金寶湯 (CPB) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Campbell Soup fourth-quarter 2010 earnings conference call.

(Operator Instructions).

As a reminder, this conference call is being recorded.

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

Please begin.

Thank you, Mary.

Good morning, everyone.

Welcome to the Campbell Soup Co.

fourth-quarter earnings webcast.

We appreciate you joining us in advance of the holiday weekend.

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

Doug and Craig each will provide you with their perspectives on our performance for the quarter and fiscal year, as well as our expectations for fiscal 2011.

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

As usual, we have created slides to accompany our presentation.

You will find the slides posted on our website this morning at investor.campbellsoupcompany.com.

Please keep in mind that as usual our call is open to members of the media who are participating 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 which could be inaccurate and which inherently are subject to risks and uncertainties, all of which are listed in our slides.

You can refer to that slide or to our most recent 10-K and other 8-K filing 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 that we make on our call.

Consistent with our previous disclosures, the results presented today all have been adjusted for items impacting comparability.

There were no additional items impacting comparability of our results in the fourth quarter of 2010.

They are all in prior periods.

We will present organic sales results today, which do exclude the impact of currency and M&A activity as we believe this is a better indicator of our ongoing business performance.

We will also present segment operating earnings adjusted for the items impacting comparability.

Since our presentation includes certain non-GAAP measures as defined by the SEC rules, we have provided a reconciliation of these measures to the most directly comparable GAAP measures as an appendix to the slides accompanying the presentation.

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

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

Thank you, Jennifer, and good morning, everyone.

Thanks to all of you on the phone and the webcast for joining our fiscal 2010 earnings conference call.

I would like to share a few comments on our performance in the fourth quarter and the fiscal year and our plans for fiscal 2011.

Then I will turn the call over to Craig for a more detailed discussion.

Our net earnings-per-share increased 10% for the fourth quarter to $0.33, including a favorable tax rate in the impact of our share repurchase program.

Our healthy beverages business led the way, posting significant sales growth in the fourth quarter.

Our quarter's results brought us to an increase in net earnings per share for the fiscal year of 12%.

In a challenging environment, we delivered strong earnings growth, overcoming softer than expected sales to finish slightly above the high end of our earnings range and well above our long-term target.

I'm pleased with how well we managed our margins this year.

I'm also pleased with our cash flow performance, including more than $1 billion in cash flow from operations this year, despite an extraordinarily high contribution to our pension fund.

We delivered those results while continuing to invest for long-term growth, including spending on our IT infrastructure, wellness and nutrition innovation, and our work in emerging markets.

In a year when sales growth was difficult for the entire food industry and short of our own expectations, we benefited from a great deal of hard work on costs and expense initiatives across the organization.

Improved productivity, favorable currency and our share repurchase program all contributed to our EPS growth this year.

That having been said, we recognized that growing the topline is the key challenge for us and for the food industry as a whole in order to deliver quality earnings growth in a sustainable way.

As we enter our fiscal year 2011, I am confident that we have the programs and plans in place to address this challenge.

Leading into our businesses in healthy beverages and baked snacks, we will offer a full slate of innovation, including V8; V-Fusion plus Tea; upgrades to the Company's largest baked snacks brand, Goldfish, which is the largest children's snack cracker in the world; and Arnott's Shapes.

New varieties and a relaunch of Chunk Cookies for Pepperidge Farm and line extensions for Arnott's Vita-Wheat, just to name a few of our renovation efforts.

Our healthy beverages and baked snacks brands will also be supported by stepped-up marketing.

In this regard, we will be leveraging advertising campaigns that have already shown positive results such as our numbers campaign on V8 healthy beverages.

We are funding the increased marketing with our expense reduction initiatives such as our improved indirect procurement effort.

In addition, we will significantly strengthen our competitiveness in simple meals.

The primary initiative in our soup business this year is to fire up condensed soup.

This initiative will benefit both cooking soups, which are part of our broader meal-makers portfolio, and our eating soups.

We will also improve the competitiveness of our ready-to-serve soups through more consistent promotional activity commencing this fall.

Both condensed and ready-to-serve soups will benefit from our new umbrella advertising campaign, which starts next week.

This campaign will celebrate the amazing qualities of Campbell Soup in a category-building fashion.

We also have competitive marketing support plan for our International Soup businesses, including a major relaunch of our Erasco Heisse Tasse Soup in Germany later this month.

And we will launch a concentrated broth for value consumers in several markets around the world.

Based on the year we just concluded and our plans for next year, we provided earnings guidance for fiscal 2011 today.

Today we expect net sales growth of 2% to 3%, EBIT growth of 4% to 5%, and EPS growth of 5% to 7%.

Craig will provide further details about our assumptions in just a moment.

As I step back and look at the broader landscape, I see that consumers remain very value conscious, and the competition in our industry will remain intense.

Consumers, likewise, have their challenges.

Growing the top line will remain difficult, and it will have to come largely from volume growth, not from pricing.

As we look ahead, we are committed to driving sustainable profitable growth, and our outlook for the coming year is consistent with that expectation.

In the near term, we will drive growth the same way successful food companies always have -- to focus product quality, innovation, strong marketing and competitive pricing.

Over the long term, we will leverage all of the assets at our disposal, including our lead brands in our core categories, regional scale, world class product technologies, financial strength and organization excellence.

