金寶湯 (CPB) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Campbell Soup's first quarter 2011 earnings conference call.

(Operator Instructions).

And as a reminder, this conference call is being recorded.

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

Please begin.

Thank you, Mary.

Good morning, everyone.

Welcome to the Campbell Soup Company first quarter earnings webcast.

With me here in New Jersey today are Doug Conant, the President and CEO of Campbell's, Craig Owens, Senior Vice President, CFO and Chief Administrative Officer, and Anthony DiSilvestro, Senior Vice President of Finance.

Doug and Craig will provide the perspectives on our performance for the quarter, as well as our expectations 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 at investor.campbellsoupcompany.com.

Please keep in mind that 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.

Please refer to slide three in the presentation, or to our 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.

Our presentation today includes certain non-GAAP measures, as defined by SEC rules.

So we've provided a reconciliation of these measures to the most directly comparable GAAP measures, as an appendix to the slides that accompany our presentation.

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

Now, I give you our President and CEO, Doug Conant.

Thank you, Jennifer, and good morning.

Happy Thanksgiving.

This morning, we reported earnings per share of $0.82.

This result was consistent with the estimate we gave on November 10th, when we adjusted our annual guidance.

At our Analyst Day last summer, and in our annual report, we gave a consumer view of our entire portfolio.

We divided it into healthy beverages, baked snacks and simple meals.

We further divided simple meals into meal makers and meals.

Within that framework, we delivered a strong performance in healthy beverages this quarter.

We also delivered solid results at Pepperidge Farm, which comprises over half of our baked snacks business.

In addition, sales of condensed cooking soups, the largest component of meal makers, rose this quarter.

Growth in these businesses supported a 1 point quarterly gain in volume mix, an important improvement compared with minus 4 points in last year's first quarter.

With that as background, today I'll give you some perspective on the performance of our largest simple meals business, US Soup.

Then I'll focus on the softness in ready-to-serve soups and condensed eating soups, since they are the primary drivers behind the recent guidance change.

I'll also highlight the actions we're taking to improve our soup performance over the balance of the year.

As we discussed earlier in our earlier release, in the first quarter we improved our soup volume performance -- to improve our soup volume performance, we stepped up our promotional profile, launched an umbrella advertising campaign, and improved our in store merchandising.

We saw pockets of strength, most notably our condensed cooking soups, and our Healthy Request soup varieties, both of which delivered sales and volume increases in the quarter.

However, our promotions did not deliver the planned volume increases in our ready-to-serve soups or our condensed eating soups.

The backdrop for the limited market response to our promotional activity in these two soup segments during the quarter, reflects the difficult consumer environment, which as you know is pressuring volumes of other industry players.

It also would suggest an extraordinary competitive activity within the category.

This competitive activity affected both our ready-to-serve soups and our condensed eating soups, as competition very aggressively promoted ready-to-serve soups in many cases at prices on parity with our condensed varieties.

As reported earlier, we chose not to match some of this promotional activity.

In my view, it simply was and is, not in the best long term interest of the category.

As we look forward to the balance of the year, we expect the second quarter to be extremely competitive, potentially comparable to the first quarter.

While this will put pressure on our earnings again next quarter, we will maintain a strong promotional program to protect our leadership position with consumers, and to honor our customer commitments.

As we move into the second half of our fiscal year, in anticipation of commodity cost inflation and to improve profitability, we expect to adjust our promotional programs to improve price realization, and to begin rebalancing our marketing mix towards advertising and brand building.

In addition, we will step up our investment in innovation to drive category growth.

We'll cover more on these fronts at CAGNY in February.

Now, to expand on our performance in the quarter, and to review this year's profit delivery expectations, I'll turn you over to Craig Owens.

Good morning.

I'll take a few minutes to walk you through the first quarter results and segment highlights, and I'll follow with some comments on our fiscal 2011 earnings guidance.

For the quarter, we reported net sales of $2.172 billion, down 1% versus the first quarter of 2010.

Excluding the favorable impact of currency translation, organic net sales decreased 2%, primarily due to lower sales in our US Soup, Sauces and Beverages segment where we significantly increased promotional spending.

EBIT of $444 million for the quarter was down 7% versus a year ago, primarily due to the increased promotional spending, partially offset by productivity improvements in excess of cost inflation and by favorable mix.

The quarter's EPS declined 6% to $0.82.

For perspective, we were lapping a very strong quarter a year ago, in which adjusted EPS grew 14%.

In the first quarter, we reported net sales declined, including a decline of 3 points attributable to the impact of increased promotional spending primarily in North America.

This was partially offset by a 1 point increase from volume mix, and a 1 point increase from currency translation.

Organic net sales decreased 2%.

Our gross margin on slide ten, declined 70 basis points to 41.2% in the current quarter from 41.9% in the first quarter of 2010.

The change was primarily due to increased promotional spending, partially offset by productivity gains in excess of inflation, and by favorable mix.

Despite increased advertising and consumer promotion spending, marketing and selling expenses decreased 2% to $277 million.

The decline was primarily due to lower selling expenses, as we have reorganized our sales teams in the US to improve effectiveness and efficiency.

We also realized cost savings in marketing overhead for the period.

Administrative expenses increased $7 million to $140 million.

Three factors drove most of the change, a 40% increase in US pension expense, higher long-term incentive compensation costs, and currency.

We have focused on cost savings efforts in the areas of selling and general and administrative expense to mitigate the impact of inflation and compensation and benefits, and we are seeing positive results from these efforts.

