Campbell Soup Company (CPB) Q4 2007 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Campbell Soup Company 2007 Fourth Quarter and Year-End Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions on how to participate will be given at that time. [Operator Instructions]. As a reminder this conference is being recorded. I would now like to introduce your host for today's conference Mr. Leonard Griehs.

Good morning and welcome to Campbell Soup Company's fourth quarter fiscal 2007 conference call. Our agenda for this morning's call will be as follows. Anthony DiSilvestro, Vice President and Controller will open with financial results for the fourth quarter and fiscal year, that will be about 20 minutes; then Bob Schiffner, our Senior Vice President and Chief Financial Officer will comment on our outlook for fiscal 2008 and put some perspective on fiscal 2007, and joining us for the question-and-answer session to follow will be Doug Conant, our President and Chief Executive Officer. Our financial results, press-release and supplemental schedule were issued earlier this morning and they are also posted on our website. Our call will last approximately one hour and it will be available for replay, approximately two hours after we are completed, through mid night September 14th. Replay number is 1-888-266-2081 or for international 1-703-925-2533 and the access code for the replay is 602828. You may also listen to a replay by logging on to our website www.campbellsoupcompany.com 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 contains certain forward-looking statements that reflect the company's expected future business and financial 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 uncertainties may cause our actual results to vary materially from those expressed or implied in our forward-looking statements. These include statements concerning the impact of marketing investments and strategies, share repurchases, pricing, new product introductions and innovation, cost savings initiatives, quality improvements and portfolio strategies including divestitures on sales, earnings and margins and other factors described in our most recent 10-K as updated from time-to-time by the Company in its subsequent filings with the Securities and Exchange Commission. Actual results could vary materially from those anticipated or expressed in any forward-looking statement made by the Company. This discussion also includes certain non-GAAP measures as defined by SEC rules. We have provided a reconciliation of those measures to the most directly comparable measures and that is available on our investor website as well. Now let's begin our discussion of results with Anthony DiSilvestro.