In my opinion, we are extremely well positioned and well equipped to compete, to perform and to win, particularly in our categories of focus.

With that, I will turn the call over to Craig for a more detailed discussion of the quarter's and the year's performance.

Craig?

Thanks, Doug.

I will spend a few moments walking you through the fourth-quarter results and segment highlights, followed by comments on our fiscal year-to-date results.

Then I will provide color around our fiscal year results by segment, including the US Soup performance, and I will conclude by addressing our FY 11 earnings guidance.

For the quarter we reported net sales of $1,518,000,000, down 1% versus the fourth quarter of 2009.

Excluding the favorable impact of currency translation, organic net sales decreased by 2% due to increased promotional spending.

EBITDA of $187 million for the quarter is down 6% versus the year ago, primarily due to increased promotional spending and cost inflation, partially offset by productivity improvements and lower administrative expense.

Despite the EBIT decline, earnings per share of $0.33 rose 10% versus the prior year.

In the fourth quarter, our reported net sales declined 1%, which reflected increased promotional spending of 2 points, partially offset by a 1 point increase due to currency translation.

To improve our price competitiveness, primarily in North America, we increased our trade spending levels across several of our key businesses.

Reflecting this increased promotional spending, organic net sales decreased by 2%.

In the fourth quarter, our gross margin percentage decreased from 40.6% in fiscal 2009 to 40.4% in the current quarter, a decrease of 20 basis points.

This decrease was primarily due to increased promotional spending and cost inflation, net of significant productivity improvements.

Higher advertising expense this quarter increased our marketing and selling expenses by 6% from $209 million in 2009 to $221 million in 2010.

Administrative expenses declined $17 million due to lower incentive compensation costs.

As I mentioned earlier, EBIT declined 6% in the fourth quarter.

Net interest expense increased 13% in the quarter as the cost of increasing the proportion of long-term debt was partly offset by the reduction in short-term rates.

The tax rate declined significantly in the fourth quarter by 9.1 points to 29.8%.

The decrease in rate is primarily due to reduced taxes from a lower level of foreign dividends compared to a year ago.

As a result of the lower tax rate, net earnings increased by 6% for the quarter.

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

As a result, diluted shares outstanding declined by 2% for the quarter, contributing to earnings per share growth of 10%.

Next I would like to comment on our segment results for the quarter.

In the US Soup, Sauces and Beverages segment, sales decreased 1%, primarily due to a decline in US Soup, partly offset by growth in beverages.

Beverage sales increased 12%, driven by significant growth in V8 V-Fusion juice, V8 Vegetable Juice and V8 Splash juice drinks.

Operating earnings decreased 6% to $139 million this quarter from $148 million in the year ago quarter.

This decrease was primarily due to an increased promotional spending, partly offset by productivity gains.

US Soup sales for the quarter decreased 5% with sales of both condensed and ready-to-serve soups declining 7% due to volume decline and increased promotional spending, while sales increased 9%.

In baking and snacking, organic sales were unchanged for the quarter as gains in the Indonesian biscuit business were offset by a decline in Pepperidge Farm.

Sales in Arnott's were comparable to a year ago as higher volumes were offset by increased promotional spending.

The favorable impact of currency drove a 6% improvement in operating earnings.

Organic sales for the International Soup, Sauces and Beverages segment declined 4%, primarily due to declines in Europe and Canada, partly offset by gains in the Asia-Pacific region.

Operating earnings decreased from $19 million to $6 million due to declines in Europe and Canada, again partly offset by margin-driven earnings growth in Asia Pacific.

Reflecting continued weakness in the food service sector, organic sales declined 9% in our North America food service segment.

Earnings increased $3 million in the quarter compared to prior years -- compared to the prior year, primarily reflecting our cost reduction efforts.

Turning now to the full-year fiscal results, reported net sales increased 1% with organic net sales down 2%, primarily due to declines in the US Soup, Sauces and Beverages segment.

EBIT of $1,360,000,000 is up 7% versus a year ago, primarily due to improved gross margin and favorable currency, partly offset by lower sales.

We achieved earnings per share of $2.47 this fiscal year, an increase of 12% versus the prior year.

This EPS growth reflects the increase in operating earnings, the benefits of using our positive cash flow to fund our share repurchase program, and a slightly lower tax rate.

Our reported net sales grew 1%.

We had a 1 point decline from volume and mix and a 2 point negative impact due to higher promotional spending.

Increases in promotional spending more than offset small price increases in the highly competitive environment with value at the top of consumers' minds.

Organic sales decreased 2% as declines in US Soup, primarily ready-to-serve and North America food-service, were partly offset by strong gains in US beverages.

Currency translation, primarily the Australian dollar and Canadian dollar, contributed 3 points of sales growth to the full year.

Our gross margin percentage increased from 40.2% to 41%.

This 80 basis point improvement was primarily due to productivity improvements in access of cost inflation.

Marketing and selling expenses for the year decreased from $1,077,000,000 to $1,058,000,000, primarily due to lower advertising and consumer promotion costs, partially offset by the impact of currency.

In several businesses, we reduced advertising expenditures and shifted those resources to fund promotional activities in order to maintain price competitiveness.

While advertising costs are down from a year ago, advertising impressions in the US as measured by gross rating points increased as we took advantage of lower media rates.

Our total marketing support, which includes promotional spending, is up for the year.

Administrative expenses increased by 2% from $591 million in 2009 to $605 million.

