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Campbell Soup Company (NYSE:CPB)

F1Q08 Earnings Call

November 19, 2007 10:00 am ET

Executives

Leonard F. Griehs - Vice President, Investor Relations

Anthony P. DiSilvestro - Vice President, Controller

Robert A. Schiffner - Chief Financial Officer, Senior Vice President

Douglas R. Conant - President, Chief Executive Officer, Director

Analysts

Alexia Howard - Sanford Bernstein

Eric Katzman - Deutsche Bank

Terry Bivens - Bear Stearns

David Palmer - UBS

Robert Moskow - Credit Suisse

Jonathan Feeney - Wachovia Securities

Eric Serotta - Merrill Lynch

Christine McCracken - Cleveland Research

David Driscoll - Citigroup

Mitch Pinheiro - Janney Montgomery Scott

Edgar Roesch - Banc of America

Andrew Lazar - Lehman Brothers

Vincent Andrews - Morgan Stanley

Pablo Zuanic - J.P. Morgan

Presentation

Operator


Good day, ladies and gentlemen, and welcome to the first quarter 2008 earnings conference call. (Operator Instructions) I would now like to introduce your host for today’s conference, Mr. Leonard Griehs, Vice President of Investor Relations. Sir, you may begin.

Leonard F. Griehs

Thank you. Good morning and welcome to Campbell Soup Company first quarter fiscal 2008 conference call. On our call this morning, Anthony DiSilvestro, Vice President and Controller, will open by discussing results for the first quarter. Bob Schiffner, Senior Vice President and Chief Financial Officer, will also offer some remarks. A question-and-answer session will follow. Doug Conant, President and Chief Executive Officer, will join us for this portion of the call.

Earlier this morning, our results were published along with a supplemental schedule for the quarter. Both of these items are also posted now on our website, www.campbellsoupcompany.com. The replay of our call will be available approximately two hours after it is completed through midnight, November 23rd. The replay number is 1-888-266-2081, or 1-703-925-2533 and the access code is 1152446.

The call will also be broadcast over the Internet. You may listen by logging on to our website and clicking on the webcast banner. As a matter of policy, our conference calls are open to all interested investors and members of the media.

Our discussion will contain forward-looking statements that reflect the company’s current expectations about its future plans and performance. These forward-looking statements rely on a number of assumptions and estimates that could be inaccurate, and which are subject to risks and uncertainties. These include statements concerning the impact of marketing investments and strategies, share repurchase, pricing, new product introductions and innovation, cost-savings initiatives, quality improvements, and portfolio strategies, including divestitures, impact on sales, earnings and margins and other factors described in the company’s most recent 10-K as updated from time to time by the company in subsequent filings with the Securities and Exchange Commission.

Our actual results could vary materially from those anticipated or expressed in any forward-looking statement made by the company. Our discussion includes certain non-GAAP measures as defined by SEC rules. We have provided a reconciliation of those measures to the most directly comparable measures, which is available on our investor website and it’s also attached to the earnings release.

Now, to discuss our first quarter results, Anthony DiSilvestro.

Anthony P. DiSilvestro

Good morning. First, let’s look at our consolidated results for the quarter. Sales grew 7% to $2.298 billion. Sales growth breaks down as follows; volume and mix added 4%, price and sales allowances added 1%; increased promotional spending deducted 1%; currency added 3%. Gross margin decreased to 41.5% from 42.6% in the prior year. The decline is primarily due to cost inflation and higher promotional spending, which were only partially offset by productivity gains and higher selling prices.

Marketing and selling expenses increased by $32 million to $348 million, primarily due to higher advertising expenses, currency, and higher selling expenses, principally at Godiva.

Administrative expense increased by $17 million to $152 million, primarily due to higher compensation and benefit costs, including those related to the company’s North American business realignment and due to currency.

Earnings before interest and taxes were $431 million compared to $438 million a year ago, a decrease of 2%. Net interest expense was $42 million, up from $41 million a year ago primarily due to higher net debt levels.

The tax rate was 30.6% versus 32.2% reported in the first quarter a year ago. The lower tax rate for the quarter was primarily driven by a tax rate reduction in Germany. For the year, we project our full-year tax rate to be approximately 32%.

Earnings from continuing operations for the quarter were $270 million versus $269 million in the year ago quarter. Earnings per share from continuing operations were $0.70 compared to $0.66 in the year ago quarter, an increase of 6%, reflecting a lower average number of diluted shares outstanding due to our share repurchase program.

Earnings from discontinued operations in the prior year’s first quarter were $22 million, representing the gain on the sale of our U.K. and Ireland businesses.

Now I’ll discuss operating highlights by reporting segment.

U.S. soup, sauces and beverages; sales of $1.097 billion were up 4% from $1.052 billion in the year-ago quarter. The sales increase breaks down as follows: volume and mix added 6%; increased promotional spending deducted 2%; total soup sales declined 1% compared to 10% growth a year ago; condensed soup sales in the quarter declined 2%, driven by lower sales of eating varieties; ready-to-serve soup sales declined 2%; broth sales increased 8%.

Sales gains for Campbell’s Select and Campbell’s Chunky Soups in cans were driven by increased promotional activity and higher advertising. Chunky also benefited from the launch of our new, simple meal varieties labeled Chunky Fully Loaded. These gains were more than offset by a decline in sales of the convenience platforms, which includes soups in microwaveable bowls and cups.

Across the soup portfolio, sales benefited from reduced sodium products, which continued to perform well. Broth sales increased due to higher levels of advertising and the launch of additional sizes of aseptic varieties.

Now I’ll comment on our other categories in this reporting segment.

