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Campbell Soup Company (NYSE:CPB)

F3Q10 Earnings Call

May 24, 2010 10:00 am ET

Executives

Jennifer Driscoll - VP, IR

Doug Conant - President and CEO

Craig Owens - SVP, CFO and Chief Administrative Officer

Anthony DiSilvestro - VP and Controller

Analysts

Alexia Howard – Sanford Bernstein

Eric Katzman – Deutsche Bank

Andrew Lazar – Barclays

Chris Growe – Stifel Nicolaus

Bryan Spillane – Bank of America

David Palmer – UBS

Terry Bivens – J.P. Morgan

Vincent Andrews – Morgan Stanley

Ed Aaron – RBC Capital Markets

Robert Moskow – Credit Suisse

Analyst for David Driscoll – Citi Investment

Judy Hong – Goldman Sachs

John Feeney – Janney Montgomery Scott

Rob Dickerson – Consumer Edge

Operator

Welcome to Campbell Soup third quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Jennifer Driscoll, Vice President, Investor Relations. Please go ahead.

Jennifer Driscoll

Thank you, operator. Good morning, everyone and welcome to the Campbell’s third quarter earnings webcast. With me here today are Doug Conant, President and CEO; Craig Owens, CFO and Chief Administrative Officer; and Anthony DiSilvestro, Vice President of Finance. First Doug and Craig will provide perspective on our performance for the quarter and the first nine months as well as our updated outlook for the full fiscal year. Following their remarks, we'll take questions from analysts and investors.

As usual, we have created slides to accompany our presentation. You will find the posted on our website this morning. Speaking of our website we would like to invite you to visit our newly revamped site for investors found at investor.campbellsoupcompany.com where we offer you streamlined navigation and improved functionality. We welcome your feedback on this site as we are always interested in improving it as a resource for you.

We also have scheduled an analyst day from 1-5 p.m. on Monday, July 12, at our world headquarters in Camden, New Jersey. We will meet inside our new employee center which will be completed in June. We will email invitations to our investor list and also encourage participation via webcast. Please keep in mind as usual this call is open to the media who are listening 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 that could be inaccurate and which inherently are subject to risks and uncertainties. Please refer to slide three in the presentation or to the company's most recent Form 10-K and subsequent SEC filings for a list of the factors that could cause our actual results to vary materially from those anticipated or expressed in any forward-looking statement.

Before I turn it over to Doug I would like to point out two items in our third quarter which impact the comparability of our results. The first is a restructuring charge equal to $0.02 per share as we have now completed the restructuring program we announced in April 2008. The second is a non-cash deferred tax expense of $0.03 per share to reflect the impact of the recently enacted healthcare legislation on Medicare Part D reimbursements. The prior-year quarter and year-to-date results also included items that impacted comparability such as restructuring related costs, adjustments on open commodity hedge positions and a tax gain recorded in discontinued operations.

Throughout this presentation we will discuss the results on an adjusted basis excluding the items that impacted comparability. Since our presentation includes these 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 our presentation. These slides, including the appendix can be found on our events website this morning.

With that, I give you our President and CEO, Doug Conant.

Doug Conant

Good morning and thank you Jennifer. Thanks for starting us off and thanks to all of you on the phone or webcast for joining Campbell’s third quarter earnings conference call.

I would like to share a few broad observations about our performance in the third quarter and year-to-date. I am also going to introduce some new information about market share as we have promised to do. Then I will turn it over to Craig for a more detailed discussion of results.

This morning we reported adjusted net earnings per share increased 13% for the third quarter. It was a strong performance overall including benefits from volume growth, continued productivity gains and favorable currency. Our business and healthy beverages led the company in sales and profit growth. Our Beverages results benefited from compelling advertising, effective promotions and continued innovation especially with V8 V-Fusion. We also saw strength in V8 vegetable juice as consumers responded to our marketing efforts.

In addition, as anticipated U.S. soup volume performance significantly improved. We continued our advertising support and stepped up our trade activity in soup. Our agility in executing course corrections and a strong consumer response drove a rebound in ready-to-serve soup while condensed soup and broth volume continued to perform well. Our sauces business also performed well including gains from popular meal makers like Prego and Pace sauces which benefited from the continuing consumer trend of dining at home. This combination resulted in a healthy increase in our total U.S. soup, sauces and beverages segment which clearly drove the company’s results.

Strong volume combined with productivity improvements helped us expand gross margins with only a modest benefit from pricing. Complementing these results was continued good performance from our Baking and Snacking business this quarter which offset softness in food service.