The increase was primarily due to the impact of currency and higher compensation and benefit costs, including pension expense, partly offset by the benefit of the Company's cost reduction efforts.

Below the operating line, net interest expense was unchanged for the fiscal year.

The tax rate was 31.3%, 70 basis points lower than the year ago rate, reflecting a lower level of foreign dividends.

For the full year, net earnings increased by 9%.

Diluted shares outstanding declined 3% for the year, resulting in earnings-per-share growth of 12%.

Now I will comment on the segment results for the full year.

In the US Soup, Sauces and Beverages segment, sales decreased 2%, reflecting a decline in US Soup, partly offset by gains in beverages.

Beverage sales increased 4%, driven by double-digit volume gains in the second half of the year.

V8 V-Fusion sales increased double-digits due to increased advertising and successful new item launches, including Cranberry-Blackberry and Acai Light varieties, and a new 8-ounce slim can package.

Sales of V8 Splash juice drinks increased, while sales of V8 Vegetable Juice declined for the full year.

Prego pasta sauce sales grew, reflecting the continuing success of our Heart Smart varieties, and sales of Pace Mexican sauce declined.

Operating earnings increased 2% for the segment to $943 million from $927 million a year ago.

This increase was primarily due to productivity-driven gross margin gains and lower advertising spend more than offsetting the impact of lower sales.

For the full year, US Soup sales decreased 4%.

Despite the increase in sales of condensed cooking varieties driven by increased home eating occasions, sales of Campbell's condensed soups in total decreased 2%.

Sales of ready-to-serve soup declined 9%, reflecting negative category trends in both canned and microwavable varieties.

Broth sales increased 3%, also benefiting from the growth of in-home meal preparation and from consumer demand for our 100% natural product offerings.

The following chart is a look at category performance in the US during fiscal year 2010 based on IRI panel data and Campbell internal estimates.

Continuing high unemployment and a corresponding low level of consumer confidence have resulted in declines in consumer spending.

These trends have impacted the food industry as a whole.

Consumers are making fewer store trips.

They are shopping more closely to their list and reducing stock up purchases and trading down to lower cost alternatives.

Broadly speaking, our data indicate that consumers are purchasing fewer items and spending even fewer dollars on grocery.

In fact, food volumes in the grocery channel declined throughout our last quarter and dollars spending has a longer negative trend.

For the soup category, these dynamics have had a negative impact, particularly on our ready-to-serve cans and microwavable products which carry higher average selling prices.

The overall category has declined by 4.7%.

Our sales have declined 5.2%.

We have outperformed all other branded players by 2 percentage points.

While we have been impacted by the ready-to-serve category trends, our meal-maker businesses, condensed cooking soups and broths, have had much better performance due to their strong value and the trend towards consumers eating more at home.

As you can see on the following chart, private-label share in soups still trails that of other mature food categories sitting at only 12%.

Campbell's dollar share in wet soup was 63.6%, reflecting a modest 40 basis point decline in the past year, driven by ready-to-serve soup.

We gained dollar share in the condensed soup -- in both condensed soup and broth, and we realize growth in total volume share for the Company for the fiscal year.

All other branded players had a collective share of 24%.

For the full year in baking and snacking, organic sales were comparable to a year ago as volume gains in both Pepperidge Farm and Arnott's branded business were offset by increased promotional spending.

In Pepperidge Farm we delivered strong sales gain from Goldfish snack crackers; however, cookies declined.

Sales in our Australia Arnott's business increased driven by both Tim Tam chocolate biscuits and Shapes savory crackers.

The favorable impact of currency and earnings growth in both Pepperidge Farm and Arnott's drove a 22% improvement in operating earnings.

Organic sales in our International Soup, Sauces and Beverages segment for the full year declined 1%.

The decrease was primarily driven by declines in Europe, reflecting lower sales in Germany and Canada due to lower sales volume of ready-to-serve soup, partly offset by gains in the Asia-Pacific region.

The sales increases in Asia-Pacific were due to volume-driven gains in Japan, Australia and Malaysia.

Despite the lower organic sales, operating earnings increased by 18%, primarily driven by the favorable impact of currency.

Excluding the impact of currency, margin-driven earnings growth in Europe in the Asia-Pacific region was mostly offset by the decline in Canada.

Consistent with the quarter, North American food service was impacted by the weak economy for the full-year with organic sales down 5%.

Earnings increased $2 million from $53 million in the prior year to $55 million this fiscal year as we aggressively manage the cost of this business to protect profitability.

Cash flow from operations of $1,057,000,000 compared to $1,166,000,000 in the prior year.

The current year cash flow includes a $260 million contribution to Campbell's US pension plan, the impact of which was mostly offset by improved working capital performance and higher cash earnings.

Capital expenditures decreased from $345 million to $315 million.

The capital expenditures for this year included the expansion of our world headquarters, capacity increases for both Arnott's and Pepperidge Farm, and the ongoing implementation of SAP and Australia and New Zealand.

Looking ahead, we expect capital expenditures in 2011 to be approximately $300 million for the fiscal year.

In fiscal 2010, we repurchased 14 million shares at a total cost of $472 million under our strategic share repurchase program authorized in June 2008 and under the Company's ongoing practice of buying back shares sufficient to offset those issued under incentive compensation plans.

Net debt ended the year at $2,526,000,000, a decrease of $47 million.

