Campbell Soup Company F4Q09 (Qtr End 08/02/09) Earnings Call Transcript

| About: Campbell Soup (CPB)

Campbell Soup Company (NYSE:CPB)

F4Q09 Earnings Call

September 11, 2009 10:00 am ET


Jennifer Driscoll – Vice President, Investor Relations

Douglas R. Conant – President and Chief Executive Officer

Anthony DiSilvestro –Corporate Controller

B. Craig Owens – Chief Financial Officer


Terry Bivens - J.P. Morgan

Judy Hong - Goldman Sachs & Company, Inc.

Edward Aaron - RBC Capital Markets

Alexia Howard - Sanford Bernstein

David Driscoll - Citi Investments

Eric Serotta - Consumer Edge Research

Jonathan Feeney - Janney Montgomery Scott

Edgar Roesch – Soleil Securities

Vincent Andrews - Morgan Stanley


Good day ladies and gentlemen and welcome to the Campbell Soup Company fourth quarter 2009 earnings conference call. (Operator Instructions) As a reminder, today’s call is being recorded. I would now like to introduce your host for today’s conference, Ms. Jennifer Driscoll, Vice President of Investor Relations.

Jennifer Driscoll

[Good morning everyone and welcome to Campbell’s fourth quarter fiscal 2009 conference call. Our agenda for this morning’s call will be as follows. Doug Conant, President and Chief Executive Officer will have some opening remarks. Anthony DiSilvestro, Vice President and Controller will discuss our results for the fourth quarter. And Craig Owens, Senior Vice President, Chief Financial Officer and Chief Administrative Officer will have some closing comments.] Following their remarks, as usual, we'll take questions from investors and analysts.

Similar to last quarter, we have created slides to accompany our presentation. You can find those posted on our Web site this morning. A replay of our conference call will be available approximately two hours after our call completes. It will be accessible until midnight on September 18, 2009. Our replay number is 1-888-266-2081 or 1-703-925-2533. The access code is 1387520. You also may listen to a replay and view the accompanying slides by logging onto our Web site, and clicking on the Web cast banner

As a matter of policy, our conference calls are open to all interested investors. Members of the media also are listening to our call.

As a reminder, our presentation today includes certain forward-looking statements that reflect the company’s current expectations about future plans and performance, including statements concerning the impact of marketing investments and strategies, pricing, share repurchase, new product introductions and innovation, productivity and cost savings initiatives, quality improvements, inflation, commodity hedging, currency translation, and portfolio strategies, including acquisitions and divestures and their impact on our sales, earnings, and margins. These forward-looking statements rely on a number of assumptions and estimates that could be inaccurate and which inherently are subject to risks and uncertainties. Please refer to Slide 3 on the presentation or to the company’s most recent Form 10-K and subsequent SEC filings for a list of factors that could cause our actual results to vary materially from those anticipated or expressed in any forward-looking statement.

Our presentation also includes certain non-GAAP measures as defined by SEC rules. We have provided a reconciliation of those measures to the most directly comparable GAAP measures as an Appendix to the slides accompanying the presentation. These slides, including the Appendix, can be found on our Web site as well.

And with that, I give you Doug Conant.

Douglas R. Conant

Thank you, Jennifer. It's good to have you on our team. Good morning everyone. Before I share a few thoughts with you on the highlights for the quarter and the year, I would like to personally thank all of you who sent me warm wishes for a speedy recovery after my auto accident. I am pleased to report that I am doing well, getting a little better every day. And let me tell you, it sure feels great to be back in the office again.

Now I would like to provide my perspective on our fourth quarter and fiscal year performance. Overall, I am very pleased with our results for the quarter, including adjusted net earnings per share of $0.30, a 15% increase. We finished the year on a high note.

Solid organic sales growth was driven primarily by a healthy increase in our U.S. soup business. We also, as promised, expanded our gross margin percentage through our pricing strategy and productivity gains. The fourth quarter was a strong finish to a good year and we look forward to fiscal 2010 with confidence.

Now, let me share my perspective on the year as a whole. As with most companies, virtually all companies in our sector, we confronted a very challenging set of economic conditions and we still delivered our long-term target of adjusted EPS growth of 5% to 7%. At the outset of the year, as you recall, we thought we could deliver the 5% to 7% EPS growth, excluding currency.

Ultimately, we hit our targets, including currency. This performance was enabled by the agility and adaptability of our teams during the year, as we offset a number of headwinds, particularly negative currency impacts and high cost of inflation.

Our growth was broad-based. U.S. soup sales increased 5%, an outstanding performance for our flagship business. Condensed soup led the way as our marketing efforts resonated with consumers who increasingly turned to Campbell soups as a key part of the meals they prepare at home.

We delivered strong performance in our ready-to-serve soup business, mainly driven by the successful introduction of our Select Harvest line.