Turning to year-to-date results our adjusted net earnings per share rose 13%. I would also highlight our good year-to-date cash flow performance. It is worth noting we delivered these results while continuing to invest in strategic initiatives including the rollout of SAP in Australia, our ongoing innovation in wellness and nutrition and our product introduction efforts in emerging markets.

Today we also updated our earnings guidance for the fiscal year. We now expect we will finish at the high end of our range for adjusted EPS. While consumers remain cautious and very value conscious and the competition is intense, our goal remains sustainable, profitable growth so we will continue to innovate. We will continue to build our brands and we will continue to position our company for long-term sustainable growth as we work our way through this especially tough year.

Before I turn the call over to Craig I wanted to briefly talk about market share and consumption data. As many of you know Campbell Soup stopped disclosing market share for soup shortly after I arrived here as the information then available excluded our fastest growing channels. We have now developed a solution IRI data and company estimates that gives us a fuller picture of our soup results across measured and non-measured channels. Craig will be sharing the data with you in a moment as part of his segment discussion.

As the data shows, in the past 52 weeks we outperformed branded competitors in soup. Private label penetration in Soup increased yet remains low relative to most well developed categories. The 52-week trend shows a loss of market share although underneath that is a one-quarter trend that is much stronger reflecting the recent rebound in ready-to-serve soup.

For this morning my main takeaways are that volume results this quarter are encouraging but that we still have work to do. Our opportunity is to translate great competitiveness in soup into leadership growth for the whole category and this is our focus going forward.

With that I will turn the call over to Craig for a more detailed discussion of the quarter and year-to-date performance.

Craig Owens

Thanks Doug. Good morning. I will take you through the financials and then provide some color on our results by segment including the U.S. soup market place performance and then briefly address our guidance.

For the quarter we reported sales of $1.8 billion, an increase of 7% versus the third quarter a year ago. Excluding the favorable impact of currency translation organic net sales increased 2% primarily due to the improved performance of our U.S., Soup, Sauces and Beverages segment. For the 9-month period organic net sales declined by 2%. EBIT increased 8% in the quarter due to an improved gross margin performance, the growth in sales and favorable currency translation partly offset by higher administrative expenses.

For the 9 months, EBIT gained 9% also reflecting an improved gross margin performance and currency as well as lower advertising expenses partly offset by lower sales volumes and increased administrative expenses. We achieved an EPS of $0.54 in the quarter and $2.14 for the 9 months. Both numbers represented an increase of 13% from the prior-year period. This EPS growth is ahead of EBIT growth as it reflects the benefits of utilizing our positive cash flow to repurchase shares.

In the third quarter our organic sales growth reflected a 4-point contribution from volume and mix. This gain and a 1-point increase due to carry over pricing were partly offset by higher promotional spending. The gains from volume and mix were primarily driven by the strong gains in our U.S. Soup, Sauces and Beverages segment where volume and mix contributed 8 points of sales growth, double digit volume gains in Beverages and gains in both soups and sauces contributed to this performance.

Currency translation, primarily the Australian dollar and Canadian dollar, contributed 5 points of sales growth to the quarter bringing our reported sales increase to 7%. In the quarter our gross margin percentage rose 90 basis points to 41.2%. We continue to generate significant productivity improvements from our supply chain and these gains contributed more than 200 basis points to our gross margin performance this quarter.

Higher productivity and negligible inflation have enabled us to step up our promotional spending to remain competitive and drive volume while delivering increases in our gross margin percentage. Cost deflation continues to moderate and was relatively flat for the quarter driven by deflation in grain based commodities, vegetable oil and energy. For the 9-month period inflation increased at a rate of approximately 1-2%.

Currency and higher selling expenses increased our marketing and selling expenses for the quarter. This was partly offset by lower expenses for advertising and consumer promotion. In several of our businesses we have reduced advertising expenditures and shifted resources to fund promotional activities. While advertising costs are down from a year ago advertising impressions in the U.S. as measured by GRPs are ahead of last year thanks to buying efficiencies.

In the quarter administrative expenses increased from $129 million to $156 million. This was primarily due to higher benefit costs including equity based benefit expenses and pension costs as well as currency. For the 9 months the same factors drove an 8% increase in administrative expense.

I will comment briefly on the below-the-line items. As I noted earlier, EBIT increased 8% for the third quarter and 9% for the 9 months. Interest expense increased slightly in the quarter reflecting higher costs associated with our long-term debt issuance in the fourth quarter of last year which extended the duration of the debt portfolio. Those costs were partially offset by the favorable impact of lower short-term rates. For the 9 months the benefit of lower short-term rates exceeded the higher costs in the new debt issuance, leading to an overall decline in interest costs.