EBIT declined 7% in the first quarter, due to the impact of higher promotional spending on sales and gross margin.

As Doug discussed, while higher promotional spending across many of our businesses drove higher volumes, it did not yield the planned volume lifts in our US ready-to-serve and condensed eating soup businesses.

Net interest expense for the quarter increased 11% or $3 million, driven by a higher mix of fixed rate debt in the portfolio, following the issuance last year of $400 million in long term debt.

Reflecting the higher interest expense, net earnings declined 8% for the quarter.

Diluted shares outstanding were reduced by 2% in the quarter, due to the favorable impact of our ongoing share repurchase program.

Our share repurchases moderated the impact of the change in net earnings, resulting in an earnings per share decline of 6%.

Now I'd like to comment on our segment results for the quarter.

In the US Soup, Sauces and Beverages segment, sales declined 3%, primarily due to a 5% decrease in US Soup sales.

The decrease in US Soup was attributable to lower price realization, driven by promotional depth and frequency.

Our healthy beverages business continues to perform extremely well, both volume and sales increased by double digits.

We posted gains in V8 Vegetable Juice, V8 Splash juice drinks, and in successful innovations including our new V8 V-Fusion plus Tea varieties.

The level of competitive activity in our sauce categories increased this quarter.

Sales of Prego pasta sauces declined slightly, as the -- as higher promotional spending was partly offset by volume gains, and sales of our Pace Mexican sauce business declined.

Operating earnings declined 11% to $295 million this quarter, from $331 million a year ago.

The reduction was primarily due to the increased promotional spending, partly offset by supply chain productivity gains in excess of cost inflation.

US Soup sales for the quarter declined 5%, condensed soup sales declined 1%, ready-to-serve was down 13%, and broth sales fell 2%.

As we mentioned earlier, the two segments that comprised our simple meals portfolio, our meal makers, those products which are used as ingredients in a meal and meals, those products which are simply heated and consumed.

Within meal makers, we had strong performance in sales of condensed cooking varieties which rose 7%, as the business responded to our marketing efforts.

While our broth sales were down slightly, we expect improved performance in this business during the holiday season.

Our issue in meals has been in our eating soup varieties, both ready-to-serve and condensed.

We increased our promotional spending, yet did not achieve the planned levels of volume gain.

Our promotional spending in the ready-to-serve segment and even steeper discounting by competition, lowered sales in our condensed business as the price gaps between ready-to-serve and condensed narrowed.

Looking ahead, we expect to spend competitively through the second quarter, and then begin to shift our marketing mix from trade promotions to more advertising and equity building activities for the second half.

We anticipate that this shift will improve our profitability in the back half, and help offset an anticipated increase in cost inflation.

On slide 16, there's a look at category performance in the United States during the latest 52 weeks, based on IRI panel data and Campbell internal estimates.

Economic conditions remain very challenging, making it more difficult for the entire food industry to grow sales.

In the soup category specifically, increased promotional spending by Campbell and by other branded players has not succeeded in growing the overall category, either for the quarter or for the year.

The overall category declined 6.8% in the past 52 weeks.

Our sales declined 7.7%.

Private label dollar sales also declined over the 52 week period.

Private label's market share in soup grew in the past 52 weeks, yet at only 12.5%, its share in soup significantly trails its share in most other mature food categories.

Campbell's dollar share in wet soup for the past 52 weeks was 62.4%.

The decline in our dollar share was driven by ready-to-serve soup and condensed eating soups.

From a volume share perspective, from a volume share perspective, our increased promotional activity kept our market share steady this past year.

In Baking and Snacking, organic sales were comparable to a year ago.

Volume sales in both Pepperidge Farm and Arnott's were offset by increased promotional spending, net of pricing.

In Pepperidge Farm, volumes rose grew to the strong growth in Goldfish snack crackers, gains in Baked Naturals, and the successful expansion of the Deli Flats line.

Sales in our Arnott's business in Australia were comparable to a year ago, as continued strong gains in Shapes and Vita-Wheat Savory crackers were offset by declines in chocolate and other sweet biscuit products.

Earnings for the segment were flat versus prior year.

Currency gains and growth in Pepperidge Farm were offset by lower earnings at Arnott's, as we lapped double-digit growth at Arnott's in the year-ago period.

Organic sales in International Soup, Sauces and Beverages were comparable to a year ago.

Gains in Europe driven by Germany, and gains in the Asia Pacific region driven by volume improvement in the Australia soup business and in Japan, were offset by sales reductions in Latin America.

Operating earnings for the segment rose 16%, reflecting strong earnings growth in Europe.

Continued weakness in the food service sector led to organic sales and earnings declines of 5% and 12% respectively, in our North America food service segment.

Moving now to cash flow and the balance sheet on slide 21.

Cash flow from operations was a use of $29 million, compared to a use of $36 million a year ago.

The impact of lower pension contributions in the current year was offset by higher working capital requirements and lower earnings.

Capital expenditures of $27 million declined from $44 million a year ago.

In the first quarter, we repurchased 4 million shares at a total cost of $156 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 was $2.789 billion, a decrease of $40 million compared with a year ago.

In our news release on November 10th, we revised our 2011 guidance, and we are confirming that guidance today.

For the year, and reflecting a 1 point favorable impact from currency translation, we expect growth in net sales of 1% to 3%, adjusted earnings before interest and taxes comparable to the prior year, and earnings per share growth of 2% to 4% from the prior year adjusted base of $2.47.