Our broth business also had a strong year in a very competitive category, highlighted by the launch of Swanson stock and the continued growth of the base business.

In addition, our Prego and Pace sauce businesses performed well, as they were key elements of simple, great-tasting, and good-value meals at home.

Lastly, our Asia Pacific business had an outstanding year, and Pepperidge Farm also delivered a very solid performance.

I am especially pleased that we produced these results while continuing to invest for long-term growth. This past year we continued to drive and invest in product innovation, to enhance our infrastructure, and to advance our plans in emerging markets. All of which will help drive our future performance.

Now you are familiar with our industry-leading efforts in sodium reduction. Health and wellness remains a highly relevant consumer trend. Our sodium reduction journey allows us to position soup as the ultimate nourishing and affordable simple meal. We advanced our wellness credentials in 2009 on this front and we will keep moving forward in 2010.

Another key example of investing for the long-term growth lies in our emerging markets business, where we greatly enhanced our distribution capabilities this past year in Russia through the agreement with Coca-Cola Hellinic Bottling Company. Hellinic's distribution capability and execution standards in Russia provide a world-class complement to our consumer insight and soup expertise.

Overall, fiscal 2009 was a terrific year for Campbell and I would like to thank our employees and our management team for delivering outstanding results in such a difficult environment.

Now many of you have me emphasize the importance of being sustainably good. Over the last seven years we have delivered solid, strong, consistent business performance while making investments in our products, infrastructure, and geographic footprint to ensure that we will realize our mission of becoming the world's most extraordinary food company by nourishing people's lives—everywhere, everyday.

Looking ahead, I am excited about the innovation we will bring to the market throughout fiscal 2010. We have an extraordinary team of engaged people, a portfolio of leading brands and strong plans for the year ahead. I am confident that all three of our core categories—simple meals, heavily anchored by soup; baked snacks, heavily anchored by biscuits and bakery; and healthy beverages, heavily anchored by vegetable-based beverages—are well positioned for good, continued performance in 2010 and I look forward to accelerating our performance in the years ahead as results of some of the investments I mentioned earlier.

With that, I will turn the call over to Anthony DiSilvestro.

Anthony DiSilvestro

I will be reviewing our financial results for the fourth quarter of fiscal 2009. My review will begin with our consolidated results and then I will cover each of our operating segments. With respect to the financials, the current quarter and fiscal year have one less week than the prior period, which is negatively impacting growth rates. As a reminder, the results of our divested Godiva business are presented as a discontinued operation.

There are a few items that impact the comparability of our results. In the fourth quarter of 2008 we announced a series of initiatives to improve performance and long-term profitability. We recognized expenses associate with these initiatives in the current prior fiscal year.

Also, in the fourth quarter of 2009 we recorded adjustments related to commodity hedging and in connection with our annual testing of the carrying value of intangible assets, we recorded a pre-tax $67.0 million non-cash impairment charge related to certain European trademarks. The results I will present have been adjusted for the impact of these and other items impacting comparability, which are detailed in the non-GAAP reconciliation attached to this presentation.

We will present organic sales results, which exclude the impacts of currency, M&A activities, and the impact of one less week as we believe this is a better indicator of our ongoing business performance. We will also present segment operating earnings adjusted for the items impacting comparability.

In the quarter, we reported net sales of $1.528 billion, down 11% versus the fourth quarter of 2008. Organic net sales increased 2% in the quarter. Adjusted EBIT of $198.0 million for the quarter is flat versus a year ago, impacted by one less week and 6 points due to currency translation. Excluding the impact of one less week and currency, EBIT increased, primarily due to lower marketing expenses and a higher gross margin percentage.

Adjusted net earnings of $107.0 million increased 11% versus 2008 due to the benefits of lower interest rates and a slightly lower tax rate in the quarter.

Adjusted earnings per share of $0.30 increased 15%. Our EPS result includes a $0.02 negative impact due to currency translation.

For the fiscal year, reported net sales declined 5%, with organic net sales up 3%. Adjusted EBIT of $1.274 billion is flat to a year ago, also reflecting the negative impact of one less week and a 4 point decline due to currency.

Adjusted net earnings of $794.0 million are comparable to a year ago. Adjusted net earnings in 2008 include the $32.0 million from the ongoing operations of Godiva recorded in discontinued operations. By utilizing $600.0 million of the net proceeds from the Godiva divestiture to repurchase shares, the loss of the earnings is offset through lower shares outstanding.

Adjusted earnings per share of $2.22 increased 6% versus 2008, despite a $0.09 per share negative impact due to currency translations.

In the fourth quarter our reported net sales declined 11%, and as you can see on the chart, reflects the negative impacts of currency, one less week and acquisitions and divestitures. Organic net sales grew 2%, driven by our pricing actions taken earlier in the year to offset the significant levels of cost inflation. This organic sales growth of 2% reflects gains in U.S. soups, U.S. sauces, and Canada, which were partly offset by declines in North America food service and U.S. beverages.

