金寶湯 (CPB) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Campbell Soup's first-quarter 2012 earnings conference call.

At this time all participants are in a listen-only mode.

Later we will contact a question-and-answer session and instructions will follow at that time.

(Operator Instructions).

As a reminder, this conference call is being recorded.

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

Please begin.

Thank you.

Good morning, everyone; welcome to Campbell Soup Company's first-quarter earnings call and webcast.

With me here today in New Jersey are Denise Morrison, our President and Chief Executive Officer; Craig Owens, Senior Vice President, Chief Financial officer and Chief Administrative Officer; and Anthony DiSilvestro, Senior Vice President of Finance.

Denise will kick us off by giving an update on our progress with our three growth strategies and commenting on our performance during the quarter.

Then Craig will offer a detailed discussion of the quarter as well as our expectations for fiscal 2012.

Following our formal remarks all of us will take questions from the audience and then at the end of the Q&A Denise will come back to wrap it up.

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.

Starting this quarter we'll be advancing the slides for you in order to enhance your experience.

Please keep in mind that our call is open to members of the media who are participating in a 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.

Please refer to slide 2 in the presentation or to the Company's most recent Form 10-K and subsequent SEC filings for a list of the factors that could cause our actual results to vary materially from those anticipated in any forward-looking statement.

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

These slides, as well as our earnings release and selected quarterly financial data, can be found on our website.

As a reminder, we revised our reporting segments in the fourth quarter of fiscal 2011.

We separated the U.S.

Soup, Sauces and Beverages segment into two segments, U.S.

Simple Meals and U.S.

Beverages.

We provided historical quarterly information on our segments earlier this month in a Form 8-K.

And with that let me turn the call over to Denise.

Thank you, Jennifer, and good morning, everyone.

Thanks for joining us for Campbell's first-quarter earnings conference call.

As Jennifer indicated, I'll touch on our three growth strategies followed by my perspective on our first-quarter financial results and segment performance.

Simply stated, our goal is to create value by driving sustainable, profitable net sales growth.

To achieve that goal we're pursuing three growth strategies.

First, we'll stabilize then profitably grow North America Soup and Simple Meals; second, we'll expand our International presence; and third, we'll continue to drive growth in healthy beverages and baked snacks.

Across Campbell the pace of activity has picked up and we're putting all of our energy into improving our performance.

Overall we're confident in our growth strategies and are keenly focused on execution.

We have the right people in the right positions and we've set up a streamlined scorecard with clear metrics so everyone knows what's expected of them and we can keep track of our progress.

To be successful with our strategies we must connect with consumers and keep their needs front and center.

This past quarter, as we began to implement our strategies, consumers continued to be impacted by the challenges in the global economy.

In the United States and other markets where we compete higher prices drove an increase in consumer spending on food, but the number of items purchased declined.

Consumers continue to shift channels in their search for value.

As a result club, dollar and drugstores outperformed traditional grocery.

There's little doubt that the pronounced caution and restraint that have characterized consumer behavior since the onset of the financial crisis are now the new norm for the food and beverage sector and we are proactively addressing it.

I'll now offer a brief perspective on our first-quarter results which were reported this morning.

Sales declined 1% and EBIT declined 6%; earnings per share were steady with last year's first quarter.

While our overall first-quarter performance was in line with our expectations, the composition of our results was mixed.

In particular U.S.

Simple Meals, Pepperidge Farm and North America Foodservice met or exceeded expectations while U.S.

Beverages and International did not.

Despite a different mix than we had expected, we are reiterating our full-year guidance.

We recognize that we have or hard work ahead and we won't rest until we change the Company's growth trajectory.

As we've said before, fiscal 2012 will be a transition year for Campbell.

We're making significant investments in innovation and marketing to restore momentum to our top line in the years ahead.

Now let me speak briefly about our segment results starting with U.S.

Simple Meals.

I'll also highlight some of the challenges we're facing in Global Baking and Snacking and U.S.

Beverages.

We had solid profit growth in U.S.

Simple Meals despite the sales decline.

While it's early, we're making progress with stabilizing the profitability of this business after which we can focus on driving sales growth.

As you may recall in the first half of last year, we engaged in heavy promotional activity that did not produce sufficient volume lifts.

In the second half of last year we changed our marketing strategy for U.S.

Soup and pulled back on heavy promotions.

Subsequently we took a list price increase due to inflationary pressures.

In the first quarter of this year U.S.

Soup sales declines were not as pronounced as we had expected, even as we cycled last year's heavy discounting.

This had a positive impact on the profitability of U.S.

Soup.

A portion of the profit increase came from reduced spending on advertising and consumer promotions.

While we do not provide quarterly guidance, you may have expected increased spending.

In the quarter we started our U.S.

Soup advertising later in September to coincide with the actual start of the soup season when we get the best returns and to extend our media dollars across the full season which runs well into our third quarter.

Our first-quarter [TVGRP's] on soup were up due to better efficiencies.