Beverage sales increased double digits, with gains in V8 vegetable juice, V8 V-Fusion vegetable and fruit juice, V8 Splash juice drinks, and tomato juice. Increased sales were driven by continued strong consumer demand for healthier beverages, increased advertising, and our new agreement with Coca-Cola North America and Coca-Cola Enterprises for distribution of our refrigerated single-serve beverages in the U.S. and Canada.

Sales of Prego Pasta Sauces grew double digits, driven by increased advertising and promotional activity.

Pace sales declined due to strong competitive activity.

Operating earnings for this reporting segment were $310 million compared with $322 million in the prior year period. The decrease in operating earnings was primarily due to cost inflations and increased advertising and promotional spending, partially offset by higher sales volumes and productivity gains.

Baking and snacking -- sales for the quarter were $532 million compared with $484 million, an increase of 10%. Sales growth breaks down as follows: volume and mix added 3%; price and sales allowances added 3%; currency added 5%; the divestiture of our Papua New Guinea business subtracted 1%.

Sales increased for all Pepperidge Farm businesses, which includes bakery, cookies and crackers, and frozen. The sales increase in cookies and crackers was primarily due to growth of Goldfish crackers and higher sales of [soft baked] and 100-calorie pack cookies.

The sales increase in bakery was primarily due to solid gains in whole grain products, including breads, sandwich rolls, and bagels.

Arnott sales increased double digits, primarily due to the favorable impact of currency and growth in biscuits, partially offset by declines in the snack foods business. The growth in biscuits was due to gains in tin pan chocolate biscuits and sweet and savory products.

Operating earnings were $73 million versus $68 million a year ago. Earnings increased primarily due to the favorable impact of currency. Within Arnott, gains in biscuits were partially offset by an earnings decline in the snack foods business. In Pepperidge Farm, sales gains were offset by the impact of higher commodity costs.

International soups, sauces and beverages -- sales for the quarter were $389 million, compared to $346 million, an increase of 12%. Sales growth breaks down as follows: volume and mix added 3%; price and sales allowances added 1%; currency added 8%. Excluding the impact of currency, sales growth was driven by solid gains in our businesses in Canada, Mexico, the Asia-Pacific region, Belgium, and France.

Operating earnings were $51 million versus $48 million in the prior year. Operating earnings were driven by the favorable impact of currency and improved sales performance, partially offset by increased expenses to establish businesses in Russia and China.

Other -- this includes the business of Godiva Chocolatier worldwide and the business of Away From Home] in the U.S. and Canada. Sales for the quarter were $280 million compared to $271 million, an increase of 3%. Sales growth breaks down as follows: volume and mix added 2%; price and sales allowances added 1%; increased promotional spending subtracted 1%; currency added 1%.

Godiva sales increased double digits due to growth in all regions and the favorable impact of currency. As previously announced, the company is currently exploring strategic options for the Godiva business.

Away From Home sales decreased as the favorable impact of currency was more than offset by sales declines in frozen entrees and refrigerated soups. Operating earnings were $25 million versus $26 million in the prior year.

Unallocated corporate expense for the quarter was $28 million compared to $26 million a year ago.

That completes my discussion of the operating segments. Now, let’s turn to cash flow and the balance sheet.

Cash flow from operations in the quarter was a source of $74 million as compared to a use in the prior year of $88 million. The prior year included the payment of $83 million to settle foreign currency hedges related to our divested U.K. and Ireland businesses.

The current year benefited from a lower increase in working capital, principally accounts receivable and inventory.

Capital expenditures were $40 million compared to $46 million in the prior year. Our forecast for capital spending in fiscal 2008 remains at approximately $400 million.

Total debt at quarter end was $2.814 billion, compared to $2.863 billion a year ago. Cash and cash equivalents were $77 million as compared to $230 million in the prior year.

Net debt, which deducts cash and cash equivalents from total debt, was $2.737 billion versus $2.633 billion, an increase of $104 million.

We currently have two ongoing share repurchase programs. Our strategic share repurchase program of $600 million, which commenced in November 2005, and runs through fiscal 2008, and our anti-dilutive repurchase program which offset the impact of shares issued under our incentive compensation program.

Combining these two programs, we spent $78 million to repurchase 2 million shares during the first quarter.

That concludes my remarks. Bob Schiffner will now make some closing comments.

Robert A. Schiffner

Thanks, Anthony and good morning, everyone. Our results this quarter were mixed. We were very satisfied with the overall performance of our baking and snacking business, as we were able to deliver strong top line performance in both Arnott’s and Pepperidge Farm and hold our gross margin in this segment, despite strong cost inflationary pressures.

Our international soups, sauces, and beverages business also performed well, aided by a weaker dollar and strong volume growth in the major markets of Canada, Australia, Belgium, France and Mexico. And our U.S. beverage business remains on fire, delivering top line growth of 30%, as well as strong double-digit bottom line growth.

Also noteworthy this quarter is the kick-off of our single serve beverage distribution agreement with Coke, which is off to a solid start and meeting our expectations.

Our U.S. soup business had a tough first quarter with net sales declining 1%. Our performance was impacted by difficult comparisons with last year’s strong first quarter, as well as by the extremely warm weather we experienced this fall.

Given the stronger-than-expected cost inflationary environment, we also did not have sufficient carry-in pricing to preserve margins. However, as we enter the key consumption periods of our soup season, we still believe that we have the products and programs to rebound in the balance of the year. Consequently, we are maintaining our 2008 EPS from continuing operations guidance at 5% to 7% growth from the 2007 adjusted base of $1.95.

In closing, I would also like to acknowledge that cost inflation has become a more challenging issue than we had originally anticipated. We clearly share this issue with other food companies in our competitive set.

Given the commodity cost environment and escalating oil costs, we now expect cost inflation to fall within the range of 6% to 7% this fiscal year, above our 5% planning assumption. Given this higher cost pressure, we are currently reevaluating our pricing strategies for the fiscal year and probably will need to take a more aggressive stance in this area going forward.