Good morning. I will be primarily discussing results for the fourth quarter and the full fiscal year from continuing operation only. The consolidated results, including discontinued operations, are detailed in the press release and in the supplemental schedules. I'll begin with our results for the fourth quarter. Net sales for the quarter increased 10% to $1.594 billion. The change in sales breaks down as follow: volume and mix added 6%, price and sales allowances added 1%, currency added 3%, gross margin percentage for the quarter decreased to 40.1% from 41.9% a year ago, while pricings and savings from our ongoing productive program offset cost inflation; gross margin in the quarter was negatively impacted by one time cost associated with streamlining the Company's supply chain organization in Australia and Indonesia and from higher costs of meeting the increased volume requirements in our US Beverage business. Marketing and selling expenses increased 15% to $309 million primarily due to increased advertising and consumer promotion activity in our US Soup, Beverage and Pepperidge Farm businesses. Administrative expense increased 7% to $179 million primarily due to expenses to establish businesses in Russia and China, higher incentive compensation costs, currency, and higher cost associated with the continued implementation of SAP in North America. Research and development expenses increased 17% to $35 million, primarily related to higher levels of new product activity. Other income of $13 million compared to $4 million expense in the prior year. In the fourth quarter, we recognized a $10 million gain from a settlement in lieu of condemnation on our StockPot refrigerated soup facility in Washington State. The impact of which was mostly offset by cost incurred during the year related to the relocation and startup of the new facility recorded in cost of product sold. In addition, we recorded a $3 million gain from the sale of our business in Papua, New Guinea. Earnings before interest impacted for $129 million compared to $139 million in last year's fourth quarter, a decrease of 7%. This decrease is primarily due to higher marketing expenses and the one time expenses negatively impacting gross margins, partially offset by higher sales volume and a gain recognized in the quarter associated with the relocation of the StockPot facility. Net interest expense was $37 million, down $4 million primarily due to lower net debt levels. The tax rate in the fourth quarter was 42.4% compared to 14.3% in the prior year's quarter. Two items were recorded in the fourth quarter of 2006 which impacted the comparability of results. The first is the favorable impact of $14 million from the anticipated use of higher levels of foreign tax credit which could be utilized as a result of the sale of our UK and Ireland businesses. The second is incremental tax expense of $4 million associated with the repatriation of earnings under the AJCA. Excluding these two items, the tax rate for the fourth quarter of 2006 would have been 24.5%. The remaining increase in the tax rate is due to higher deferred taxes recognized in 2007 on our international businesses. In comparison, 2006 benefited from both a rate reduction in Canada and various tax planning strategies. Earning from continuing operations for the quarter were $53 million or $0.14 per share compared to $84 million or $0.20 per share in the year ago quarter. Items impacting comparability for the fourth quarter of fiscal 2006 include $4 million in tax expense or $0.01 per share related to the repatriation of earnings under the AJCA. A $14 million tax benefit or $0.03 per share from the recognition of higher foreign tax credit which could be utilized following the divestiture of our UK and Ireland businesses. For comparability the prior year EPS requires an adjustment to reflect the pro forma impact of using $620 million of divestiture proceeds from the sale of our UK and Ireland businesses to re-purchase 17 million shares. The impact from last year's fourth quarter is an increase of $0.01 per share. After factoring these items into the reported result, earnings from continuing operations are $53 million compared to an adjusted prior year of $74 million, a decrease of 28%, and EPS from continuing operations of $0.14 compares to an adjusted 2006 fourth quarter EPS of $0.19, a decrease of 26%. We reported earnings from discontinued operations in the fourth quarter of $8 million or $0.02 per share, primarily due to the favorable settlement of prior year tax audits in the UK. Now let's turn to full year results from continuing operations, net sales increased 7% to $7.867 billion. The change in sales breaks down as follows, volume and mix added 3%, price and sales allowances added 2%, currency added 2%, gross margin for the year increased to 41.9% from 41.8%. The prior year percentage includes a $13 million benefit or 0.2 percentage points from a change in the method of accounting for inventory from LIFO to average cost. The increase in gross margins is primarily due to productivity gain and higher selling prices which has partially offset by cost inflations and one-time expenses associated with the relocation and startup of our StockPot facility. Marketing and selling expenses were $1.322 billion, an increase of 8% primarily due to higher levels of advertising in our US Soup, Pepperidge Farm and Beverage businesses, currency and higher selling expenses in Godiva. Administrative expense increased to $604 million from $583 million in the year ago period. The current year includes a non-cash benefit of $20 million from the reversal of legal reserves due to favorable results in litigation. The remaining increase was primarily due to higher incentive compensation costs, expenses related to the implementation of SAP in North America, expenses related to our emerging market investments in Russia and China, and the impact of currency. Research and Development expenses increased 8% to $112 million from $104 million. Other income of $35 million compared to other expense of $5 million in the prior year. Fiscal 2007 includes a $23 million gain on the sale of an idle Pepperidge Farm facility which we have highlighted as an item impacting comparability. And the $10 million gain from the settlement in lieu of condemnation of our refrigerated soup facility. The impact of which has been mostly offset by one time expenses recorded in cost of good sold to relocate and startup the new facility. Earnings before interest and taxes were $1.293 billion compared to $1.151 billion for the prior year. Items impacting comparability are the following. In fiscal 2007, a $23 million gain from the sale of a Pepperidge Farm facility and a $20 million benefit from the reversal of legal reserve. The prior year includes a $30 million gain related to the change in method of accounting for inventory from LIFO to average cost. After adjusting for these items EBIT increased from $1.138 billion to $1.250 billion, an increase of 10%. Net interest expense was $144 million versus $150 million in the prior year. The current year includes a $4 million reduction of net interest expense in connection with a favorable settlement of bilateral Advanced Pricing Agreements or APA, among the Company, the United States, and Canada, related to royalties. The prior year includes a non-cash reduction in interest expense of $21 million from the favorable settlement of a US tax contingency related to transactions in government securities in a prior period. Excluding the impact of these tax settlements, net interest expense declined $23 million primarily due to lower net debt levels and lower interest expenses associated with income tax matters. The tax rate was 28.4% compared to 24.6% in the prior year. The current year includes the tax benefit of $22 million from the APA settlement. Adjusting for the APA settlement as well as the tax rate impact from the related interest adjustment, the Pepperidge Farm facility sale and the reversal of legal reserves, the tax rate in the current year would have been 30%. Last year's tax rate was impacted by three items. A $14 million benefit related to the recognition of higher foreign tax credit, a $39 million benefit on the favorable resolution of a US tax contingency related to transactions in government securities and a $30 million incremental expense related to the repatriation of non-US earnings under the AJCA. Adjusting for these items and the impact of the change in accounting for inventory, the fiscal 2006 tax rate was 29.1%. Earnings from continuing operations for the year were $823 million or $2.08 per share. Earnings from continuing operation for 2006 were $755 million or $1.82 per share. Items impacting comparability recorded in fiscal 2007 are a $13 million or $0.03 per share gain from the reversal of legal reserves, the aggregate favorable impact of $25 million or $0.06 per share from the APA settlement and a $14 million or $0.04 per share gain from the sale of the Pepperidge Farm facility. Items impacting comparability recorded in the fiscal 2006 are an $8 million gains or $0.02 per share from the LIFO accounting conversion, a $60 million gain or $0.14 per share from the IRS settlement related to transactions in government securities, a $30 million expense or $0.03 per share from the AJCA dividends, and a $14 million tax benefit or $0.03 per share from higher foreign tax credit which could be utilized following the divestiture of our UK and Ireland businesses. One further adjustment for the prior year earnings per share from continuing operations is required for comparability. As previously mentioned, the pro forma impact of the repurchase of 17 million shares associated with the proceeds from the sale of the UK and Ireland businesses increases earnings per share by $0.07. After adjusting for these items, adjusted earnings from continuing operations for the year would have been $771 million compared to $686 million for the prior year period, an increase of 12%. Adjusted earnings per share from continuing operations would have been $1.95 as compared to a pro forma $1.73 in the prior year, an increase of 13%. Now let's turn to reporting segment for both the fourth quarter and full year. US Soup, Sauces and Beverages. Sales for the fourth quarter rose 8% to $599 million from $556 million in the year ago quarter. Here is the breakdown of the change in sales. Volume and mix added 8%, price and sales allowances added 1%, increased promotional spending subtracted 1%, operating earnings decreased 26% to $84 million from $114 million in the year ago quarter primarily due to increase to marketing spending and higher supply chain costs, partially offset by higher sales. Let's touch on a few highlights for the quarter. US retail soup sales for the quarter were flat, condensed soup sales increased 1%, ready-to-serve soup sales declined 4%, and broth sales increased 8%. Sales of condensed soups increased with eating varieties delivering gains driven by lower sodium variety. Sales of condensed cooking soups declined in the quarter. Ready-to-serve soup sales declined due to lower sales of Campbell's Chunky soups. The convenience platform, which includes soups in microwaveable bowls and cups, achieved solid gains driven by growth of Campbell's Classic varieties in microwaveable bowls. Swanson broth sales increased driven by the continued consumer demand for aseptically packaged broth. Beverage sales posted significant volume-driven double-digit sales growth driven by consumer demand for healthy beverages and higher levels of more effective advertising. V8 Vegetable Juice, V8 Diffusion and V8 Splash, each experienced growth. Prego pasta sauces had double-digit volume-driven sales growth driven by the introduction of its new advertising campaign. Now let's turn to the full year results for this segment. Sales of $3.486 billion rose 7% from $3.257 billion a year ago. The change in sales breakdown as follows. Volume and mix added 5%; Price and sales allowances added 2%, operating earnings were $862 million versus $815 million reported a year ago. Prior year earnings include a one-time gain of $8 million related to the change in method of accounting for inventory. The operating earnings increase was primarily due to higher sales and productivity improvement, which was partially offset by cost inflation and increased advertising expense. For the year, total US soup sales increased 5% with the condensed soup sales up 3%, ready-to-serve soup sales up 5% and broth sales up 12%. Condensed soup sales increased as both eating and cooking varieties grew. In addition, condensed soups continue to benefit from the gravity-feed shelving systems now installed in more than 17,400 stores. Ready-to-serve sales rose as gains in both Campbell Chunky and Campbell Select soups were driven by higher levels of advertising. Additionally, sales of convenience products grew double-digits. Ready-to-serve soup sales benefited from gravity-feed shelving systems for ready-to-serve canned and microwavable soups which are now installed in over 2,600 and 3,400 stores, respectively. Sales of the lower sodium products continue to contribute the growth of both condensed and ready-to-serve soups. Swanson broth sales posted significant gains driven by increased advertising and continued strong consumer demand for aseptically packaged broth. Beverage sales grew double-digits, driven by consumer demand for healthy beverages and higher levels of more effective advertising with all Beverage brands posting sales growth versus year ago. In Sauces, Prego pasta sauce delivered strong sales growth and Pace Mexican sauce sales also increased. Baking and Snacking; sales for the fourth quarter increased 8% to $471 million from $438 million in the year ago quarter. The change in sales for the quarter breaks down as follows, volume and mix added 2%, price and sales allowances added 2%, increased promotional spending subtracted 1%, currency added 6%, a divesture subtracted 1%. During the fourth quarter, the Company sold the Papua New Guinea biscuit business. Pepperidge Farm sales increased, driven by growth in bakery product and the frozen business partially offset by decline in cookies and cracker. Bakery achieved strong sales growth driven primarily by continued consumer demand from whole grain bread and continued growth of sandwich rolls. In cookies and cracker sales growth of Goldfish snack croakers was more than offset by declines in cookies. Operating earnings declined 21% to $49 million from $62 million, primarily due to lower earnings at Pepperidge Farm resulting from higher marketing and manufacturing expenses partially offset by higher sales and due to lower operating earnings from our businesses in the Asia Pacific region. Operating earnings in that region declined due to one-time cost associated with streamlining the Company's supply chain organization in Australia and Indonesia as well as some declines in Australian snack foods business, partially offset by currency. Sales for the year increased 6% to $1.850 billion from $1.747 billion a year ago. The change in sales for the year breaks down as follows, volume and mix added 2%, price and sales allowances added 2%, increased promotional spending subtracted 1%, currency added 3%. Operating earnings was $240 million versus $187 million a year ago. Fiscal 2007 earnings include a $23 million gain for the sale of a Pepperidge Farm facility. The prior year earnings include a one-time gain of $5 million related to the change in method of accounting for inventories. The reaming increase is primarily due to higher earnings at Pepperidge Farm and the favorable impact of currency. Within Arnott's, excluding currency, increases in biscuits were offset by declines in the snack foods business. Let's look at a few highlights for the year, Pepperidge Farm achieved strong sales gain driven by growth in all businesses, bakery, cookies and crackers, and frozen. Bakery posted solid gain driven primarily by wholegrain bread and sandwich rolls. In cookies and crackers sales gains were driven by double-digit growth of Goldfish, partially offset by declines on cookies. Arnott's sales increased primarily due to currency. Within Arnott's solid gains in biscuits driven by the strong performance of Tim Tam chocolate biscuits offset by declines in snack foods. International Soup and Sauces sales for the quarter rose 19% to $309 million from $260 million, the change in sales for the quarter breaks down as follows; volume and mix added 9%, price and sales allowances added 2%, reduced promotional spending added 1%, currency added 7%. International Soup and Sauces sales increased due to currency, growth in Canada driven by Soup and Beverages and in Europe driven by gains in Erasco in Germany and Liebig Soups in France. Operating earnings increased to $19 million from $5 million a year ago. The increase was due to growth in Europe and Canada, partially offset by expenses to establish our businesses in Russia and China. Sales for the year increased 11% to $1.399 billion from $1.255 billion a year ago. The change in sales for the year breaks down as follows; volume and mix added 5%, price and sales allowances added 1%, currency added 5%, operating earnings increased 17% to $169 million from $144 million a year ago, operating earnings were driven by gains in Europe and Canada and the favorable impact of currency partially offset by expenses to establish businesses in Russia and China. In Europe sales increased due to currency and strong wet soup growth in France, Germany and Belgium. In Canada sales increased primarily due to the strong growth in Soup. Other: Sales for the quarter increased 8% to $215 million from $200 million in the year ago period. The change in sales breaks down as follows; volume and mix added 3%, price and sales allowances added 3%, reduced promotional spending added 1%, currency added 1%, Godiva sales grew double-digits driven by significant growth in Asia and growth in North America due to strong retail same-store sales growth. Away From Home sales increased driven by growth of frozen soups and beverages. Operating earnings increased by $17 million to $5 million from an operating loss in the prior period due to higher earnings in Away From Home reflecting the $10 million gain recognized from the settlement in lieu of condemnation of the refrigerated soup facility and improved operating performance. For the year sales grew 4% to $1.132 billion from $1.84 billion, the change in sales for the year breaks downs as follows; volume and mix added 2%, price and sales allowances added 3%, increased promotional spending subtracted 1%, operating earnings increased 13% to $124 million from $110 million in the prior year, operating earning was driven by improved operating performance in Away From Home and the gain on settlement in lieu of condemnation of a StockPot facility partially offset by cost associated with its relocations and startup. Let's look at a few highlights of the year. The Away From Home businesses in the US and Canada delivered solid sales growth driven by gains in frozen soups and beverages. Godiva worldwide sales increased primarily due to growth in both Asia and North America. That completes my discussion of operating segment. Unallocated corporate expenses for the quarter decreased from $30 million to $28 million. The decrease was primarily due to the gain on the sale of our Papua New Guinea business partially offset by higher expenses on the SAP implementation in North America. For the full year, unallocated corporate expenses declined from $105 million in 2006 to $102 million in 2007, the decrease was slight the best from the reversal of $20 million of legal reserves due to favorable results and litigation, mostly offset by higher incentive compensation cost and expenses associated with the ongoing implementation of SAP in North America. Now let's turn to cash flow and the balance sheet. Cash flow from operations for the year was $674 million compared to $1.226 billion a year ago. The reduction is primarily the result of an increase in working capital as compared to a decline in 2006, and the payments of $186 million primarily to settle foreign currency hedging transactions. Capital expenditures were $334 million as compared to $309 million in the fiscal 2006. We expect capital expenditures in fiscal 2008 to be approximately $400 million. During the 2007 fiscal year, we repurchased shares at a total cost of $1.140 billion. These repurchases included three programs, first, we repurchased shares at a cost of $620 million using a portion of the proceeds from the divesture of our UK and Irish businesses. Second, we purchased $200 million under the strategic share repurchase plan announced in November 2005. And the remaining shares were purchased to offset the dilution from our equity-based compensation program. Total debt was $2.669 billion compared to $3.213 billion in the prior year. Cash and cash equivalents were $71 million as compared to $657 million in 2006. Net debt which deducts cash and cash equivalents from total debt was $2.598 billion versus $2.556 billion, an increase of $42 million. This concludes my discussion of the year. Bob Schiffner will now offer some closing comments.