As Doug mentioned, we'll continue to spend at competitive levels in the second quarter, putting downward pressure on our margins which will likely result in a quarterly earnings decline and first half results that will be directionally similar to the first quarter.

We expect earnings growth in the back half of the year as we improve price realization, achieve further productivity gains from our supply chain, maintain our good expense management, continue to realize the earnings per share benefit of using our free cash flow to repurchase shares.

Our full-year guidance is based on our assumption that achieving improved price realization will improve sales growth in the second half.

With that, I'll turn it back to Jennifer for the question-and-answer session.

Thank you.

Thanks, Craig.

At this time, Mary, we're going to conduct our Q&A session.

I'd like to request that our callers limit themselves to a single question, so that we may respond to more people who have questions in the queue.

However, we would like you to stay on the line while we answer your questions, just in case clarifications are needed.

Thank you.

(Operator Instructions).

Our first question comes from Vincent Andrews from Morgan Stanley.

Hello, Vincent.

I'm sorry, our first question comes from Andrew Lazar from Barclays Capital.

Hello, Andrew.

Good morning.

I guess, Doug, when you arrived at Campbell's ten years ago or so, you took certainly a fresh look at the business, fresh eyes, and made some tough decisions, rebased the earnings level to increase your investments in R&D, and marketing.

And a lot of those investments really did pay off and you saw much better soup growth, and a much better track record there in the years that followed.

I'm curious if you were to take a similar look at the business today, it's a little bit harder admittedly, but kind of with fresh eyes, almost as if you were again an incoming CEO.

I realize Denise will, of course, have her say on all this in due course.

But if you were an incoming CEO, what would be the two or three key things that you would point out today, to the investment community that might give us some perspective on it?

And you want that answer in 25 words or less, Andrew?

(Laughter).

Well, maybe the one or two key things, then.

Well, sure.

The first thing I'd observe is, wow, what a great category, and what a great leadership position we have.

We're in nine out of ten households in the United States, in US Soup.

We have on average, anywhere from eight to ten cans in the pantry.

We are incredibly relevant to today's consumer.

So we have a high penetration, and we have a real presence in the fabric of American families in the US Soup business.

Our challenge I think, is to deal with some new -- some paradigm shifting going on, where consumers are rethinking the way they purchase their food and beverage products.

And if I was to look at it, I'd say clearly, the increased promotional activity that was accelerated by some of the competitive -- some of the competition just hasn't helped the category.

My experience is when we innovate the category benefits, and we win.

When we innovated, earlier in my tenure, with the first microwavable soups, Soup at Hand was the product of the year in the food industry, and the category grew.

When we innovated with iQ Maximizer at shelf, the category grew.

When we innovated in ready-to-serve soups with a whole new, fresh look at our Select Harvest franchise targeted at women, Select Harvest was the product of the year in the food industry, and the category grew.

I think our challenge is that we didn't have adequate innovation to attract consumers in a compelling way to the category this year, and price alone is just not enough.

The other thing I think we need to do is get back to a better balance, between our promotional spending and our brand building activity.

We're competing with a lot of simple meal alternatives.

We have to have a meaningful presence there.

We're in the pantry.

We've got to get out of the pantry, and we have to increase usage.

We're not going to do that through price promotion that puts more in the pantry.

We've got to pull it out.

And so I think the focus on brand building and relevant innovation are the two keys for the US Soup business.

That having been said, I feel great about the platforms we've built in our healthy beverage portfolio and in our baked snacks portfolio.

As I shared in July, I think we arguably have the best performance in the world in baked snacks over the last five years, and we have great innovation there.

And we arguably have the best performance in healthy beverages in the last five years, particularly in vegetable based beverages.

We have great innovation there.

So we have got to innovate and brand build in soup, the way we have in the past, and the way we're doing in the other categories.

And that in 25 words or less is the challenge -- or more, is the [trend].

Right, no, that's helpful.

I appreciate the perspective.

And I guess maybe some had perhaps expected hopefully that some of the restage on condensed this year, and some of the things you were doing would have been maybe enough of a step-up, although not where you ultimately wanted to get to, to have a bit of a better soup performance coming into this year.

Yes.

Interestingly, Andrew, it's too early to call on the condensed soup relaunch.

We had terrific response on half of our portfolio in condensed cooking soups.

Where we got hurt, was in condensed eating soups with aggressive price competition from other players.

Price competition, that I honestly believe is not sustainable.

And we just chose not to compete at that level, and we'll slog through that over the next quarter or two.

Thanks.

I appreciate your thoughts.

Yes.

Okay.

Mary, our next question, please?

Our next question comes from Vincent Andrews from Morgan Stanley.

Hi, Vincent.

Glad we got you this --

I know, sorry about the phone difficulties.

I guess my one question would be --

You're going to blame the phone?

(Laughter).

Doug, you talked about eight to ten cans being in the pantry.

If you look back over time, is that eight to ten a consistent number that's been in there, or has that number gone up or down, and is there a risk of that number going to go from eight to ten, to six to eight, or four to six?

Well, it's roughly steady.

But I'd say if I had to -- our measurement in this area is not -- it's hard to measure.

But if I was to say anything, there's been a tick up in this period over the last 12 months.

And so it's not an issue per se of people putting soup in the -- our soup in the pantry.

Our challenge is getting it out of the pantry.

Which is why we chose not to be as competitive, as we could have been in our promotional spending.

We believe in the long-term benefit of brand building, and we're going to focus on that as we go forward.