We anticipate a continuation of the challenging economic environment with high unemployment, low consumer confidence and value-focused consumer shopping behavior.

Reflecting this outlook, we expect growth in net sales of 2% to 3%, primarily volume-driven for the full fiscal year 2011.

We expect growth and adjusted EBIT of 4% to 5%, which reflects an increase of 40% or $17 million in our US pension expense and a forecasted inflation in cost of sales of 2% to 3%.

Our projected 2011 growth rates and sales and EBIT are 1% below our long-term targets.

We expect adjusted earnings per share growth of 5% to 7%, consistent with our long-term growth target.

With that, we will take your questions.

Thank you.

Mary, at this time we are going to conduct a Q&A session, and we would like to request that callers limit themselves to one question.

Also, please stay on the line in case we need to clarify your question, and that way we will respond to more callers.

Operator?

(Operator Instructions).

Eric Katzman, Deutsche Bank.

Obviously it is a tough environment, and Doug, you have told us that and the data indicates, and thank you also for providing the marketshare data in that category trends.

I think that is helpful.

But I guess what I wanted to understand was, Craig, you went into a little bit with the marketing spending how that was down for the year, and you were forced to shift from advertising to promotion.

But, as the year progressed, did you just feel that the portfolio, particularly in soup, was not, I guess, positioned with the consumer, and that that is why you really did not aggressively try to push advertising and get the consumer to really stay interested in that category?

Maybe you could just talk a little bit about the dynamics of that decision versus the consumer as the year progressed and how that affects your view into 2011.

Let me try that on.

Basically what we learned in the first half of the year -- relearned -- we have known it before -- that there are two moments of truth.

The first moment of truth is when there are in-store making purchasing decisions, and the second moment of truth is when they actually prepare and consume the product.

What we learned in the first half was that we needed to be sufficiently competitive and hit the right price points and manage price gaps smartly relative to other competitors in soup and more broadly in simple meals.

And so, over the course of the year, we focused on making sure we were competitive in that first moment of truth.

At the same time, we did maintain overall for the year a competitive level of advertising and actually improved our GRPs versus the target.

So we felt we had the right balance.

It was a tough year.

Quite frankly, we never were able to fully overcome the second-quarter shortfall.

We came back with a solid third quarter, and as we got into the fourth quarter, we found our customers really wanted to focus their inventory build into the -- late in the summer in order to minimize their working capital before we started our advertising and promotion, which really kicks off in a big way actually on September 6.

So that is how we managed the year.

I'm very bullish about our ability to perform in this coming year.

We understand the pricing environment we are in now.

We are organized to compete at that level going into the season and not trying to adjust in midseason.

We are very well aligned with the customers now.

The customers are more prepared to deal with the environment we are operating in.

So I'm very bullish about our ability to perform starting in the first quarter.

Just as a follow-up and then I will pass it on, is that why it seemed as if your comments vis-a-vis the product format was that you are it sounds let a little bit more focused on the condensed side where your only competition is private-label as opposed to ready-to-serve and that your senses to the consumer and what the retail customers want is, let's say, a greater focus on that value delivery?

Yes, the consumer is looking for the value, and our condensed soup offering is the most appealing to consumers right now both for cooking at home and for consuming with their eating soups.

So, as you know, we have a major relaunch of our condensed soup line.

We call it firing up condensed where we have product improvements, marketing improvements, shelving improvements, and all of that activity is coming together starting in the first two weeks of September.

So that is our primary focus this year.

But, at the same time, we are going to be very competitive with other simple meal alternatives for ready-to-serve soup going into the season.

We expect that 1-2 punch to have impact.

We will also have in my experience the first fully integrated campaign supporting the entire Campbell's Soup portfolio that we have ever had at very high levels.

So you will start to see that beginning September 6 as well.

I guess one last point on soup that Craig mentioned but we sort of glossed over, is we had the best volume performance of anyone in the soup category this year, and that includes private-label.

So while the category was down, we know what it takes to get the volume on track, and we are in the process of doing that this year.

So while we may have difficulty in terms of getting any price realization this year, we do expect to have good volume performance, and I think that is going to allow us to deliver very solid results.

Andrew Lazar, Barclays Capital.

Let me pick up on that comment around volume heading into the new fiscal year.

One of the things that struck me looking at the fiscal third quarter to the fiscal fourth -- and obviously they are very different quarters, right, in terms of how they are made up and the seasonality and all -- and the comparisons.

But in the fiscal third quarter, the additional promotion really seemed to drive quite a bit of the incremental volume that we saw in that fiscal third quarter.

In the fourth it seems like that relationship was a lot less clear.

That the incremental promotion did not necessarily drive the volume.

Given that's such a big part of I know what you're doing going into next year, I just wanted to get your thoughts on that.

Maybe there are some things, differences between the two quarters that would be helpful for me to get a better understanding of.

And then we will from that; also I have a follow-up after that.

Andrew, you are right.

The fourth quarter is very different than the third quarter.

It's only 15% of our year.

And what we found was customers were more focused on preparing for the next soup season as opposed to aggressively promoting and building the business in the fourth quarter.

So I would say all of the focus began to shift towards building inventories for the first quarter, and I expect you're going to see that turn around in the first quarter.

So I think it was more of a customer and, quite frankly, a Campbell's Company focus gearing up to the first quarter and making sure that we had all of particularly our condensed soups in our old labels cleaned up and moved out and begin shipping in our new labels more fully to all distribution beginning in August for our September relaunch.