Thanks, Anthony, and good morning, everyone. My comments today will cover my perspective on our fourth quarter results, an assessment of our fiscal 2007 performance and our current expectations regarding performance in our new fiscal year. Starting with the fourth quarter, based on the annual guidance that we gave at the end of the third quarter, our bottom-line results were consistent with this forecast. Despite flat sales for US Soups, our sales performance was very solid plus 10% versus prior year with strong volume growth. This performance provides very solid top-line momentum leading into the new fiscal year. There are two other items in the quarter worth commenting on. The first is our gross margin which was down for the first time in 10 quarters when measured versus prior year performance. This quarter we incurred a number of one-time expense items all of which were planned in advance. Most of these initiatives related to our international businesses and were aimed at improving our future performance. Making these investments now should help us to continue to drive gross margin improvement in fiscal 2008. The second item worth mentioning is the performance of our US Soup business. Despite the heavy increase in counter-seasonal advertising and consumer promotion, sales of Soup were flat in the quarter. We are still evaluating all the factors that contributed to the Soup performance. As always, we will take the learning from our analysis and apply it to improve the efficiency and effectiveness of our future marketing plans. Turning to our full-year performance, I am very pleased with our results. Adjusting for items impacting comparability, net sales, EBIT, and EPS increased 7%, 10%, and 13%, respectively. This performance was generated while making significant incremental investments in marketing support as well as in our North America SAP project and our emerging market initiative. In addition, I am very pleased with our overall operational balance as all of our reportable business segments generated excellent top and bottom-line performance. Diving even deeper, we are very pleased with our 5% net sales growth in US Soup with condensed soup growing sales for the third consecutive year, and our double-digit top and bottom-line growth in our US Beverage business led by V8 Red and V8 V-Fusion. Also noteworthy are our third consecutive year of double-digit earnings growth by our Pepperidge Farm and our second year of double-digit earnings growth for Arnott's biscuits, excluding the impact of currency. Clearly we are very proud of our financial performance over the last three years. However, we can't spend a lot of time looking through the rearview mirror. With solid momentum in most of our businesses, fiscal 2008 will still offer a number of challenges, namely higher cost inflation than our earlier expectations especially in our baking and snacking businesses; second, continued investment in emerging markets to build our Soup business there; and lastly, a significant increase in our effective tax rate to a range of 32% to 33% which we communicated to you earlier. Offsetting some of this impact will be the benefit of an extra week of fiscal 2008 compared with fiscal 2007. Today we feel reasonably confident that we can manage cost inflation which at roughly 5% is the highest level that we've experienced in many years. And absorb incremental investment associated with emerging markets. However, given the impact of the higher effective tax rate, we expect EPS growth from continuing operations for fiscal 2008 to be in the 5% to 7% range above our adjusted base of $1.95 and consistent with our long-term target. Given the higher tax rate, this range of EPS growth implies a robust growth in EBIT of between 7% and 9% which is consistent with our recent historical performance and we believe near the top of our competitor's check. With that I'll now turn it back to Len.