Do you think that there's any risk that the amount of spending that you need to put in place, in order to get the soup out of the cupboard is in excess of what you're sort of modeling today?

We've got to rethink that, given the environment as it's changing.

But I think we have -- I think there was some good work done by someone from your crowd, that talked about our share of spending.

And I think that's a -- we've got a commanding presence there.

I think we can find our way through that.

But we clearly have to have better balance between our trade spend and our consumer spend.

Okay.

Thank you very much.

I'll pass it along.

Okay.

Thanks, Vincent.

Next question, please?

Our next question comes from Eric Katzman from Deutsche Bank.

Hi, Eric.

Hi.

Good morning, everybody.

Happy holidays, Thanksgiving.

Glad to know your phone's working.

Yes, at least that's working.

(Laughter).

I guess the question, maybe a bit of a follow-up on Andrew's earlier point, in terms of innovation success.

I guess, Doug, I agree with you, that it isn't necessarily always our focus, but you have been quite strong in biscuits and beverages, whereas the innovation in soup of late has lagged, and hurt -- obviously hurt the category.

In fact, it seems like the category decline actually accelerated in the last quarter, versus the trailing 52 week data that you gave before.

But in any case, the question is like, is it the nature of the categories in biscuits and beverages, that's it's more of an impulse purchase, and that's making the innovation there easier or more successful versus the soup, which is just I guess inherently less impulse oriented or less convenient oriented, and that's the challenge?

Well, a couple things, Eric.

First of all, I think the reason you see the deterioration in category performance is not necessarily due to innovation.

It's simply due to some very aggressive price promotion and sales deflation.

I think on a volume basis, it's holding up just fine.

But nonetheless, the sales dollars are down.

In terms of -- I believe every category has it's own rhythm.

And we focused heavily on renovation here within our US Soup portfolio this year.

We were very focused on getting our product quality up, our sodium levels down.

As you know, we have Front-of-Pack labeling coming in the next few years.

And we wanted to make sure that our portfolio was very prepared for Front-of-Pack labeling in a very positive way.

We've done that.

But what it meant was we did a lot of renovation, and not a lot of innovation.

And now other peers have also talked about that, and there's a recognition in today's environment, you need to create more excitement in your category.

We just didn't do that in soup this year.

But I would go back to, we have done it in prior years, and we have done it in other categories.

So our challenge now is to rethink how we compete, and take a fresh look as Andrew talked about, given the reality that the consumer is changing their shopping behavior, and we've got to come up with creative solutions here.

Because some of the ways we've approached it in the past, are not necessarily working as we would have expected.

And I guess as a follow-up, thank you for that.

But as a follow-up, I mean, do you see that as being a -- either a kind of an SG&A, or a capital expenditure as a pretty high cost?

I mean when, again to Andrew's point, when you came in a decade or so ago, the Company had basically starved itself.

And literally, you had to upgrade the cooking methodology for condensed.

And so are we talking about, given the change in the consumer, a need to really -- I don't know -- aggressively rework the ingredients, or the how you cook it?

Or -- I mean, I'm no expert, but just kind of how should we think about that?

Well, Eric, I personally believe we've got to take a fresh look.

So I don't want to close off any options.

But that having been said, we have a very clear line of sight to how we can improve the processing of our soup.

We've talked about it before in terms of our --

Common soup platform.

Our common soup platform, and we have a line of sight as to how we can -- it may require some investment which we haven't defined yet -- fully yet, but where we can deliver soup at a higher quality and a lower cost.

So we have a whole body of work going on there.

But in terms of innovation, we have the capacity, and we have the funds necessary to step up our game in innovation and soup.

There's nothing that we can't manage corporately.

But we do have to rethink that, and we have to keep an open mind, and we're going to do that as we go through this year.

I think as we get deeper into the second quarter, and move towards CAGNY, you'll get -- we'll be a little more clear on that.

Okay.

Thank you.

I'll pass it on.

Thanks, Eric.

Next question, please?

Our next question comes from Alexia Howard from Sanford Bernstein.

Good morning, everyone.

Good morning, Alexia.

(Multiple speakers).

Hi.

Just sticking with the innovation theme here, I'm curious about the V8 Soup platform.

It feels as though it went through it's rebranding after Select Gold transitioning to V8 Soup, but it's been left with relatively few SKUs in there.

I don't think much marketing has gone behind that brand.

Maybe there's still the limitations that you can't really put bits into it, there's not much garnish in there.

Could you just give us some idea about whether there is -- there are -- could there be major expansion plans in that area, and if so, what holds you back?

Well, there's nothing really holding us back.

There is some technology, where we can't get full pieces of vegetables and meat into the product, given the constraints of the technology, and the FDA regulatory requirements.

But basically, US consumers like big chunks of meat and vegetables in their soups, which this technology doesn't lend itself to.

Now, in France, Belgium and several other countries where we compete, the dominant form is that aseptic package that we sell the V8 Soups in.

And in those countries the -- that is a preferred way to eat soup.

We're positioned now to bring that technology to this country and as we get further along with the evolution of the technology, and can put bigger pieces of garnish through it, I think we're going to have an opportunity there.

The important thing for us was to be the first mover in this country, in this technology in soup, and to be in a position to advance it as soon as the technology evolved far enough.

I think there's opportunity there.

It won't change the fundamental trend in the category, but it's a good niche opportunity, and over time it could become bigger.

I think if you view it more broadly too, we still feel like -- we still feel like there's some opportunity in premium soup.

It may not be all in the aseptic form, but we think we've got some opportunities out there in premium soup.

