金寶湯 (CPB) 2011 Q2 法說會逐字稿

Eric Katzman, Deutsche Bank.

I guess my question has to do with the difference between the soup shipments versus the consumer offtake.

And I guess, Doug, maybe you could just kind of walk us through as the quarter kind of progressed.

Because I thought that -- I don't know -- I guess we never want to talk too much about weather, but I would've thought with the weather being the way it is that retailers maybe would've if anything stocked more soup, not kind of cut back on the number of -- the amount that they had.

So maybe you could just walk through that.

Eric, maybe I'll jump in there and then if Doug or Denise have anything to add.

I think the first thing to recognize is that we started into this period of pretty heavy promotional discounting in the third quarter of last year and consequently, we had fairly strong shipment levels and a certain amount of inventory build coming into this quarter.

Secondly, I guess I would acknowledge that, as you are well aware, it's hard to read with great precision movements in inventory inside all the channels, some of which are unmeasured at the store level and at the pantry level.

So we are very encouraged that the takeaway was as good as it was in the quarter.

I don't feel like we lost any sales because of what was going on with respect to inventory levels.

But clearly as you look across the first half of the year, the promotional activity has not -- we haven't gotten the kind of lift that would have paid for the kind of promotional activity that we have done across the first half of the year.

Just building on it, we do have the volume growing again which was essential.

We wanted to protect our consumer base.

As you will recall a year ago, we were losing some of our base to other simple meals and we said we have to protect that with the consumer, and we have.

But in the deep promotional environment that we are in, not just in soup, but in the broader simple meals arena, retailer inventories are getting increasingly difficult to measure and manage.

We have visibility to pieces of that, of those inventories, but not to the full range of outlets and channels.

So I feel good about the direction, but clearly we had some inventory that got worked off.

Okay, and then just as a quick follow-up, just any thoughts on did -- do you think the pretty bad winter so far helped some of that consumption?

And is that maybe what is giving you a little bit more confidence in the second half to pull back on the promotion and just kind of let advertising do the work?

Well, just a few thoughts on that.

Historically, at least the 10 years I have been here, we sort of naturally pull back from price promotion as we go into the spring and summer.

So this is a natural -- a very natural cycle here.

We also have visibility into the performance of our advertising campaign which is the best performing campaign that I have seen since I have been here in terms of consumer response.

So given that we naturally pull back anyway and that we have seen positive encouraging response to the advertising, I think it's a natural thing for us to do.

But Denise may want to expand on that.

Yes, I think that going into the second half of this year, we have the opportunity to better balance our price promotion with our brand building now that we have a stronger campaign.

Okay, I'll pass it on and I'll see you at CAGNY next week.

We're counting the minutes, Eric.

Me too.

Thanks, Eric.

Mary, our next caller?

Terry Bivens, JPMorgan.

Doug, here's a question for you.

All of our data seems to indicate that you guys really throttled back on promotion during the month of January which I found a bit surprising.

Is that consistent with the actual strategy?

And if it is, what would be the thinking there during that single month?

Terry, we didn't really -- we're not going to -- I won't get into a discussion on month-to-month promotional planning.

But I would say broadly speaking across the border with all of our major customers, we maintained our promotional presence through the entire quarter.

What I will acknowledge is that other branded competitors, one in particular, was very aggressive again in January and may have attracted more of the promotional attention in that month.

But, Denise, I might be wrong, but I think we maintained a pretty solid profile and we maintained our advertising presence throughout.

Exactly.

And just to follow to that, I guess the big question is how much of a threat is this competitor you just mentioned to the more rational strategy in the second half?

I mean if they really hit the pedal on promotions, doesn't that really compromise the strategy?

How are you looking at that?

Historically, the category has not been particularly promotionally sensitive when we get into the spring and summer.

The retailers aren't particularly interested in running hot deals on soup in April.

So typically -- and the consumer is not particularly looking for hot deals on soup in April.

So I personally believe the more balanced approach that Denise is taking and that she just spoke about makes sense.

And we can weather the storm here.

We have good brands to compete in the space, we have good advertising against it.

We will offer very good price values still relative to other simple meals.

And as we have highlighted in the past, oftentimes depending on -- in most periods, we have more interaction with other simple meals than we do with the branded competitors in soup.

And I think in that broader arena, we will be sufficiently competitive.

Denise, would you --

Yes, Terry, I think going forward, we know that when we have competitive price value and we have great advertising and brand building, that's when we grow profitably.

And I think although I was very happy with the consumer takeaway in volume for the quarter, it came at a high cost.