Hey, Matthew, would you start the Q&A session please. Question And Answer

Absolutely. [Operator Instructions]. Our first question comes to us from Alexia Howard from Sanford Bernstein.

Hi, Alexia.

Hi. Couple of really quick ones, on the gross margin front, if you took pricing and productivity improvement were they enough to offset the cost inflation this quarter and when you sort of strip out the impacts of the one-time items?

Almost but not quite.

Okay.

Our gross would have been slightly down; obviously, not down by 1.8 percentage points, but it would have been slightly down.

And then with the V8 distribution rounding up this month, is that likely to continue to pressure margins going forward with the co-packing... the packaging incremental cost that you've totaled with this off quarter.

The answer to that is we have a couple of very important capital projects that are now being executed which ultimately will eliminate those incremental costs. My expectation is that it will happen more toward the end of the year than the start of the year but again all of those expenses have been factored into our forecast for next year.

Okay. Thank you very much.

Good. Next question, Matthew.

Thank you. Our next question comes from Terry Bivens from Bear Stearns.

Good morning, everyone.

Hi, Terry.

I think we all recognize Q4 is a small quarter. So I don't want to get too carried away about it but clearly the Soup performance was a little bit light relative to expectations, apparently, even your expectations, particularly with Chunky. So, I guess the question would be, do you think you now have a pretty good handle on what maybe could have gone better and is there ample time to apply that learning, as we get into the really crucial quarters; Q1 and Q2.

Terry, this is Doug.

Hi Doug.

This is my, I believe, seventh fourth quarter call and when we've done very well in the fourth quarter we said it's not a big quarter. We choose to look at it on a full year basis and we've done... and this year we're flat. I would say you just can't read anything into it. It's 10% of our sales volume in Soup. We're dealing with small numbers which impact creates optics around percentages that are misleading. What I would say is we feel very good about the profile for Chunky and ready-to-serve soups going forward. We grew the whole ready-to-serve business meaningfully over the last year and we grew Chunky and we grew Select, and we have stronger plans in place for this coming soup season than we had for the last soup season. So, we have every expectation that we'll do as well or better on ready-to-serve soups and Chunky, in particular, especially with our fully loaded initiative on Chunky this coming fiscal year than we did last year.

Well, you are preaching to the choir on that, I know it's a small quarter but I guess if you could perhaps give us just a little bit more color on how Chunky... what you think the problem may have been there, whether... I know Mills was pretty promotional but just a bit of color on that?

Well it's... I can't help you more than, because I can't get in... I am not going to get into the consumer information which we've covered before. Our sales profile was fully acceptable to us as the fourth quarter is all about honoring our commitments but also setting ourselves up to have a great this next fiscal year and we are very comfortable with what we did there on ready-to-serve soup.