So I think there is more of a timing issue related to this fiscal year then there was a consumer issue in the fourth quarter.

That is helpful.

It is so small, any move can have a big difference on the percentages.

As you think about 2011 then, as your internal market research people and the operating folks build up their plans from the bottom up, how do you think about -- looking at what the overall category did in your last fiscal year, to hit your 2% to 3% sales growth target in the coming fiscal year, I guess I'm curious what assumptions are embedded in that in terms of what you think the soup category does this coming year, or do you take it to that level, or is it all about even if the soup category does not grow we can take share because of what you're going to be doing from an activity standpoint?

I'm trying to get a sense of what you're building in into your thought process there, specifically around the core US Soup business.

As you know, we do not provide guidance by category.

But I think it is safe to say we expect improved performance in our soup business in the US, and I certainly believe that we can and should lapping a difficult year after seven straight years of soup sales growth, to have one hiccup here.

I expect we will be back on the growth track in soup.

So even though we will not have an opportunity right now it does not look like for price realization, we should have opportunity for volume growth, and I expect we will be back growing again.

And we know how to compete with actually both private-label and other branded competitors.

We are certainly outperforming all other branded competitors on a dollar basis, and we even outperformed private-label on a volume basis this last year.

So I think we are going to be able to perform very solidly.

Thank you.

I would just add to that, the guidance on the top line of 2% to 3% obviously is the whole portfolio.

And, as you know, we are pretty optimistic about our beverage business, as well as our baking and snacking businesses.

Alexia Howard, Sanford Bernstein.

Just wanted to stick with the soup category a little more.

We have not talked about the competition from simple meals much this time around.

I was just curious about whether you saw the promotional activity from other categories intensify this quarter, which may serve to choke off the soup category sales growth even worse than might otherwise have been the case?

And do you anticipate that kind of level of promotional activity in those other simple meal categories to stay the same in fiscal 2011, or do you see any sort of relief in sight?

The fourth quarter is so small for us a small change creates a large percentage drop.

And this was more focused on how we exited the year and worked with our customers to prepare for the next year.

In terms -- so I personally have not observed that there is some significant impact from other simple meals in this quarter.

What I would say is we are anticipating that it will be very competitive next year and as competitive as it was this past year, and we are very prepared for that.

Broadly you would expect simple meals to due better against the soup category in the fourth quarter, so every year has a Q3 to Q4 movement.

In fact, simple meals were soft along with the whole grocery trade in the quarter.

Not as soft as soup individually but soft.

Chris Growe, Stifel Nicolaus.

I just wanted to question for you in relation to promotion.

And especially looking at this past year and looking at some of the other food companies in general, we are not seeing a very good lift around promotional spending as a general statement, and I think that would be true for soup.

I'm just curious why you think the proportional levels stay high?

I inferred that from some of your comments -- and maybe correct me if I'm wrong -- but looking at the coming year, it sounds like you're going to still be pretty aggressive on the promotional front.

Is that the right use of money because I know you're also doing some advertising spending?

I'm just curious on your thoughts on that.

Well, importantly we have, as we have done for years, we have been building our marketing pressure on both the trade spending front and on the consumer spending front.

I.e.

you are going to see competitiveness on both fronts across the portfolio beyond just soup.

But in this conversation, we will just focus on soup.

We expect to have significant increase in our advertising and consumer spending as well.

It is one of the benefits of having such a good cost management program.

We have been able to build our gross margins and EBIT margins to a point where we can afford to spend -- continue to spend back against the business in a sizable way.

So you are going to see strong support on both dimensions.

We have to win at both moments of truth.

We have to keep it top of mind with the consumer, but we have to be competitive at the point of purchase.

And we believe we can do both those things.

We do have an excellent cost management program that is helping to fund that work.

By the way, we are also spending very competitively in healthy beverages and baked snacks, too, so that in all three of our areas of focus, we have got very competitive business plans.

And would you regard the level of productivity savings then this year or cost reduction efforts as any different from, say, fiscal 2010 or maybe the average the last several years?

Is it really stepping up this coming year?

Because you have got some margin growth built in, and you have got a lot of spending built in it sounds like.

Well, I will let Craig comment on it more fully.

But our cost savings effort this year, our productivity and total delivered cost effort delivered excellent results this year, and we have specific project streams that promise to deliver excellent results in this coming fiscal year.

We had our best year ever, at least the best year in certainly many years in terms of cost savings this past year in FY 10, more than within cost of sales, significantly more than offsetting inflation and then beginning to see some good results within our operating expenses, somewhat masked by big increases in pension, and we will fight that same thing a little bit as we come into FY 11.

But the short answer would be that we do expect a continued strong performance, both at cost of sales and at operating expenses again in 2011.

Could you quantify how much it helped maybe your gross margin in 2010, or do you have that handy?

How much the --?

The productivity.

Like I'm just curious what it would have helped your gross margin for --

Sure.

The enabler program in the full year contributed about 210 basis points to the gross margin improvement.

Bryan Spillane, Bank of America/Merrill Lynch.

Just a couple of follow-ups.

First, on the net sales growth guidance of 2% to 3%, does that include or exclude foreign exchange?

The assumption on foreign exchange is that it will be approximately neutral to the current year.

So it is included at about -- (multiple speakers)

Okay.