The tax rate was steady for the quarter at 32.9%. It was up 70 basis points for the 9 months primarily due to higher state tax costs. Net earnings increased 9% for the quarter and year-to-date. We continue to execute our strategic share repurchase program, leveraging our strong cash flow. As a result, average shares outstanding declined by 3% for the quarter and 4% year-to-date, lifting EPS growth for both the quarter and 9 months to 13%.

Next I will comment on our segment results in the quarter. In U.S. Soup, Sauces and Beverages sales increased by 5% due primarily to the 13% growth in beverages. Beverage sales reflected significant gains in V8 V-Fusion benefiting from the increased marketing support and successful new launches including the Cranberry Blackberry flavor and 8 ounce slim cans in a range of flavors. We also achieved volume driven sales in both V8 vegetable juice and V8 Splash.

We increased our competitive activity behind our U.S. soup business driving a 5% increase in volume. After reflecting the increased promotional spending U.S. soup sales increased by 2%. Sales of Prego pasta sauce and Pace Mexican sauces grew in the quarter as these products continue to benefit from increased in-home meal occasions. Reflecting the higher sales and improved gross margin performance, operating earnings increased by 10% for the segment.

Soup sales increased 2% for the quarter with condensed sales declining 1%, ready-to-serve sales rising 4% and broth sales posting a 9% gain. As I mentioned previously, soup volume increased 5% with each of the three soup formats head of the prior-year.

Now I would like to discuss our view of the U.S. wet soup category and dollar share performance. These disclosures are based on IRI panel data and company estimates which we believe fairly capture approximately 90% of retail sales. The figures I am sharing are based on a rolling 52-week period, in this case for the period ended April 18th. Overall, we estimate a dollar decline in retail sales of the U.S. wet soup category of 2.7% driven by lower volume. Campbell’s had a decline of 3.6% in wet soup retail sales. Our ready-to-serve soup business contributed the most to our decline while our condensed and broth formats both outperformed the category.

Our soup performance compared favorably with the deeper decline of 4.3% for all other branded players. Private label retail sales rose by 6.7%. Again, these are 52-week dollar results. On a 13-week basis our dollar share results were stronger and our results were even better on a volume share basis for the 13 weeks. The next slide, number 17, shows dollar share within the U.S. wet soup category for Campbell, all other branded players and private label. Campbell has a dollar share of 63.4%. All other branded players collectively hold 24.6% of the dollar share and private label dollar share of wet soup finished at 12% which is lower than its share in most other well developed food categories.

In Baking and Snacking organic sales increased 1% as volume gains in both Pepperidge Farm and Arnott’s were mostly offset by increased promotional spending. Goldfish snack crackers continued to have very strong growth. The favorable impact of currency as well as margin driven gains from our cost reduction efforts and from deflation in grain based commodities drove a 31% improvement in operating earnings.

Organic sales in our international Soup, Sauces and Beverages segment declined by 2% primarily due to lower soup sales in Canada. Within Europe organic sales gains in Germany were offset by declines in France as the competitiveness in that marketplace intensified. Despite the lower organic sales operating earnings increased 28% driven by the benefit from currency translation and gross margin gains from productivity savings. Reflecting continued weakness in the Food Service sector, organic sales for the North American food service business declined 6%. The segment’s earnings declined by $9 million due to higher manufacturing costs and lower sales.

We are very pleased by our year-to-date cash flow performance. Cash from operations of $859 million rose $53 million from a year ago, more than offsetting a $260 million pension contribution in the first quarter. Significantly improved working capital performance especially inventory reduction and higher earnings both contributed to these results. Capital expenditures of $177 million were about the same as last year. Capital expenditures this year include expansion of our world headquarters, a capacity increase for both Arnott’s and Pepperidge Farm and the ongoing implementation of SAP in Australia and New Zealand.

We spent $315 million in the first nine months to repurchase 9 million shares. Net debt at $2.4 billion is $114 million below the prior-year level. With respect to our guidance, we continue to expect growth in net sales of 2.5-3.5% and growth in adjusted EBIT of 6-7%. Given our third quarter performance and our outlook for the remainder of the year we expect growth in adjusted EPS to be at the high end of the previously announced 9-11% range.

That concludes our formal remarks and now we will take questions from callers. Thank you.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of Alexia Howard – Sanford Bernstein.

Alexia Howard – Sanford Bernstein

I guess the question around innovation as we look out into the next season I think a number of folks I have spoken to were somewhat worried given the presentation at CAGNY it was all going to be focused on condensed soup as we go into the next year. I wonder if you could give us any commentary about plans you have in ready-to-serve or broth just to give us an idea of how you see the balance of innovation playing out over the next year or so?