Okay. I'll pass it on. Thank you.

Thanks. Next question, Matthew.

Thank you. Our next question comes from Chris Growe from AG Edwards.

Hi, good morning.

Hey, Chris.

Hi. So, I wonder if you can maybe give a little color... there was some incremental expenses around V8 production and that obviously, soup profits in that division were down about $30 million. Was that a half or a meaningful component of that number or was it more about the marketing in Q4?

They in fact both had an impact... you are specifically talking about the US Soup, Sauces and Beverage segment. Clearly both had an impact, but I think the impact of marketing was stronger.

Okay. And should we read from your comments that you are sort of rethinking the counter-seasonal advertising. Is that what we should infer from that or is that just up for analysis now?

We are sorting through it right now. We spend on a record high level, a modern day record high level on counter-seasonal advertising, and it's only one component of how we promote, we also have a lot of activity at retail, both with our shelving systems as well as our promotional activity and our couponing activity. And we are going revisit that whole marketing platform for counter-seasonal advertising for next year. But the way, the way I choose to view it, is as a Company we... and for the year, we delivered strong top-line growth 7%, but we increased marketing a meaningful 8% on top of that. And so, we... overall we've got a growth engine going here where we're driving top-line organic growth with good quality marketing. And we will keep refining it and making it better year-in year-out and that's been the model for the last five years and it will be the model going forward.

Sure. And then just do you have any comment, Doug, perhaps on the Soup inventories as we kind of enter the season here. How do they end the quarter or how they are looking forward to early '08 here?

Well, as I said we are very cognizant as we wrap up the fourth quarter about honoring our commitment and making sure that we've got a good... we are well positioned for the coming soup season, and I can tell you at this point in time, we feel very good about our inventory positions going forward. So, we are right where we want to be in terms of having the right inventory levels for us to get off to a very good start.

Okay. Great. Thank you.

Any next question Matthew.

Our next question comes from Lloyd Khaner from Khaner Capital Management.

Hey Lloyd.

Hi, Len; hi, everybody. Congratulations on great sales results for the quarter and for the year. Just regarding the Beverage business' double-digit growth in the quarter it's clearly getting the V8 message out effectively giving your customers what they want and this is happening before the distribution with Coca-Cola Enterprises starts, but I am wondering is your production capacity now that's about to get going considering the strength in your sales already? Do you have enough?

Well this... we believe so, this wasn't just a serendipitous act joining forces with CCE; it's been contemplated for a while. We have ourselves well positioned for the start shift in September. But it would be a nice problem to have if we could meet demand. But we are well positioned to meet the forecast of the sales growth coming forward and we're, as Bob mentioned earlier, we are putting in place infrastructure to meet even higher demand as we go through the year.

Great. And could you... is it possible you are going to add even more products that we don't know about at this point?

That's always possible.

Okay. Thank you very much.

Okay, Matthew, next question.

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

Ed Roesch, how are you today?

Doing well. Thank you.

You've got your last name like me, Ed, it's always difficult to pronounce.

Indeed. I guess one thing I was kind of curious about the marketing spending and Doug thanks for your comment about some tweaking going into next year. But in general are you thinking about marketing spending being flat as a percentage of sales in fiscal '08 versus '07?

Well, in general, as we've talked about before, at a very high level, we look for having 20% to 22% of sales as company invested in total marketing. Now over time we've been able to manage the trade portion down as a percentage modestly and increase the consumer. But that 20% to 22% of spending is reasonable in terms of total company and as we grow sales, we will continue to grow our marketing budget. So, I think you can expect to see us maintain a reasonable percent of sales. But that implies some pretty bullish increases in spending.

Okay.

Ed, this is Bob Schiffner, just to make sure that that 20% to 22% is based on a list sales basis not a net sales basis.

Thanks Bob.

So that you won't be shocked in the future.

Great. Okay. Thank you. And then one other, I mean, just to put the comments about spending in the Beverage segment into perspective, I mean, there were costs absorbed getting ready for the beginning of shipment really offset by no revenue at this point. Is that true for the fourth quarter?

No, in fact most of those costs that were incurred in the fourth quarter were in fact generated because of the growth in our grocery business as apposed to the single serve business.

Okay.

So, that's how I would summarize that impact.

Our V8 business is very healthy and very strong independent of the CCE activity.

Okay. Well those were just a couple of quick ones, I'll pass it on. Thanks.

Next question, Matthew.

Our next question comes from Eric Serotta from Merrill Lynch.

Good morning.

Hey Eric.

Doug and Bob, last quarter and at the Investor Day, you guys highlighted how investments in China and Russia would be a drag on results not just for the next few years but in the fourth quarter as well. Reading the press release and listening to the conference call, I noticed you didn't really discuss it in the gross margin section or the SG&A section. You had touched on it briefly in the International Soups and Sauces segment. I'm wondering how material was that spending this quarter. Was it greater or less than your expectations from three months ago? And in the future should we see that spending hit more of the SG&A line as you are advertising there and promoting there, or hit more than our COGS line from something's like the co-packing arrangements for China and shipping from Russia into... from Germany into Russia.

Eric, the answer to that is, it frankly hits all the lines, both gross profits as well as marketing and sales and as well as G&A. I can tell you that it is not material at all in the fourth quarter. In all cases the impact is slightly over a $1 million in value in each of those areas. And in the future -- [Multiple Speakers].

... yes for the quarter. And obviously looking down the road we expect those numbers to increase next year just because of the impact of the introduction of the new products, and in fact you should assume that all three of those expense areas gross profit obviously not being an expense but that area will be impacted going forward.

Eric, just as a point, we did mention in the admin expense, increase of 7% for the quarter that... the number one factor in that was Russia and China expenses.

Okay.

We did talk about that.

Bob, was the $1 million in each of those three buckets or less than $1 million issue those three buckets, less than what you had been planning three months ago?

No, no, no, not at all. It was on expectation.

It's as expected and all of the costs are contemplated on our guidance going forward.

Okay. Thanks for the clarification.

Okay. Our next question, Matthew.

Our next question comes from Mitchell Pinheiro of Janney Montgomery.

Hey Mitch.

Good morning. Couple of things; one, with regard to the $400 million in capital spending could you... can you talk about the major projects within that number and how much maybe specifically you are targeting for your China and Russia ventures?

