金寶湯 (CPB) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Campbell Soup Company second-quarter 2012 earnings call.

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

Later we will conduct the question-and-answer session and instructions will be given at that time.

(Operator Instructions) As a reminder today's conference is being recorded.

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

Please begin.

Thank you.

Good morning.

Welcome to the second-quarter earnings call and webcast for Campbell Soup Company.

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

Denise will kick us off today by giving a strategic update and commenting on our segment results for the second quarter.

Craig will offer his take on the quarter and first half, as well as our expectations for fiscal 2012.

Then, after we take your questions, Denise will make a few closing remarks.

Before I move on to our important reminders, I would like to invite all of you to join our webcast next week at February 22, Wednesday, at 10.30 a.m.

Eastern, when we are presenting at the CAGNY 2012 conference in Boca Raton.

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

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

Please keep in mind that this 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.

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

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

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

With that let me turn the call over to Denise.

Good morning.

Thanks for joining Campbell's second-quarter earnings call.

Six months into our strategic transition we are focused on building a different company at Campbell.

As we said last July, implementing our new strategic direction will require substantial investment.

We are confident that the course we have charted will positioned Campbell for future success.

This morning I will provide my perspective on our segment performance and our progress.

Our US Simple Meals and North America Foodservice businesses are tracking favorably and we expect improved performance in Australia and US beverages.

We are slightly behind our expectations on net sales, but projecting to be within our guidance for full year 2012.

As a reminder, Campbell's primary goal is to create value by driving sustainable, profitable net sales growth.

We continue to make progress executing our growth strategies and our focus remains on the consumer.

Our three growth strategies are -- stabilize and then profitably grow North America Soup and Simple Meals, expand our international presence, and continue to drive growth in Healthy Beverages and Baked Snacks.

As we told you last July, in fiscal 2012 we are increasing our investment in brand building and innovation for the long-term growth of our business.

Overall, to enhance our brand-building efforts this quarter we increased advertising and consumer promotion expense by 6% with gains across all of our portfolio.

You will continue to see increased advertising and consumer promotion in the back half of this year.

Our innovation investments are also progressing and I look forward to sharing some of the early results with you at CAGNY next week.

Within the US grocery trade this past quarter dollar consumption softened dramatically, particularly in the last four weeks of the quarter.

For total Simple Meals this softer consumption occurred almost all categories with 32 center store categories experiencing declining trends for the four-week period versus full year-to-date.

Our hypothesis is that continued pressure on the consumer in the current economic environment increased after holiday spending cycles and the resulting decrease in personal disposable income has forced consumers to reduce discretionary spending, including food.

Overall, consumer outlay for total food and beverage was up only 1% in the 12-week period and the average number of units per trip declined 3%.

Against this background I will offer a brief perspective on our second-quarter results.

Our second-quarter performance was broadly in line with our expectations; however, sales of $2.1 billion were slightly lower than what we anticipated.

As expected, our adjusted EBIT and EPS were down due to the marketing investments we are making, inflation, and a higher tax rate.

Now let me offer some perspective on some of our segment results.

In US Simple Meals, we are delivering on our efforts to stabilize profitability.

We had a modest profit decline in US Simple Meals as weaknesses in Sauces was partially offset by stronger profits in Soup.

There were three drivers of our Soup performance.

Number one, we are achieving price realization via reduced promotional discounting and list price increases.

As a result, we are shedding less profitable volume.

Number two, we are delivering and supporting meaningful levels of innovation.

We launched 27 new products this year compared with just three last year.

And, number three, we are driving advertising and consumer promotion behind our big brands and consumer behaviors.

Our overall US Soup business performed as expected with some puts and takes.

Condensed soup and broth sales were better than expected.

Ready-to-serve soup sales did not meet our expectations.

Increased list prices and the reduction of heavy promotional discounting resulted in significant price realization.

This created wide price gaps against branded competitors that impacted our volume and market share.

We believe that we can be more competitive in RTS and still continue the momentum of profit improvement in the Soup business.

Our strategy to increase brand building and reduce heavy discounting is working and drove the fourth consecutive quarterly profit increase for US Soup.

We anticipate that sales trends in the second half will improve as the heavy discounting is now behind us.

We achieved our largest net gains in soup distribution in more than four years.

Total distribution points on shelf increased mid single digits.

We recognize that we still have opportunities to build distribution in value channels.

We are setting up our US Simple Meals for future success and we will talk more about that at CAGNY next week.

Before I leave Simple Meals, as you know, we have made some leadership changes at Campbell and Mark Alexander now leads our Campbell North American business.

Mark has a proven track record of success.

He has managed businesses all over the world, including soup businesses in the United States, Canada, Europe, Asia, and Australia.