We also started our consumer promotions later this quarter based on insights from last year when an earlier start did not deliver the desired returns.

This year we chose not to repeat non-TV and consumer programs from last year's first quarter that proved inefficient including certain couponing and sampling events for condensed soup.

At this point advertising for U.S.

Soup is in full swing.

We sure hope you've seen our TV campaign and are inspired to buy a few Campbell products this holiday season.

Going forward you can expect both advertising and consumer programs to increase, in fact we expect both will be up when we review our full-year performance with you next September.

We're committed to emphasizing brand building activities for the long-term health of this business.

Innovation will also play a key role in stabilizing and profitably growing Simple Meals.

This quarter we launched 35 new products in Simple Meals versus five a year ago.

While it's too early to read consumer reaction, we're on track to achieve our distribution and shelf space targets and we're executing our merchandising plans.

As you know, last quarter we shifted our retail store coverage to a broker sales model through Acosta and added 5,000 stores.

We were able to get our new products on shelf more quickly and also expect our holiday program to be strong this year.

Because innovation is so critical to our plans we have ramped up our investment.

Our new breakthrough innovation teams have been moving quickly to develop more disruptive innovation for fiscal 2013 and beyond.

We're targeting both new users and new occasions.

As we've stated, it will take some time to build a consumer driven pipeline.

We'll discuss the progress we're making on our innovation strategies and share some of the new products with you at the same time we present them to customers.

Our efforts to stabilize U.S.

Soup profitability are on track.

However, we have more work to do and we'll not be satisfied until we get the top line growing again.

Global Baking and Snacking, which performed solidly through 2011, softened this quarter due to Arnott's.

A more cautious Australian consumer and the volume impact of higher prices at retail drove a profit decline for total Global Baking and Snacking.

On our fourth-quarter call I mentioned that we had a strong quarter in Australia; however, the adverse trends that some of our peers have been highlighting have clearly impacted us in the first quarter.

Arnott's growth stalled this quarter; as the consumer environment weakened, consumers faced increased prices on shelf and the retail environment became more intensely competitive.

We are adjusting our plans and programs as Australian consumers increasingly reflect a recessionary mindset which is impacting a broad range of categories and brands in Australian supermarkets.

Even in a difficult environment we continue to have several advantages in our corner, including a leading market share, exposure to expandable consumption categories, a history of on-trend innovation that continues to delight consumers and strong brands.

On a lighter note, I have to mention the fact that Tim Tam Biscuits were one of the official gifts the Austrian government gave to President Obama for his daughters for his recent trip to Australia.

Pepperidge Farm continues to perform well with solid sales increases which lifted the overall segment results.

Consumers responded well to our new products including Cracker Chips and Milano Melts.

To keep our new product pipeline strong this past quarter we broke ground on our new Pepperidge Farm innovation center which will open its doors in the first quarter of fiscal 2013.

Turning to U.S.

Beverages, sales declined 3% and operating earnings were down 45%.

Needless to say that's a considerable decline and warrants explanation.

Three important factors were at play -- we had significant inflation in juice concentrates and packaging costs; the shelf stable juice category declined; and competition intensified with new entrants in vegetable juice and fruit/vegetable blends.

Short-term we believe we must maintain our competitiveness despite the inflation in this high potential space.

Over time we can increase our reliance on innovation and marketing.

On that front we launched V8 V-Fusion Smoothies during the first quarter and have other innovations planned for later in the year.

And we just debuted our new advertising on October 15 featuring action star Jackie Chan.

Craig will fully comment on all of our segments, including beverages, in a few moments.

In September we provided updated earnings guidance for the fiscal year.

As I stated earlier, we're reiterating the same guidance today.

We view fiscal 2012 as a year of transition and investment; there's a lot of energy and a renewed sense of purpose at Campbell to improve our performance.

Changing our growth trajectory will take time as we fully implement our growth strategies to create a meaningfully different company.

Now I'd like to turn the call over to Craig for his analysis of our financial results and an elaboration of our expectations for fiscal 2012.

Thanks, Denise, good morning.

I'll spend a few minutes to discuss our first-quarter results and segment highlights and follow with some comments on our full-year earnings guidance.

While our profit results for the quarter are consistent with our expectations, the profile of the first-quarter results is not indicative of our full-year plan.

We expect improved sales and gross margin trends as well as increased marketing spending in the balance of the year.

For the first quarter we reported net sales of $2.16 billion, down 1% versus the first quarter of 2011.

Excluding the favorable impact of currency organic net sales declined by 2%.

EBIT of $416 million for the quarter was down 6% versus a year ago, primarily due to significant cost inflation and lower volumes partly offset by higher selling prices and productivity improvements.

On a segment basis improved profitability in U.S.

Simple Meals was more than offset by declines in U.S.

Beverages and Global Baking and Snacking.

Earnings per share were $0.82 for the quarter, comparable to a year ago.