And then just anything we should think about in terms of the phasing during the year?

Because you have got some difficult currency comparisons in a few other quarters.

So I'm just -- kind of assuming that it is neutral for the whole year, or is there anything we should think about in terms of the seasonality of that?

I think -- I guess the best way to think about it would be that the assumption would be that across the year we don't expect to see much movement.

So the comparisons, you are right.

You probably need to pay a little bit of attention to what was happening underneath it in 2010 because that was a volatile year.

Okay.

And then on the cost inflation, 2% to 3%, is that net of productivity, or is that before productivity?

That is before productivity.

That is before the productivity programs.

So if we are assuming incremental productivity, your cost inflation, net cost inflation, would be below 2% to 3%?

Yes, we would expect to be able to offset that amount.

Okay.

And if I understood what you said in your response to Chris Growe's question, was your net cost of goods inflation actually deflationary?

Like was it less than -- was it negative?

No, it was not negative for FY 10.

It was slightly up.

Okay.

All right.

So we should be thinking about something similar for this year?

Well, no, it will be (multiple speakers) sorry.

Net of enabler savings for 2010 it would have been negative.

And then net of -- (multiple speakers)

Net of enabler savings for 2011, again, we would expect to be able to neutralize it or better.

Okay.

And then in terms of that raw cost inflation number, how much of it is -- how much of it is hedged, and if you can just talk about some of the moving parts there?

I'm assuming that resins and packaging may be up, but produce is down.

Yes, I'm not sure that is fair.

Some of the bigger drivers within commodities would be wheat prices up.

Across the produce range, I think we would be more than we were in the prior year probably.

The tomato harvest, for example, is not looking as good this year.

Within energy we have probably got some advantage versus prior year.

So (multiple speakers) natural gas costs and that sort of thing.

Okay.

And so then, just as we are thinking about forecasting a year that has little or no pricing, is volume dependent with support from promotions, you know, part of what protects the gross margin is that net of enabler savings, there really is not going to be much inflation in your cost of goods sold.

And given -- I guess I'm trying to understand just what could change that equation?

How much of what you have got in terms of inflation is locked in, or is it pretty well locked in for the year?

It varies by commodity, and it varies by our different businesses around the world.

I mean broadly speaking you should think about the first half of the year being pretty stable and us having pretty good visibility to it.

If there were really significant moves between now and then, you would see some of that flowing through in the second half of the fiscal year.

Okay.

All right.

That is helpful.

We are going to end it there because that was already kind of a two-part question.

If we could move on, Mary.

David Palmer, UBS.

Doug, I think a lot of folks are really touching on this whole promotion spending impact with consumer topic, and you certainly touched on the fact that the fourth fiscal quarter is not the biggest deal -- quarter in the world.

Certainly the customers, the retailer customers, are trying to rightsize trade inventory heading into the next soup season, which muddied the interpretation of that quarter even more.

But I'm just trying -- this really has to do with the packaged food industry in general.

It feels like folks are trying to manage how much they spend on any one visit.

And it seems like the bulk deals, the sort of 10-for-10 of whatever category we are talking about, are not working like they did in the past.

And, as you can see, people are really searching for a strategy here that -- and you are thinking about the responses at the consumer level going into the next year.

Any thoughts on that in general at the consumer level would be really helpful.

Thanks.

Sure, David.

There is a palpable change in consumer buying behavior that is unlike anything we have experienced certainly for a few decades.

They are being more surgical with their shopping.

They are managing their pantries differently.

They are going to professional shopping in the sense that mom is not sending the teenagers out to go pick up the groceries now.

She is looking at where the best deal is and sort of surgically buying.

Consumers, by and large, are not buying forward as much as they might have been before in terms of pantry management.

So what we are finding is we have to be more surgical as well in response to consumer needs.

But there are certain points in time where there is an ebb and flow to this.

I suspect that when we get into the back to school time, there will be multiple purchases as people build pantries, maybe not to the extent that they did before, but they will be looking for volume opportunities.

And there are other opportunities during the course of the year where multiples will be attractive to people.

We have to manage this by store, by customer, by event.

And so what you will see from us is a much more surgical trait activation plan focused on meeting consumer needs by customer, by season than we have had before.

So you just have to be -- as the consumer is getting more surgical in their behavior, manufacturers and customers have to be more surgical in how they create the offerings.

I will just mention we will be talking a little bit about that and our plans for the upcoming soup season at the Barclays Conference on Tuesday afternoon, which will be webcast, and we invite you to join us for that.

So after that commercial break, I will take our next question, please.

Vincent Andrews, Morgan Stanley.

Most of my questions have been answered.

I guess the maybe one thing left for me would just be, Doug, if I can ask you, you talked a little bit about inventory levels in the fourth quarter and what the trade was looking to do going into next soup season.

Broadly speaking, do you think there is any risk to another step down in inventory levels at retail?

You are talking about a sort of continued dramatic change in consumer purchasing behavior.

To what extent does the retailer need to respond to that?

I think we have got great visibility to inventories.

As you know, we do continuous replenishment for many of our customers, as well as help them manage their categories.

So we do not see any material change in inventory in the fourth quarter or going forward.

We think we are at pretty thin levels right now.

We are pleased with the way we are managing our working capital, and I think our customers are about where they need to be to be to be competitive.

So I don't see any material change there.

Ed Aaron, RBC Capital Markets.