For the year, our reported net sales declined 5% and similar to the quarter, reflects the negative impact of currency, one less week, and acquisitions and divestitures. Organic sales increased 3% as growth in U.S. soup, U.S. sauces, and our baking and snacking businesses was partly offset by declines in North America food service, Europe, and U.S. beverages.

For the quarter, our adjusted gross margin percentage increased from 39.1% in fiscal 2008 to 40.6% in the current quarter, an increase of 1.5 points and for the year increased from 39.7% to 40.2%, an improvement of 0.5%. The improved performance in both periods was driven by pricing and productivity improvements in excess of cost inflation. For the year, inflation in ingredients, packaging, and energy was approximately 8%.

For the quarter marketing and selling expenses declined 21% from $263.0 million in 2008 to $209.0 million in 2009, due to lower marketing expenses, the impact to one less week, and the impact of currency. We reduced marketing expenses in our U.S. beverage and Pepperidge Farm businesses as we redeployed spending to promotional programs to address the price-value equation in these premium-priced segments.

For the year, marketing and selling expenses decreased from $1.162 billion to $1.077 billion, primarily due to the impact of currency, lower marketing expenses, and lower selling expenses. While we increased advertising in U.S. soup to support the launch of our new soup items, we reduced marketing expenses in other businesses to fund increased promotional activity. Our total marketing support, which includes promotional spending, is up for the year, currency neutral, and is up about 1 point as a percent of list sales.

For the quarter, administrative expenses increased $16.0 million to $184.0 million, due to higher incentive compensation costs, partly offset by the impact of currency.

For the year, administrative expenses declined 3%, from $608.0 million to $591.0 million, primarily due to the impact of currency. Currency-neutral expenses are flat, reflecting our efforts to manage costs in the current economic environment.

Net interest expense declined 39% in the quarter and 33% in the year as our debt portfolio was well positioned to benefit from the significant decline in short-term borrowing rates available to companies with strong credit ratings.

In the quarter, our adjusted tax rate declined by 1.1 point from the prior year to 38.9% and for the full year the adjusted tax rate was 32%, slightly above the year-ago rate.

Diluted shares declined 5% and 6% for the quarter and year, respectively, due to repurchases utilizing Godiva divestiture proceeds in 2008 and our ongoing strategic share repurchase programs.

In our U.S. soups, sauces, and beverages segment, sales on a reported basis of $650.0 million in the quarter compares to $673.0 million in the prior-year period. Organic sales increased 4% in the quarter.

U.S. soup sales increased 7%, driven by growth in condensed, RTS, and broth.

Our sauce businesses performed well, with double-digit sales growth in Prego pasta sauces and sales growth in Pace Mexican sauces.

Beverage sales decreased due to lower sales of V-8 vegetable juice, reflecting higher promotional spending and reduced volumes as demand has been negatively impacted in the current economic environment, partly offset by strong gains in the sales of V-8 Fusion juice.

Operating earnings increased to $148.0 million from $124.0 million in the year-ago quarter, an increase of 19%, primarily due to lower marketing expenses and an improved grossed margin percentage, partly offset by the impact of one less week.

As I mentioned, excluding the impact of one less week in acquisitions, U.S. soup sales increased 7% in the quarter. Sales of condensed soups increased 4%, driven by significant growth in cooking varieties, benefiting from increased meals at home and growth in eating varieties.

Ready-to-serve sales increased 14%, driven by growth in Select Harvest, V-8, and Chunky Soups.

Driven by the successful introduction of Swanson stock and continued growth of aseptic varieties, broth sales increased 7%.

Sales, mainly RTS and broth, benefited from a reduction in new item introductory costs as the year-ago quarter reflected costs associated with the launches of Select Harvest and Swanson stocks.

We are very pleased with the strong performance of our U.S. soup business for the year. Excluding the impact of one less week and acquisitions, sales increased 5%.

Driven by a double-digit gain in condensed cooking and growth in eating varieties, condensed soup sales increased 6%.

RTS sales grew 4%, driven by the successful launches of Select Harvest and V-8 soups, partly offset by a decline in Chunky.

Broth sales increased 8%, driven by our new sauce and stock lines and growth in aseptic varieties.

On a reported basis, baking and snacking sales in the quarter of $466.0 million compared to $533.0 million in the prior-year quarter. Organic sales increased 1%.

Sales increased in Pepperidge Farms cookies and cracker business, driven by gains in Goldfish, partly offset by declines in our bakery and frozen businesses.

Sales in our Arnott's branded business in Australia increased in the quarter, driven by gains in both chocolate and savory biscuits, partly offset by a decline in private label and industrial sales associated with a plant closing in Australia.