Now, I’ll turn it back to Len for our question-and-answer session.

Leonard F. Griehs

You can begin the question-and-answer session, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Alexia Howard from Sanford Bernstein.

Alexia Howard - Sanford Bernstein

A question on the margin outlook for the rest of the year and how quickly we might expect that to start to come through. Clearly -- I was frankly quite surprised to see the pricing for the company overall be fairly flat on a net basis for the whole company this time around, given that most other companies are taking things up. What we’ve heard from some of the companies is that contact [tracks] with retailers at promotional price points sometimes delay or create a time lag before you can actually take pricing up. Can you talk to me a little bit about how quickly we might expect to see the combination of better pricing and productivity improvements come through to start to help that out?

Robert A. Schiffner

Well, as far as productivity is concerned, we should see fairly constant productivity improvements through the year. I think from a pricing standpoint, it’s fair to say that that impact will probably be more of a second half impact as opposed to a first half impact. So sitting here today, I would tell you that we still expect to hold margins on the year. I think it would be highly unlikely at this point to expect better margins and we should start seeing that improvement more toward the second half of the year.

Alexia Howard - Sanford Bernstein

Okay. Thank you very much.

Operator

Our next question comes from Eric Katzman from Deutsche Bank.

Eric Katzman - Deutsche Bank

Good morning, everybody. I guess first to follow up on that, on Alexia’s line of thinking, so basically now you’re -- with higher pricing hopefully in the second half, assuming private label and General Mills follow, you would assume that sales growth and EBIT growth are roughly the same?

Robert A. Schiffner

Roughly the same -- our forecast is roughly the same, yes.

Eric Katzman - Deutsche Bank

Okay, and then you get some benefit from the share repo and maybe some debt pay down, or something like that, to create the leverage?

Robert A. Schiffner

More from share repo.

Eric Katzman - Deutsche Bank

Okay, and then I guess is it mostly -- in terms of the inflation, is it mostly a function of fuel that’s changed the outlook, Bob?

Robert A. Schiffner

Well, I think we’re looking at higher wheat prices. I think to some extent, both dairy and our oils have also increased in pricing as well, but clearly diesel fuel is a big element.

Eric Katzman - Deutsche Bank

Okay, and then last question and I’ll pass it on, or maybe more of a comment, I’m a little bit surprised that you chose to highlight weather. I mean, I really think it’s kind of a double-edged sword. On the one hand, maybe it was a factor but to the extent that you are calling that out versus what you said in the past, Doug, that I’m never going to highlight this, now it makes me say all right, well, if it’s cold, then you better really do well as opposed to kind of blaming it when it’s warm. Can you just go through that a little bit? And I guess to the extent that you can talk about the category, how has weather impacted the category overall, as opposed to you maybe losing share or something like that?

Douglas R. Conant

Eric, I would have been disappointed if you hadn’t raised that issue, so thank you. As you know, we’ve been doing this now for going on seven years, 28 quarters, and have not highlighted weather as a significant issue. And I still don’t believe it will be a significant issue for the year.

Every year, we have had warmer quarters, colder quarters, and overall we’ve been able to deliver our sales forecast as a result of that and ultimately our earnings forecast. So what we chose to do was highlight the fact that in this fall, this autumn, the weather clearly had an impact on our fall plans but I do not believe it will have an impact on our full year plans.

I am very comfortable with our forecast, which basically we’re standing by our original forecast, which said we would grow sales as a company 3% to 4%, and you know if we are going to do that as a company, we need to do that in soup. We’re very comfortable with our forecast for the year.

I will say we got off to a slow start and affected by weather more so than we have observed in the last 28 quarters since I’ve been doing this, but it will not be an excuse for the year.

Eric, I wish there was a perfect one-for-one correlation here but quite frankly, when the weather is warm, significantly warmer, we do see a slight dampening in sales. When we see it go from being cold to colder, we don’t see the same kind of lift, that’s because it’s cold enough already to have soup and if it’s a little colder, it really doesn’t drive soup consumption that much more.

The one other thing I would say about our U.S. soup business is we are reporting that we are down a little less than 1%, but I feel very good about the way our soup business is positioned. We were down a little less than 1% versus a record high 10% growth last year and this first quarter in U.S. soup is the second-best first quarter we’ve had in at least 10 years, and it’s $100 million above where it was only three short years ago. So we’ve lifted the whole performance level of our soup portfolio to a new level. We didn’t grow as much as we had hoped for and I would say we just lost a little of the edge due to the weather and I think we’ll get it back over the balance of the year.

I feel very good about the way we’re positioned but we have our work cut out for us. We have to do better and we know what we need to do and we’ll do it and we’ll lead the category to a higher performance level.

I do think, although we won’t comment on any specific consumption or share information, you have seen and the customers have seen that this category was slow over the last three months and we expect that to pick up and in fact, we’re already starting to see that in November.

So that’s it from here.

Robert A. Schiffner

Eric, let me just embellish on a little bit of what Doug said. We’ve done a lot of empirical analysis here around the impact of the weather and basically, what we have seen over time is that weather patterns will impact the flow of volumes within a soup season. When you look over many soup seasons, weather doesn’t play hardly any factor at all but within the soup season, it will in fact have an impact on moving volume around. So again, this is what we’ve always said, is that you have to evaluate us throughout a full season as opposed to one quarter and I think that’s the point we were trying to make relative to weather.

Eric Katzman - Deutsche Bank

That’s helpful and I think that’s a fair point. Are you seeing any recent lift in condensed because of consumer pressure out there, in terms of disposable income stress or let’s say recession type movements?