Douglas Conant

We highlighted some of that at CAGNY but clearly the focus at CAGNY was on our focus to what we call fire up condensed soup. We have a full platform of marketing and sales initiatives and innovation going against both Chunky, Select Harvest and Swanson’s broth and Swanson stock. I am not going to get into the specific details of it but I can assure you we will be fully competitive in terms of our innovation with any and all players in this segment. We will also be fully competitive from a marketing expense perspective and a selling perspective. We will compete vigorously. Not to worry.

Alexia Howard – Sanford Bernstein

A follow-up on the pricing outlook. Obviously we saw a little bit more intense promotional activity this time around. As I look at the comparables going forward it looks as though those might get a little bit easier going forward. Do you anticipate we are going to see continued more intense step up in promotional spending as we go through the next few quarters or are you expecting you might ease off the accelerator pedal relative to where you are today?

Douglas Conant

I guess the principle is we will compete vigorously. We believe in our capacity to compete at a level the competition would find challenging. Witness some of the comments by both the private label suppliers and by competitors. I was encouraged in this period because we actually competed vigorously in this last quarter, registered good volume gains and we were actually able to manage it within the context of our overall portfolio in a way that allowed us to hold our EBIT margin. We have the capacity to compete as is necessary and we are going to be very vigilant and not let anything get away from us as it did in the second quarter. We will compete and it is hard to say any more than that.

Operator

The next question comes from the line of Eric Katzman – Deutsche Bank.

Eric Katzman – Deutsche Bank

Thank you for providing the market share data. I know that has been a struggle with everybody so I appreciate that. I would ask is you did relatively well in soup this quarter. Last quarter was a struggle. You kind of commented last quarter it was the timing of promotion and to a certain extent analyzing the competition versus simple meals. Even though it has just been a couple of months can you give us a sense as to how you are thinking about the simple meals competition and what seems to be hurting ready-to-serve versus I guess the shorter-term need or efficacy of promotion, maybe just kind of go into that?

Douglas Conant

I will do it at a high level but I will say when we have our analyst meeting in July when we have opportunity to amplify on the conversation we will have a very clear articulation of that on July 12th. What we are finding is we know what the key price points are to drive soup volume and sales. We don’t need to become overly obsessed with the myriad of simple meals alternatives out there.

We do have to be informed by the way they are promoting their products but our key challenge is just to execute against the soup category in an intelligent way, be alert to what is going on in the simple meal arena and quite frankly at this point I am just focusing on growing soup. I think we can do that with competitive price points that allow us to continue to build the business and do it in a margin-neutral to enhanced way.

It is not going to be helpful on this call to get into a detailed discussion of simple meals. We know what it takes to win in soup and we just simply need to do it. We missed an opportunity in the second quarter. We weren’t openly concerned about it. We were concerned but we knew we could course correct. We have. We are not overly thrilled with the performance. I think it is solid and it is about what we expected. We are just going to focus on growing the category and being better informed about what the simple meal activity is.

Operator

The next question comes from the line of Andrew Lazar – Barclays.

Andrew Lazar – Barclays

Some of the promotional moves you made this quarter perhaps show us that consumers are still interested in buying ready-to-serve as an example but as you mentioned are price sensitive versus other simple meals and things of that nature. While what you did this quarter around promotions was far more tactical in nature I guess with the whole compete vigorously piece and being able to keep…understanding you have to keep certain key price points in mind, it sounds like some of this also will be somewhat more normalized heading into the next soup season and beyond. I am trying to get a sense of if that is the case how that jives with your comment around margin neutral or enhanced way. What are the issues around the economics soup and specific to ready-to-serve to Campbell maybe in this new very price point sensitive environment you have to be [keyed] in on?

Douglas Conant

The notion of competing vigorously is largely dependent on where the broader industry is going. As you know, shopping trips are down, consumers are incredibly value conscious and we just know we have to be competitive with our other soup players with private label and all other branded soups. When I talk about competing vigorously it is against other soup players while being informed by what is going on in this broader simple meal environment. I guess the answer when you look forward is it depends.

It depends upon how competitive it gets. We believe we have the operating efficiencies and the productivity mindset that is going to allow us to compete vigorously and hold or enhance margins. That is the approach we are taking. We will see where the industry heads but we believe we can manage our way through it at least as well if not better than anyone else we compete with.

Andrew Lazar – Barclays

What I am getting at and you addressed this a bit is to sort of get a better sense of the economics of the overall category which have been very favorable for a long period of time does that need to change? The only reason you can get through it is obviously the productivity of course helps you.