Our biscuit business in Indonesia achieved significant sales growth.

Operating earnings declined from $72.0 million to $69.0 million due to currency, one less week, and lower earnings in Arnott's, partly offset by growth in Pepperidge Farms.

Sales in our international soup, sauces, and beverages segment of $289.0 million compares to $362.0 million in the prior year. Organic sales increased 5%, driven by growth in Canada, up double digits in soup, growth in the Asia Pacific region, driven by growth in Malaysia, and growth in Europe, driven by higher sales in Belgium, partly offset by declines in Germany.

Adjusted operating earnings declined from $30.0 million to $19.0 million due to currency, one less week, and increased investments in emerging markets, partly offset by gains in Canada.

In North America food service, sales in the quarter of $123.0 million compares to $147.0 million in the prior-year period. Organic sales declined 7% as the food service sector continues to be negatively impacted by the economy.

Reflecting lower sales volumes, earnings declined from $7.0 million to zero in this non-seasonal quarter.

Turning to the cash flow and the balance sheet, cash flow from operations of $1.166 billion compares to $766.0 million in the prior year. The prior-year cash flow reflects the negative impact of approximately $230.0 million of taxes paid in connection with the sale of the Godiva business.

Adjusted for the tax payment, cash flow from operations improved versus the year-ago period.

Capital expenditures increased from $298.0 million to $345.0 million, reflecting higher spending in the U.S. as we complete initiatives to increase the capacity of our U.S. beverage business and undertake improvements in our headquarters facility.

Looking forward, we expect capital expenditures in fiscal 2010 to be approximately $350.0 million.

In fiscal 2009 we repurchased 17.0 million shares at a total cost of $527.0 million under our June 2008 strategic share repurchase program and repurchases to offset the diluted impact of our stock compensation programs.

Net debt at the end of the quarter was $2.573 billion compared to $2.534 billion a year ago, an increase of $39.0 million as cash from operations was sufficient to fund capital expenditures, dividends, and share repurchases.

Now, I will turn it over to Craig.

B. Craig Owens

I would like to spend a few minutes looking forward to key topics in fiscal 2010 and discussing our guidance. As Doug mentioned earlier, we enter the new fiscal year with a great deal of confidence in our plans. We have a portfolio of healthy, well positioned businesses, we have a broad array of planned innovations, touching all three of our core categories, particularly soup.

The restaging of our Chunky line, the launch of lower sodium condensed tomato soup, our new Select Harvest varieties and new light condensed soups are all part of our plans for a strong consumer offering this soup season.

We are projecting moderating inflation, between 1% and 3% for the full year. This enables us to be less dependent on pricing and we anticipate driving sales growth, primarily through volume, as we indicated at our July analyst event.

We continue to expect benefits from enabler programs and supply chain efficiencies. We also look for benefits from our SAP implementation and as a result, we expect to see another year of improvement in our gross margin percentage.

These programs and efficiencies are important to us so that we can allocate resources to further innovation and long-term opportunities such as emerging markets.

Due to our investments to date, we currently enjoy high awareness levels and an outstanding repeat rate in Russia, which we will begin to leverage through our distribution agreement with Coca-Cola Hellinic.

We remain optimistic about China and continue to invest in our current products and new product development, based on consumer insights.

We expect the earnings impact from our total investment in emerging markets for fiscal 2010 to be similar to last years.

Included in our guidance for fiscal 2010 is higher pension expense, which we alluded to at the end of the third quarter. Like many companies, we saw the global recession affect the value of our investment portfolios that fund the pension need. Our fiscal 2010 pension expense will rise on a year-over-year basis by approximately $30.0 million , or $0.06 per share. This reflects the contribution to our U.S. pension plans in fiscal 2010 of about $260.0 million.

We assume currency will be slightly favorable for the year. As you think about the first quarter of fiscal 2010 keep in mind that we are lapping a tough comparison to a very strong first quarter in fiscal 2009, driven by especially dynamic performance in the U.S. soup business that year, where we benefitted from two prior pricing actions. However, we are confident that we will deliver on our plans for the full year and feel particularly good about the innovations for the entire soup season.

In summary, based on all the factors I've discussed, we're looking for a revenue growth of 3% to 4%, adjusted EBIT growth of 5% to 6%, including the pension expense, and adjusted EPS growth of 5% to 7%.

All of our guidance for fiscal 2010 in consistent with our long-term growth targets.

With that, we'll take your questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Terry Bivens - J.P. Morgan.

Terry Bivens - J.P. Morgan

A couple of things on the soup front as we enter the soup season, again, I know sometimes panel data can be somewhat misleading but I wanted to ask you two things. From our vantage point, it looks like Progresso, as we go into the series, appears to be a little more aggressive than normal, in some of the alt channels; I'm thinking there of Walmart.