Douglas R. Conant

Our experience with condensed in the fullness of time has been that when there is economic pressure on consumers, condensed is a good value offering and it should hold up reasonably well. But as you’ll recall, we had 25 straight years of a declining condensed business and we’re in year four of growing it again. It will be interesting to see how it responds in this situation but we’re optimistic about it.

Eric Katzman - Deutsche Bank

Okay. I’ll pass it on. Thank you.

Douglas R. Conant

Just to build on the condensed piece, we have said that aspirationally over the last three years, we’ve grown condensed soup sales at about a 4% clip and we said aspirationally that’s what we would like to do.

The way we do the math on that is basically condensed soup sales should grow with population, which is around 1% to 2% and hopefully we expect to do a little better. We think we can stay in that model of growing with population this year and hopefully do a little better.

Eric Katzman - Deutsche Bank

Thank you.

Operator

Our next question comes from Terry Bivens from Bear Stearns.

Terry Bivens - Bear Stearns

Good morning, everyone. Two quick things; you know, Doug, traditionally I guess there have been times in the past when you haven’t done this, but usually pricing comes kind of near the end of soup season. Is there any risk to trying to get it a little bit earlier?

Douglas R. Conant

Terry, it’s not really very practical because you have your -- you have all your programming laid out with your customers already through the rest of the soup season and in all likelihood, it’s going to be -- it would be difficult, if not impossible, to move that around. So it is what it is.

Robert A. Schiffner

Terry, we really aren’t projecting any kind of thing on pricing at this point. I think what we’ve said is we would -- we’re going to have to revisit but we’re not making any forecast around pricing or we’re going to do it or anything like that.

Terry Bivens - Bear Stearns

Okay, I thought I heard a hint there, but okay. And just one other quick thing; why the need to be so promotional in the quarter? That one surprised me a bit.

Douglas R. Conant

We had set up our plans independent of what turned out to be a very warm autumn, and we intend to fully compete. As you’ll note, our marketing spend was up significantly. If we had wanted to hit the consensus number, we could have cut it a little bit but we intend to compete fully and significantly. We’re in it for the long haul. We thought it was appropriate this year to compete and manage our price gaps tightly with private label and the branded manufacturers, and so we did.

Terry Bivens - Bear Stearns

Thank you.

Operator

Our next question comes from David Palmer from UBS.

David Palmer - UBS

A quick question, just to lead off; your consumers, do you think they are pushing back a bit on your higher priced items in a tough economic environment? The reason I ask this, and this might be out there, your microwaveable platform, clearly higher priced and then you have your Fully Loaded lineup and that was clearly priced at a higher level. Is perhaps Fully Loaded not doing quite as well as you thought it might be because of that price point? Or separately, that microwaveable lineup, is that because of perhaps retailer and progressive brand introductions in the microwaveable bowls? Or perhaps, do you think there might be something broader going on with the consumer trading down?

Douglas R. Conant

No. Just a couple of points; one, the microwaveable platform is the most pronounced reason for that slowness in the first quarter is promotional timing and we expect it to be strong for the year.

The other observation I would make on our higher priced items, they still offer great value relative to other simple meals. And we know that particularly with Chunky, we know that we are interacting more with other food alternatives than soup. And actually, we do track our performance relative to other simple meals and we do know we’re outperforming that category and most of them are higher priced than soup. So we like our price value proposition relative to simple meals and we like our price value proposition relative to all the alternatives out there as we go into the year.

The microwave piece is more timing than anything else.

David Palmer - UBS

You also said in your release, and I think in your remarks, that low sodium is performing well. Could you give us an idea of what that means to you?

Douglas R. Conant

Well, we continue to, on all the new items, we continued to track very healthy repeat rates and that collection of SKUs continues to grow nicely above the average of the line. And even though the competitive fray has gotten a little more intense, we are also now adding the lower sodium version, the healthy request versions to our microwave line and they’ll be flowing in this quarter and getting into next year, I mean later this year.

So we’ve added I think 17 new sodium items on top of the last year’s launch. Last year’s launch is growing at an above average rate and with the 17 on top of it, including taking it into microwave, we think we’re going to have another very solid year.

David Palmer - UBS

And lastly, on Godiva, you expect that to close by the end of the calendar year, and you’ll be using the cash proceeds, if indeed this is what happens, for share repurchase?

Douglas R. Conant

It’d be premature to comment.

Robert A. Schiffner

Yeah, we’re not going to comment on that.

David Palmer - UBS

Okay. Thank you very much.

Operator

Our next question comes from Robert Moskow from Credit Suisse.

Robert Moskow - Credit Suisse

Thank you. Doug and Bob, could you tell me how much -- what kind of increase in consumer marketing do you think that you’ll do this year, just on the advertising levels? You’ve said that you didn’t want to cut the first quarter, so you want to stay strong. Can you give us a range?

Douglas R. Conant

Well, we have a plan to have solid growth in consumer A&C, advertising and consumer promotion for the year but quite frankly, we don’t give out forecasts for that. But we are currently contemplating having a solid increase.

Robert Moskow - Credit Suisse

Okay, and then spending in Russia and China, I noticed that profits are actually up in your international soup business, Bob had said to expect some dilution from that spending the next couple of years. Was there heavy dilution to profit growth in international from Russia and China?

Douglas R. Conant

Bob, why don’t you take that?

Robert A. Schiffner

We in fact did have higher spending in the emerging markets this quarter versus last quarter. It’s up approximately $3 million, so we would expect to have higher losses or more expenses, depending on how you look at it over the full year as well. So again, emerging markets will be a dilutive influence on us in fiscal ’08.

Douglas R. Conant

The consumer spending -- both markets we now have products in market at retail. Consumer spending is in full -- on full display in our China lead market and just rolling into our Russian market. So you’ll see the spending in these lead markets start to go up in the second quarter.

