environment.

So the answer when you look forward is it depends.

It depends on how competitive it gets.

We believe we have the operating efficiencies and the productivity mind set that is going to enable us to compete vigorously and hold our enhanced margins and that's the approach we're taking.

We'll see where the industry heads, but we believe we can manage our way through it, at least as well, if not better than anyone else that we compete with.

Okay.

What I'm getting at is, and you addressed this a bit, is to get a sense of have the economics of the overall category, which have been very favorable for a long period of time, does that need to change and the only reason you can get through it is obviously the productivity of course helps you.

Actually, the economics are, as you know, incredibly favorable as condensed soup gets traction and outperforms the rest of the category.

That enables us to leverage our scale in a very advantaged way.

So as long as at-home consumption, at-home dining is up and as long as our condensed soups are seen as being good value solution for consumers, we're extraordinarily well positioned in this environment to be able to navigate that.

Thanks very much.

(Operator Instructions).

Our next question comes from Chris Growe with Stifel Nicholas.

Hi, good morning.

I just wanted to ask you about the last couple quarters especially, and especially this quarter, you've gotten much more promotional, and you mentioned advertising being down in the quarter.

I just wanted to step back and look at from a category standpoint, should your emphasis be more so on advertising to help drive category growth or is it more about the price points you're trying to hit, to try to be more competitive, versus simple meals?

Could you give me a better feel for that?

Absolutely.

We have a model here that we actually work with.

It's called Total Preferred Value and it has to do with a combination of all the benefits, both the product benefits, the advertising and the trade promotion activity, all divided by the price and all relative to competition.

So we do look at it as a bundle.

But if I piece it apart a bit, first of all our advertising, as Craig mentioned, our spending's down but our total grips are up so we're out there.

Our share of voice is quite strong relative to other alternatives.

And again, you've got to view our trade promotion as partly offsetting all the pricing that went on the past two years which is why we've been able to, as costs have come down to being up 1% to 2%, has enabled us to compete vigorously on the trade promotion line and still have good margins.

I think we've got a good formula here.

We are committed to growing the category.

As the category leader we have to do that.

And I think going forward you're going to see a step-up in our marketing spend, in our marketing expense line.

We intend to grow the category.

Okay.

And then to follow-up on that, Craig gave the new information, thanks for providing that on the share and the sales.

Was dollar share, if you were to talk about 13 week periods, was dollar share up in the quarter?

We don't release the 13 week periods.

We're only going to do the 52s.

You'll start as we build up some traction with the program every quarter, you'll get some visibility into it.

Obviously we felt better about the third quarter than we did the second quarter.

Next question, please.

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

Good morning.

Just a point of clarification on the difference between the second quarter and the third quarter.

In terms of promotional activity, was the frequency higher, did you promote, did you have just a larger number, greater number of promotions or was it more driven by just having different price points, lower price points?

The answer is yes, Bryan.

We returned to price points that we had targeted earlier in the last couple years.

And we did it with what we would regard as competitive frequency.

And we particularly got stronger on quality merchandising.

So merchandising events that included feature and display.

Did you get retailers to also invest, co-invest with you on this stepped up activity?

Retailers have a high interest.

Some retailers did do that.

Retailers have a high interest in the category.

It's the largest category in the center of the store.

It's a proven traffic builder.

So as they're really competing now to get store trips up and to get their share of market up, soup is a natural product for them to focus on and some of them give up a little margin to do that.

Okay.

Great.

Thank you.

Thanks.

Next call, please.

(Operator Instructions).

Our next question comes from David Palmer from UBS.

Hi, guys.

Just a quick question, my one question, on productivity saves.

In previous years we had talked a lot about the better look at activity-based cost that you might get via SAP and that be getting supply chain rationalization savings.

Is that occurring now at Campbell?

Are we perhaps looking at better or higher year over year productivity saves this year?

How are you looking as you go into 2011?

We are looking at higher productivity saves this year versus last year.