And therefore, we need to make sure that we are growing our earnings as well as our net sales.

Okay, thanks for the color.

We will see you next week.

Episodically, we have experienced when we hit stride with sufficient innovation, sufficient brand building activity, balanced with responsible trade promotion, we know we can make this proposition work.

We just have to do it with greater consistency.

Thanks, next question.

Chris Growe, Stifel Nicolaus.

I wanted to ask about -- to look at this quarter, not only do I see a lot of advertising on TV, but I know you've been keeping pretty heavy on the advertising.

Yet it was down in the quarter according to I think the numbers Craig mentioned.

Is that just a matter of timing?

We're going to keep up -- kind of the foot on the pedal for the second half of the year and move towards more advertising?

Can you talk about that please?

The GRPs were down I think modestly.

But we're talking about still very high levels of advertising and we believe at a threshold level.

And we are committed to maintaining that as we have indicated.

But, Denise, do you want to expand on that?

Yes, Chris, a couple things.

First of all, we maintained a very high level of advertising.

We actually had a different mix of 30s and 15s which impacted our GRPs.

But our Anthem campaign which was a 30 second was very, very productive.

So that was one of the changes we made.

And we will continue advertising heavily into the third quarter.

Okay, and I just wanted to be clear on kind of this -- a comment you made earlier on simple meals.

I guess that's obviously been a challenge for the soup category.

And you got more promotional and more aggressive and clearly in this quarter from a takeaway standpoint did well versus other simple meals.

But obviously the cost is very high to get there.

So what I'm trying to understand, is that a sustainable strategy?

Is this what it takes to be competitive against simple meals, simply to be more promotional, more price promotional?

Chris, I think the best way to describe this is that starting in the first quarter this year, we did have an observation of a larger amount of switching between soup and other simple meals.

And because the advertising campaign was new and it took time to gain traction, the lever that we had to use was to get more competitive on our price promotion.

We were successful in getting the switching behavior back to what we call normal levels.

Meanwhile the advertising is starting to get traction, so we believe we have a much more balanced marketing mix to work with going from the second half of this year forward.

Okay.

Thanks for your time.

Next question please, Mary.

David Driscoll, Citi Investments.

Doug, can you comment on shelf space in the soup category?

Are you holding shelf space?

Is it declining?

How do we -- kind of the one thing that I still find that investors ask all the time is just kind of fundamentally why this category doesn't seem to be doing better.

And back to Eric's question, it was such a tremendously cold winter.

I know you're saying that the FDM data looked okay, but the shipment data down.

It just feels hard to explain.

So talk about shelf space and then talk about just big picture about the category trends.

David, we have not seen changes in shelf space for the soup category.

We watch this as you know very, very closely.

To date since we started our fiscal year, we have put in over 20,000 new upgraded iQ Maximizers across the retail landscape.

So we have been working very closely with retailers in the category on shelf space.

So it is competitive out there, and it's one thing we continue to watch.

But to date, we haven't seen any movement in that.

And in all the dollar stores, when they are expanding their footprint at the expense of the traditional retailers, there's nothing negative with that fundamental change at retail.

Is that a true statement?

We have a presence in those dollar stores and we are committed to getting our fair share of that presence.

So we have products that can play in that space.

And in the fullness of time, we think that's a very manageable proposition.

Okay, all right, I appreciate the comments, look forward to seeing you next week.

Great and just as a reminder, please restrict yourself to one question if you could.

Man, you are tough, Jennifer.

Thank you.

Our next question?

Alexia Howard, Sanford Bernstein.

Can I ask about the beverage category?

It seems as though it slowed down quite a bit in sales growth terms this time.

In particular, I think you had the tea version of the V8 that was being launched.

How are the distribution trends on that?

Is that going as expected or are there other dynamics in that beverage segment that are causing some challenges?

The beverage business has always been very competitive.

And we're very proud of the fact that V8 has been outperforming the shelf-stable juice category for quite some time now.

I would say that we continue to invest in V8.

Splash and V-Fusion did very well this past quarter.

We were a little bit lower on V8 Red and I would just say that we continue to be very, very optimistic about our ability to compete with beverages.

And for the half, it has been solid.

Yes (multiple speakers) 5%.

When there is significant pressure on food budgets, people we have observed are willing to trade out of the category and go to water and other more value-oriented items.

But on balance, we feel very good about our presence here and our growth prospects.

Yes, our volume full-year to date on consumer takeaway is up 6.6%, so we're really happy with that.

Okay, thank you very much.

I will pass it on.

Next question.

Andrew Lazar, Barclays Capital.