Robert Moskow - Credit Suisse

Okay, one more thing; have you seen anything from your retailers, maybe specifically convenience store operators, on their concerns about taking a lot of inventory in with pricing going up, with inflationary pressures and the lending squeeze? I’ve got to imagine the answer is no since your beverage business is so strong and that’s got to be convenience store related.

Douglas R. Conant

Well, actually we are just getting started with the convenience store piece with Coca-Cola Enterprise and Coca-Cola North America. The bulk of our growth in this first quarter was out of our grocery business, but the -- we don’t see any -- we’re not unusually highly developed in the convenience channel. It’s an average development index for us and we don’t see any issues there right now.

Robert Moskow - Credit Suisse

Thank you.

Operator

Our next question comes from Jonathan Feeney from Wachovia Securities.

Jonathan Feeney - Wachovia Securities

Good morning. Thank you. Bob, you gave us the next sales number for the U.S. soup business specifically. Could you give us a sense of what volumes in pricing were in just that U.S. soup franchise as a whole?

Robert A. Schiffner

We don’t break it down that far, Jon.

Jonathan Feeney - Wachovia Securities

Then maybe at 30% growth, it seems like beverages are huge -- obviously a huge area of strength and just getting started. Maybe some reason to believe that might accelerate. Is there a meaningful gross margin inflation or deflation that we’re seeing from that business right now and maybe in the future?

Robert A. Schiffner

It’s above average.

Jonathan Feeney - Wachovia Securities

It’s above average gross margin?

Robert A. Schiffner

Yes, it is.

Jonathan Feeney - Wachovia Securities

For the company?

Robert A. Schiffner

For the company.

Jonathan Feeney - Wachovia Securities

Okay. Wow. And just, and correct me if I’m wrong, the lower tax rate had looks like something like a $0.02 positive impact in it, but I think the tax rate guidance used to be 32 to 33, so by cutting off that high end, you kind of -- do you think you might have -- you would have pulled $0.02 out of guidance had you not gotten that tax benefit? Or did you do some opportunistic sort of investing with that little bit?

Robert A. Schiffner

Well, the German tax rate reduction had about a $0.016 impact on EPS and frankly, our guidance was 32% to 33%. We are now pulling it down to more -- closer to 32% for the full year and so expect to see higher tax rates for the last three quarters. So I don’t think it’s going to offer us a tremendous amount of financial flexibility relative to our plans going forward.

Jonathan Feeney - Wachovia Securities

If I could just ask one for Doug; you called out in the release the eating varieties of condensed soup as a disappointment. I would assume the increased promotional activity has mainly been aimed at ready-to-serve. Is this maybe a cannibalization you’re seeing? Is that the way this business works?

Douglas R. Conant

No, actually I think what happened, we called out a few areas where we felt we should do better. We called out convenient, microwave and convenience. That was more of a promotional timing issue and condensed eating, in my opinion, was softened a little bit by the weather impact and I think you’re going to -- we’ll see, but I’m confident we’re going to see a stronger performance the next three quarters.

Jonathan Feeney - Wachovia Securities

It looks like the weather’s helping you today. Thank you.

Operator

Our next question comes from Eric Serotta from Merrill Lynch.

Eric Serotta - Merrill Lynch

Good morning. I’m wondering whether you guys could go into the category dynamics in RTS cans a little bit more. If we take out the promotional timing impact in the microwave bowls and convenience platforms, it still seems that your RTS performance was a little disappointing, especially considering the very strong performance that Mills has spoken about lately on Progresso in terms of both share gains and retail sales increases. Could you talk about your performance there in a little bit more detail?

And as a follow-on to that, could you talk about the overall trade inventories in soups, not just RTS but condensed and RTS?

Douglas R. Conant

The first quarter does not a year make, and the key quarters are the second and third quarters, and we like our outlook for ready-to-serve for the year. We did -- it’s difficult to tease out meaningful comparisons when you have -- we had a record quarter a year ago and so we had just an outstanding first quarter performance a year ago, and then we’ll lapping that with some unusual weather that’s affected the way we are planning and promoting, and we also changed some promotional timing around our microwaveable platform relative to our canned platform. And we on top of it launched a new line, Chunky Fully Loaded.

So you have a lot of moving parts here. What I would say is that, and I can’t get into the ins and outs of that, but what I will say is if we are expecting 3% to 4% growth in our soup business, we would expect that kind of growth from our ready to serve business and I think we’re well-positioned for the year to deliver that.

Eric Serotta - Merrill Lynch

Okay, and then trade inventories, a quick follow-up for Bob --

Robert A. Schiffner

Eric, I would say that in fact, we are not seeing any major deviations from our expectations relative to trade inventories.

Eric Serotta - Merrill Lynch

Okay, and Bob, just to follow-up, two quick items here; in the past, you’ve spoken about $150 million to $180 million as sort of a bogey for ongoing productivity each year. Given the increased pressures on the commodities side this year and maybe a little bit higher promotional spending, do you think you need to hit a higher number than that?

Robert A. Schiffner

Well, the more we can generate, the better, that’s for sure. And we are working very diligently at trying to get as much costs reduced as we can. But I think this year we’ll be very happy to stay within that range. Hopefully, as we look out past fiscal year ’08, we can generate a higher level. But I think for this year, we’re pretty satisfied that’ll probably fall within the range that you’ve identified.

Douglas R. Conant

We have the SAP implementation, which we’re ramping up this year. It gives us visibility into ways to ramp up our productivity in 2009 and beyond, but given that we are still rolling that out this year, it’s just not going to give us the kind of lift that we think it will give us in ’09 and ’10.