The enabler program, as we call it, continues to not only do well, but actually accelerate.

Undoubtedly, one of the drivers of that is, in fact, the implementation of SAP across North America.

It gives us better visibility across our plant network and more standardization.

I still think we're relatively early on the learning curve around SAP so I think there is some opportunity to continue to build.

The other place you're seeing it is in our improved working capital and inventory performance because another thing that the new system platform has done is to give us better visibility, particularly to raw material inventories in the plant.

As we talk about our expectations going forward, you also have to remember that we have a very aggressive SG&A target over the next three years of cutting $150 million to $200 million out over the three-year period, which should deliver zero overhead growth incrementally to all this other cost management work.

We have a clear line of sight to having a very competitive cost position over the next three years.

Thank you.

Thank you, David.

Next question, please.

Our next question comes from Terry Bivens from JPMorgan.

Good morning, everyone.

Doug, I know over the years we've gone back and forth over some of the syndicated data.

I just wanted to ask you this.

We look at Nielsen data and through the 12 weeks that ended mid-quarter, it looked like soup sales in aggregate were down 4 points or so.

And your reported number in terms of sales is up 2.

That's a little bit wider variance than I've seen.

So the question is really in the last two weeks of the quarter, was there any special retail program you guys undertook or anything of that nature?

No.

And Terry, we can't reconcile against your numbers, obviously, but there are a couple things to take into account.

One is some retailers do give up some margin and do take prices down further than we are, as they try and build their promotional profile.

As we talk, we do manage inventories or help our customers manage about 60% of our inventory base and there's been no appreciable change in the inventory level.

Okay.

Very good.

Thank you.

You're welcome, Terry.

Next question, please.

Our next question comes from Vincent Andrews from Morgan Stanley.

Thank you and good morning everyone.

Just a quick question on commodity costs, particularly looking out.

It seems to me like maybe tomatoes would be down on a go forward basis, maybe tin plate as well.

But then you have some protein inflation coming, particularly pork, beef, and to a lesser extent chicken prices are at variable levels.

How is that all going to net out as we look forward?

We'll talk in a little bit more detail about our outlook around inflation for next year when we do the fourth quarter, Vincent.

I think directionally I think the things that you pointed to would be the way that we're looking at it.

We've got a hedging program so we're covered for some of that exposure as we move into '11.

But we'll give you an inflation outlook next quarter.

Thank you very much.

Thanks, Vincent, next question, please.

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

Thanks, good morning.

I'm having a little hard time reconciling the implied fourth quarter guidance.

If I take current spot rates, it looks like you need maybe 6% or 7% organic growth to hit the low end on the top line.

Which strikes me as a bit optimistic.

But then on the EPS line it seems like you need about 200 basis points of margin contraction there which seems a little pessimistic.

I'm trying to understand if there's anything I might be missing.

I don't know whether there's anything you're missing or not.

We're cycling a very strong profit production from last year for the quarter.

So you're right, as you look at EPS it's not a very strong quarter implication.

It's part of the reason that we guided to the top end of the range.

We feel good about hitting the top end of our range.

I think we do need positive growth at the top line in confirming the guidance.

We think that's where we're going to wind up.

Okay.

Thank you.

And just building on it, we're also preparing to move forward our condensed soup relaunch and some of the expenses for that will fall into the fourth quarter, as well.

So the spending profile will be a little different.

Just a real quick follow-up.

Is there any difference in terms of when you get the initial load for the upcoming season, maybe more coming in Q4 this year than some last year, is that a fair way to think about it?

Not particularly.

Okay.

Thanks.

Next question, please.

Our next question comes from Robert Moskow from Credit Suisse.

Hi.

Doug, I remember at CAGNY you said that you needed to address the price value equation in ready-to-serve.

And now you're saying that you've returned to price points maybe that you targeted maybe two years ago.

Is this the solution?

Is this price/value issue now addressed or is next year a whole different situation?