We are not going to comment on the specifics of the capital budget, I will say though that the big impact comes from a couple of places. One is the V8 capacity addition which both Doug and I previously spoke about. And the other one is we are also expecting the build an employee services center here in Camden, and in fact that is a part of the increase in capital spending as well.

So, the $60 million or $70 million, maybe if you are typically spending the 3... low $300 million area, the increment would be on those two projects, perhaps?

Yes, primarily, yes.

Okay. Thanks. Another thing is with regard to your cost inflation, you had said, you've built into your expectations 5% cost inflations?

That's our current forecast for the year, yes... for the New Year.

Okay. Will you... should we expect either pricing... higher prices, will you need higher prices at all to overcome that or is effect maybe lower promoted prices or how do you deal with that?

The philosophy is still the same, Mitch. It's pricing and productivity is going to... is... we expect we will find a way to get pricing and productivity to offset inflation. We have some... we are bullish on our productivity efforts. So, hopefully that means we won't have to rely very heavily on pricing, but we have a long way to go here and we have to see how this market plays out in terms of the actual inflation we experience.

Okay. So, if we are looking... so, you are expecting some margin improvement, EBIT margin improvement in '08 and that would be driven by a combination of factors?

Mitch, we haven't given any detailed information on our sales growth, so again we are not making any specific forecast on our operating profit margin. We are expecting and committed to driving gross margin improvement, but that's where we draw the line there.

Okay. And just last question is concerning Q1. Anything unusual that we should be aware of timing-wise expense... is there anything that we should factor into our estimates?

There is nothing that... there is nothing beyond what you have been made aware of already.

Okay. All right. Thank you very much.

Of course as soon as I say that Mitch, something will happen. You got me thinking, indeed, Mitch, so.

Next question, Matthew?

Our next question comes to us from Robert Moskow of Credit Suisse.

Hey Rob.

Good morning. How is it going?

Good.

I had a question about the timing of your soup season this year. Some years you kind of come out really strong, right after that, in other years you kind of wait until it gets cold. Is there any thinking going on in terms of timing this year as to when you invest heavily in promotion; and then secondly, what kind of visibility do you have as far as what retailers have already bought in or committed to for merchandising activity around Soup?

Rob, before we start, I just want to caution, we are not going to give away our marketing plans.

Okay, you're not doing that, okay.

No. Rob, and plus there is a competitive gain that goes on here, and we tend to have a plan and then we modify the plan as we deal with competitive activity. So, it wouldn't be very helpful to you to forecast something that in all likelihood would change. What I can share with you is we expect to be fully competitive. We do have visibility over 60% of our inventory, we have visibility into our customers through our continuous replenishment program, so we have a good feeling on inventories and we feel very good about those inventory levels going forward. And so, we are... we think we're well positioned to have to get off to a good start and beyond that I think you are just going to have to wait and see.

Okay. And can you give us a sense of low sodium as a percent of your mix right now? Where do you think it is roughly and where do you think it could go next year?

Well, it's... we continue to be bullish about it. I can't really give you a lot better information on it beyond what I gave you at Cagney. Everything we see shows us that about 50% of our new sodium SKUs are... 50% of the volume is incremental and as we have... interestingly, as we've surveyed our consumers extensively, we're finding about 60% of the people that are buying the new products or claiming that it is bringing them back into the Campbell Soup franchise after they had left, because they were concerned about sodium. So we see it as a category-growing strategy and one that should continue to contribute this year as we expand our low sodium offerings. So, we're very bullish about it still.

Okay. And then lastly, wheat prices have skyrocketed mostly because of poor crops. Is that a major reason why you are now pushing more towards 5% cost inflation? And then specifically on Pepperidge Farm, are there actions you need to take? I know you've talked a little about pricing, but specifically on Pepperidge, is wheat flour something that you need to react to?

It's a big issue.

Yes. It's a major component of cost inflation for us. It's a major reason as to why our expectations of cost inflation are higher, and obviously it is an issue that Pepperidge Farm is in fact doing a lot of thinking about as we speak.

I would tell you in terms of bakery companies, there is not a company on the planet that has a better understanding of pricing and spending principles than Pepperidge Farm, and that has a better trademarks that allows us to withstand the vagaries of pricing. And so we have every confidence that we'll find our way through this but it will be challenging.

Great. Thank you very much.

You're welcome.

Any next question, Matthew?

Our next question comes to us from Jonathan Feeney from Wachovia.

Hi, Jonathan.

Hi. Good morning. Doug, I just wanted to follow-up a little bit on the international initiative. I think... I know you're committed to international no matter what happens and you have certain plans that you've laid out in the context of your current guidance. I guess I just wonder if... does your rate of investment from here accelerate meaningfully, if you see better results in the US than expected? You know what I mean? Are... would you accelerate your push into China and Russia where results come in significantly better than planned over the next three/four quarters?

It's premature to forecast what we will do quite frankly. Products, this is the first week product is on the shelf in China, and it won't be on the shelf in Russia for another three weeks. And it's only in lead markets. So it's premature for me to start hypothesizing what may or may not happen. While I am very proud of this management team, we look at our... all of our strategic options very thoughtfully, and in a very disciplined way we move forward. If it looks like there is an opportunity to get greater traction faster we will look at pursuing that. What I will tell you is we have the resources necessary to be able to meet our commitments and lean into whatever growth initiatives is offering the best opportunity for return on investments.

Okay. And just a couple of detail points for Bob, on the cost inflation 5%, I guess... is there anything substantially... any major cost category that's driving that to the exclusion of others?

Yes. Basically wheat flour, dairy, chocolate... to some extent... and the, or oil.

I was saying, and so is it safe then to assume that your packaging cost assumption is well below 5%?

Yes, it is safe to assume that.

Okay, and just follow up on Alexia's one question earlier, specifically you tell us about these one-time items that you say that cost inflation just about kept up with pricing, does that mean you know the one time items in the quarter were about 180 basis points at the gross margin?

Well, yes. I mean I believe the most important think to consider relative to the one times is that even though in the quarter we had roughly $13 million of one-time credits, we had more than $13 million of one-time expenses. So, when you look at the quality of earnings for the quarter, I think it's important to keep that in mind that this was frankly a pretty high quality earnings quarter as opposed to one that was driven by a one-time positive P&L impact.