Now Global Baking and Snacking.

Global Baking and Snacking turned in a similar performance as the prior quarter, but with slightly different drivers.

We made a choice to increase marketing investments in our Pepperidge Farms business.

Our cracker business responded well, garnering gains in sales and market share.

Goldfish sales increased double digits; however, pricing contributed to softening in our cookie business during the peak holiday season.

In Bakery, industry consolidation has made for challenging category dynamics including competitive pricing pressure.

Overall, we can compete with our position as a premium player with strong brands and the greater agility that our size enables.

In Australia, consumers have sharply curtailed their spending this year and Arnott's had a tough first half.

We started to see stronger sales in January.

We expect improved performance in the back half of the year driven by a strong promotional calendar and a robust set of new product introductions.

Turning now to US beverages.

As you saw in the second quarter and the first half of this fiscal year, our US Beverage business is not always without challenges.

We had a significant decline in EBIT, due primarily to increased advertising and promotion and cost inflation.

We expect the rate of inflation to abate in the second half and profitability will continue to improve.

And we also have a number of new product introductions slated for the second half.

We have had plenty of experience navigating the V8 business through cyclical up swings and down swings, and we have learned that the best way to maximize the health of this business is through brand building and innovation but also to defend what we have built.

Recently our V8 V-Fusion business has been pressured by new competition in the fruit and vegetable segment.

Our investments to defend it have led to earnings pressure in the short term, but this is the best course for long-term success.

And despite a weak shelf-stable juice category and intensified competition, V-8 is outperforming the category and gaining share.

We reiterated our annual guidance this morning.

The guidance reflects the strategic transition we're making, including investments in brand building and inovation, reallocation of existing resources to fund growth and headwinds in the first half in our US beverages and Australian business.

As I said earlier, we view fiscal 2012 as a year of investment for Campbell.

We remain very focused on the superb execution of our three growth strategies to create a meaningfully different company over time.

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

Thank you Denise, good morning.

I will spend a few minutes walking through the results and segment highlights, followed by a brief look at our first half result, and then I will provide an outlook for the year and reaffirm our full-year sales and earnings guidance.

For the quarter we reports net sales of just over $2.1 billion, down 1% versus the second quarter of 2011.

In aggregate there was no currency impact this quarter, so organic sales also declined by 1%.

We reported a 2% decline in organic sales in our first quarter.

We recognized some additional restructuring charges in connection with the program that we announced last June.

Excluding that impact, EBIT decreased 8% this quarter to $332 million, primarily due to significant cost inflation, lower volumes, and increased marketing investment partly offset by higher selling prices and productivity improvements.

On a segment basis, sales gained in the North American Foodservice division and US Beverages were more than offset by decreases in international Simple Meals and Beverages and US Simple Meals.

Earnings fell across all of our segments except for North America Foodservice.

Earnings per share were $0.64 this quarter, a 10% decline as compared with the second quarter of 2011.

The 1% decline in net sales reflected a decrease in volume and mix of 3 points and the negative impact of increased promotional spending of 1 point partly offset by an increase in pricing of 3 points.

The majority of the pricing gains have come from our list price actions in US Soup and in our Baking and Snacking segment taken to partially offset the impact of inflation.

With respect to promotional spending variances, higher rates of spending in Baking and Snacking and in our US Sauces business were partly offset by a reduction in our US Soup spending.

As many of you know, over the last month or two we have seen a softening across many categories within the US grocery trade.

Our categories, and consequently our sales, have been negatively impacted by this trend.

For the second quarter our gross margin decreased by 100 basis points to 38.4% from 39.4%.

This 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 sold was approximately 7% in the quarter.

Our lower margin segments have outperformed our higher margin segments contributing to a negative mix impact.

While we have implemented higher prices and achieved productivity gains, these have not been sufficient to offset inflation and negative mix.

Our gross margin performance is below our own earlier expectations primarily due to higher rates of promotional spending in Baking and Snacking and in US Beverages.

Our marketing and selling expenses increased 2% to $297 million compared with $291 million in the prior year.

This increase was primarily due to higher advertising and consumer promotion expenses; selling expense was lower.

As part of our new strategic direction, we are investing in brand building and innovation to drive profitable sales growth for the Company.

In the second quarter we increased advertising and consumer promotion expense by 6% with increases across many of our key brands.

Administrative expenses decreased by $2 million to $152 million, reflecting the benefit of cost savings from restructuring initiatives partly offset by higher incentive compensation and benefit costs.

Below the operating earnings line, net interest expense fell by 16%, a decrease of $5 million reflecting an overall reduction in long-term interest rates.

The adjusted tax rate increased to 33.7% from 27.1% in the prior year.