Denise, a couple of weeks ago, I guess there were some pretty high-level management shifts that were made at Campbell.

I think a new head of sales, a new head of US Soup and some others.

And even -- I know it's very early to sort of get your strategic outlook and plan, I was wondering if perhaps you could share a bit about maybe what skill set you were looking for in some of those key people, maybe what objectives you had in mind when you were making those sort of -- it would seem like pretty key personnel decisions going forward.

Yes, that organization shift had been planned for quite some time, Andrew.

And what we are doing is we are setting up the North America Soup, Sauce and Beverage unit to create better focus and to jumpstart innovation.

And I will talk more about this at CAGNY.

But those leadership changes and the structures were designed on purpose to do that.

And just to build on it, as part of the -- what we call our ORP process, we have been developing those two leaders for roles like this for the better part of six or seven years.

So this is a natural evolution of the thinking but tailored to address the issues of the day and the issues that Denise has highlighted as being most critical to moving forward.

I appreciate it, I know they come highly regarded I think both internally and externally and I guess from Pepperidge.

So I was trying to get a sense just what -- I'm trying obviously to get a little bit more insight into where you are headed going forward obviously and how those folks add to that.

But we'll get more into that at CAGNY as well.

The good part about Campbell's, Andrew, is that we do have some great bench strengths and these are great leaders that are coming into these positions.

See you next week.

Thanks, Andrew.

Next question.

(Operator Instructions) Ed Aaron, RBC Capital Markets.

I just want to talk just a little bit more about your expectations for managing pricing back up in soup.

It's just I guess a little bit hard to have full confidence given some of the recent trends there, and I was wondering if you have similar plans and equal conviction in your ability to -- equal confidence in your ability to manage condensed and ready-to-serve.

Or do you view those categories or those segments as somewhat different from each other as you think about the next few quarters?

I think there is an interaction with condensed eating and some of the RTS brands.

And particularly with the price discounting that we had in the marketplace, the value proposition of condensed became less apparent to the consumer.

Going forward as we realize our pricing, I believe that that will be restored and condensed will have a much better second half.

Next question please.

David Palmer, UBS.

Doug and Denise, someone mentioned the positive response to the new ad campaign in the Q&A.

Are there any details you could share about -- from almost a consumer level research perspective how are perceptions and/or behavior perhaps changing this year with regard to soup?

Are there certain demographic groups that are cutting back or coming back to soup versus other categories?

Any insights would be helpful, thanks.

We still consider it early days, but the consumer response to the campaign has been really positive.

And we've had certain executions -- because this is a portfolio campaign, and there's sub-branded advertising within it -- we've had certain executions that have performed better than others.

And we continue to learn and improve it.

But this is some of the best advertising we've had on air in our recent past.

So we're very, very encouraged by that.

It is the first time that we've had an umbrella campaign across the entire line.

So we are pioneering new ground here for the Company for the first time in over 20 years that have we done it this way.

So we have expected that it would take a little time.

The response in particular to the Anthem spot that Denise mentioned has been exceptionally good in research and then in qualitative tracking following the launch.

We've also had good response to some of our condensed cooking executions.

And our Chunky execution that we were concerned about because we were migrating from a brand-building Chunky NFL perspective into this broader spot, but our Chunky business has held up very well through all of this activity.

Right, and our Healthy Request business has also been off the charts.

As it relates to the advertising.

So we have seen impact.

Where we have been pressured has been when we have tremendous price gap pressure that is changing the promotional -- the price points to a point where our condensed eating soups have been so pressured by ready-to-serve pricing.

But on balance, we see it across the portfolio in a very positive way.

And we think that we can strengthen the execution on condensed eating and we are working on that right now.

Thanks, Denise and Doug, see you next week.

Next question please.

Judy Hong, Goldman Sachs.

Thanks, good morning.

Craig, you called out input cost inflation in fiscal 2012 and I'm wondering if you can quantify or give some quantification to what you are expecting for cost inflation.

Our math shows that you could be facing something like 6%.

Are we in the ballpark?

And then in relation to that, sort of your ability to use price as a lever to offset that as opposed to maybe other levers that you can see in your P&L to manage through that inflation.

Yes, we don't have an F12 forecasted.

We're a little early for that yet.

As we look at this year, clearly the trend is up.

We're going to finish the first half sort of flattish on ingredient, package and energy input inflation.

And then in the second half, we would expect something more like about 3%.

And as we look forward to 2012, probably somewhat higher than 3%.

But I don't have a number for you.

So, it clearly is in our thinking.