Eric Serotta - Merrill Lynch

And then finally, and I’ll pass it on, just to follow-up on Alexia’s question -- I think it was Alexia’s -- on the pattern of margin improvement throughout the year. Without talking about the timing or possibility of pricing in particular, I seem to remember that you made comments that the margin should improve in the second half relative to what the performance that we’re seeing in the first half.

At the same time, you are, given the seasonality of your business, about 68%, 69% of your earnings are typically generated in the first half. Could you just maybe help reconcile how improved margins in the second half will counterweight the margin pressure that we see in the first half to get you flat for the year?

Robert A. Schiffner

Well, Eric, clearly you can do the math. Obviously I don’t disagree with the fact that our profits are weighted more to the front half than they are the back half, although I’m not so sure that I ultimately agree with the numbers that in fact you are using. But again, I mean, it’s obviously a mathematical issue. We expect -- if we expect to hold margin for the full year, we’re going to drive higher margins in the second half relative to the first half and the weights I think will not be as dramatic as you have just communicated. So that’s how we get there.

Eric Serotta - Merrill Lynch

Okay. Thanks a lot. I’ll pass it on.

Operator

Our next question comes from Christine McCracken from Cleveland Research. If you have your phone on mute, can you un-mute your phone, please?

Christine McCracken - Cleveland Research

I just wanted to follow-up on an earlier question on your eating state volumes. You mentioned I think in the fourth quarter that you actually had a big increase. I’m just wondering if you thought it was possible that you had any pantry loading that could have maybe affected first quarter.

Douglas R. Conant

No, Christine, we don’t really -- the customers don’t take inventory in any meaningful quantity going into the summer, so no, that was not an issue at all.

Robert A. Schiffner

Christine, I can add to that; we do get now panel information on pantry loading for our consumers and frankly, the pantries look if anything slightly below where they are historically at this point. So pantry loading as it relates to the consumer is not an issue.

Christine McCracken - Cleveland Research

Good to hear. And then, just on the commodity cost outlook, it seems like the bulk of the delta is in where you’ve seen the changes essentially are affecting your baking and snacks segment. I’m wondering, when you look at what you can do to offset that in terms of pricing versus taking weight out, it seems like you have a little more flexibility relative to the soup. So I’m just wondering one, if you expect the commodity cost pressure to really hit that segment, and then secondly, are you considering all of your alternatives in terms of offsetting that cost increase?

Robert A. Schiffner

The answer is yes, we are looking at everything possible. We do expect cost inflation to be much more aggressive in our baking and snacking business starting in the second quarter. We were pretty much hedged throughout most of the first quarter, so that’s going to be a challenging segment for us going forward and so we are looking at doing a number of things there to offset that impact of cost inflation.

Christine McCracken - Cleveland Research

I’ll leave it there. Thanks.

Operator

Our next question comes from David Driscoll from Citigroup.

David Driscoll - Citigroup

Great. Thanks a lot. Good morning, everyone. Bob, you mentioned wheat as the number one commodity cost increase. However, margins were hurt the worst in soup, sauces and beverages. Can you just tell me what costs hurt that particular line? Because that seems to be the area that we should be focused on.

Robert A. Schiffner

Well, when I’ve talked about those commodities that we expect to hurt the most, I’m giving you kind of an annualized view of that. Obviously this quarter we have not been hit as hard in the baking and snacking business as we will be going forward. In fact, when we do look at the soup business, it’s safe to say that in fact we do get impacted somewhat by wheat. We do have flour that is an ingredient to thicken some of the soups. Dairy has hurt us with our cream soups. We do also have some oil that is [a component] into our soups as well.

Those are the items that in fact are driving the soup inflation.

David Driscoll - Citigroup

The other piece that I wanted to follow up on was the last conference call in early September, wheat prices were actually higher than they are today on nearby futures. You mention that you’ve raised your commodity cost expectations for the full year. Can you help me understand what appears to be a little bit of a differential between those comments? I would actually have expected you to say that versus where wheat prices were when you did your last conference call, is slightly better.

Robert A. Schiffner

Well, I think again timing plays a very important role in terms of when you expect those prices to hit and where you’re covered and where you’re uncovered. You could look at spot prices in September and frankly, those are not very meaningful in terms of how they ultimately will hit our P&L going forward. So I’ll just leave it at that.

Douglas R. Conant

It’s more of a coverage issue than what you see in the market, David.

David Driscoll - Citigroup

Okay, but my question is that from what I can tell, a couple of months ago when you did your call, you had a 5% commodity inflation expectation. You knew what the coverage was. The wheat prices haven’t worsened -- certainly they are bad but they haven’t worsened, and it looks to me like there’s a big delta, a big increase in commodity costs inflation expectations, and I would assume that the only reason why your plan would change is if the spot market change related to that uncovered stuff. So I’ll chat with you guys, I’ll call you offline on this one. There’s something I’m missing here. Thank you.

Robert A. Schiffner

David, let me just comment; I think the one piece you are missing is in fact the run-up on diesel. Also in fact the run-up on dairy prices as well, so again it’s hard just to look at spot prices and say hey, this is the impact because as Doug just mentioned, it’s really the areas where we are covered and uncovered and frankly the longer term prices as opposed to current spot prices. So I’m looking forward to your phone call.

David Driscoll - Citigroup

Great. Thank you.

Operator

Our next question comes from Mitch Pinheiro from Janney Montgomery Scott.

Mitch Pinheiro - Janney Montgomery Scott

Good morning, everybody. A couple of things, and most of my questions were asked, in the microwaveable soup thing, just a clarification -- you said it’s more timing related. Is that just promotional timing? Is that what you said?

Douglas R. Conant

Well, promotional and advertising and how we’re managing the portfolio of opportunities we have quarter to quarter. So obviously we think it will be stronger in the last three quarters than it was in the first, without tipping our hand on any one specific thing.