We've got in our food service business, we're having some success with volume growth at the premium end of the category.

And we think there may be some other ideas out there around the premium end of the category, that would go after that same consumer use occasion.

Great.

Thank you very much.

I'll pass it on.

And thanks, Craig, for your answer.

Our next question, please?

Our next question comes from David Palmer from UBS.

Thanks.

Question on Healthy Request and your mix of your soups.

You say in the release, the Healthy Request varieties had a 9% sales gain across condensed and ready-to-serve.

My question is what is the mix of Healthy Request of each of the categories, ready-to-serve and condensed?

How rapidly do you anticipate this mix evolving?

And separately, I guess relatedly, do you believe the sodium concerns are becoming even more of an overarching demand driver for soup lately, or perhaps this is just a result of you converting your soups and the facings of your soups to Healthy Request?

Thanks.

Sure, David.

I appreciate the question.

I can't break out for you Healthy Request by segment.

What I can say is it's had a positive impact across all the segments.

And I think we've addressed the sodium issue in a very satisfactory way at this point for today, and also for tomorrow as we prepare for Front-of-Pack labeling.

We're always going to have to be alert to dealing with that issue, but by and large, we think we've addressed it.

I think the challenge for us now is to create some taste adventure, and leverage some of our other benefits as we continue to manage the sodium profile.

But we're not as concerned with it today as we were before.

We had to position in our portfolio to be in the right place, when we get to Front-of-Pack labeling, and we've done that.

And so we've taken care of the long-term.

And now we've got to focus on innovation in the near term, which goes beyond just the elimination of negatives, and starts to celebrate the wonderful positives that we can do with soup.

So I think that's going to be our focus on innovation.

On Healthy Request, by the way, is a good example, if we have a clear and compelling platform that the consumer understands, they buy soup in a can, and they buy it at a fast rate.

Same thing's true with our cooking soups.

So we're not necessarily constrained by the can.

If we have the right proposition, we can grow that business.

And our challenge on our base business is to find that right proposition, while we push off into some new areas.

I guess what I'm getting at on that whole thing is, if this is being done the right way in your mind, as that mix increases, so might this stability and then ultimately the growth of the category.

However --

Absolutely.

That will happen.

And by the way, we sell it at a higher price with a better margin, and it's getting increasingly more important in our portfolio.

So it tells us we're on the right path.

Not only that, but we've actually lowered the sodium further on those Healthy Request varieties, and the consumer is, along with improved flavor technology, the consumer is buying the proposition.

So in the fullness of time, I think we're well positioned there.

Thanks, Doug.

Thanks, David.

Our next question, please?

Our next question comes from Terry Bivens from JPMorgan.

Good morning, everyone.

Hi, Terry.

Doug, let me come at it at slightly a different way here.

You guys have had some pretty good innovation over the years.

But if you look at innovation like, say microwaveables, it seems in a bad -- in a weak economy to have really kind of hurt you.

I know the take-away there, you and I have talked about it, hasn't been good.

And you've got General Mills, they're pretty smart marketers, ditto Sam Reed's group.

I guess my question, I hear this a lot from folks, is is the answer that we simply have to wait for the economy to turn, that soup is just innately going to struggle during a downturn?

I mean -- that's my worry.

That's a well founded worry, Terry.

By the way, whoever else is on the phone, I'd appreciate it, if the next question could go to Craig Owens.

(Laughter).

But --

We've got to keep you on the spot until you retire.

I'm sorry.

That is a concern, because we have a lot of pantry inventory, people are shopping the pantry.

There's less incentive to go out and buy more soup.

And we do have to navigate through that paradigm.

There's no evidence that we can't navigate through it, other than we had a tough quarter, where there was extraordinary price competition that we chose not to match.

So we're going to have to see how this plays out.

Terry, we can manage through this.

We've been down this road, not quite the same way before.

When I started our soup business was -- I want to say about a $1.7 billion in sales.

And yes, it's been tough, but up till -- it's over -- pushing $2.2 billion now.

And with good ROIC and good margins, and we'll find our way through it.

We do have to step into the innovation, work the brand building.

It's not easy.

But if anybody can do it, we can do it.

Okay.

Thanks very much, Doug.

I'll pass it along.

Thanks, Terry.

Next question, please?

Our next question comes from Chris Growe from Stifel Nicolaus.

Hi, good morning.

Good morning, Chris.

Hi, Chris.

Doug, we're not going to let you off that easy.

(Laughter).

I thought you should also know I'm wearing my parka today.

So we're hoping for some cold weather too so.

Well, soup also sells in Phoenix and Tampa.

I've heard that.

I've heard that.

My question for you is just in relation to trade promotion, and maybe there's two parts to it, maybe one.

But my point just is that, you made some pretty clear comments that you're looking for price realization now, in the second half of the year.

Is that based on a change in your input cost outlook, or simply just a change in the way you want to attack kind of the advertising versus promotional balance?

Well, it's a little of both.

But the -- and this is a question Craig can weigh in on.

But I'll start the answer.

Clearly, the promotional track is not helping the category.

And I guarantee you, it's not helping the other competitors.

I believe when you heard the Tree House earnings announcement, they weren't too excited about soup margins either.

And so I expect we're going to navigate through this thing, and the category will pursue a more rational approach to pricing and margin management.

But I've got to tell you, if it doesn't, we're going to find the right balance.

But we will have to continue to compete, because we're in this for the long term.

And so we're going to have to play this quarter by quarter, and manage it smartly.