As you are probably aware, one of your peers made a comment this week about soup weakness basically being a global phenomenon right now.

You have obviously talked a lot about the specific factors that contributed to ready-to-serve category weakness in the last season in the US.

But I just wanted to get your response to the assertion that consumers are maybe behaving similarly in terms of soup category consumption just around the world right now?

Well, actually we do not see that.

You just have to think of soup in a more complete and holistic perspective, and that includes at-home soup consumption.

And what we see in some markets around the world is people migrating to preparing more soup at home, but actually the number of soup eating is growing as it has grown over the last four years.

I think at our Analyst Day we talked about in the last four years in the US there have been 1 billion more servings than they were four years ago.

So we see soup consumption being very solid around the world.

However, more of it is at home, and we have to participate in that at-home occasion.

But this is really the sweet spot for consumers.

We just have to find a way to participate with them.

That is why our broth businesses, by and large, are up all around the world where we help the consumer prepare the soup.

So I don't have that concern.

Okay.

If I could just sneak in one quick follow-up.

It sounds like on the quarter there was a bit of a timing shift in terms of shipments with retailers managing inventories down that should have -- in turn have a benefit in the first fiscal quarter.

That seems like a percentage that you might be able to quantify for us.

I was hoping maybe you could give us a number around that for how much you would pick up in Q1 in terms of the timing of shipment change?

It is negligible because of the size of the quarter.

It is just not significant.

Okay.

Fair enough.

Thank you.

Diane Geissler, Credit Agricole Securities.

Doug, you and I had a conversation at your Analyst Day.

What did I say?

Uh-oh.

Basically you talked a little bit about the consumer and about the retailer.

I think your comments mainly was basically you did not expect a big change in consumer behavior because the consumer is still strapped.

But what you thought you might see is that the retailer would manage categories better, and maybe there would not be as much promotion in some of the simple meal categories that you compete against.

And I guess we've had a change with the nation's largest retailers.

Has that dialogue changed at all?

Is that still your --?

I think my point in that conversation was that our retail partners know how to compete and they will respond.

Retailers -- this is a mature industry -- retailers find a way to meet consumer needs.

The meltdown threw, I think, the whole industry off its game a little bit.

But our industry is built to evolve, to compete and to meet consumer needs.

And I think the point I was trying to make in that conversation is that I have a lot of confidence that the retailers will figure it out.

That they will -- I mean on balance, if they need to promote more and get to certain price points to meet consumer needs, they will do that.

On balance I think they will find a way to do that efficiently.

It will play out over the next year or two.

But your expectations would be that it would be maybe a little more rational this year than it was --?

I mean --

(multiple speakers) less reactionary is the way --

I think we are all a little better prepared to deal with what is in front of us than we were last year.

But I think you have to plan for the worst and hope for the best here, and so we are prepared for it to be very competitive.

Ed Aaron, RBC Capital Markets.

(multiple speakers) I don't know if you are willing to go there or not, but I figured I would at least ask you to address the speculation about possible acquisition that has been rumored in the press.

It does seem pretty consistent with the objectives that you laid out at your meeting in July.

So to the extent that I might get you to comment, I thought I would ask.

You are right.

We will not go there.

Speculation about what?

I'm not aware of any speculation.

I'm only -- you know, we do not comment on any external development activity.

Does anyone want to ask about beverages or baked snacks?

I have got a great story there.

Akshay Jagdale, KeyBanc Capital Markets.

I will ask about baked snacks.

The one question I had, I just wanted to put it into context.

Your sales growth guidance implies almost a 4.5 point year-over-year change in sales.

So in light of what you just said, can you talk about where that growth is going to come from from a divisional standpoint?

That is your opportunity to talk about baked snacks.

And then also I wanted to get a better sense of your optimism going into the soup season and your marketing plans.

So if you could talk about just the magnitude of change in your marketing spend and the difference in quality year over year, that would be very helpful.

If I think in terms of our -- we basically manage three core -- compete in three areas -- simple meals, baked snacks and healthy beverages.

The way we report that it is not as obvious.

But I think you can clearly expect our baked snacks performance to be above the average that we expect, as well as our healthy beverage business.

The way we report it is through our North America -- in our soups -- what is it?

Soups, Sauces and Beverages.

But our two core areas of healthy beverages and baked snacks will be above average, we expect.

And at this point those are now about 40% of our sales and earnings.

So it is beginning to get material in terms of our overall performance.

In terms of the quality of our marketing effort, I think the thing I would highlight as it relates to soup is, this will be the first time in my experience that we have a fully integrated one umbrella line campaign that will have substantial weight behind it across the full year for soup.

I believe the quality of this, from all of our testing suggests, that this is going to be our highest quality marketing effort that we have had in the decade that I have been here.

So the numbers are big, but the quality of the work is the best we have done.

It should start to materially impact our performance beginning in the first quarter.

And by the way, the quality of our marketing in healthy beverages is exceptionally strong.

In fact, I just saw the creative for the new work this morning.

And I expect another big year out of V8 as well.

Robert Moskow, Credit Suisse.

So my question was on marketing spending.

I have got a question from a client here.

I thought it was a good one.

It is that the marketing and selling line is about where it was -- it is actually down $100 million from where it was two years ago.

And I know a lot of money has shifted above the line to trade support or trade promo.