And I was specifically, Bob, referring to your commentary under the fourth quarter gross margin highlights where you said pricing and savings offset cost inflation.

Yes.

So, that's about 180 bips to supply chain organization, Australia and Indonesia?

It's not quite, it's not quite, because overall gross margins were down by 1.8 percentage points. So, it's a large portion of that but not a 100%.

It's fair to say more than half though?

Oh, absolutely.

Great. Thanks so much.

Yes. Just building on the inflation point again, we feel very good about... well we in oils are putting a little pressure on us, we feel very good about our diversified product portfolio. It allows us to manage our way through these things because we don't have all our eggs in one basket, so the pressure we're feeling on baking is obviously not going to translate directly into soup. So, we can mange our way around it.

Okay. Thanks so much.

Matthew, how many more questions in queue?

I'm showing we currently have six questions left in queue.

Okay we'll take those, and then we will cut it off.

Our next question comes from Christina McGlone from Deutsche Bank.

Christina, hi.

Hi. Bob, I guess I just wanted to talk about cash flow for next year.

Yes.

So, we have higher CapEx, you have this payment this year because of foreign currency hedges. Would we expect that to repeat, and then do you think working capital will be a use of cash, again.

No, I think, working capital will be much more normalized, obviously, we're ending the quarter with what I believe is a reasonable amount of operating working capital as opposed to ending FY06 with an abnormally low level of working capital. So, I see our working capital performance next year, hopefully, improving. And you are right about the CapEx. So overall, clearly I see a much better year for operating cash flow as well as free cash flow relative to our performance this year.

Okay. And this foreign currency hedging issue was just a one-time payment.

Absolutely.

Okay. And then in Pepperidge Farm you had mentioned higher manufacturing expenses. Is that just the installation part of it or was there some sort inefficiency there or something out driving that.

There was... most of it was inflation. There were some other non-recurring costs, more of an operational nature, that will clearly not be repeated as we head into the New Year.

Okay, but most of it was inflation.

Correct.

Okay. And then just the last question, the Arnott's snack food has been having difficulties for some time now. Are we starting to lap that difficult period, I mean is it... what's your outlook there?

Yes, it's a challenging situation and... but we think we are managing it as well as it can be managed. And so we think the best days are ahead on snack foods. We've integrated it into our Arnott's base business so that we are leveraging our Arnott's infrastructure to help manage it and it's much more efficient than it was, but it's still a challenging situation we got to work through. The good news is that the balance of our Australian business is quite strong. Arnott's had a great year; our soup business in Australia also had a very good year. So, we can manage around it but it continues to be a challenging situation for us.

Okay. Thank you.

Okay. Matthew, next.

Our next question comes from Vincent Andrews of Morgan Stanley.

Good morning. Just quickly can you... just want to make sure that 53rd week in fiscal 2008 will be in your fiscal fourth quarter, is that correct?

That's correct.

Okay. And then, quickly on the International segment which you've mentioned last year is kind of a work-in-progress. Are we not regurgitating the results this year, what are kind of your expectations for '08 in that segment?

Continued solid growth. I mean, we think we've got it to a point where it's performing better than it had been and we think we are going to continue to see progress.

Okay. And what about SAP cost for 2008? You said it was going to be $10 million to $20 million for 2007, was it closer to $10 million or to $20 million in 2007, what do you think for '08?

Well in 2007 SAP costs were close to the $30 million, and we expect them to come down but still be north of $20 million in FY08.

Okay. And was there a reason why it was higher than your expectation this year?

No. It was... we are clearly on plan relative to that... our project and so clearly we are satisfied with that project and how it's been executed so far.

Okay. Thank you very much, I appreciate it.

Okay. Next, Matthew.

Our next question comes to us from Pablo Zuanic of JP Morgan.

Good morning, everybody.

Pablo.

Hi. Doug, a question for you. When I look at 5% sales growth in fiscal year '07, I wonder whether you are going to maintain that in '08. As you made the argument that you have the launch and review shortly on that shelf in '07, in '08 what's really new. And on top of that, I think, you made argument that General Mills has been quite aggressive with their light low calorie soups which is an area you haven't really tap into. Why should we expect soup sales to grow 5% in '08? Not that you are giving guidance, but just help us out with that.

Well, I think we have a rich competitive profile, much of which I profiled at CAGNY. And as we've indicated with our guidance, although we haven't given specific sales guidance this year, we are bullish on our overall company sales growth objective this year, and obviously we are bullish on it from a company perspective. We are bullish on it from a soup perspective. We see continued opportunities to grow condensed soup. We see amazing buoyancy in broth and we like our prospects in ready-to-serve soup this year given the plans we have in place, and I'm not going to get into the details of the marketing plan, but I'll reaffirm that we like our prospect and we think we ought to be able to continue to grow the business at the rate we've been growing it for the last three years.

And just a quick follow-up on reduced sodium, based on the data we have, what's working, are they new products whereas a reformulated products have not resulted in growth, actually they are down. Is that what your research is telling you, that maybe those kids soups are being somewhat rejected by consumers?

Well, I don't have visibility into your numbers. I am very comfortable that our total reduced sodium effort and our total wellness effort in Soup has got very good buoyancy and I have no concerns about it. And I think all of our wellness soup offerings this year are certainly bigger than they were last year and we will profile some of that in our Annual Report and I expect they'll be even a larger percentage of our sales next year.

Great. And one last one Bob from me. Bob, I mean you said that it was $1 million in each bucket, energy markets in the fourth quarter. If I double that for '08 on a full year basis that would be about $8 million, talking just about a $0.02 headwind from emerging markets in '08 is my math right?

Pablo, I am glad you asked that question, because I in fact gave Eric some bad numbers, okay, on emerging market; I was looking that really FY06 and in fact not at FY07, let me kind of put this back into the correct context. Basically, in the fourth quarter, the whole emerging markets effort cost us a little bit in excess of $0.01 per share. So, again, what I said about the expenses being spread across all the lines of the P&L in comps as well as marketing and selling as well as in G&A, is true; except, obviously, it was a much bigger effort this year relative to last year and so as we look forward we can expect that to grow significantly not only in the fourth quarter but also in the full year FY07 versus FY08. I hope that's helpful.