Rob, I'd love to get out the crystal ball.

We know at what level we need to be competitive in order to grow the category.

And we'll see what happens.

I suspect these kind of levels might very well be required as we go into next year but we'll see.

We're going to be very agile here and we're going to stay on top of competitive pricing in the soup category and also we'll be informed by pricing in some of the key categories in other simple meals, and we'll just make sure we're at an appropriate price point and believe we can manage that in a way that allows us to continue to grow earnings.

But the answer is we'll see.

Thank you.

Next question, please.

Our next question comes from David Driscoll from Citi Investment.

Good afternoon, this is actually Cornell calling in for David Driscoll.

Just a quick question.

I wanted to know, given the sharp response that you guys received in the quarter on the volume front from all of the trade promotion, do you think that there's a risk as we move forward that we're basically training consumers to look to buy items, soup items off the shelf when they're on promotion and how do you balance that?

Very carefully, and we will be very careful with that.

But the promotional price points we're at are promotional price points we've been at in the past.

So this is more of a return to more competitive price points than before.

And I think we'll find the right balance.

As I said, we're going to maintain a strong marketing profile as well as a trade promotion profile here.

We have the scale and we have the opportunity with our condensed franchise to spend back nicely and get good returns.

So we believe we can manage through it.

But we do have to manage the whole marketing mix, you're absolutely right.

Thank you.

Next question, please.

Our next question comes from Judy Hong from Goldman Sachs.

Thanks.

Good morning.

Doug, just going back to the soup category performance, I think you've talked about your initiatives to really focus on key price points and you've seen your trends get better.

But the category being down 2.7% in the last 52 weeks, was really the key issue just the price points or is there anything as it relates to the category that needs to get better in terms of getting category improvement?

And then just relating to that, I thought in the last quarter you focused a lot more on the simple meals category and the pressure that you've seen from those category of soup.

It seems like in this call it's really just having this key price points and then as it relates to other categories and simple meal, just being informed and maybe monitoring as opposed to really being focused on those categories.

So I'm just trying to understand if there has been a change in looking at those broader simple meals categories in the last three months or so that makes you more comfortable that just being informed and monitoring those categories are really the right thing to do.

Good question, Judy.

As I mentioned when Eric asked the early question on simple meals, we're going to have a full discussion of simple meals in our July analyst meeting and I think within the context of having a full period of time to have a quality conversation, we can get into simple meals in a more complete way.

I think from my perspective for this call, we're approaching it as managing what we can manage, which is the soup business and our competitiveness in the category and being smart about what's going on around our category.

Until we have our July meeting, I think that's the appropriate posture to have.

We do know that when we have good, competitive price promotion in soup, we can deliver quality results and so I'm comfortable with that now.

But more to come and we'll talk in July.

Okay.

And then Craig, just on currency, I think last time you gave guidance 3 to 4 points.

Yes.

So in the quarter, currency at the top line was worth about 5 points.

And at EPS currency was worth more like 7 points.

6 or 7 points.

Okay.

And then just for the full year guidance for the fourth quarter, currency has obviously moved around a lot.

For the full year I think we're probably still more in the 3 to 4 range.

The quarter is not indicative of the full year.

Thank you.

Next question, please.

Our next question comes from John Feeney from Janney Montgomery Scott.

Good morning, everybody.

I wanted to think about your gross margin for a second and what it means in the context of operating leverage.

Because it occurs to me that a lot of companies in the food space have had an easier run over the past year or so, back to 2006-ish type gross margin levels and I think that's presumably because the volume performance has been tough in soup for a little while now.

I'm trying to estimate how incremental a turn in volume could be to your gross margin going forward.

In other words, do you see a sustainable model with a higher gross margin than it's been historically, say going back to 2006, if we can grow volume even 2% or 3% consistently off these levels?

Modest volume growth has terrific leverage on our P&L.