I expect it will be more rational in the second half, than it's been in the first half.

There will be pressure on margins.

We are expecting input costs to go up.

And I expect everyone's going to have to find their way through this.

Craig, would you?

Well, just to expand a little bit on the inflation piece of the question, we would expect input cost, commodity cost to be somewhat higher in the second half.

Not hugely so, and our overall inflation profile for the full-year won't be a lot different than it was in the quarter, which was plus 3%.

We would expect to be in the 2% to 3% range on total cost of goods inflation for the quarter.

But with a higher contribution from input cost in the second half, and a somewhat stronger enabler program, and other cost savings in the second half.

We do, however, recognize just as everybody sees, that the general trend in commodity cost is upward.

And we think it's important that we stay up with that, and prepare ourselves for the second -- for next -- not only the second half of this year, but for next year.

And so that is part of what's driving our thinking around price realization.

Okay.

We worked hard to build -- responsibly build good, quality margins here, top quartile in the S&P food group, and with good return on invested capital, and we're going to work hard to maintain that.

But we also have to compete, and that's the balance we're going to work through over the next three quarters.

I just want to make sure I was clear, that on the better balance between trade and advertising, is that accomplished by reducing advertising in the second half of the year?

I guess I already thought were you balanced on those two items.

We were more balanced until the first quarter.

And in the first quarter, our trade spending was up, as you can tell.

And although it didn't go up as much as some of the competition's trade spending went up.

So I expect the trade spending part of that will come back to us in the second half.

Okay.

Thank you.

Our next question, please?

Our next question comes from Diane Geissler from Credit Agricole Securities.

Good morning.

Good morning, Diane.

I apologize in advance, if you already covered this.

I may have missed it.

Could you just comment on what were the volume trends in US Soup versus take-away?

We didn't comment -- I don't recall that we commented on the volume trends.

They're better than the consumer take-away numbers.

I don't want to get into precedent setting here, but they were better than the dollar take-away.

Okay.

Is that a concern for you, as you head into the second quarter and into the back half of the year, that maybe you have a little bit -- a little bit of an inventory build?

Not particularly.

I wish we had a problem with inventory build.

That means that our sales would have been higher.

Our volume was still down for the quarter in soup, I believe.

I'm looking at -- yes, so our volume was still down, but -- modestly.

So we are -- we came into the year focusing on delivering better volume trends.

And we did improve the trend line there, but I think -- in my opinion, it's very manageable at this point.

In the quarter, most of the sales decline Doug mentioned, US Soup sales down 5%, most of that is driven by the increased promotional spending.

And related to inventory, we haven't seen any material change in retailer inventory levels.

Okay.

I was thinking pantry.

But we do have visibility to retail -- we manage many of the retailer's inventory levels, and we haven't seen any change there.

Okay.

Terrific.

Thank you for the commentary.

Thanks, Anthony for adding on to that.

Next question, please.

Our next question comes from Akshay Jagdale from KeyBanc.

Good morning.

Thanks for taking the question.

I wanted to focus on the soup performance relative to simple meals.

You haven't talked about that too much.

Can you just update on how you think you're doing relative to simple meals, if you're losing share there?

You talked about trying to improve velocity, in terms of the number of soups you're selling every year.

But I'm trying to figure out whether that's a problem relative to simple meals, or it's just a problem within the category itself?

Well, I don't have good data for simple meals that's comparable to the data we're sharing with you.

But overall, what I can say is last year at this -- as we went into the season, we saw very aggressive pricing in other simple meals that we believe affected our volume performance.

We started to address that, and actually made great headway through August, September.

What we see this year is -- I mean since October, we see the other simple meal activity heating up on a price basis, as is indicated by all the food companies earnings announcements.

And so, we're -- it's a dog fight again, in terms of price competitiveness within the category.

I don't have data from other simple meals at this point to talk to you about the outlook for the season.

We'll have a better feeling for that, as we go through the second quarter.

But it's -- there's no evidence that things have abated there.

Okay.

And just the way I read the progression of things in soup, I just wanted to know if I'm reading it correctly.

Last year or a few months ago, you were talking about price as being the issue, and bringing down the price points within soup.

That seems to have been done now.

Now you're talking about holding back on that a bit.

What's going to be the next trigger?

I mean, you also today talked a little bit about the possibility of increasing the total dollars spent on marketing including promotions.

But if this doesn't work, which is if the industry, the soup industry's not as rational in the back half as you expect it may be, what's the next thing that you think will need to change here for things to get better?

Well, we're always trying to find the right balance between price and value addition.

We call it total preferred value here.

Some of the benefits for the price offered.

And every year, it's a bit of a poker game.

And what we learned in the first quarter is that price competition per se, does not necessarily help the category.

And I expect the category over time will become a little more rational, and we will see more brand-building, and -- we'll see a moderated level of price competition.

I don't believe -- we're not intending to suggest anywhere that total spending will go up in the second half.

We expect our trade promotion spending to come down, and we expect to maintain a pretty good, solid brand-building profile.

And we expect to start to bring more innovation to the category.

We think that's a better model for the category.

It meets consumer needs in a more complete way.

But we have to see how the game is played by other simple meals and by soup.

What I can tell you, is we will find our way through this.

We have before, and we will again.

Okay.

Thanks.

I'll pass it along.

Thanks, Akshay.

Next question, please?

Our next question comes from Robert Moskow from Credit Suisse.

Hi, Doug.