And the other thing I wanted to ask you about is just the microwaveable line. I know it is just a portion of RTS but it seems to kind of continuing a slump. If you could address those two things.

Douglas R. Conant

I suggest if you want any help on the Progresso plants, I can give you a phone number in Minneapolis where they'll be happy to answer those questions for you.

We feel good, first of all, about our position here. Basically, as we said, we reported very good sales growth this past year in U.S. soups, and we also mentioned, separately, that retail inventories are down a little bit.

And what that is suggesting is that it translated into very good consumer takeaway, all in. I wish we had a solution to help you between panel data, IRI, Nielsen, to make this more transparent. And I do want to mention that we are working against a goal of doing that.

But overall, we feel very good about our sales and our consumer takeaway in U.S. soup. As in all soup seasons, there are ebbs and flows to our performance and our competitors' performances. We were very aggressive kicking off Select Harvest last year and so comparing our latest 4 or 12 weeks versus last year is not going to be particularly useful to you.

In terms of microwavable, it is a segment that is premium-priced, by and large relative to the canned products, and it has been adversely affected as people have made more value-oriented choices, which have benefitted the canned businesses. For the whole segment, not just Campbell's.

And as a result, the segment has struggled a bit. But the convenience factor is still valued. It is still driving incremental sales. And so we are comfortable with where we are. We expected to do better this year. But it is the one modest watch-out on an otherwise very positive story for our soup portfolio, a story that quite frankly, has never been better across all segments.


Your next question comes from Judy Hong - Goldman Sachs & Company, Inc.

Judy Hong - Goldman Sachs & Company, Inc.

Your volume mix in the quarter was down 2%. The third quarter your volume mix was down. I know you said in fiscal 2010 that you should see a lot of the sales growth really coming from [inaudible]. Can you just give us your confidence level in terms of achieving that volume growth and what really needs to happen to get the volume growth to accelerate from the current pace.

Douglas R. Conant

First of all, when I look back over the last nine years, we've had a lot of, when we look at every year's annual guidance, whether it's performance overall or performance on key measures, when we've articulated a commitment to doing something, we've done it. So I have a lot of confidence coming in that we will deliver volume growth.

The key challenge last year was we had, as you know, unprecedented inflation pressure that drove us to take some incremental pricing actions that were not originally contemplated in our plan. And as we all know, you take those pricing actions, they can have a short-term impact on volume.

We have worked through all that now and as we get into, particularly the second and third quarters, but partially the first quarter, we expect that pricing to all be bedded down and us to be able to look at an improvement in volume. We've seen that in prior years and I think the key is that we expect less pricing volatility than we experienced over the last two years with the crazy inflation environment we were in.

Judy Hong - Goldman Sachs & Company, Inc.

And just a quick question on guidance, as it relates to currency. If we look at spot rates, it actually seems like currency should be a much bigger benefit than the slightly favorable comment that you made. So, when you think about 3% to 4% sales growth, then 5% to 7% earnings guidance this year, is that on a constant currency basis and how should we think about currency impact on that number?

Douglas R. Conant

To be completely clear, as we said even last year when we went through so much negative currency headwind, our long-term growth model targets assume currency in. So in other words, we believe that over time the ups and downs of currency, particularly in the developed markets, will mostly offset themselves and in the less developed markets that we need to be seeking acceptable return on dollar-based investments. And so, over time we believe we can hit top line EBIT and EPS growth, currency included.

Last year we had a very negative dislocation with currency and we communicated that we were still confident in being able to deliver our EPS growth, currency neutral. In the event, we delivered our EPS growth, currency in. We had some favorability in interest expense, and ex the 53rd week, we even delivered our top line growth, currency in, inside the range of our long-term growth target.

This year our plan assumes, as we said just a minute ago, a slightly favorable impact from currency and that we will be able to deliver given that within the guidance that we have given.

The currency rates, as you know, over just the last few weeks have been fairly volatile and now, I agree with you, if you look at current spot rates, it would be more than slightly, and so our guidance includes an assumption of slightly currency.

B. Craig Owens

And hopefully there is some upside to that, be we have a long way to go.


Your next question comes from Edward Aaron - RBC Capital Markets.

Edward Aaron - RBC Capital Markets

I wanted to ask kind of a big picture industry question about consolidation. Obviously a lot of headlines out there this week and I'm curious to get your view on whether we're about to see a big wave of M&A in the space and how you see Campbell Soup fitting into that picture.

Douglas R. Conant

Well, I don’t have a crystal ball here. Personally, I believe, as I have shared with all of you before, I believe in the power of more focused food companies where the management team is very focused on a few core categories and developing world-class capabilities in those categories. That is our strategy.

That somewhat flies in the face of a position of larger diversification and large-scale mergers. So I think we're better positioned to deliver our numbers and to create shareholder value in the near term and the long term, just the way we're positioned today.