Douglas Conant

Actually the economics as you know are incredibly favorable as condensed soup gets traction and outperforms the rest of the category. That enables us to leverage our scale in a very advantaged way. As long as at-home consumption and at-home dining is up and as long as our condensed soups are seen to be a good value solution for consumers we are extraordinarily well positioned in this environment to be able to navigate that.

Operator

The next question comes from the line of Chris Growe – Stifel Nicolaus.

Chris Growe – Stifel Nicolaus

The last couple of quarters especially this quarter you have gotten much more promotional. You mentioned advertising being down in the quarter. I wanted to step back and look at it from a category standpoint. Should your emphasis be more so on advertising to help drive category growth or is it more about the price points you are trying to hit to be more competitive versus the simple meals? Can you give me a better feel for that?

Douglas Conant

Absolutely. We have a model here we work with that is called Total Preferred Value and it has to do with the combination of all of the benefits both the product benefits, advertising and trade promotion activity all divided by the price and all relative to competition. So we do look at it as a bundle. If I piece it apart a bit, first of all our advertising as Craig mentioned our spending is down but our total grips are up. We are out there. Our share of voice is quite strong relative to other alternatives. Again, you have to view our trade promotion as partly offsetting all of the pricing that went on in the past two years which is why we have been able to as costs have come down and being up 1-2% has enabled us to compete vigorously on the trade promotion line and still have good margins.

I think we have a good formula here. We are committed to growing the category. As the category leader we have to do that and I think going forward you are going to see a step up in our marketing spend and our marketing expense line. We intend to grow the category.

Chris Growe – Stifel Nicolaus

To follow-up on that, Craig gave the new information and thanks for providing that on the share and the sales, was dollar share, if you were to talk about 13-week period was dollar share up in the quarter?

Douglas Conant

We don’t release the 13-week periods. We are only going to do the 52’s. You will start, as we build up some traction with the program every quarter you will get some visibility into it. Obviously we felt better about the third quarter than we did the second quarter.

Operator

The next question comes from the line of Bryan Spillane – Bank of America.

Bryan Spillane – Bank of America

Just a point of clarification on the difference between the second quarter and third quarter. In terms of promotional activity was the frequency higher? Did you have a larger number or greater number of promotions or was it more driven by just having different price points? Lower price points.

Douglas Conant

The answer is yes. We returned to price points we had targeted earlier in the last couple of years and we did it with what we regard as competitive frequency. We particularly got stronger on quality merchandising, so merchandising events that included the feature and display.

Bryan Spillane – Bank of America

Did you get retailers to also co-invest with you on this stepped up activity?

Douglas Conant

Retailers have a high interest. Some retailers did do that. Retailers have a high interest in the category. It is the largest category in the center of the store. It is a proven traffic builder. As they are really competing now to get store trips up and to get their share of market up, soup is a natural product for them to focus on. Some of them give up a little margin to do that.

Operator

The next question comes from the line of David Palmer – UBS.

David Palmer – UBS

A quick question on productivity saves. In previous years we had talked a lot about the better look at activity based costs you might get via SAP and that beginning supply chain rationalization savings. Is that occurring now at Campbell and are we perhaps looking at better or higher year-over-year productivity save this year? How are you looking as you go into 2011?

Douglas Conant

We are looking at higher productivity saves this year versus last year. The Enabler Program as we call it continues to not only do well but actually accelerate. Undoubtedly one of the drivers of that is in fact the implementation of SAP across North America. It gives us better visibility across our plant network and more standardization. I still think we are relatively early on the learning curve around SAP so I think there is some opportunity to continue to build. The other place you are seeing it is in our improved working capital and inventory performance because another thing the new system platform has done is give us better visibility particularly to raw material inventories in the plant.

Craig Owens

As we talk about our expectations going forward you also have to remember that we have a very aggressive SG&A target over the next 3 years of cutting out $150-200 million out over the 3-year period which should deliver zero overhead growth incrementally to all the other cost management work. We have a clear line of sight to having a very competitive cost position over the next three years.

Operator

The next question comes from the line of Terry Bivens – J.P. Morgan.

Terry Bivens – J.P. Morgan

I know over the years we have gone kind of back and forth over some of the syndicated data. I just wanted to ask you this; we look at Nielsen data and through the 12 weeks that ended mid quarter. It looked like soup sales in aggregate were kind of down 4 points or so. In your reported number in terms of sales is up 2. That is a little bit wider variance than I have seen. The question is really in the last two weeks of the quarter was there any special retail program you undertook or anything of that nature?