I wanted to know if you remembered several years ago when you did rebase margins, and then margins starting ticking positive, I think you said something about operating margins of 17% to 18% was an appropriate range for the Company.

And fiscal 2010 ended up at around 17.7.

Do I have my numbers right, and do you think that that ended up being the right level of margins for the Company, or do they need to go lower than that?

You have exactly the right numbers.

You did your homework, Rob, very good.

We have a new reality that we're competing with today.

Back when we talked about this, I don't know, could be several years ago, we had some competitors that were pushing 20 to 24 kind of EBIT margin levels.

In today's environment -- and I thought 17 to 18 for a market leader, with our category -- our portfolio, 17 to 18 felt about right.

We think that is about right.

But we have to manage through it, given today's new reality where the competitive fray is intense.

And as you see, all of our peer group is under margin pressure.

So we're going to have to feel our way through it.

But you have the right margins.

It's 17.7, and our goal was to be between 17 and 18, top quartile, in a sustainable way.

We've climbed that hill, and we're there now.

And we're going to try to maintain it but we're going to have to see what happens competitively.

Thank you.

Thanks, Rob.

Next question, please?

Our next question comes from Robert Dickerson from Consumer Edge Research.

Yes, I just had a question around the balance sheet and cash flow.

Obviously, the top line's a little bit weak.

There's a lot of competition in the category, sauce and soup.

I feel I've kind of asked this question before but, I mean, you're still -- you still have a pretty solid balance sheet.

Your free cash flow yield's still around 7%.

I'm just curious, at what point would you expect a little bit more activity in buying back shares, or allocating the free cash flow that you're generating to just try to spur growth?

And I'm not sure if you're trying to save it to put back into more CapEx or what, or -- excuse me.

If you could just comment on that a little bit?

You're right.

We do have a strong balance sheet.

We've got terrific cash flow.

We've always said that the best investment in our business, is one that we can put into organic growth.

We've got, as Doug commented, we've got terrific margins.

We've got terrific return on invested capital.

So anything that we can do to leverage core businesses, and reinvest in those businesses -- some examples over the last couple years would be investment in additional Goldfish capacity in our Pepperidge Farm business, additional capacity in our Arnott's business in Australia, all of those kinds of investments have terrific return on them.

As we move down from investment in core business, we have said that we would like to be, and are more attentive to opportunities around potential acquisitions of businesses that we think could be value accretive.

It's not a very target-rich environment.

You haven't seen us act on one since the relatively small acquisition of Ecce Panis.

But that would still be a place that we would be looking.

We've had an active share repurchase program.

As you know, probably know, most of you know, we've been working against a $1.2 billion program that the Board approved in 2008, with a three year time frame around it.

And we have a continuing program of neutralizing compensation-based equity issues.

And then the final thing that we think about is around dividend.

You saw us just announce a dividend increase coming out of this last Board meeting of 5%.

So I think we're in agreement with you about the strength of the balance sheet.

And we look at -- and the strength of our cash flows, and that's sort of the order of priority, as we think about where we've got opportunities and how best to deploy that cash.

Okay.

Great.

Thanks a lot.

Thanks, next question, please.

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

Good morning.

Just a question on where you think retailers stand, in terms of their view of the category.

And I guess I had the perception that last year maybe the promoted price points in soup weren't where they should have been or could have been.

And -- but also that there was some feedback, that as the leader in the category, that Campbell's needed to spend more in advertising and get more people -- pull more people into the category.

And so you came to this -- came to the market with a plan, where you've got umbrella advertising, and you've got lower price points, more competitive price points than you had the year before.

And yet we end up in the situation, where the decision was made to promote even more.

So is there just a disconnect, between the way you're looking at the category, versus the way that retailers are looking at it?

All I can say is we're lined -- we're lined up with the retailers for a very strong profile over the next quarter or two.

And I think it's going to settle in in a more positive place.

But our brand building didn't start until September 7th.

And that's when the advertising started, and we're just getting warmed up on the advertising front.

We believe it's going to take time to establish that brand building profile with the umbrella campaign.

And we're going to see it through.

The trade promotion in the first quarter was the wild card.

We didn't get the lifts, we would normally have expected.

And we have to go back to the drawing board on that.

Part of the issue was that competitive activity was even more intense, and we have to sort through that as well.

I guess my point is, without talking about getting into the competitive details, we believe we can find our way through it.

We have the margin structure.

We have the capabilities to compete in the category.

We're just going to have to feel our way through it.

We obviously have to lead the category to higher ground, and we intend to do that over the next three quarters.

But we're going to have to feel our way through it.

I don't think there's any fundamental disconnect between us and the retailer.

There's a lot made of sort of the push and shove between manufacturers and retailers.

Right now I think what you're seeing across the whole food industry, is that it's a really difficult environment.

You're seeing negative same store sales out of probably most retailers.

You're seeing down spending across all categories in the grocery store, both dollars and units have been down over the last several periods.

And I think we're all looking for ways to sort of reinvigorate the consumer.

And my feeling is, being a little bit distant from the direct contact with the retailer, but that we're all looking for ways to get the consumer moving again.

I guess I just had the perception that you responded to some of the -- Campbell's responded to some of the observations that were done in peer reviews, or in category reviews.

And what you've done, is basically undermined by the level of promotion that was allowed to occur in October.

And I guess that's the part that I'm having trouble with.

I think the challenge is, well, we've got to play the hand we have.

And we're going to continue the brand building which we know takes time.

And the other lesson learned I would say, is that renovation was insufficient to drive short-term sales performance.