The prior-year rate benefited from tax credits associated with foreign earnings.

Reflecting the higher tax rate, adjusted net earnings were down by 13%.

Adjusted EPS benefited from a 4% reduction in diluted shares outstanding, declining 10% to $0.64 per share.

Second-quarter segment sales results and the corresponding organic growth rates are shown here.

US Simple Meals sales declined 2%, reflecting lower sales in both US Soup and US Sauces.

US Soup sales fell 2% this quarter as volume performance was impacted by higher selling prices and decreased promotional spending.

Our sales performance was better than retail or take away, and this reflects the impact of movements in customer inventory levels relative to the prior year.

We ended the quarter with retailer inventory at normal levels and comparable to prior year.

Within the US Simple Meals segment sales of the US Sauces segment decreased 2%.

Prego Pasta Sauce achieved 6% volume-driven sales gains benefiting from increased advertising support and promotional activity.

Pace Mexican sauce declined 7%, reflecting the impact of increased private-label activity, and other Simple Meal brands also declined.

Global Baking and Snacking sales decreased 1% due to declines in Arnott's.

Pepperidge Farm had increased sales primarily due to crackers led by the double-digit growth in Goldfish Snack Crackers partially offset by a reduction in Cookie and Bakery products.

The performance of our Arnott's business was negatively impacted by higher promoted and nonpromoted price points at retail and a weak consumer environment.

Although still down, the sales trend in Arnott's was much improved compared to the first quarter.

Within international Simple Meals and Beverages, organic sales declined 4% primarily due to declines in Europe and Canada partly offset by gains in Latin America and the Asia-Pacific region.

In Europe where there has been a challenging economic environment, sales fell primarily due to volume loss in France and Germany.

Reflecting improved top-line performance and outpacing the category, US Beverage sales increased 4% versus prior year.

Gains were primarily driven by growth in V8 Splash drinks and V8 V-Fusion juice partly offset by weakness in V8 Vegetable juice.

Contributing to growth this quarter were the launch of new items including V8 V-Fusion Smoothies as well as higher levels of advertising to support the new campaign with Jackie Chan.

Sales in North America Foodservice increased by 9% primarily due to volume-driven gains in fresh chill soups sold at retail.

Operating earnings for US Simple Meals decreased by 2% to $174 million this quarter.

This reflected lower earnings in US Sauces including incremental spending on Simple Meals innovation partly offset by gains in US Soup.

For the segment, lower volumes and increased advertising and consumer promotion expenses were partly offset by an increase in gross margin percentage and lower selling and administrative expense.

Our strategy to reduce the level of promotional spending in US Soup to improve profitability is working.

We have now achieved four consecutive quarters of earnings growth.

Earnings within Global Baking and Snacking declined by 12%, reflecting decreases in both Pepperidge Farm and Arnott's primarily due to cost inflation and increased promotional and marketing spend.

This was partly offset by higher selling prices.

Within international Simple Meals and Beverages earnings declined 16%, primarily due to increased costs associated with our market expansion investment in China and lower earnings in Europe and Canada.

Operating earnings for US Beverages were down 21%, reflecting significant cost inflation primarily in juice concentrates and packaging materials, as well as higher advertising and consumer expense partly offset by productivity gains.

North America Foodservice continues to achieve strong growth with operating earnings up 33%.

Higher earnings have been primarily driven by volume gains, higher selling prices, and productivity improvements partly offset by cost inflation.

US Soup sales for the quarter decreased 2%.

Within Soup sales of condensed soup increased by 5% with gains in both cooking and eating varieties.

Ready-to-serve sales, where price elasticity is most evident, declined 12%.

RTS sales in the quarter benefited from the introduction of Slow Kettle soups.

Broth sales also increased on volume gains of aseptically packaged broth and the successful introduction of our Swanson Flavor Boost product.

Before I move on I want to comment on a topic that has received increased attention lately.

As you know, Bisphenol-a, or BPA, is widely used in metal food packaging to help preserve and protect food and to maintain its nutritional value and quality.

We believe that current can packaging is one of the safest options in the world; however, we recognize that there is some debate over the use of BPA.

The trust that we have earned from our consumers for over 140 years is paramount to us and we have been monitoring and working on the issue for several years.

Because of this, we have already started using alternatives to BPA in some of our soup packaging and we are working to phase out the use of BPA in the lining of all of our canned products.

The cost of this effort is not expected to be material.

The US wet soup market share results from the latest 52 weeks, based on IRI panel data and Campbell's internal estimates, is shown here.

Campbell's market share decreased 2.4 points to 60% as we focused on stabilizing Soup profits.