In the first quarter our reported net sales declined by 1% as a 2 point decline in organic sales was partly offset by a 1 point gain from currency translation.

As you can see on the slide, the decline in organic sales reflects a decrease in volume and mix of 5 points and the negative impact of increased promotional spending of 1 point, partly offset by an increase in pricing of 4 points.

The impact of lower volumes was primarily in our U.S.

Simple Meals business.

The personal spending variance is primarily due to increased spending across the U.S.

Beverage portfolio.

And the price increase is primarily in our U.S.

Soup and Pepperidge Farm businesses where it is helping to offset significant cost inflation.

As expected our volumes have been negatively impacted by our efforts to improve price realization.

Our gross margin declined from 41.2% in the first quarter of 2011 to 39.5% in the current quarter, a decrease of 170 basis points.

This decline was primarily due to cost inflation and unfavorable mix partly offset by higher selling prices and productivity improvements.

Overall our inflation rate and cost of goods was approximately 7% to 8% in the quarter which is consistent with our full-year expectation.

The weaker sales performance in our higher-margin U.S.

Soup and U.S.

Beverage business is contributing to the negative mix impact.

Marketing and selling expenses decreased by 6% to $261 million compared to $277 million in the prior year, primarily due to lower advertising and consumer promotion expenses principally in the U.S.

Soup business, partly offset by the impact of currency.

The increased effectiveness the U.S.

Soup advertising commenced later in the quarter to coincide with the start of the soup season.

There were several key businesses in which we stepped up our marketing support.

Most notably we significantly increased the advertising support in our U.S.

Beverage and U.S.

Sauce businesses.

Administrative expenses increased by $5 million to $145 million this quarter primarily due to higher incentive compensation and benefit cost and the unfavorable impact of currency, partially offset by the benefit of cost savings from previously announced restructuring initiatives.

As I noted earlier, EBIT declined by 6% in the first quarter.

On this slide we show the items below the EBIT line.

Net interest expense fell 7%, a decrease of $2 million driven by lower rates on our long-term debt portfolio as we have refinanced a $700 million maturity that was due in February of 2011.

The tax rate declined 40 basis points to 32.2%.

Benefiting from the lower tax rate and the lower interest cost net earnings declined by 5% this quarter.

However, diluted shares outstanding also declined 5% in the quarter, the result of or share repurchase activity since the first quarter a year ago and thus earnings per share were comparable to prior year.

Segment sales results and the corresponding organic growth rates are shown on this slide.

U.S.

Simple Meals sales declined by 3% reflecting lower results for U.S.

Soup partially offset by growth in U.S.

Sauces.

U.S.

Soup sales fell 4% in the first quarter as lower volumes were only partly compensated by higher selling prices.

We have improved price realization through our reduction in promotional discounting and a list price action.

Our promotional spending in the first quarter includes the funding to support our 35 new Simple Meal items compared to just five items a year ago.

Within the U.S.

Simple Meals segment sales trends in U.S.

Sauces have improved achieving modest gains in the quarter.

Sales of Prego pasta sauce achieved volume driven sales gains while sales of Pace Mexican sauce declined slightly.

As I mentioned, we have stepped up our support both in advertising and promotional spending, which is beginning to have a positive impact on performance.

Sales of the Global Baking and Snacking segment increased 1% as growth in Pepperidge Farm was partially offset by declines at Arnott's.

Pepperidge Farm sales increased primarily due to gains in Goldfish snack crackers and the continued success of Milano Melts cookies.

The decline in Arnott's was driven primarily by lower volumes which have been negatively impacted by higher price points at retail and a weakening consumer environment in Australia.

Within the International Simple Meals and Beverages segment organic sales declined by 7% primarily due to a volume driven decline of soup sales in Canada where we significantly reduced promotional spending.

Lower European sales also contributed to the decline.

Volume reductions in France and Germany were only partly offset by sales gains in Belgium.

U.S.

Beverage sales decreased 3% versus prior year primarily driven by a decline in sales of V8 vegetable juice partly offset by sales growth in V8 V-Fusion and V8 Splash.

We continue to focus on accelerating innovation in this category and the launch of V8 V-Fusion Smoothies significantly contributed to sales growth in the quarter tracking ahead of our expectations.

We increased both advertising and promotional spending in response to intensified competition and new entrants into the category.

The shelf stable juice category in total declined in the period.

Sales of North American Foodservice increased by 6% primarily due to volume gains in fresh, chilled soup sold at retail.

Operating earnings for U.S.

Simple Meals increased 8% to $260 million this quarter.

The increase in operating earnings was primarily due to improved performance in U.S.

Soup.

U.S.

Soup operating earnings increased primarily due to higher selling prices and lower marketing expenses partially offset by volume declines.

Within marketing, the reduction associated with the timing of our U.S.

Soup campaign was partly offset by the increased brand building support behind our sauce business.

Earnings within Global Baking and Snacking declined by 12% on lower earnings at Arnott's.