Mitch Pinheiro - Janney Montgomery Scott

Okay, was the percentage -- I guess I should ask; what is the percentage that you give of microwave and your convenience platform outside your grocery and mass channel? Is that a -- did that have weakness as well or as it really a grocery and mass issue?

Douglas R. Conant

We don’t break out the channels but what I would say is that the convenience channel has got a lot of upside for us. We are not that well-developed there, so -- yet.

Mitch Pinheiro - Janney Montgomery Scott

Okay, last question is were there any growing pains in the quarter related to V8? You were sort of tapped out on capacity. Was there any meaningful costs there associated with that?

Robert A. Schiffner

No.

Mitch Pinheiro - Janney Montgomery Scott

Okay. All right. Thank you very much.

Operator

Our next question comes from Edgar Roesch from Banc of America.

Edgar Roesch - Banc of America

Good morning. So just on the baking and snacking, I just want to understand a little bit more because your press release mentioned that Pepperidge Farm saw costs that offset the sales increases in describing I guess what sounds like flat profitability. So first of all, a lot of that is fresh bakery. I would have thought the pricing would be relatively easy to come by in offsetting costs there.

And then, your outlook is for the margins in that segment to improve as we go throughout the year, is that right?

Robert A. Schiffner

No, we didn’t say that, Ed. We just said that in fact our margins were basically flat for the quarter, our gross margins.

Edgar Roesch - Banc of America

Okay, in the Pepperidge Farm business -- or in the baking and snacking in total.

Robert A. Schiffner

In the baking and snacking segment, that’s correct.

Edgar Roesch - Banc of America

Okay. And didn’t you mention in the release though that Pepperidge Farm, it sounded like you were getting pinched on your margins because of cost increases. Is that right?

Robert A. Schiffner

Pepperidge Farm had solid top line growth for the quarter, relatively flattish when you look at operating profit and that’s due to more than anything higher marketing and some cost inflation, but not nearly as much as we expect going forward.

Edgar Roesch - Banc of America

Okay, that’s very helpful color. Thank you. And then one last question for you; the gold label select, I’m seeing it more in some of your marketing messages. You are highlighting it with your ready-to-serve portfolio. Can you just give us an update on how that initiative is going? Thanks.

Douglas R. Conant

The aseptic soup initiative is going well globally and it continues to be solid in France, Australia, Canada, particularly doing well in Canada. And we see a very slow build here in the U.S., as we expected. It’ a major change in terms of packaging format for consumers. Repeat continues to be very good.

The challenge for us is to find the best way to market that proposition within the context of our full portfolio. We’re very comfortable we’ll find our way there. It continues to be highly differentiated with great repeat and we just have to find the right way to take it to a higher level, but it’s fully satisfactory for now.

Edgar Roesch - Banc of America

Thanks, and do you have the same number SKUs this year, pretty much flavors and varieties that you had last year?

Douglas R. Conant

We added one or two. We added Southwest Corn Chowder and one other, so it’s a slightly bigger line.

Edgar Roesch - Banc of America

I’ll be sure to try those. Thanks.

Operator

Our next question comes from Andrew Lazar from Lehman Brothers.

Andrew Lazar - Lehman Brothers

Good morning. I know Doug, on the fourth quarter call, you had highlighted retailer inventories looked very good, very comfortable and lean heading into the fall. So I’m trying to get a sense of, with I guess the fiscal first quarter being to some extent a lot more about sell-in to the retailer and getting them all set for the fall season, was there any shift in what you might call market share or mine share at the retail level in the quarter, or on the shelf that we haven’t seen play out yet in any marketplace data?

Douglas R. Conant

Andrew, I’m sorry. I’m not sure exactly what you mean.

Andrew Lazar - Lehman Brothers

If the first quarter, and maybe this is not the way you look at it, but if the first quarter is more about selling into the retailer and making sure you’ve got the proper levels of inventory and product there and on the shelf for when the weather gets cold, and your inventories coming into this first quarter were in very good shape and very lean, was it more just the items you discussed, weather and year-ago comps, rather than any shifting of let’s say any space allocation on the retailer shelf or retailers, were they just less willing to take on typical levels of seasonal inventory because of the warmer weather, or what have you?

Douglas R. Conant

I believe that’s probably the single biggest difference. We have a pretty effective and efficient inventory management process with our customers and we didn’t see the kind of order patterns that we would have expected to see in a normal fall, so we also expect those to obviously come in the second quarter instead of the first.

Andrew Lazar - Lehman Brothers

I know that a couple of quarters ago, you had talked about condensed growth and some of the possibilities going forward, and some of this might frankly have been more aspirational in nature on your part, but I think you talked about being able perhaps to continue similar levels of growth on condensed that you’ve seen over the past couple of years, 3%, 4% levels. And today you talked about still being able to grow it, which is obviously admirable for condensed, which was not the case years ago. But I’m just getting a sense -- has anything changed that perhaps has maybe dampened your outlook a bit on condensed possibilities, or is it just those were more aspirational in nature when you made those comments?

Douglas R. Conant

Well, I think we have to find the right balance between reality and aspiration. And starting slow in the first quarter makes it hard to imagine delivering at the high end of our 4% level that we had delivered the last three years. But we do still expect to grow it in this year and expect it to be very competitive.

We have great programming, we have continued progress with our IQ shelving system and we see another solid year but we’ve clearly got off to a slow start. That’s all that’s reflected in that comment.

Andrew Lazar - Lehman Brothers

Thank you.

Leonard F. Griehs

How many more questions in queue?

Operator

We have two more questions, sir.

Leonard F. Griehs

Okay, we’ll take those and then we’re going to stop.

Operator

Our next question comes from Vincent Andrews from Morgan Stanley.