The share loss was driven by ready-to-serve soup as our market share from condensed was down only slightly and broth was actually up.

Other branded players gained 1.5 points in total and private-label gained nearly 1 point.

The overall category was down in dollars by 0.9% in the past 52 weeks.

Our Soup sales declined 4.7%, underperforming the category due to anticipated volume loss associated with our reductions in deep discounting and our list price increase.

Other branded players increased sales by 5% during the period while private-label sales rose 6%.

Our first-half results now reported and organic net sales decreased 1%.

Excluding items impacting comparability, adjusted EBIT of $750 million was down 7% versus a year ago.

As with the quarter, this decrease was primarily due to significant cost inflation and lower volumes, partly offset by higher selling prices and productivity gains.

A 5% decline in adjusted EPS was less than the EBIT decline as we have continued to benefit from utilizing our excess cash flow to repurchase shares.

Diluted shares outstanding fell by 4%.

Cash flow from operations was $478 million compared to $483 million in the prior period.

This decrease reflected the impact of lower cash earnings partly offset by the benefit of lower pension contribution.

During the first half of the year we utilized our positive cash flow to repurchase 5.3 million shares at a cost of $173 million under our strategic share repurchase program announced in June 2011 and our practice of buying back shares to offset those issued under our equity-based compensation programs.

Net debt was $2.6 billion, a decrease of $240 million.

Reflecting our expectation of improved sales performance in the second half of the year, we are reaffirming our full-year guidance.

We expect net sales growth of between zero and plus 2%, a decline in adjusted EBIT of between 7% and 9%, and a decline in adjusted EPS of between 5% and 7% putting adjusted EPS in the range of $2.35 to $2.42.

We are now forecasting that our gross margin percentage will decline about a point compared to 2011.

As I mentioned earlier, this is due to higher rates of promotional spending in our Baking and Snacking segment and in US Beverages.

Our guidance has not changed because operating expense, including marketing, is now forecast lower than our original expectation.

That being said, we are still planning significant increases in our advertising and consumer promotion in the second half of the year.

Thank you very much.

With that I will turn it back over to Jennifer to start the Q&A.

Operator, we are ready for the Q&A.

Could you give us our first question?

(Operator Instructions) Eric Katzman, Deutsche Bank.

Good morning, everybody.

I guess my question revolves around your outlook.

It sounds like a little bit more confidence in the second half; fiscal sales doing a bit better and yet, as I am sure you are aware, a lot of companies are grappling with the consumer and lower volumes.

You kind of made reference to that as well post the holiday, so that would refer to just January.

So I guess why exactly do you feel that sales can hang in there when it seems like the consumer is going the other way and retailers are cutting back on inventory, and the whole industry appears to be in the midst of really, really tough times?

There is a number of factors, Eric, that give us reason to believe that second half will be better.

First of all, in our US Soup business, we are continuing with much higher levels of marketing, advertising, and consumer promotion in the second half of the year versus where we were last year.

In addition, we are now cycling a period of time that does not include the heavy discounting that we have had in the base for the last four quarters.

We also have price realization on US Soup that will come through versus year ago.

In Australia, where we have had a tough first half, we have a much stronger promotion calendar in half two and several new product launches, and we have already seen evidence as recently as January that the performance of that business continues to get better.

In Beverage our cost inflation comparatives improve and we are also introducing new products, and we are continuing to support that business as well with advertising and consumer promotion.

I think the other thing in Beverage is we are continuing to take steps in the supply chain to improve margins.

So I believe across all the businesses we are taking into account that it is a tough environment and we are making the necessary plan changes to make sure we are delivering despite that.

Just as a follow-up and then I will pass it on.

Condensed seemed to be surprisingly strong in the quarter versus the IRI data that we see and some expectations.

But I am kind of wondering is it a function that the price point on condensed is so low given the -- and the value that the consumer sees that that has really started to come through?

Because obviously Smucker, General Mills, and others have kind of -- if they took the pricing over a certain threshold it seemed like the volume just collapsed coincident with that.

And maybe condensed is the opposite because it's normally featured during the winter, sometimes 10 for 10 or things like that.

So maybe you can just comment on that and I will pass it on.

There is no doubt that Condensed Soup benefited from the fact that we have -- with the increased pricing that we have taken in the category and RTS especially, condensed has come through to the consumer as a better value.

Coupled with a strong holiday on Condensed Soup we did have a good quarter.

So I do think that it is a better value at this point.

I don't know if you have anything else that you want to say, Craig?

I think maybe a little bit of the difference between the consumption numbers that you referenced and the sales take away in condensed, we said in the discussion here that inventory movement -- and it's really prior year inventory movement that was a little unusual -- helped us a little bit in terms of shipments versus consumption.