It will be interesting to see how the environment shakes out. There are several companies that are looking to improve their performance in the near term and they make some decisions that I might not make. But in our case, Campbell's case, we are very happy where we are.

Edward Aaron - RBC Capital Markets

On the inflation of 1% to 3%, that's probably the lowest that I've seen within the peer group and I come out entirely intuitive when I think about your mix of inputs. Is it fair to say that a lot of that difference might just have to do with maybe some unfavorable hedging in fiscal 2009?

B. Craig Owens

Yes. Clearly, as we said several times in 2009, our input costs were impacted by some hedging activity that we did. So I think that assumption may be right, with respect to our numbers. I can't comment on anybody else's. I know, certainly across the sector, there were other people that were suffering from the same problem with respect to hedging, just because there was such a drop in commodity prices early in the year.

Edward Aaron - RBC Capital Markets

Just trying to understand a little better why the administrative costs were up so much, especially when you factor in the extra week last year. There's a bit of an interesting distinction with the incentive comp just in that some of your competitors are cutting back in that area and it seems like you must have increased it fairly significantly in the quarter.

B. Craig Owens

Well, we had an adjustment in the quarter because the quarter finished the year higher than our previous projection and so we adjusted the compensation rates accordingly. If you look across the full year, our administrative cost performance was good; it was about flat.


Your next question comes from Alexia Howard - Sanford Bernstein.

Alexia Howard - Sanford Bernstein

I have a question about the outlook on margins. The margins came out very nicely this quarter. They were up phenomenally last quarter as well. It seems as though as we look out to 2010 you are talking about pretty flat marketing expenditures. I'm assuming that productivity savings are still coming through. I think you'll have some carry-over from the pricing that you took in the February/March time frame, which should give us positive price in the first half of the year at least, and you've got this moderation in commodity cost and I believe a similar level of investment in emerging markets.

Are you comfortable that you're going to see pretty solid margin expansion through the course of the year? Is there anything else that I'm kind of missing out on that might be weighing on margins?

B. Craig Owens

I think you mentioned most of them Alexia. The only thing I would add is that we continue to have, as we said in July at the analyst event, when we had a lot of focus on our supply chain, we continue to see strength in our supply chain efficiency programs, in our enabler programs, benefits from the SAP implementation. We will have the first full year of benefit from the beverage capacity implementation that we've done in our Texas plant and the aseptic line implementation that we've done in North Carolina in 2010. So all of those things play into it, too, but your list was a pretty good one, generally.

Alexia Howard - Sanford Bernstein

And just a real quick follow-up. You mentioned the year end [inaudible] and then the cost of new item introductions and how that plays favorably for ready-to-serve soup this quarter. Will we see any sort of impact negatively next quarter from the re-launch of Chunky, or is that all a whole different ballgame because it's just replacing existing product?

Douglas R. Conant

That's the answer. There was no new item introduction cost, sliding cost, associated with the Chunky re-launch because we were replacing existing items, which contrast versus prior year where we were launching a whole new Select Harvest line at a higher sliding cost. That's the only difference.


Your next question comes from David Driscoll - Citi Investments.

David Driscoll - Citi Investments

I wanted to explore your thoughts a little bit further on unemployment and its effect on the company. I believe the number was quantified for the last soup season at perhaps a benefit of around 1.5 points. But that was offset by the price and volume elasticity. Unemployment rates just keep going higher. Job losses continue. Certainly that seems to be the schematic at least for the next several quarters. How do you view the benefit of unemployment as regard to the impact on soup volumes for the coming soup season?

Douglas R. Conant

I wasn't there so Craig will have to answer it, but I will tell you, conceptually, the soup portfolio is well positioned as the value item. We are really focusing on driving volume through value offerings this soup season. So broadly speaking, I think we're going to find ourselves in a positive position there.

B. Craig Owens

I don't recall that we correlated very specifically unemployment rates and soup sales. Obviously unemployment is one of the things that we look at in terms of the general health of the consumer out there, but recognize that as you look across our line, as we did say in Maxton, we've got some pieces of our business that actually benefit somewhat from a more difficult economy, and of course other pieces of our line that suffer from it.

So I wouldn't get too precise in trying to correlate unemployment rates with our expectations on soup. We continue to be very focused on the value proposition as we recognize that the consumer is under significant pressure in this economy, unemployment being part of that pressure. Both the reality of people being unemployed and the concern and pressure on those who still have jobs but are concerned about increasing unemployment rates.

So I would stay away from some sort of false precision around the correlation, but say that we view this year's economy, economic assumptions in 2010 and the U.S. economy, are somewhat similar to the way we viewed 2009.