Pepperidge Farm has already taken some pricing action because some of the earlier pressure has been as you're well aware on grains and so impacting that business.

And we're very mindful of it as we look at our commercial policy around soup in the back half of this year and coming into next year.

But it's a little early for us given our cycle and given our pricing cycle to be forecasting that.

And just in terms of broadly speaking, any other levers that you feel that you may have over the next six to 12 months and your ability to manage through that inflation?

On the cost side, one of the things that's helping us you know mitigate the impact as we move into it is a combination of our hedging program and our contractual arrangements with certain suppliers.

That's not going to -- those things don't offset long-term inflationary pressure but they do give you some time to react and to manage your pricing in the marketplace against what you see coming as inflation.

We also within cost of sales -- not directly impacting input from ingredients, packaging and energy -- but within cost of sales, we continue to have a really strong and successful enabler program.

We will be at record levels I think again this year after having a strong year last year.

So we are attacking other pieces of the cost base.

We've talked publicly about soup common platform and some longer range programs that we've got.

But every year, we're trying to fight back something like 3% or so of our total cost base with structural cost decreases.

So those are the things on the input side.

On the output side of course, we've got within pricing, we've got the opportunity to manage at the list price level as well as manage promotional depth and frequency.

Judy, also, I think it is still true at a very high level to think in terms of -- we believe we have the ability through pricing and productivity to manage our cost base.

And it's beyond just soup.

It also applies to our other branded areas in healthy beverages and in baked snacks where we have good brands.

We can price to manage between pricing and productivity.

Over time we have demonstrated the ability to manage cost.

We also have a very good discipline about our SG&A management.

Great.

Okay.

Thank you and see you next week.

Next question please.

Akshay Jagdale, KeyBanc.

This is Adam Josephson in for Akshay.

Thanks for taking my question.

I realize consumer takeaway was good in the quarter, but obviously the category continues to have its challenges.

I just have two questions.

Is it possible that some of the problems that the category is having are attributable to a generational shift and that younger people tend to eat less canned soup than their predecessors?

Or is it possible that the trend toward healthier soups has been detrimental to the category because the soup doesn't taste as good as it did before?

I will turn it over to Denise in just a second and she's going to cover more on this when we get to CAGNY.

But what I would say is those areas create great opportunity for us.

We believe we can do a better job particularly with millennials and we believe we can continue to drive on the health and wellness front to grow the category faster.

And that's -- we're going to cover that at CAGNY.

But, Denise, do you want to give him a (multiple speakers)?

I would say the best way to answer it is Campbell's Soup is in 85% of all households.

And we do have a very high index with millennials.

Although it's not as high as baby boomers i.e.

that is the opportunity for us, it's still pretty significant.

The other question that you asked was about health and wellness, and our Healthy Request soup was actually our best performing line this year.

So, we are hitting the mark on that acute need of heart health.

So that's probably the best way I can answer it and I will provide more insight on that at CAGNY.

Great.

Thanks very much.

Next question please, Mary?

Robert Moskow, Credit Suisse.

You know, I was just listening to the tone on the call today more than anything, and I got to say, it's awfully positive.

You just lowered guidance for the back half of the year, and I would argue that the soup plan for this year did not -- soup did not go according to plan.

And I guess I'm just kind of wondering, Denise, as you think about strategic planning for fiscal 2012, most people that I talk to think that there needs to be some kind of re-basing of margins or expectations.

And the tone is so positive, it just doesn't seem like that's where you're headed right now, and maybe the re-basing today is all that is necessary.

And that's fine, but I'm just kind of -- the performance to date just hasn't really been very good and I'm not quite sure how I can kind of get on board that things are going to get quickly better.

First of all, I'm going to acknowledge what you said and that is that we believe we can do better in the soup business and that our performance as a result of the heavy price discounting that we engaged in did not give us the lift that we had expected; and the volume gains that we had realized were not sufficient to drive profitable net sales.

So I agree with you there.

And I'm not happy about that.

However, you know that I have a new team and we're really focused on creating value over the long term, and we have an opportunity here to explore all of our options for doing so.

So it's unclear at this point whether a re-base would be the right step for Campbell.

But that said, we believe at this point that we have enough resources right now that we could just reallocate to fund our growth, including trade spending and some of the dollars that we had appropriated for sodium reduction in R&D.

So this new team is looking with fresh eyes at everything.

Just to build on it, for context, we have grown EPS every year for nine years.

We have grown EPS 10% over the last five years.

We have a flattish performance in a very tough year, and we know what we need to do better, we are focused on it.