And that was probably more prevalent in Condensed than it was in RTS.

Thanks.

We will see you next week.

Okay, next question, please.

Akshay Jagdale, KeyBanc.

Morning and thanks for taking the question.

I was just trying to get your sense of the overall trends in food volumes.

There has been a lot been said about that; most other companies are experiencing volume weakness.

Can you just give us a sense of what you are seeing from the consumer?

So, with all of the insights that you have into the consumer, what are you seeing in terms of their buying patterns?

How they changed and perhaps how is Campbell reacting to that?

That would be helpful.

We are obviously tracking 39 categories in the center store and, of those 39, 32 had trends in the last four-week period that were much lower than the full year-to-date trend.

So there clearly is something going on.

And as I said in my opening remarks, I believe it's just post holiday pressure.

Consumers are making choices and one of the biggest discretionary budgets they have is their food budget and so we believe that that is largely responsible for what we are seeing.

Basket size is down 3%, so units per buyer is down, and spending is down so they are clearly making different choices.

Have you made any changes to your strategy short-term, because this is a more recent event?

I know you have your long-term plans, which you have made clear to us, but have you made any changes recently given the trends you have seen?

I would say the most changes that we have made have been in the Australia business.

In the United States we have been able to navigate this because this has been with us for a while.

I would sort of separate big strategic moves, where I think Denise is exactly right, from sort of the day to day in the marketplace.

We have seen -- in this past quarter we have increased our promotional activity and spending a little bit in Pepperidge where we have seen category weakness in Bakery.

We are sort of constantly adjusting the dials at a small level, but I agree that we haven't made any big, significant strategic --

Right.

Overall, we are staying on course.

Great, thank you.

I will pass it along.

Next question, please.

David Driscoll, Citi Investment.

Good morning.

Wanted just to a little bit more about the advertising spend and the plans here.

So back at the analyst day you mentioned that there was the effort to do both an increase in the advertising budget and in R&D, and I believe the sum total of that number was about $100 million.

So far year-to-date I think -- correct me if I am wrong on this, Craig -- but I think the number is still slightly down on advertising.

So Craig, Denise, can you pull this together for me and tell me how you are tracking against that original goal?

And perhaps -- it has been my hypothesis that because the weather was so warm maybe spending a lot of money on advertising with the fourth warmest winter on record is not the best use and maybe you delay it to next year.

So can you take this and kind of give us an update?

Yes.

Let me talk first about sort of process that we used when we reference that number and where we are against that spending.

We literally in our annual planning process identified $100 million, some of which we allocated initially in the planning process and some of which we actually kept back in a fund to be allocated as we went through the year.

The use of all of that $100 million was a combination of improving our brand-building activities, particularly against some of those brands where we felt like we had not been sufficiently funding them, and increased innovation activity.

We said at the time that that amount would show up in all kinds of different parts of the P&L.

Some of it is in trade spend actually because that is where we expense slotting fees for new products.

Some of it is in SG&A because it's helping to support some of the new product platform teams that we have put in place.

Most of it, of course, winds up on the P&L in marketing and R&D.

That program, that $100 million program is very much on track.

In fact, we are spending maybe a little bit ahead of $100 million rate for the year.

We are pretty encouraged by some of the results that we see from it and we are sticking to our guns there.

Now in the rest of the P&L, as we said in our guidance statement here, we are a little bit below -- as we forecast the full year now we are going to be below our original expectation in terms of marketing spend.

We are benefiting, for example, in R&D from the restructuring activity that we did toward the end of last year where we took out some resource and some spending that we thought wasn't giving us productive payback.

So you have got ups and downs and puts and takes across the P&L.

It's fair to say that the incrementality of this $100 million is not going to be as great as we originally thought it was.

That was referencing back to my point that I made in the guidance statement that marketing for the full year would be somewhat lower than our own expectation.

But it's sort of the difference between the daily, weekly, monthly management of the P&L, our opportunity to find cost savings in various parts of the P&L, offsetting and being reallocated versus that $100 million program.

Can you just maybe make a comment on the winter weather and how that factors in to how you spend against it?

Because I am just curious on whether or not you guys react to the weather and say maybe we don't want to spend as much right now because it was so warm.

We are absolute advocates of global cooling, but actually we acknowledge the fact that the weather was warmer.

But we also sell a lot of soup in warm weather climates so we have got to deal with that.

And we are.

I think where we are going, particularly with our Soup business, is we want to increase usage of the product in some positive need states.

Not necessarily the negative ones, like when people are sick or when they are cold.

So we are not going to use weather as an excuse, we are going to use it as just another environmental factor.

No question in a seasonal business that it has had some impact.