Douglas R. Conant

We do have maybe a tailwind in this regard in soup, but we have headwinds in this regard in our food service operation relying on improved away-from-home eating, our premium-priced beverage business has seen pressure during this economy, as it has in prior recessions and difficult financial times. And our Pepperidge Farm business, although it grew, it grew at a much slower rate this year, as the premium nature of that portfolio was pressured more than it had been. Although, again, we did grow that portfolio.

So there are puts and takes here. Overall, we feel very good about the portfolio and our ability to grow it.

David Driscoll - Citi Investments

What did you say for the marketing spend outlook for 2010? And also interest expense guidance for 2010?

B. Craig Owens

We didn't give any specific guidance on either marketing or expenses. We said we thought we would expand our gross margin and that—there's implied expansion in our margins between the 3% to 4% top line growth and the 5% to 6% at EBIT.

Anthony DiSilvestro

On the interest expense we would expect some fairly upward pressure as a result of two things. Some long-term financings that we've recently completed as well as some expectation for some upward pressure on short-term rates.


Your next question comes from Eric Serotta - Consumer Edge Research.

Eric Serotta - Consumer Edge Research

I know that earlier in the year you had some disconnect between your shipment volumes and consumer takeaway related to retailer inventory destocking. When you look at the overall soup season as a whole, did consumption, by your measures, pretty much track sales or was there any net effect for the year?

Douglas R. Conant

Just to reaffirm, we had good sales growth. We were 4% to 5% on an adjusted basis, adjusting for the 53rd week, and we have retail inventories that went down. So it suggests that consumer takeaway was very solid and we were very satisfied with it.

B. Craig Owens

The full year impact of the retailer destocking was not very significant in our numbers across the full year. But it was, as Doug says, the inventories were slightly lower at the end of the year than they were at the end of last year.

Douglas R. Conant

And certainly I guess my point would be that there was no—we didn't increase sales by building customer inventories. So you can take the 5% to the bank and if it went through and there is no meaningful inventory change, it would suggest that there was very good consumer takeaway.

Eric Serotta - Consumer Edge Research

As I look to your fiscal 2010 top line guidance of 3% to 4%, and I looked at variance components, you are talking about volume being the primary driver, so assuming volume is up, assuming some sort of positive impact from FX and some sort of positive impact from the carryover of pricing, since you raised your promoted price points towards the middle of last fiscal year, it seems to me that 3% to 4% could be conservative. Could you give us a break down as to what you're looking at in terms of pricing versus volume contribution to that 3% to 4% top line?

B. Craig Owens

I think we don't want to slice the part into all those pieces. We've said that we thought that volume would be the primary driver of the top line and I think I'll leave it there. As I said earlier, on the FX, our assumption is slightly positive but not as positive as the current spot rate.

Douglas R. Conant

And we're not going to get into any pricing discussion in a forward-looking way. So we're just going to stay clear of that.

Eric Serotta - Consumer Edge Research

Certainly looking in track channel data we've seen continued private labels share gains in the condensed category. Wondering whether you could put that into a broader context and what actions you are taking this year to manage that. I know you clearly have a dominant share position relative to your only competitor, private labels, but what actions are you doing to offset that, in addition to your innovation and the like?

Douglas R. Conant

I guess the place to start is the momentum we have got in condensed soup. We reported 6% sales in soup and there wasn't much of an inventory build, that 6% looks pretty good relative to the way the category performed, so we're very satisfied with our position with soup. And then we're building on it nicely with the launch of our lite, condensed soups. First ever breakthrough there with the launch of our reduced sodium tomato product and the promotional support behind that, along with a re-launch effort around our Healthy Request line, which cuts across all of our condensed soups.

So the key to our success is to leverage the tailwind that is going on with at-home eating and with our branded presence in condensed soup and then continue to innovate in key areas, which the key area for us in condensed soup is in cooking and in wellness. And we are fully loaded. I'm very comfortable that we will be able to compete there.

My sense is the pressure is going to be on other ready-to-serve brands that aren't meaningful differentiated. If the condensed segment grows I suspect the pressure will be on other ready-to-serve brands that don't have a clear reason for being.


Your next question comes from Jonathan Feeney - Janney Montgomery Scott.

Jonathan Feeney - Janney Montgomery Scott

I wanted to talk a little about advertising. I know, Craig, you said you didn't want to get too specific about how we pull apart the components for next year but just two questions. I know currency has impacted this big relative decline in selling and marketing expenses. Is it possible for you to break out like a constant currency sort of decline in relative marketing expenditure for this quarter? First of all.

And then second of all, as we look forward to next year, Doug, we talked about how advertising you thought would still be up for the year, despite these second half declines. Would you forecast any kind of increase for next year, and if some of them were negative?

Douglas R. Conant

First of all, it's not going to be helpful to look at the fourth quarter. It's the smallest quarter, it's not indicative of anything other than year end close. I don't recall the exact comment on advertising spending, but my recollection is it was around our soup spending and our soup advertising was up for the year.