Douglas Conant

No. We can’t reconcile against your numbers obviously but there are a couple of things to take into account. One is some retailers do give up some margin and do take prices down further than we are as they try and build their promotional profile. We do manage inventories or help…our customers manage about 60% of our inventory base and there has been no appreciable change in the inventory level.

Operator

The next question comes from the line of Vincent Andrews – Morgan Stanley.

Vincent Andrews – Morgan Stanley

A quick question on commodity costs particularly looking out it seems to me like maybe tomatoes would be down on a go-forward basis and maybe tin plate as well. Then you have some protein inflation coming particularly pork, beef and to a lesser extent chicken prices are at very high levels. How is that all going to net out as we look forward?

Craig Owens

We will talk in a little bit more detail about our outlook around inflation for next year when we do the fourth quarter. I think directionally I think the things you pointed to would be the way we are looking at it. We also have a hedging program so we are covered for some of that exposure as we move into 2011 but we will give you an inflation outlook next quarter.

Operator

The next question comes from the line of Ed Aaron – RBC Capital Markets.

Ed Aaron – RBC Capital Markets

I am having a little hard time reconciling the implied fourth quarter guidance. If I take current spot rates it looks like you would need maybe 6-7% organic growth to hit the low end on the top line which strikes me as a bit optimistic. But then on the EPS line it seems like you need about 200 basis points of margin contraction there which seems a little pessimistic. I am trying to understand if there is anything I might be missing.

Craig Owens

Well I don’t know if there is anything you are missing or not. We are cycling a very strong profit production from last year for the quarter. So you are right as you look at EPS it is not a very strong quarter implication. It is part of the reason we guided to the top end of the range. We feel good about hitting the top end of our range. I think we do need positive growth at the top line and in confirming the guidance we think that is where we are going to wind up.

Building on that, we are also preparing to move forward our condensed soup relaunch and some of the expenses to that will fall into the fourth quarter as well. So the spending profile will be a little different.

Ed Aaron – RBC Capital Markets

Is there any difference in terms of when you get the initial load for the upcoming season, maybe more coming in Q4 of this year than last year. Is that a fair way to think about?

Craig Owens

Not particularly.

Operator

The next question comes from the line of Robert Moskow – Credit Suisse.

Robert Moskow – Credit Suisse

I remember at CAGNY you said you needed to address the price value equation in ready-to-serve. Now you are saying you have returned to price points you targeted maybe two years ago. Is this the solution? Is this price value now addressed or is next year a whole different situation?

Douglas Conant

I would love to get out the crystal ball. I guess we know at what level we need to be competitive in order to grow the category. We will see what happens. I suspect these kind of levels might very well be required as we go into next year but we will see. We are going to be very agile here and we are going to stay on top of competitive pricing in the soup category and also we will be informed by pricing in some of the key categories in other simple meals and we will just make sure we are at an appropriate price point and we think we can manage that in a way that allows us to kind of continue to grow earnings. The answer is we will see.

Operator

The next question comes from the line of Analyst for David Driscoll – Citi Investment.

Analyst for David Driscoll – Citi Investment

I wanted to know given the short response you have received in the quarter on the volume front from all of the trade promotion, do you think there is a risk as we move forward we are basically training consumers to look to buy soup items off the shelf when they are on promotion and how do you balance that?

Douglas Conant

Very carefully. We will be very careful with that. The promotional price points we are at are promotional price points we have been at in the past. So this is more of a return to more competitive price points than before and I think we will find the right balance. As I said we are going to maintain a strong marketing profile as well as a trade promotion profile here. We have the scale and we have the opportunity with our condensed franchise to spend back nicely and get good returns. So we believe we can manage through it but we do have to manage the whole marketing mix. You are absolutely right.

Operator

The next question comes from the line of Judy Hong – Goldman Sachs.

Judy Hong – Goldman Sachs

Going back to the soup category performance I think you had talked about your initiatives to really focus on key price points and your trends get better but the category being down 2.7% in the last 52 weeks was really the key issue just the price points? Or is there anything as relates to the category that needs to get better in terms of getting category improvement? Then relating to that I thought in the last quarter you focused a lot more on the simple meals category and the pressure you have seen from those categories to it seems like in this call it is really just having keep price points and as it relates to other categories in simple meals just being informed and maybe monitoring as opposed to really being focused on the category and I am trying to understand what kind of if there has been a change in looking at those broader simple meals categories in the last 3 months or so that makes you more comfortable that just being informed and monitoring those categories are really the right thing to do?