It has had some impact on our European business.

But I think Denise's point really is that in terms of resource allocation, we have tried to continue the brand-building activity that we think is sensible.

And we are seeing some good results, particularly in our Soup business, from the advertising itself.

I wanted to also give you a little bit more perspective on the $100 million.

Just so that you know, we spent the money on everything we expected to and we haven't held anything back.

We are budgeting on things that haven't come through yet.

You will see some of those next week.

And we are going to continue to invest this money when we are ready to spend it, but we feel really good about the fact that it's the right appropriation for the ideas that we have.

Thanks for all the comments.

See you next week.

Next question, please.

Chris Growe, Stifel Nicolaus.

Good morning.

I just had two quick questions for you.

I wanted to ask about the shift to alternate channels.

I guess I can see the consumption decline occurring in the IRI and Nielsen data.

I guess I am surprised that people are really cutting back to that degree.

But can you talk a little bit more about the alternate channel performance and really as it pertains to Campbell?

Or maybe if you have a broader view on how that shift is occurring for the consumer and what that means for you?

We know that alternate channels right now in the industry are performing about 7 to 8 points above traditional channels and that shift is occurring, again, across most of the food business.

I would say that we have opportunities in the value channels in particular and that the IRI data is probably about 60% coverage for us.

That is helpful.

Then my other question just was I guess maybe to Craig, just to understand the retail inventories now are at the right level.

Was that a benefit across the business?

Was it just for Soup?

If you have a little color on that, maybe how much it benefited the business.

It was primarily within Soup.

Again, it's really last year that was unusual.

We came into the second quarter last year with pretty heavy inventory levels, and so in the year-over-year comparison you saw less takeout of inventory this year than you did last year.

Yes, it's very much a Soup idea and maybe a little bit of it in the Sauce business, but it's primarily a Soup issue.

Is it a couple points of benefit to Soup or is that too much?

It was probably about a couple of points benefit to Soup.

Okay, that is helpful.

Thanks so much.

You're welcome.

Next question, please.

Ed Aaron, RBC Capital Markets.

Good morning, everybody.

So you mentioned in your prepared remarks that Condensed and Broth were better than you expected, RTS was maybe a little bit worse.

And then, Denise, I think I heard you mention that you expect to be more competitive going forward on RTS.

Were you referring entirely to your plans for more innovation and marketing or did you mean that maybe you went a little bit too far in managing your price points higher and have plans to course correct out a little bit?

I think the combination of the list price increases we took, the higher promoted price, and then less frequency of promotion on RTS all at once was -- created the result that we got.

We believe that we can still work with the levers that we have to work with, improve the profitability of the business based on what we are cycling last year, and be more competitive.

And we are going to continue to increase our advertising and consumer promotion on this business as well as the innovation.

Do your trade spending plans for the back half of the year, have they changed at all in ready-to-serve?

Well, changed versus what?

Do you mean have we adjusted our trade?

We are not going to go back to (multiple speakers)

We manage our trade spend pretty dynamically, so if you are asking if the total envelope changed I don't think we are going to get down into that level of detail on our planning.

But we have clearly devoted some more resource to RTS as we have come through the very end of this last quarter and start into the next quarter.

Right, we will not go back to the heavy discounting though.

Fair enough.

Thanks for taking the question.

You're welcome.

Next question, please.

Bryan Spillane, Bank of America Merrill Lynch.

Good morning.

Just wanted to, I guess, follow up on Soup in general.

Just as the year started you had raised prices on ready-to-serve and some of the other, the advertising and some of the new product innovation, was going to follow.

So I guess two things.

One, are we at a point now where you feel like you have most of the resources in place?

Meaning you are spending on advertising at a level that was sort of commensurate with what you were expecting.

I am assuming there is going to be some more news on the product front coming forward and so what we are looking at now and going forward is more reflective of what you were envisioning in terms of increasing the spend levels behind your Soup business to support the pricing.

Yes, that is exactly the point we are at.

Okay.

I think you will -- as we go forward, so again we have just now cycled the previous year of less deep discounting and the comparisons will get a little clearer as we come across into the third and fourth quarter, the second half of the year.

And that alignment is basically just happened very recently.

I mean even going into this quarter you still weren't quite aligned on that, right?

Correct.

That is exactly right.

That is correct.

And then just, if I could, just one follow-up.

The Condensed performance, even if you shift out a couple of points for inventory, Condensed actually performed pretty well this quarter.

And that is even in the face of having some competitor price points on ready-to-serve that we are still pretty aggressive.

So could you just talk a little bit about why you think that occurred?

And has Condensed benefited also from the umbrella advertising on Campbell's?