Okay. But if I double it to $0.02... thanks for this headwind for '08 will be about $0.08?

For the full year FY08 our EPS impact is going to be much larger than $0.02. It's going to be more probably in the $0.03 to $0.05 range.

Per quarter or per year.

For the year.

For the year. Okay. And one last one. When you sold, regarding Godiva, when you sold you gave soup business, from the beginning you talked about that you would use the profit for share buybacks to further dilution. Here you have not said that. Does that mean that you are not expecting dilution? Help us out there a little bit with Godiva.

We haven't said it because we're still in the process of evaluating our strategic options relative to Godiva. So, again, it would be obviously very premature on my part to comment on these proceeds when we're still evaluating strategic option.

Right. Thank you.

Okay.

Thanks. Next question, Matthew.

Thank you. Our next question comes from Steven Kron from Goldman Sachs.

Hey, Steve.

Hey Len. Thanks. A couple of follow-ups on the gross margin line and then I have another question. First, I guess, Bob, going back to the cost inflation side. Can you just give us a sense on the visibility there? It seems like, certainly, we know wheat prices and some others have shot up more recently, but big jump versus the prior guidance. So, just how hedged... how lock in are you? Can you give us a sense for that?

I wouldn't say there's anything abnormal, okay? I think our hedge cost is similar to what it's been in other years which is a large amount being hedged and when I think we've got a similar situation this year relative to previous years other than the rate of inflation being somewhat higher.

Okay. And then, Doug, on the gross margins you said that you are pretty bullish on productivity savings. If you think about the new programs that you have planned for this year, do they exceed that of the new programs that we saw last year?

Well, we have a total delivered cost program, that we've been betting down now for, this is the third year, and we are identifying... every year we get a little better at identifying bigger savings opportunities. And so we feel good that we ought be able to meet or exceed our productivity efforts of this year, and hopefully we will find some upside there.

Okay. And then the last question I had was on the ready-to-serve gravity feed shelves. Can you give us a sense sort of pacing, perhaps, for 2008, where at this time next year, where would that 2,600 and the 3,400 that you shared in the press release where can those numbers be and any sense for any retailer feedback as far as the incrementality of these shelves compared to condense when you roll that out.

Yes. First of all, I think the way to look at it is, we believe we have upside with our condensed shelving still and we are working against that but we have roughly 17,000 installed at this point. We think there is that kind of upside with both the microwave and ready-to-serve, and it's just a question of pacing from retailers in terms of when it gets implemented. It's a slower build because it involves more different brands than just ours, as you were calling condensed basically is all Campbell's and private labels, so you can make one decision with the buyer and it's all done. In ready-to-serve you got to deal with all the ancillary brands and the companies that are represented by them and guess and create a successful model going forward, it just takes longer. So, I would say, over the next two to three years we... you should expect to see us in as many stores with ready-to-serve maximizers as we have in our condensed portfolio. The other good news on this... so there is great upside, and why we are so excited about that is we actually... all of the testing in the market to-date suggests that there is greater upside in terms of incrementality to convenience maximizer and the can maximizer in ready-to-serve. There is greater incrementality than we experienced in condensed. So, there is great upside there, not just for our brand but for the whole category.

That's great. That's helpful. Thank you.

Okay. Next question, Matthew.

Our next question comes from David Driscoll from Citi Investment Research.

Great. Thanks a lot. Good morning, everyone.

Hey, David.

Hi, David.

Pricing across the entire business was up, I think, in the first half of the year about 3% what has decelerated as of late was the fourth quarter coming in at 1% despite the fact that cost appeared to be rising; Doug/Bob, can you comment here on the competitive factors that are preventing you from taking further price increases? And really what's... it seems very logical that we should see a lot more price increases going through but yet when I look at the trailing fourth quarters and the churn line that goes right against the very logic that I am thinking would be appropriate for '08. How do you match these two things up, pricing and cost?

We are not going to get... as I know you appreciate... we are not going to get into our pricing strategy, and we won't get into our pricing but our core philosophy remains in place, pricing and productivity will offset that inflation and we tend to this very surgically, we have good models in place. It's difficult for you to read it, it's also difficult for our competition to read it but it enables us to grow our sales at a very competitive rate and not hurt our business. So, we are comfortable with our overall profile; I am not saying it's easy but we have a plan and we will work to plan.

But is it fair to say that in your... you made a comment just a minute ago that you did commit to gross profit margin improvement in FY08 and doesn't that basically say, and I'm almost just trying to get you to make sure that I am not missing anything, does that imply you have to get pricing in '08 given this kind of cost environment.

Across our entire company portfolio pricing will play a role, as it has every year but what you see is the way we manage it and you can see it in our numbers this year, we manage it in a way where we get good volume growth and pricing that helps cover the cost and we are very comfortable with that model. But as a Company, obviously some pricing will have to happen this year.

Very good. Final question is just the commodity cost side. Bob, I want to try this one, one different way. The prior forecast you gave last quarter was 3.5% to 4%; it's now jumped up considerably up to 5%, was the delta primarily attributable to the rise in wheat prices?

I wouldn't quite say that, it was a significant part of the delta but it also, as we said before, includes the price of chocolate, as well as oil, as well as dairy.

Great. Thanks a lot.

You are welcome.

Okay. Matthew, our last question.

Our final question is a follow-up from Eric Serotta from Merrill Lynch.

I'll keep this quick. First thanks, Bob, for that clarification on the... market.

Yeah, sorry, Eric for the bad information.

No problem and just real briefly, was there any impact in the quarter or do you expect any impact in the next quarter from shipments of new products into the pipeline on a year-over-year basis. You had a pretty robust new product pipeline for this year, you had a pretty robust one last year. Was that... was the delta material in the quarter and should we expect a material delta of sort of pipeline fill in the first quarter?

Well, the only thing that attract maybe slightly different is obviously we are starting up our beverage contract with Coke, that may have some impact, but in terms of the rest of the business there is nothing materially different, we would expect, with this first quarter versus prior first quarters.

Great. Thanks a lot. I'll end here.

Okay. Thank you, everyone. Matthew, that will conclude our conference call today.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a great day.