Vincent Andrews - Morgan Stanley

Thank you. Good morning, everyone. Just looking at the weather issue from another angle, in the past you guys have stated that the number one reason that people don’t buy soup in warmer weather is that they are not thinking about it, and that goes towards your marketing or communication message to consumers. And in the fourth quarter you talked about reviewing some of your counter-seasonal advertising. So I just was wondering if you could update us on what you think happened in the quarter from a marketing perspective. Is there something you want to do differently or something you should be doing better? Where are we in terms of that?

Douglas R. Conant

You’re talking the fourth quarter or the first quarter or just --

Vincent Andrews - Morgan Stanley

I’m sorry, just -- I really meant more the first quarter but maybe just take us through the fourth quarter and the first quarter and what you are willing to tell us on a go-forward basis.

Douglas R. Conant

Well, the key here is that we still -- the number one reason people don’t consume soup is they don’t think about it and there’s clear indication to us when it’s warmer out, they think about it less than when it’s colder out. And then we try and layer in our marketing activity to optimally kind of work with weather and find the right balance that lifts the category.

What we found is that advertising in consumer alone are insufficient to drive change the awareness levels with consumers. And we do have to work -- we have to acknowledge that at times in a quarter or in a month or two, weather patterns can affect volume, although we don’t see any impact over a full soup season.

We also have to recognize that we learned in this counter-seasonal advertising is we can increase our marketing spend but we have to make sure we are executing well at retail so that when the consumer comes in, we are winning the war at retail as well as the war in terms of share of voice.

So we have some fine-tuning to do to get fully integrated marketing plans that win the share of voice battle in terms of advertising, and also when at the point of purchase. And we didn’t execute that particularly well in the fourth quarter.

Vincent Andrews - Morgan Stanley

Would you say the same about the first quarter then?

Douglas R. Conant

Well, the first quarter, fundamentally I believe it was more weather related than anything else and we expect our marketing programming to lift us up in the second quarter substantially.

Vincent Andrews - Morgan Stanley

Okay, that’s very helpful. Thank you very much.

Leonard F. Griehs

All right, last question.

Operator

Our last question comes from Pablo Zuanic from J.P. Morgan.

Pablo Zuanic - J.P. Morgan

Good morning, everyone. Just briefly, my main concern is on the top line front. I mean, we could make the argument that pricing down 2% in soups is pretty bad, right, and that the last time we saw that was in October 2004. That [inaudible] with gross margins is not just cost, it’s a promotional effort. I’m wondering, despite all the innovation that has been successful until now, you are still having to be promotional. That’s a comment more than a question.

I guess my question is --

Douglas R. Conant

Pablo, I would just mention that the reason we said that is because last year our soup was up 10% in the first quarter, so I think that’s important to understand. We did have significant growth last year in that first quarter.

Pablo Zuanic - J.P. Morgan

Okay, that’s fair but I don’t think, despite a comp, why would you need to promote, but anyway the argument really is here when I look at segmentation in the market and I see Chunky Fully Loaded and still advertising with the NFL, I think that’s nice and obviously a it’s a segment that you’ve captured well. But what about other segments? And I see General Mills targeting obviously the female market with a light soup platform. I wonder how easy or difficult it will be for you to copy that, or to promote what you may already have in the portfolio.

And then I look at the ethnic section of the supermarkets, all these cap soups and chicken noodles that are different probably from the one that you sell and I don’t see Campbell targeting that segment.

Here you are trying to sell soup in China and Russia, but I wonder what are you really doing to target your segments here in the U.S., which are not small?

I’m just wondering -- again, aseptic, off to a slow start, you’ve said that; reduced sodium has its own cloud, let’s see how that goes, but what’s next? I mean, Chunky Fully Loaded to me is more of the same for the NFL crowd, but what else? There are other segments out there that Campbell could be targeting. Can you comment on that?

Douglas R. Conant

I will comment fully on that at CAGNY, Pablo. We’ve already released our programming for this fiscal year. We feel as if we are doing quite a lot with quite a lot of segments between kids with condensed, adult males with eating, premium quality soup with both our stock pot initiatives as well as our aseptic initiatives, and certainly competing with the other branded entries in lighter ready-to-serve soups.

General Mills is doing a great job and I think they are to be commended for that. We can do better and we will do better, and we will have more to say in terms of our plans going forward and targeting as we go into the next soup season, but we are very satisfied with the portfolio of opportunities we have here in front of us.

And I must say, just as a small nugget of, in terms of Russia and China, the markets we compete in in the world today account for a whopping 6% of all soup consumption in the world. Russia and China alone account for 50% -- eight times that of all the markets that we compete in today and that is a big opportunity that this company needs to address and we will. And that’s where the big opportunity is -- not to say there aren’t wonderful niche opportunities in our own back yard and good for you to call us on it and we should do better against them.

Pablo Zuanic - J.P. Morgan

And just to follow up, if I may, and thanks for that answer; in terms of the rollout of the [inaudible] at Wal-Mart, I hear that you are doing that now but I had expected to see a better number on the condensed soup side, maybe it’s comp, but how is that going and how quickly should we expect to see [inaudible] throughout the Wal-Mart network?

Douglas R. Conant

We don’t comment on any specific customers. We are -- what we have seen with the rollout with all customers is it is difficult to get that implementation in in the fall during the soup season. They tend to not reset shelves then, so some customers will cut in and make the change more abruptly but I don’t think you should expect to see any, with any customer, any significant change overnight as we go through the soup season.

Pablo Zuanic - J.P. Morgan

Thank you.

Leonard F. Griehs

Okay, that will conclude our call then.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today. You may all disconnect and have a wonderful day. Thank you.

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Source: Campbell Soup F1Q08 (Qtr End 10/28/07) Earnings Call Transcript
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