The decline there was primarily due to the impact of cost inflation and lower sales volumes partially offset by the favorable impact of currency.

Pepperidge Farm earnings were comparable to a year ago as the impact of cost inflation was offset by higher selling prices and productivity gains.

Within International Simple Meals and Beverages earnings declined by 16% primarily due to lower earnings in Canada and the Asia Pacific regions.

Operating earnings for U.S.

Beverages declined by 45%, this was primarily due to double-digit inflation for juice concentrates and packaging material, the negative impact of increased promotional spending and increased advertising.

Given the competitive environment we increased marketing spending both in trade promotions and advertising to step up our support for this business.

Operating earnings within North America Foodservice increased by $4 million primarily driven by higher selling prices and productivity improvements partly offset by cost inflation.

U.S.

Soup sales are detailed here.

In the quarter lower volumes were partly offset by higher selling prices.

As we've discussed, we shifted our promotional strategy in the middle of last year.

As anticipated the shift is having a negative impact on volume and sales which will continue through the first half of this fiscal year.

Within Soup condensed sales decreased by 4% with declines in both eating and cooking varieties.

Ready to serve was down by 9% reflecting declines in both canned and microwavable soups.

The RTS segment has been the most impacted by price realization through reduced promotional spending.

Broth sales rose 6% primarily driven by higher selling prices and volume gains mostly in aseptic cartons.

The US wet soup category performance from the latest 52 weeks based on IRI panel data and Campbell internal estimates is shown here.

The overall category rose in dollars by 0.4% in the past 52 weeks.

Our soup sales declined by 2.6% underperforming the category due to volume declines associated with our reductions in trade spending which began February 1 and our list price increase beginning in mid-June.

Other branded players increased U.S.

Soup sales by 4.7% during the period while private-label soup sales rose by 7%.

While it's not shown on the chart, total volume in the soup category declined slightly versus the prior 52 weeks.

Campbell's market share decreased 1.9 points as we focused on stabilizing soup profits.

The share decline was driven by ready to serve soup as our market share from condensed soup and broth were essentially unchanged.

Moving now to cash flow from operations, it was a source of $73 million compared to a use of $29 million in the prior period.

Cash flow benefited from a $72 million reduction in pension contributions and a $49 million decrease in working capital requirements.

Capital expenditures of $35 million were up from $27 million a year ago.

During the quarter we broke ground on our new R&D facility at Pepperidge Farm which will contribute to our innovation efforts going forward.

For the year we continue to forecast capital spending of approximately $325 million.

During the first quarter we repurchased 2.6 million shares at a cost of $85 million under our strategic share repurchase program announced in June 2011.

Net debt was $2.7 billion, a decrease of $85 million.

Last July we discussed our new strategies to stabilize and then profitably grow North America Soup and Simple Meals, expand or International presence and continue to drive growth in healthy beverages and baked snacks.

Fiscal 2012 represents a transition year as we make the investments necessary to return to our long-term growth target rates.

Our expectations for 2012 remain unchanged with net sales growth to be between 0% and 2%.

And we expect a decline in EBIT of between 9% and 7% and a decline in adjusted EPS of between 7% and 5%.

We expect increased marketing spending for the balance of the year as well as improved sales and gross margin trends.

Now we'll move to Q&A.

Thank you.

At this time we'll conduct a Q&A session.

We'd like to request that callers limit themselves to one question and stay on the line in case clarifications are needed, that way we hope to respond to more callers.

And if you have further questions you can just get back into the queue.

(Operator Instructions).

Andrew Lazar, Barclays Capital.

On the past call you guided to flattish gross margins for the full year.

And I realize with margins in the first quarter being perhaps a little weaker than at least we had modeled, I guess I'm wondering if that's still a reasonable assumption for the full year.

And the reason I ask is that if not, with the top-line and EBITDA guidance unchanged, I'm trying to get a sense of what this implies for SG&A and if Campbell is still committed to the $100 million in the incremental spend around marketing and innovation for the year.

Well, let me start with the last piece of that and say that we are committed to the incremental spend against innovation and marketing.

In the first quarter we were cycling the worst inflation comparison that we'll have across the full year and we probably had a little bit of a negative -- a more negative mix composition in the first quarter than we would expect to have for the balance of the year, Andrew.

I think that for the balance of the year, for the remaining three quarters we would still be expecting gross margin to be essentially flat.

Whether we'll get back all of the reduction we had in the first quarter or not, I'm not sure.

But I think we'll be essentially flat for the balance of the year.

Is there anything else that changes that allows you to keep your EBIT guidance for the year the same?

Or is it more just that's the reason for the range, I guess?

Well, partially that's the reason for the range.

But again, if you think about the profile of the P&L this quarter, the things that would be different as we look forward would be an expectation for a stronger top-line, a somewhat better mix composition, stronger gross margin and those things would give us the ability to show the higher marketing spend as we go forward and the balance of the three quarters and still hit within the range of our bottom-line.