The way I view our marketing spend, and we have got to be careful with it because you remember what a crazy year it was a year ago at this time, in October, November, December, and costs were going up, pricing had to be effected, everybody was managing their P&Ls very carefully. We ended up having to shift some of our advertising spending into the close-in and promotional spending to be competitive and to meet some of the competitive activity.

The way I'm viewing this past year, I think Anthony talked about it, spending as percent sales, our total marketing spend, which is our advertising and our trade, was at 23.1%, which up a full point versus the prior year. But there was a mix shift there because we had to meet some close-in promotional challenges. I think within the context of better than that 23.1% spend, we have enough resources to support our advertising and our trade, and that's contemplated in our plans. We're not going to break those apart for you.

But if we can, on a steady state basis, go forward with 22% to 23% to 23.5% of list sales spending we have found over the last nine years that I've been here, that we can be competitive and grow our top line around 3% to 4%. So that's the way we're viewing it. We're not going to get into breaking the pieces out or forecasting spending.

I would like to say the market is now nice and easy to predict but it's just not. So that's the perspective we have.

B. Craig Owens

I think that's the right answer. If we had broken it apart at the same time last year, then we wouldn't have diluted it because we reacted to the market as we came through the year. So exactly as Doug said, we re-deployed assets in a way that matched the need in the marketplace.

Just to touch on a couple of the technical pieces of your question, I think there was about 3% of currency is what said in the fourth quarter impacting the marketing line.


Your next question comes from Edgar Roesch – Soleil Securities.

Edgar Roesch – Soleil Securities

On Pepperidge Farm, you mentioned the trade down and that seemed to be very prevalent earlier in fiscal 2009. It's uncontrollable but it's a bit of a headwind against that brand being a little more premium-positioned and having some trade down. Has that effect diminished at all lately?

Douglas R. Conant

We're very competitive in the space. And we did grow Pepperidge Farm last year, top and bottom line. So we feel very good about it. The growth slowed relative to prior years. Even in a tough year we've got a great brand and we actually are seeing a little better traction of our brands in Pepperidge Farm right now. So knock on wood, we should have another solid year in Pepperidge Farm.

Edgar Roesch – Soleil Securities

I'm thinking back to a couple of years ago when it seemed like the pricing and promotional setup for the 60s were somewhat locked in, for lack of a better term, from kind of this point forward until you get through the bulk of the 60s. And last year it seemed like it was a little more dynamic where you could react on the fly to the things that you saw in the marketplace. Could you comment on whether things are still a little more dynamic or are we kind of back to things being locked in a little bit?

Douglas R. Conant

Broadly speaking, our soup programs for the year with every customer are presented to that customer for the full fiscal year, certainly through the soup season, which goes through February. And typically will run through the beginning of our fiscal year, but really don't get up and running until September. And that has been true every year, and depending on the customer, it gets hard, if not impossible, to move things around because then they plug those programs into their planning. And soup happens to be such a large important category for them, they are reluctant to make many changes.

My hypothetical answer to your question regarding last year is that I think last year got so crazy, not only for us but also for our customers, that we were collaborating together to try and find ways to keep the category healthy and help the customers meet their needs. And everybody was a little more flexible last year. But by and large, I think you've got to contemplate that the programs you put in place are the programs you have, in the soup business.

Now there is more flexibility in some of our other categories that operate on shorter lead times. Our Pepperidge Farm business and some of our other categories are a little more flexible but soup is by and large, as a rule, not very flexible.


Your final question comes from Vincent Andrews - Morgan Stanley.

Vincent Andrews - Morgan Stanley

If we look at the volume loss in the U.S. soup, sauces, and beverages, could you help us understand where that was concentrated or whether it was spread across the segment.

Douglas R. Conant

Without looking at the numbers, the key area that we had in U.S. soup, sauces, and beverages, beverages were soft, particularly V-8, where we were premium priced and we're addressing that this year through our marketing programs. Overall, for the year and for the quarter, the beverage business has been the challenge for us.

Anthony DiSilvestro

I would add that our Prego and Pace sauce businesses performed very well with volume gains.

Vincent Andrews - Morgan Stanley

Were your soup volumes up or was there any weakness in a particular part of soup?

Anthony DiSilvestro

The part of soup was noted on the call. Our microwavable platform continues to be softer than the rest of our portfolio. But the rest of the portfolio held up well.

Vincent Andrews - Morgan Stanley

So the rest of the portfolio grew but you had negative mix from the convenience platform.

Jennifer Driscoll

We appreciate all of you for your participation in our first quarter earnings Web cast. As a reminder, a replay will be available beginning in approximately 2 hours. If you are a reporter and have questions, please call Anthony Sanzio. His phone number is 856-342-4390. Investors and analysts with questions can call me, Jennifer Driscoll, at 856-342-6081. And this concludes today's program.

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