We were making changes and we are evolving our US condensed soup portfolio to be well positioned, when we get the Front-of-Pack labeling in the next few years, to get our health profile right.

We've done all that.

But it was -- we had insufficient innovation on top of that, to get consumer interest.

So we've got to step up the innovation, while we continue to do all this renovation work, and we'll do that.

And we'll profile more of that when we get to CAGNY.

Okay.

Thank you.

Next question, please?

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

Thanks for taking the question.

Good morning.

Just trying to better understand kind of the cadence of the numbers, as you move through the year here.

You talked about expectations for improved performance in the back half.

But I'm wondering why you might not start to see some of the improvement in Q2?

If you think back to last year, you saw some improvement the quarter after you course corrected so to speak, after you had your weak quarter.

And you had such an easy comp in the second quarter, I'm trying to understand why the improvement might not come a little bit sooner than you seem to be expecting.

And then as a quick follow-up to that, what gives you the confidence that you can get better price realization in the back half of the year, when you think about the current competitive environment?

Good questions.

Obviously we're giving you -- trying to give you a feel for our quarterly flow of business.

But we don't give quarterly guidance.

And it could -- we could do better in the second quarter.

These are unusual times as reported by the entire peer group, and we're feeling our way through it.

We have enough evidence to suggest that we can do better on the price realization front in the back half.

We now know in today's environment what's working from a trade promotion perspective, and what's not.

And that's changed a bit, since even a year ago.

So I think we can -- we believe we can refine our trade promotion plans in an intelligent way, deal with today's reality, and be more effective and more efficient in the back half.

I think too, Ed, if you think about where the big months are in the soup season, we've made customer commitments that run through the back end of the first quarter, and into the -- well into the second quarter, which is sort of the heart of the increase in sales, on a seasonal basis.

And so we've got pretty good visibility to where we'll be promotionally there.

If you remember last year, the change in the formula a little bit came between, again, second quarter and third quarter, not between first and second.

Fair enough.

Thank you.

Thanks, Ed.

Next question, please?

Our next question comes from Eric Serotta from Wells Fargo.

Thanks for taking the question and happy holidays.

Thanks, Eric.

Same to you, Eric.

Just looking at the -- your comments, in terms of the back half of the year.

For the first half of the year obviously you were promoting heavily, and you plan to for the second quarter, and weren't seeing the lifts that you liked.

What gives you I guess, the confidence that in the second half as you pull back on some of that promotional activity, tilt the portfolio more towards -- or tilt the marketing mix more toward advertising, and actually take promoted price points up, that you are going to see a positive volume and sales improvement?

Well, we have -- Eric, I would just say we have some insights into what's working right now and what's not.

And we see pockets where we clearly overspent, and didn't get the return.

So there are some low fruit opportunities.

We're also working with our retailers who are also looking to bring more profitability into the category.

And I just -- it's informed judgment that we can do better, but we have to wait and see.

I think the other point is looking at the portfolio beyond soup, we are expecting improved top line performance in some of our other segments.

Yes.

That's a great point, because we do have very robust plans in baked snacks and healthy beverages.

Also, our meal maker business with condensed cooking soups is doing well.

And our Healthy Request soup is doing well.

So we're dealing with a relatively small part of our earnings pool that is the issue for us.

And clearly, it's important, but we believe we have enough buoyancy in the rest of the portfolio that we can navigate this.

Okay.

A quick follow-up question on innovation.

It came up several times, the importance of innovation, and your renovation not being enough this year.

I'm wondering, is there something about the soup category that you feel you've kind of tapped out on the innovation potential?

You had the big moves in sodium reduction.

I'm sure there's more of that to come.

But could you perhaps preview a bit for us what you're going to talk about at CAGNY, or give us some sort of a framework to think of the innovation that's coming in the soup category?

Well, what I would share with you, and we will cover more of this at CAGNY, is that we do have ideas in the pipeline, that have been well-developed, and we are preparing to move to market.

Typically, in food, there are five benefit areas.

You have taste, nutrition, convenience, variety and value.

And we've really leaned in hard on nutrition and convenience, as two key foundational areas that needed to be attended to with the soup business over the last decade.

And we've put ourselves in a solid position there.

Now we have to lean a little bit harder on the taste, variety and value dimensions, and we have ideas there.

So those will be coming with us to CAGNY.

Okay.

I'll pass it on.

Thanks.

Thank you, Eric.

And we'll take our final question, please, Mary.

Our final question comes from Judy Hong from Goldman Sachs.

Thanks, good morning.

Good morning, Judy.

Doug, I know that the innovation and brand building obviously are important to grow the category.

But do you think perhaps maybe you're underestimating the price issue in the category?

What I mean by that, is last year you basically got hurt, because you had a lot of competition from simple meals.

This year you got hurt, because the competition really stepped up more aggressively.

And granted, it's only one month's data, but you look at Progresso's performance in the last month, their volume was up 40% plus.

So I'm just wondering if, as you look at the category, and sort of take a fresh your fresher look at what you need to do, brand building, innovation and everything else, you kind of also have to look at sort of the price points, and address that part of the equation.

Absolutely.

This -- we're in a battle every day.

We compete for it.

The 40% plus is a big number, but the incremental cases, competition shift in October, was only 2% of our US shipped volume for the first quarter.

You talk about big numbers on a small basis, with virtually no returns.

We can manage our way through this, Judy.

Okay.

Okay.

Thanks.

Okay.

And operator, we'll conclude our call with that.

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

You may now disconnect, and have a wonderful day.