Yes, regarding the $100 million investment, we are absolutely committed to it.

We've ramped up staff and funded our innovation breakthrough teams in R&D and we are building a consumer validated pipeline for F'13 and beyond.

And then you will continue to see increases in advertising and consumer promotion as the year unfolds versus year ago.

Thanks very much.

And the next question, please.

Eric Katzman, Deutsche Bank.

(Multiple speakers) a nice Thanksgiving.

I guess the first question I have has to do with the -- is there anything short term or intermediate-term, Denise, that you think can -- that can be done to kind of change the dynamics in Beverages and -- at Arnott's?

It just seems that that's to a certain extent more macro driven in the case of Australia and for Beverages it just seems like, unless the competition goes away or the category for whatever reason turns around, it's a little bit out of your control.

Well, it's true that the shelf stable juice category has weakened and, despite our declines, we actually did outperform the category.

However, we believe that given the new entrants into the fruit and vegetable segments of the category as well as vegetable-based segments that we really needed to increase our promotion and protect our business.

Now we have our new products shipping starting with V8 V-Fusion Smoothies which early days look really positive and our new advertising has started too.

So what we really would like to do as the year unfolds is rely more on the innovation and the brand building and much less on the price promotion going forward.

But we'll have to watch the dynamics of the category because this is a very important business for us.

In regards to Arnott's, needless to say that we are revising our plans to respond to this new reality and we believe that we have very strong brands in that marketplace and we'll continue to work that.

And the other thing we are doing is introducing new products into the market.

Okay.

Do I get a follow-up, Jennifer?

Sure.

Okay.

I guess just having observed the Company for a long time now, it seems that when it comes to the soup advertising or promotion the Company over the years just has tried like advertising in the fiscal fourth quarter and tried to get -- boost the business in a non-seasonally important part and then obviously you've changed what happened a year ago.

But I guess is it -- maybe it's a tough question to answer, but is it really about the timing of the advertising or promotion?

I mean isn't it at the end of the day just about the quality of the soup during the height of the soup season and that's really what's going to make a difference and not what seems like a never ending shift as to what the Company thinks is the right time or not the right time to advertise or promote the product?

I think that quality in the product is always important and we at Campbell's take that very seriously.

I do think though that based on what we did last year in the first quarter with the heavy discounting and the frontloading of our advertising, the fact that we are cycling with a whole different program this year is definitely going to show up in the comps.

And so we felt that we had to explain that.

Okay, I'll pass it on.

Thank you.

Next question, please.

Bryan Spillane, Bank of America-Merrill Lynch.

As you look into analyzing the first quarter, and I think -- and you were pretty clear I guess going into -- going back to the fourth-quarter call that in soup you were expecting a pretty tough quarter just because you were raising prices, you had less promotional activity and your advertising wasn't going to hit until late in the quarter.

And it looks like the volume elasticities were not worse than you thought they were going to be or I think maybe even a little bit better.

As the advertising has hit and as we start to model I guess the second and third quarters, have you begun to see at all a positive effect of being on air more?

Has it had some effect on the elasticities?

Just trying to get a sense for whether now there's -- you're getting some traction from having more support behind the price increase.

We're not going to comment on that current month or partial quarter in any way.

Right.

Right, right.

But I think that what I can comment on is that we were encouraged by the fact that the volume declines weren't as severe as we modeled them and that the elasticities were in fact better.

That said, we know that to grow this category we need a shift from stocking up to brand usage.

And so the increase in marketing and advertising in quarter two and quarter three will be against that particular goal.

So our expectation is that we'll continue to cycle a tough quarter in quarter two and we will be cycling comparable conditions starting February 1.

But we will be in full swing for both quarters.

And just maybe as you looked at the first quarter, just any idea or any insight into why the elasticity ended up being better than you thought?

Is it because the product proposition is better, is it because the competition did something different, just trying to understand that in terms of trying to extrapolate into the second quarter what we should be modeling.

I believe that last year when we did the heavy promotion discounting we didn't get the volume lifts that we had anticipated because, given the recessionary environment, the consumer stock-up behavior had fundamentally changed.

Thus when we had better price realization the lifts were actually a little better than that what we thought.

So I think that what we learned here is that the consumer is willing to pay a higher price for the product.

That said, we have to make sure we maintain a good balance of promotional activity with regular pricing in the marketplace.

Okay, great.

Thank you.

You're welcome, Bryan.

Next question please.

Chris Growe, Stifel Nicolaus.

I just had a couple questions for you on U.S.

Soup.

I know you had the launch of Slow Kettle in the quarter; you also had some new products a year ago.

I'm curious maybe if you have any little color on Slow Kettle initially.

And then maybe in relation to that, year over year was there a benefit investment from new product activity in U.S.

Soup?

Well, first of all, just the sheer number of new product entries in U.S.

Soup was about 27 new SKUs this year versus three last year.

So we hit the market with some force.

And just to highlight really two new products that show early signs of encouragement, one, as you mentioned, Slow Kettle, and the second is Swanson Flavor Boost.