Yes, we believe that our advertising has been much more effective, particularly the anthem that we have across the portfolio, and we have also introduced advertising on the icon Condensed soups which we had walked away from for a while.

And the emotional impact of moms love serving and kids love eating.

That has been pretty effective for Condensed Soup.

As I mentioned earlier, we had a good holiday.

So you are starting to see -- the messaging (technical difficulty) you can show evidence or you can see signs that if you turn the messaging on you are actually starting to get consumers to respond to it?

Yes, that is right.

What I failed to mention also is our Healthy Request business continues to perform very well.

Okay, great.

Thank you.

Next question, please.

Robert Moskow, Credit Suisse.

Thank you.

I guess just from the outside, Denise, it's just very hard to look at fiscal 2012 as an investment year when I am looking at SG&A and it looks like it's going to be barely up this year.

I know there is a lot of puts and takes, but it looks like R&D spending actually will be down.

A lot of us thought that there was something kind of big on the horizon from a product perspective to kind of revitalize soup, but with R&D not looking like it's up Craig saying that -- I thought I heard Craig say that one of the projects that you thought you were going to invest in you decided not to do.

So did something change in terms of the level of investment?

First of all, Rob, a correction.

No project has been canceled; that is the important point here.

All of the new initiative spending has been funded; it has been funded at a level that we anticipated.

In fact, we have funded some new initiatives that we didn't even have fully baked and ready to fund versus the time that we talked to you in July.

What I did say is there is going to be less incrementality that is going to show up in the P&L because in the base business we have made some decisions as we have come through the year, in some cases, to reallocate spending in a different way.

In some cases to take out spending that we didn't think was effective.

So nothing has been canceled.

With respect to R&D, I believe that R&D is likely to be up slightly for the year but, again, you are seeing two things going on.

One is some new initiative spending has is going in to R&D.

The other is some resource that we took out of the R&D spending line as we did the reorganization of the business last year in a way that we do not think has hurt our innovation capability but has simply gotten rid of some non-productive spending basically.

I got you.

So that was the low sodium, right?

Yes.

Also important to recognize that much of our innovation spending, for example, the funding of our innovation teams, that expense sits in the marketing overhead line within marketing and not within R&D.

And that has R&D resources on it.

Okay, but even the marketing and selling isn't really materially higher.

So I guess really what I am getting at is, is this the level investment -- the $100 million is done and it is not going to happen again in fiscal 2013; like there is not another $50 million or $100 million coming in fiscal 2013?

No, you will continue to see us invest, particularly in half two.

And we believe that we have gotten then the level of advertising and consumer basically to where we want it, and we will continue to shift mix over time, but there won't be big slugs of money.

But we benefit from the fact that it is now essentially in the base.

As Denise said, in July we felt like our operating margin numbers had gotten up to a level that we just didn't think were sustainable if we were going to do the kind of reinvestment in the business that we wanted to do.

So adjusting the base essentially does give it to you for the next year.

Absolutely.

I got it.

And advertising, what do you think advertising is going to be up this year, because I think you started the year saying that you definitely -- advertising had fallen to a level that was unacceptable the year before?

So I don't have a specific advertising number, although we are going to start -- in terms of forecast I think we are going to start being a little bit more visible in terms of our A&C spending as we go forward.

So we are working on that.

A&C will be up.

It was up 6% in this quarter and it will be up for the year.

It will be up significantly more.

That is helpful.

Thank you.

You are welcome.

Next question, please.

Alexia Howard, Sanford Bernstein.

Very good news on the BPA front.

Thanks for announcing that.

I guess my question is more of a strategic nature.

Would you consider separating the Soups, Sauces, and Beverage business from the Baking and Snacking business, or would it be that operational deleveraging, would that be too great and prevent such a move from creating value?

We have heard a lot of companies announce splits over the course of the last several months.

You yourselves sold Godiva, I guess, several years ago.

Pringles has just sold for a great multiple and Pepperidge Farm is a similarly strong brand.

Is it something that you have considered?

And what do you think the pros and cons are around that kind of a decision?

No, we are focused on three categories in the Company and we believe that operating as one company is the best future for Campbell's.

Okay, thank you very much.

I will pass it on.

Thanks, Alexia.

Next question, please.

David Palmer, UBS.

I believe Campbell is already a pretty big spender on advertising as a percentage of sales.

I don't know if you disclosed that, but I thought it was pretty high single digits.

So perhaps you could describe why you believe, not just quarter by quarter but big picture year over year, why there will be a volume response from incremental ad spend.

And maybe this is the kind of thing that maybe you can get on the flywheel here of reinvestment and stabilize the volume in your core Soup business.

I guess related to that is do you think you have the product and the marketing message where you want it?