We have spending as a percent of sales at a record high level.

So we have some resources there.

And we've just got to find a way to manage things smartly.

And then I would emphasize that every year, we go through a strategic planning process with our Board where we look at all of our options.

Denise and her new team are doing that right now and I think she'll be in a position with a much more informed and complete look to cover that when she gets to our July analyst meeting.

So I think in the meantime, we have plenty to do and we are on it.

So I think this is just a natural evolution of the business and we have got to work through it.

But you know, three of our four segments are growing earnings.

We have an issue here in the US and we are on it.

I appreciate the clarity from both of you.

I really do wish the best of luck.

I don't think soup is the next buggy whip.

You have done a lot for the category over the years, Doug.

I think the category can grow.

So see you at CAGNY.

Well, I do too but we can and will do better.

We can do better.

We can.

Okay.

Thank you.

Thanks for the question, Rob.

Next one?

Robert Dickerson, Consumer Edge.

His line has just dropped.

Bryan Spillane, Bank of America.

Bob, if we can get you back in the line, we will try to put you through.

Just a quick question on costs.

Craig, if we look at G&A or cost control in G&A I guess in the back half of the year, how much is there a benefit running through your G&A line from lower compensation expenses?

Well, we have seen lower compensation expenses in the first half, and I think you would see that continue as a trend into the second half.

There are also some -- if you will recall in the second half last year, we also had a recall on SpaghettiOs which is another item that will help us in terms of comparison second half versus first half.

Can you quantify?

Like how much are you expecting lower compensation expense to benefit the full year?

Most of the benefit frankly is coming from lower incentive compensation which we take -- if you look at the first half, we are on the track that we think is appropriate for the full year.

So how much has it been for the first half then?

We're not going to provide that level of detail.

Well then, as we're modeling the second half, should we factor in a higher compensation expense for next year?

I'm just trying to get a sense for is G&A going to be artificially or abnormally low this year because you have missed your plan and we have to put that back in for next year.

Some help on just how to think about that would be helpful.

So clearly as we look at next year, we would anticipate higher incentive compensation.

But as Denise said, we've got a very disciplined process against total G&A and we would look to be realizing efficiency opportunities in other areas.

But just with respect to incentive compensation, yes, we would look for a bigger year next year.

Okay, great.

Thank you.

Next question?

Eric Serotta, Wells Fargo.

It seems that over the past couple of quarters, your condensed cooking soups have been one of the bright spots in a clearly tough environment particularly for US Soup.

This quarter in the press release, you commented that there were declines in both condensed cooking and eating varieties.

Wondering whether you think something has fundamentally changed there, what the drivers have been behind that decline and what your outlook is for the cooking portfolio.

Eric, we are pretty happy with condensed cooking overall for the half.

And one of the biggest events we have is our holiday season.

And when we look at the total performance of this business throughout the holiday -- and some of those cases start shipping in October all the way through the end of the year, we are pretty pleased with the momentum in cooking soups.

And our broth of course has been stellar for both quarters.

So we know the trends here are good.

Consumers are cooking at home more, we have invested very heavily in Campbellkitchen.com which is providing recipes.

So we still are very excited about the Campbell cooking soup line.

Recognize too, Eric, that in the quarter, the biggest divergence between positive consumer takeaway and shipment data was in the cooking soup category.

Okay, thanks.

I'll pass it on.

Thanks, Eric.

Next question please.

Priya Ohri-Gupta, Barclays Capital.

Just a quick question, can you talk about your plan to address the recent $700 million in debt that matured?

Sorry, I didn't get the question.

I'm sorry, could you repeat that, Priya?

Address the $700 million recent maturity?

Yes, the $700 million in debt that came due I guess a few days ago.

Can you just address your plans as to whether you look to refinance that into new long-term paper or just pay it down over time?

Sure, got it.

Sorry, I just didn't get the question the first time.

We did a $400 million issue last July which in effect pre-funded some of that.

We took advantage of the low rate environment.

We have plenty of room within our commercial paper program that as the $700 million matured and rolled off, we just -- we roll that balance into the commercial paper program.

But I think it would be fair to say that we are looking for opportunities to -- if you want to think about it this way, to term out the rest of it.

Great.

That's very helpful.

Thank you.

I guess with that, we're going to be closing out our Q&A session.

Thanks, everyone, for your participation in our second-quarter earnings webcast.

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

If you are a reporter and have some questions, we would like you to call Anthony Sanzio.

His phone number is 856-968-4390.

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

This concludes today's program.

You may now disconnect.

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

You may now disconnect and have a wonderful day.