But you know as well as anyone, Doug, that advertising dollars when they go down even, if GRPs maybe are going up a little bit, it never ends up being a formula for success.

And I'm kind of -- I'm not quite clear on where advertising is going this year.

Is it just up in line with sales, or are you increasing it above the pace of sales growth this year?

Or do you have a need to rebalance it?

In the fullness of time, I expect it will be rebalanced.

It is actually up above the pace of sales this year as we go forward.

So you will see it up.

It is a good question.

I do believe the quality is up significantly, and I know the spending is up above our growth in sales.

So the net impact should be significantly up, and the effective reach of the campaign in soup is significantly improved versus where it was last year.

And we have seen some deflation in the cost as well in fiscal 2010.

And on top of that, we are using significantly more social media and other vehicles to reach consumers.

So we have really diversified our marketing plan in an exciting way as will be very evident starting on September 6.

Is it getting back to an inflation in fiscal 2011 for media rates?

No.

No, not yet?

Okay.

And then just one last thing, you said that the umbrella campaign is one of your favorites.

I'm glad you mentioned it.

I have seen umbrella campaigns come and go, and often they tend to be used because you want to make -- you want to save money.

You have three different products you want to advertise.

So you put them all together, and you hope that the umbrella impact helps all of them a little more.

What makes this campaign better than others that you have tried in the past?

I think you have tried them and then walked away and then tried them again.

What makes this one better?

In my experience we have only tried this one other time since I have been here in 10 years.

A couple of keys.

One is it is all soup, so we are not trying some umbrella campaign across different products.

It is really across our condensed and ready-to-serve portfolio.

And what we found is there is -- we have the beauty of the Campbell's trademark, which cuts across all of those soups very naturally.

So we have found a natural campaign that tests extremely well with consumers both for our specific brands of chunky, select harvest and our condensed soups, and it also works for the whole line better.

Terry Bivens, JPMorgan.

One thing we look at is the average pricing per unit on soup.

If you look at the 2009 period, it was well down from 2008.

So I'm trying to get a little more at pricing as we go into this year.

To hit your volume targets, how much higher do think you need to go and promotion or conversely particularly with ready-to-serve, are you happy with the price points, or is it possible we could actually get a list price decline?

We don't comment on pricing, but we are very comfortable we know the price points at which our products will move.

That is for condensed and ready-to-serve and all varieties of ready-to-serve.

And we are committed to hitting those price points in a timely, smart way with our customers, and each customer is a little different.

But we know exactly what we need to do from a price promotion perspective.

Okay.

But just a quick follow-up.

We hear from some retailers, I mean they are obviously concerned as well that soup has not done well in this environment.

Have any retailers come to you and proposed shrinking the shelf space?

Have you heard anything of that nature?

Quite honestly, no.

They view soup as being very integral to the center of their store concept.

And, as you know, we work with all the retailers very closely on this category.

All the discussion is about, how do I make it work better?

And they are actively enrolled in that program, and the response to our program for this coming year is as good as I have ever seen it.

So we have grown soup sales for seven years in a row.

This year it is down.

I expect it to be back up as do they, and I think we can do it in a win-win way with our retailers.

I will take one last one, and then we will wrap it up.

David Driscoll, Citi Investments.

You made a number of comments to a few other callers about gross margins.

Can you just quantify what you expect to be the range of changes plus 50 basis points, whatever for FY 11?

Yeah, I'm not going to give a basis point guidance number.

What we have said is that we don't expect much pricing.

We do expect to be able to offset the 2% to 3% inflation that we would anticipate with our enabler program.

And so I think the net of that is that you could expect some modest expansion at gross margin, but I do not want to get into putting a stake in the ground on a particular number.

I have got three other quick points or quick questions about the guidance.

What is embedded in the guidance as regards share repurchase?

What is the tax rate, and what is the interest expense?

Tax rate and interest expense, not much different from prior year.

You saw the interest rate go up pretty significantly in Q4.

That was due to a financing that we did, but we have a financing rolling off in February that we believe will neutralize all of that across the year.

So unless we see a big movement in rates somehow, we would not expect interest expense to be much different.

Would not expect tax rate for the full year to be much different.

And share repurchase program, we are still operating under a June 2008 authorization that was $1.2 billion.

We don't announce the precise amounts that we do, but that is the authority we are operating under.

But you cannot say like shares would be down 1% to 2% in FY 11?

Well, in FY 10 we actually ran at a little bit lower than the $400 million a year that that $1.2 billion would imply, largely because of the pension refunding that we did of about $260 million.

We don't have that big of a pension nut to deal with this year.

So we would probably come back more to the level that we were at prior year.

Final question.

Cash flow from operations, would that be similar to the past year, or would it be a bit better?

I don't -- you know, I don't have -- again, probably the most extraordinary unusual that we had in the cash flow last year was the $260 million that we put into pension.

We got about $100 million that has gone in at the beginning of this year.

We gave you our capital numbers in the call.

There is nothing else extraordinary out there that we have.

And with that, we will end our Q&A session.

Thank you, everyone, for participating in our fourth-quarter earnings webcast.

As a reminder, a replay of our call will be available beginning in about two hours.

If you are a reporter and have questions, please call Anthony Sanzio.

She is at 856-968-4390.

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

Have a nice Labor Day weekend, and now we will conclude our program.

You may disconnect.

The party is over.

Thank you.

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

You may now disconnect, and have a wonderful day.