And so to the degree we have confidence in our ability to manage our costs, and as Craig articulated we do, and we do have the ability to -- I don't want to say manage, but we control our pricing, we lead pricing in our categories, we ought to be able to image our way through this and get good leverage out of volume.

The challenge is obviously to get the volume going.

That's what we did for the third quarter.

I believe for the next year, that's should be something we should be able to continue to do, particularly as we get into the first half of next year.

I think the other aspect of it is the portfolio management piece of it that Doug mentioned earlier.

You saw us simultaneously get more competitive, drive more top line, and have better profitability in this quarter than we did in the second quarter.

Part of it was the benefit of higher volume.

Part of it was the benefit of managing the total portfolio toward that end.

Okay.

Thanks very much.

Next question, please.

Our next question comes from Rob Dickerson from Consumer Edge.

Hi guys.

Good morning.

I just had a question on the balance sheet.

I know obviously I think we can all tell at this point that the soup category hasn't been performing extremely well and you guys are doing your best to promote and get volumes and gain incremental share.

But I'm just curious how you're thinking all-in about your balance sheet because obviously you continue to pay down debt.

If I look at Q3 now, just extrapolate where we are, run rate into the end of the year, we're starting to look at just about 1.5 times levered EBITDA.

And by my math obviously if you decided to go back to the debt markets you could raise very easily $1 billion in incremental cash and you'd still be at two times, only at two times levered and even if you decide to buy back shares, you could buy back 10% of your share base and you could double your EPS growth effectively for next year on a fiscal basis.

So I'm just curious, at what point do you really start to use the strength of your balance sheet, if the soup category continues to underperform?

Craig will jump right in here but we've grown soup sales now for seven straight years.

We had a hiccup in the second quarter that affected our ability to grow this year.

Our outlook for the soup category is one of growth, albeit modest growth, but our belief is we ought to be able to competitively grow the soup category.

I think we've grown compound annual sales in the 3% to 4% range in soup for the last seven years.

Obviously we missed it in the second quarter but we're very confident in our ability to grow soup and so I think there's a growth model there.

We have to grow other things faster than that in order to outperform the category, outperform peer group.

You want to take the other part of that on the balance sheet?

Just to clarify, I feel as if the strength of your balance sheet may be under-appreciated.

In general, I'm just curious how you're thinking about the best way to leverage that.

We appreciate the balance sheet quite a bit but I'll let Craig talk about it.

I agree with your analysis of the balance sheet.

Obviously, in terms of priorities, reinvestment in our organic growth is our first priority because it's typically the thing that gives us the best value creation.

Don't forget that we have also pointed to a willingness to be more aggressive in looking for acquisition opportunities.

That's a second area where the strength of the balance sheet could help.

And we've raised our dividend again this past year.

So we tend to look at the share repurchase program as the component of cash flow that is more flexible, depending on what we're doing with acquisitions or more recently in the past with divestitures.

We upped our share repurchase program as we divested properties.

I think that's the way we'll continue to look at it going forward.

But the cash flow strength of the Company and the balance sheet strength of the Company is well understood and appreciated here and we are constantly trying to figure out how to best leverage that.

I think you're seeing that current cash flow benefit.

Craig mentioned the lift between EBIT growth rates and EPS growth rates and we're fully aware that is driven by the positive cash flow that business throws off.

Great.

Thanks a lot, guys.

This is Jennifer.

Thanks for the question.

Since you've all been pretty good at sticking to one question only we're going to get some double dippers worked in here.

Operator, next one.

Our next question comes from Eric Katzman from Deutsche Bank.

Thanks for taking the follow-up.

Doug, most of the questions have been focused on soup, not too surprising, but it seems like really the outperformance in the category came from beverages and the sauces and the salsa businesses.

It seems to me that from the consumer perspective, those are very different, let's say, habits or trends.

The Beverage business, if you listen to Coke or Pepsi, it's been a bit weak.

The single serve market has been a struggle.

But you're all of a sudden recovering there.

On the other hand, you've got a weak consumer probably buying pasta and the sauces to go with it.