And it's too early really to gauge consumer reaction at this point, but we have achieved our distribution targets and we've got our merchandising plans in place.

So far our Slow Kettle distribution and velocity is on plan and our Swanson Flavor Boost philosophies are above target and we believe that's due to the fact that we have now started our advertising and FSI support against that.

So we're very happy with the sales execution, but I don't think you would have seen much impact on the actual numbers in the first quarter.

Right, not yet.

We've been pretty limited.

Okay.

And then I just wanted to follow up on a previous -- I think it was from Bryan's question, but the marketing and the R&D and the increased investment of $100 million for the year.

Was that skewed at all to other divisions?

So is U.S.

Beverages getting more of that money than maybe you thought?

I'm really more interested in how soup spending as you see it today -- does that have to increase more or less than you thought or is it just on plan?

Well, first of all, I think there are two things that are important here.

One is that when you think about the $100 million you can think about it in lots of different parts of our P&L, right, we're supporting new product introduction with money that would show up in trade spend, we're increasing marketing spend in this past quarter.

For example, we've made considerable investment in beverages with -- and our sauce business.

As the year progresses you'll see some increased advertising in soup.

We're also supporting SG&A kinds of expenses in the P&L as we've put the innovation platforms that we've talked about together in CNA.

The other thing, and I think Denise made this point particularly back in July, it's not just a matter of tossing an extra $100 million in on top of what we were doing.

There's been a tremendous amount of redirection of activity and effort in the base spending so that we feel that we are being more effective in our spending within the R&D line, that we're being more effective with our spending inside the marketing programs against some of these products.

So even in the event that say advertising against a particular product line may not be up significantly, we think we're spending a little more wisely and we're definitely more focused on new product and innovation.

So I guess my point is it's a little hard to score keep across all of those different dimensions against the $100 million without also thinking about redirected activity within the base.

We set up an operating committee to work with this with a large amount of discipline to make sure that we're tracking where the money is spent and how we're getting the best returns for that investment.

But this is going to take us some time.

Sure.

Thank you for the answer there.

You're welcome, Chris.

Next question, please.

Rob Moskow, Credit Suisse.

I guess I'm still a little confused on where the money is being spent.

I think that your advertising campaign for Look What Soup Can Do is expected to be only mildly higher than it was a year ago, a little above $100 million.

And then I look at the R&D line and it's flat versus year ago.

Denise, you said that you're staffing up and you're probably testing a bunch of ideas, but I guess I'm just not clear.

Like I would've expected R&D certainly to be up higher, I would have expected market research to be higher.

Where are you right now in testing a pipeline of ideas that can come out in fiscal '13?

We have a full-court press against developing this consumer validated pipeline and we have -- remember, we had a number of R&D and consumer insights resources on sodium reduction in the past.

We've been able to repurpose a large number of those resources towards developing new disruptive innovation, particularly in the area of Simple Meals because we already had a pretty robust group against beverage and baked snacks.

But it is in absolute full swing and we're pretty pleased with the progress that they're making.

That's not necessarily showing up in the P&L as you look at the numbers versus year ago because there has been some reallocation.

But as the year advances you will start to see the advertising and consumer line jump.

Okay, I get it.

And then, Craig, can you remind us if there's anything in that $100 million -- any assumption on higher incentive comp hitting your numbers this year?

No, we have said that we have a headwind of about $20 million on incentive comp, but that is not in any way counted in the $100 million.

Separate.

Okay, thank you very much.

Next question, please.

David Driscoll, Citi Investment.

Hi, good morning, this is actually Alexis Borden in for David this morning.

Just a question, we saw some volume weakness across International Baking and Snacking, and the Baking And snacking of course on the Australia side.

Did you expect these volume declines and what do you see going forward?

Do you think volumes are going to rebound or is this a trend here?

Did you mean throughout Global -- just to clarify, Global Baking and Snacking or just Australia Baking and Snacking in particular where you're asking about volumes?

Both the International segment and the one -- also Global Baking and Snacking?

We anticipate that the Pepperidge Farm part of our business which performed well in the first quarter will continue on that trajectory.

We are dealing with the slower consumer environment in Australia.

We did have more price realization in quarter one and we believe the pricing that the consumer experienced negatively impacted our volumes.

So we are revising our plans to respond to this new reality.

And we will continue to support our brands with strong levels of marketing support and introduce new products.

And so, we expect that there will be a positive response to this.

But what about the International Simple Meals and Beverages?

Volumes were down 7%.

Do you see further volume losses there or kind of --?

We got off to a pretty tough start in both pieces of our Australian business, so Denise talked about Global Baking and Snacking, the soup side of that business was weak-ish also for some of the same reasons with respect to consumer weakness in Australia.

And the European business, frankly, was soft particularly in Germany and in France.

And the other point to make there is we employed the same strategy in Canada that we did in the US.