Douglas Conant

Good question. As I mentioned when Eric asked the earlier on simple meals we are going to have a full discussion on simple meals in our July analyst meeting. I think within the context of having a full period of time to have a quality conversation we can get into simple meals in a more complete way. I think from my perspective for this call we are approaching it as managing what we can manage which is the soup business and our competitiveness in the category and being smart about what is going on around our category. Until we have our July meeting I think that is the appropriate posture to have. We do know when we have good, competitive price promotion in soup we can deliver quality results. I am comfortable with that now. More to come and we will talk in July.

Judy Hong – Goldman Sachs

Craig on currency. I think the last time you gave guidance of 3-4 points?

Craig Owens

In the quarter currency at the top line was worth about 5 points. At EPS currency was worth more like 7 points. 6-7 points.

Judy Hong – Goldman Sachs

That is for the full-year guidance or the fourth quarter? I guess currency has obviously moved around a lot.

Craig Owens

For the full-year I think we are probably still more in the 3-4 range. The quarter is not indicative of the full-year.

Operator

The next question comes from the line of John Feeney – Janney Montgomery Scott.

John Feeney – Janney Montgomery Scott

I wanted to think about your gross margin for a second and what it means in the context of operating leverage. It occurs to me a lot of companies in the food space have had an easier run over the past year or so back to sort of 2006-ish type gross margin levels. I think that is presumably because the volume performance has been tough in soup for a little while now. I am trying to estimate how much, how incremental a turn in volume could be to your gross margin going forward. In other words, do you see a sustainable model with a higher gross margin than it has been historically, say going back to 2006, if we can grow volume even 2-3% consistently off these levels?

Douglas Conant

Modest volume growth has terrific leverage on our P&L. So to the degree we have confidence in our ability to manage our costs as Craig articulated we do, and we do have the ability to control our pricing, we lead pricing in our categories, we ought to be able to manage our way through this and get good leverage out of volume. The challenge is obviously to get the volume going and that is what we did in the third quarter. I believe for the next year that is something we should be able to continue to do particularly as we get into the first half of next year.

Craig Owens

The other aspect of it is the portfolio management piece of it that Doug mentioned earlier. You saw us simultaneously get more competitive, drive more top line and have better profitability in this quarter than we did in the second quarter. Part of it was the benefit of higher volume and part of it was the benefit of managing the total portfolio toward that end.

Operator

The next question comes from the line of Rob Dickerson – Consumer Edge.

Rob Dickerson – Consumer Edge

I have a question on the balance sheet. I know obviously I think we can all tell at this point the soup category hasn’t been performing extremely well and you are doing your best to promote and get volumes and gain incremental share. I am curious how you are thinking all-in about your balance sheet because obviously you have continued to pay down debt. If I look at Q3 now and extrapolate where we are a run rate into the end of the year we are kind of starting to look at just about 1.5 times lever to EBITDA. By my math obviously if you decided to go back to the debt markets you could raise very easily $1 billion in incremental cash and you would still be only at 2 times levered. If you decided to buy back shares you could buy back 10% of your share base and you could double your EPS growth effectively for next year on a fiscal basis. I am curious, at what point do you really start to use the strength of your balance sheet if the soup category continues to underperform?

Douglas Conant

Craig will jump right in here, but we have grown soup sales now for 7 straight years. We had a hiccup in the second quarter that affected our ability to grow it this year. Our outlook for the soup category is one of growth, albeit modest growth. But our belief is we ought to be able to competitively grow the soup category. I think we have grown compound annual growth sales in the 3-4% range in soup for the last 7 years. Obviously we missed it in the second quarter but we are very confident in our ability to grow soup. I think there is a growth model there. We have to grow other things faster than that in order to outperform the peer group. But you want to take the other part of that on the balance sheet?

Rob Dickerson – Consumer Edge

Just to clarify, I feel as if the strength of your balance sheet may be under appreciated and in general I am just curious how you are thinking about the best way to leverage that?

Douglas Conant

We appreciate the balance sheet quite a bit but I will let Craig talk about it.

Craig Owens

I agree with your analysis of the balance sheet. Obviously in terms of priorities reinvestment in organic growth is our first priority because it is typically the thing that gives us the best value creation. Don’t forget we have also pointed to a willingness to be more aggressive in looking for acquisition opportunities. That is a second area where the strength of the balance sheet could help and we have raised our dividend again this past year. We tend to look at the share repurchase program as the component of cash flow that is more flexible depending on what we are doing with acquisitions or more recently in the past with divestitures. We upped our share repurchase program as we divested properties. I think that is the way we will continue to look at it going forward. The cash flow strength of the company and the balance sheet strength of the company is well understood and appreciated here. We are constantly trying to figure out how to best leverage that.