So maybe you could talk a little bit about how you did well in those areas and just address what seems like a, I don't know, maybe a bifurcated consumer.

Sure, Eric.

I hate to say it, but that's a good observation.

You don't have to hate that.

We do manage our portfolio of businesses.

Our first strategy says we focus on healthy beverages, baked snacks, and this simple meal arena.

The healthy beverage piece around V8, V8 has been arguably the best organic juice beverage company in the world over the last five to six years.

We have done an exceptional job of leveraging the trademark, maintaining some premium pricing, solving consumer issues around their intake of vegetables and fruit, and have built a wonderful innovation stream against V8 and we're very bullish about that business going forward.

We're also bullish about baked snacks.

Between healthy beverages and our baked snacks business, which has also arguably been the best performing baked snack business in the world, that's about 40% of our EBIT.

So there's a wonderful story there.

Then, if you go into these other sauces that are, I believe, benefiting from at home meal consumption, we call them meal makers, like Pace and Prego, and to a lesser extent Swanson broth which is a component to a meal, we also see growth in those businesses.

So overall, we feel very good about our portfolio.

This is going to be an area of focus when we get together in July.

So we have a nice growth story here in this at home meal making kind of environment.

Our sauces have been performing well.

And actually our broths have also been performing well as have our cooking soups which are used in meal preparation as well.

Between healthy beverages, baked snacks and a large component of our simple meal portfolio, we feel as if we're well positioned to compete.

Thanks for that.

Next question, please.

Our next question comes from Andrew Lazar from Barclays Capital.

Thank you.

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

No, never, never.

Just a quick one.

With some of the weakness in the overall soup category that you've talked about a bit, has that led to any change in the way your key retail partners are thinking about managing the category going forward?

Whether it be changes in how they merchandise it, changes in how they think about space allocation on the shelf for the category as a whole, not even necessarily Campbell specifically, any changes there that are of any note, either ones that are potential challenges or opportunities?

Andrew, there's no evidence to that effect at this point in time.

And as you know, most of the customers at this point, virtually all of them, have locked in their plans for the space allocation and promotional activity for the upcoming soup season.

And there's no evidence to suggest they're viewing it negatively.

In fact, there's been actually great interest in our focus on condensed, on the relaunch of condensed soup and there's I'd say a high level of energy for the soup category from a retail perspective going into the year.

They're looking for great value offerings that address this consumer who is feeling value stretched, who is looking for at home meal solutions, and we think the soup category is very well positioned there.

Our customers are responding well to that.

So I'm cautiously bullish about the response from the customer.

There's been no evidence of any pulling back from the customer.

As you actually see in the third quarter with the numbers.

Thank you.

Thanks, Andrew.

We'll take our final question, Operator.

Our final question comes from David Palmer from UBS.

Thanks for the second question.

With regard to Select Harvest, now that the second soup season for that is on the books, how would you judge the repeat and loyalty of that in the second year?

Any color on that would be helpful.

Thanks.

David, we feel very good about Select Harvest and we view it within the larger context of our portfolio strategy.

We had Chunky that was very much targeted to men.

We needed to get a competitive entry that was targeted to women.

And we were able to successfully launch it.

As you know, Select Harvest, I believe you know, was the IRI new product of the year, the best selling new product in the entire food store in its first year, going through January 1 of this year, and so it was a big success in year one.

As you often do, you expect to have things soften in year two as you lap pipeline and other promotional launch activities.

We feel very good about it and we're poised to have a very good year next year.

So overall we feel good about it.

Just like in Chunky, we have to get the right promotional price points but we have a great proposition there so we're very comfortable with it.

If you look at the two year growth trend, it's very positive for Select Harvest still.

It's good.

Thanks.

Okay.

Thank you Doug, Craig and Anthony and thanks to all of our callers for participation in our earnings Webcast.

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

If you are a reporter and you 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.

You may now disconnect and have a great week.