Where you are going to have a pretty good ROI from this incremental ad spend that you are talking about, particularly in the next half of the year?

Thanks.

The advertising levels, as you pointed out, are pretty robust, especially relative to other Simple Meals.

But it's not just the level of advertising.

It's the quality, it's the messaging, and it's the news.

And so if you think about certain amount of advertising on the base business to remind consumers to buy the product, because it's not necessarily top of mind all the time.

But then you couple that with the innovation we are going to continue to bring to the marketplace and using the advertising lever to communicate that news and excitement, we believe that over time that is the best way to build the business.

I guess what I am really getting at here is with your core business the volume has been going the wrong way for a few years.

I think folks are wrestling with is this a company that is sort of overearning until they stabilize that business and what that reinvestment needs to be.

Is it fair to think that you need to spend a lot more to get that stabilized?

That is where I am really getting at there with that question.

We know that we can advertise the business for a longer period of time in the year than we have been in the past, and that is part of what we are correcting this year.

But we do think that where we are arriving is the right level, coupled with the innovation we are going to be bringing to market.

Thank you.

Next question, please.

Eric Serotta, Wells Fargo.

Good morning.

Wondering whether you could provide a little bit more detail as to what changes second half versus first half in terms of the RTS business.

I realize that the comps get easier, but you were down pretty significantly against some comparisons that were not that great in the first half.

Craig mentioned that you have some room or some flexibility to adjust price points but you are not going to do anything aggressive.

Why should that get materially better in the second half versus the first half?

We do know in the second quarter this year that the list price increases coupled with the higher promotion price points created price gaps that were too wide.

And so we have worked to adjust those.

We do know that we didn't have enough promotion frequency in the first half and so we are working on that as well.

And so with those insights we believe with some modifications we will have a better outcome on RTS.

The other thing is we were very heavily discounting RTS last year in the base and we are cycling that.

Okay.

Within RTS could you talk about which brands were sort of your primary problem areas?

Is it still Select Harvest or is Chunky seeing some weakness as well, and also trends in the microwave platform which your competitor effectively walked away from?

We had weakness across the spectrum there, Eric, in microwavable and Select Harvest and in Chunky.

One bright spot was the introduction of Slow Kettle has been pretty well hitting its mark, so that was a positive.

But, honestly, RTS was weak across the portfolio.

And we do believe that some of the benefits in Condensed came at the expense of some RTS.

Thanks for your help.

I will pass it on.

Operator, we will take our last question before our wrap up.

Matthew Grainger, Morgan Stanley.

Thanks for taking my question.

So just wanted to focus on US Beverages.

Are you seeing any moderation -- and obviously it's still competitive but are you seeing any moderation in the competitive conditions there?

Then, as you look out across the balance of the year, how do you feel about the sustainability of the type of top-line growth that we saw in that segment during the quarter?

I am not expecting that beverage competition will get any easier, but that said, for the investments that we have made in our beverage business our products are up in sales and they have grown share in an immensely competitive category.

So we are going to continue to run our play.

Where we do think things will improve is in the profitability as the inflation that we have experienced in the first half starts to abate as we cycle the second half.

Thanks, and very quick follow-up.

Any initial thoughts on sort of consumer receptivity to the Smoothie launch?

Very good.

We are very encouraged by the results of that launch.

Very, very early days though.

Very early, but good.

All right.

Thank you again and see you at CAGNY.

Before we conclude our second-quarter call, let me leave you with a few thoughts.

We continue to advance our three growth strategies this quarter.

Our US Soup profits improved, which is important to us.

Australia biscuits are regaining their footing.

On the other hand, while US Beverage sales increased profits were down significantly, so we have some more work to do.

But the first half served only to reinforce our conviction that brand building and innovation are what is required to deliver the profitable sales growth we want, and that has our undivided attention.

The important point is that we are committed to building a different company at Campbell's, a company that creates value by driving sustainable, profitable net sales growth.

And we are focused on executing our growth strategies and have plans to improve our performance in the second half with increased advertising and consumer spending; new product innovations in US Simple Meals, Beverages, and global Baked Snacks; a stronger promotional calendar in Australia; and we also expect inflation to abate in US Beverages.

And as we said last July, implementing our new strategic direction will require substantial investment to fund a radically different innovation process and to reinvigorate consumer-focused brand building.

Thanks again for joining us today and have a nice holiday weekend.

And with that Jennifer will now conclude our call.

Thanks, Denise, and thanks, everyone, for your participation on 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 questions, please call my colleague, Anthony Sanzio, at 856-968-4390.

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

This concludes today's program.

Have a great three-day weekend and you may now disconnect.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the conference.

You may now disconnect.

Good day.