[Anthony DiSilvestro]

I think you are seeing that current cash flow benefit. Craig mentioned the lift between EBIT growth rates and EPS growth rates. We are fully aware that is driven by the positive cash flow that business throws off.

Operator

The next question comes from the line of Eric Katzman – Deutsche Bank.

Eric Katzman – Deutsche Bank

Most of the questions have been focused on soup which is not too surprising. But it seems like the outperformance in the category came from Beverages and Sauces and the salsa business. It seems to be from the consumer perspective those are very different let’s say habits or trends. The Beverage business if you listen to like Coke or Pepsi it has been a bit weak. The single serve market has been a struggle but you are all of a sudden kind of recovering there but on the other hand you have a weak consumer probably buying pasta and the sauces to go with it. So maybe you could talk a little bit about how you did well in those areas and kind of address what seems like a bifurcated consumer?

Douglas Conant

Sure. I hate to say it but that is a good observation. We do manage a portfolio of businesses. Our first strategy says we focus on healthy beverages, baked snacks and the simple meal arena. The healthy beverage piece around V8, V8 has been arguably the best organic juice beverage company in the world over the last 5-6 years. We have done an exceptional job of leveraging the trademark, maintaining some premium pricing, selling consumer issues around their intake of vegetables and fruit and have built a wonderful innovation stream against V8 and we are very bullish about that business going forward.

We are also bullish about baked snacks. Between healthy beverages and our baked snacks business which is also arguably been the best performing baked snack business around the world, that is about 40% of our EBIT. So there is a wonderful story there. Then if you go into these other sauces that I believe are benefiting from at-home meal consumption, we call the meal-makers like Pace and Prego and to a lesser extent Swanson broth which is a component to a meal, we also see growth in those businesses. Overall we feel very good about our portfolio. This is going to be an area of focus when we get together in July.

So we have a nice growth story here and this at-home meal making environment our sauces have been performing well and actually our broths have also been performing well as have our cooking soups which are used in meal preparation as well. So between healthy beverages, baked snacks and a large component of our simple meal portfolio we feel as if we are well positioned to compete.

Operator

The next question comes from the line of Andrew Lazar – Barclays.

Andrew Lazar – Barclays

With some of the weakness in the overall soup category you have talked about a bit, has that led to any change in the way your key retail partners are thinking about managing the category going forward? Whether it be changes in how things are merchandised or changes in how they think about space allocation on the shelf for the category as a whole? Not necessarily Campbell specifically. Any changes there that are of any note either ones that are potential challenges or opportunities?

Douglas Conant

There is no evidence to that effect at this point in time. As you know most of the customers at this point, virtually all of them have locked in their plans for the space allocation and promotional activity for the upcoming soup season. There is no evidence to suggest they are viewing it negatively. In fact, there has been actually great interest in our focus on the relaunch of condensed coup. There is I would say a high level of energy for the soup category from a retail perspective going into the year. They are looking for great value offerings that address the consumer who is feeling value stretched, who is looking for at-home meal solutions and we think the soup category is very well positioned there and our customers are responding well to that. I am cautiously bullish about the response from the customer. There has been no evidence of any pulling back from the customer as you have actually seen in the third quarter with the numbers.

Operator

The next question comes from the line of David Palmer – UBS.

David Palmer – UBS

With regard to Select Harvest I guess now the second soup season for that is on the books. How would you judge the repeat and loyalty of that in the second year? Any color on that would be helpful.

Douglas Conant

We feel very good about Select Harvest and we view it within the larger context of our portfolio strategy. We had Chunky that was very much targeted to men. We needed to get a competitive entry that was targeted to women. We were able to successfully launch it. As you know or I believe you know, Select Harvest was the IRI new product of the year. The best selling new product in the entire food store in its first year going through January 1 of this year. So it was a big success in year one. As you often do you expect to have things soften in year two as you lap pipeline and other promotional launch activities.

We feel very good about it and we are poised to have a very good year next year. So overall we feel good about it. Just like in Chunky we have to get the right promotional price points but we have a great proposition there so we are very comfortable with it.

Craig Owens

If you look at the two year growth trend it is very positive for Select Harvest.

Jennifer Driscoll

Okay. Thank you, Doug, Craig and Anthony and thanks to all of our callers for your participation in our earnings webcast. As a reminder, a replay will be available beginning in approximately two hours. If you are a reporter and have questions, please contact Anthony Sanzio at 856-968-4390. Investors and analysts should call me, Jennifer Driscoll, at 856-342-6081. This concludes today's program. You may disconnect. Have a great week.

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Source: Campbell Soup Company F3Q10 (Qtr End 05/02/2010) Earnings Call Transcript
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