So volumes are down significantly in Canada as we pulled back significantly on our trade promotion levels.

And so as with U.S.

Simple Meals we would expect to see some strengthening as we move through the year there.

Okay, that was hopeful.

Thank you.

Thanks, Anthony there for chiming in.

Next question, please.

David Palmer, UBS.

Just a question on the advertising.

How do you anticipate your trends, the consumer response to advertising which has ramped up lately?

Is it typical that the response is gradual?

Do you expect a gradual ramp up in consumer spending, particularly that non-promoted volume?

Or is this something where you typically see more of an immediate response as you remind them of soup in that occasion?

Advertising typically takes a little bit longer than the immediate gratification of a promotion.

However, there's been some changes in our advertising that are really, really important.

We did repeat an Anthem spot because that really showed some good diagnostics last year.

What we did was we revised our condensed soup spots to highlight more of the emotional aspects of the brands given consumer feedback.

So that's fundamentally different.

We were also featuring our icons, Chicken Noodle Soup, Tomato, in those spots which we did not do last year when we featured the other varieties.

We continued with Chunky in the campaign as is because that was a very strong response.

So we believe overall that we've learned from what worked last year and what didn't and we strengthened the campaign.

But we do expect that that campaign will take time to seed and grow the business.

If I can just squeeze one more in.

How would you characterize the pricing right now in the soup aisle?

It looks like there's broader price increases by competition out there in just the last month or so of the data, but maybe that's just a blip?

No, we moved prices up in June, but your observations are correct.

In quarter one we're starting to see other branded and private label competitors improve their price realization.

Thank you very much.

You're welcome.

Next question, please.

Ed Aaron, RBC Capital.

The beverage business had some margin pressure this quarter and we don't have a ton of historical data around that segment.

So I'd just like to maybe get your sense for how you frame your expectations around both when those margins might start to recover and then also what you would consider to be a normalized sustainable segment margin for beverage?

Well, Ed, it's difficult to predict when the environment might change.

Two things are going on at the same time here.

One is that we've seen really significant inflation into the category from both packaging cost and from juice concentrate.

And the other thing is that we've seen a lot of competitive entrants into the category.

So we have been intentionally being very competitive with respect to price and with respect to promotional activity to defend the territory that we've carved out there.

Historically I would say that the V8 red juice tends to be very responsive to the overall consumer environment and tents to weaken somewhat in difficult economies, strengthen somewhat in stronger economies.

We've continued to see good growth from our innovative product entries, but we haven't gotten as much margin as we would normally like in those areas because of circumstances that I just described.

So I think as you look forward, clearly we would expect to restore some margin to the category over time, but in the short term it's going to be -- it's going to be a rough piece of the business for us because of those circumstances.

And just as a quick follow-up, can you tell us if there's historically much margin seasonality within that business?

We obviously know the last year's numbers, but over a longer period of time are certain quarters higher versus lower margins in that business typically?

There's not a great deal of seasonal variation in our juice business

Thank you very much.

-- on margin.

Next question, please.

Rob Dickerson, Consumer Edge Research.

So I ask this question almost on every call every quarter now, but I just want to focus on the balance sheet again and buybacks.

I know over the past -- consistently over the past 10 years you buy back shares every year past three years on average, each year you've been buying back about 600 million it sounds like.

Some of your options are starting to roll off more.

So I'm just curious, this year I saw you brought back some shares in Q1.

But should we be modeling in a $500 million cash outflow or just some color on expectation for incremental buybacks this year especially because you're so under levered.

Yes, we don't give a forecast on share buyback by the year.

As you know, we've got a $1 billion program that was approved last June.

I think the best thing I can do is just relate back to what we say about cash flow.

First priority is reinvestment in our business for good return.

Our second priority is to the extent that we can identify good candidates for acquisition and our partnership kind of activities, invest in the expansion in our International business, or in our domestic business in those ways.

We try to be very consistent with respect to the way that we handle the dividend.

And the share repurchase is sort of the last and most flexible piece of the cash flow picture for us.

In order to keep it that way we don't lock ourselves into a specific forecast for the year.

Okay, and then just a quick follow up on the comment you just made too is on cash flow is -- if I just look on average over the past five years, you've actually spent more on the dividend than you have on CapEx and purchasing new assets combined.

I'm just -- if I'm thinking forward three or five or 10 years for a stable business as you're on the cash flow side, do you think that would ever reverse?

I mean do you think -- would you ever potentially hold the dividend flat?

Not grow the dividend, but grow more in acquisitions and value creating investments?

We tend to look at the dividend versus the peer group that we're in.

And while we don't have a written policy from the Board we hang around the middle of the payout ratio of the peer set.

And I think that would be a reasonable expectation looking forward.

Okay, thanks.

I'll pass it on.

Next question please.

Jason English, Goldman Sachs.

So in addition this quarter, you guys had a lot of the coming to market.

I think, Denise, you highlighted soup going from three to 27.

Was there any sort of pipeline benefit just as you stock up warehouses, get that on shelf that we should be aware of this quarter?

Not one that would be very material to the numbers, Jason, no.

Okay, thank you, that's helpful.

Looking at soup in aggregate, you guys had a lot of comments about you're upbeat on elasticity, it's coming in better.

You're feeling good about innovation; you're feeling good about the efficacy of your marketing, even if the magnitude is down year on year.

How do we put that with some of the performance though?

Because I look at soup, particularly RTS, and it's down nine this quarter, it was down 13 in the same quarter last year.

Is that really better than what you guys were expecting this quarter?

Actually the overall soup performance was better than what we were expecting this quarter in that we said that we were going to stabilize the category from a profitability standpoint for us and then grow net sales.

And believe me, when we went away from the price discounting that we did last year and the volumes came in better than expected and therefore the profitability was better than expected, we believe we're on our way to stabilizing our business and then profitably growing from that base.

Just to give some more context on that, our volume performance in soup in the first quarter despite the list price increase in the fourth quarter and the reduction in trade is better than the back half of last year.

Where was the increase in trade then because I see your promotions were negative 1% this quarter as a contributor to sales.

Was that more sauces and salsa?

Yes, trade is up on both beverages and sauce businesses.

Got it.

All right, thanks a lot, guys.

I'll pass it on.

Thank you.

Next question.

Eric Serotta, Wells Fargo.

I think you just answered it, but just wanted to go through -- give -- go through a little bit more color on the trade spending in U.S.

Simple Meals.

It's kind of surprising to me that overall trade spending in Simple Meals could be up when it's down for the U.S.

Soup business, just given the relative size of soup versus sauces.

How is that the case?

Part of it is that the nuance to how we calculate these variances -- certainly on a dollar basis, year-on-year, trade promotion spending is down in U.S.

Soup.

When we do the sales variances, you can think of it as if we are doing it on a rate-per-case idea.

So promotional spending is down and volume is down and that's why you don't see it on the sales variance as much.

Okay, thanks.

And then, Craig, have you given an estimate as to COGS inflation for this year?

Yes, we have.

We have said that input costs would be in the 8% to 10% range, that the net impact after our enabler program would be between 3% and 5% on total cost of sales.

Okay, and has that changed since the Analyst Day that -- I believe that was from the Analyst Day, right?

Has not changed and the first quarter fell roughly in line with that.

We were up between 7% and 8% in terms of input cost, our enablers were about 3% of cost of sales.

Okay, I'll pass it on, thanks.

We have time for one more question.

Diane Geissler, Credit Agricole Securities.

I just wanted to talk about the shipment versus scanner.

And I think this might be a function of what you talked about earlier in the call when you said you saw some channel shift with traditional retail sort of bearing the brunt of the changing shopping patterns.

But I'm particularly concerned about the ready to serve segment which seemed to show for the 12-week basis a bigger decline than your shipments.

So is that just a function of consumers are shopping in channels that aren't part of the scanner data?

Or is there a little bit of buildup because we know that advertising is going to get turned on?

What do you attribute that to?

We found that for the quarter shipments track consumption more closely than what we experienced last year.

And in quarter one typically we ship ahead of consumption because we're building for the season, but we did see a lower level of customer inventory than last year.

And we believe that in the prior year, because of the heavy discounting we did, we were definitely shipping more cases ahead of consumption in the quarter last year.

And we do track customer inventory for the majority of our customers and actually our inventories are down versus year ago.

So -- but we believe that the shipments are pretty much in line with consumption.

Okay, and then can you just clarify for me, when did you turn advertising on last year?

When did you turn it on this year?

And then when did you turn it off -- speaking about soup -- last year so I can get some kind of idea about -- did you turn it on in August and this year you turned it on in September or just give me a time line?

Yes, we turned it on August 1 last year against our re-ignite condensed launch and we were pretty much done by the half time.

And this year we turned it on the week after Labor Day, this is in soup, the week after Labor Day and we intend to go through the third -- the end of the third quarter.

In Beverages we turned on the advertising October 15.

In Sauce we didn't advertise that much last year, so we actually started Sauce advertising in the quarter.

Okay, and what do you consider half time, just to clarify, last year?

The end of January.

End of January, okay.

Thank you.

Okay, we'll turn back over to Denise for our wrap-up.

So before we conclude our first-quarter call, let me leave you with a few thoughts.

The important point I want to make is while it's early we are clear where we're headed and we're beginning to execute our strategies.

We'll continue to do what we said we would do and we'll continue to tell you what's working, what's not and what we're doing about it.

And while our first-quarter financial performance was largely in line with our expectations, we recognize that we've got more work to do in our categories.

Stepping back the quarter serves to reinforce our conviction that more brand building and innovation are needed to deliver the profitable sales growth that we want.

And as we focus forward we're determined to build a different company at Campbell, one that creates value by driving sustainable profitable net sales growth.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation and have a wonderful day.

You may now disconnect.