Campbell Soup Company
Q4 2008 Earnings Call Transcript

Published: 11 Sep 2008

[Operator:]

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

[Leonard Griehs:]

Good morning and welcome to Campbell Soup Company fourth quarter fiscal 2008 conference call. Before we begin, I would be remiss if I did not take a moment to reflect and remember those who perished seven years ago today in the terrorist attacks in New York, Washington and aboard United Flight 93. For many of us that day will always bring back sad memories. Innocent people fell victim to senseless hate. For those who died we keep this memory, for those who lost loved ones and friends we mourn. May those of us who remain cherish every day and always appreciate those who are special to us. Our agenda for this morning’s call will be as follows. Anthony DiSilvestro, Vice President and Controller, will discuss financial results for the fourth quarter and fiscal year and will comment on our outlook for fiscal 2009. Douglas Conant, President and Chief Executive Officer, will join Anthony for the question-and-answer session to follow. Our financial results press release and supplemental schedule were issued earlier this morning. These are also posted on our website. Our call this morning will last approximately one hour. It will be available for replay approximately two hours after the call is complete and last through midnight September 18th. The replay number is 1-888-266-2081 or 7-703-925-2533 and use access code 1276968. You may also listen to a replay by logging on 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. This 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, portfolio strategies including divestitures, impact on sales, earnings and margins and other factors described in the company’s most recent 10-K and as updated from time to time by the company in 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 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 at www.campbellsoupcompany.com. Before we begin our discussion of results, Douglas Conant who is joining us from Sydney, Australia, where he is visiting and reviewing our Asia Pacific business, will have a few opening remarks.

[Douglas Conant:]

Thank you Leonard and good morning everyone. Well it certainly has been quite a year; in fact, in my 33-year career I cannot recall a more challenging environment in the food industry, particularly with the unprecedented cost inflation. Against that backdrop I’m very pleased to report that we delivered a very strong fourth quarter, particularly in our US soup business. And leveraging the strong fourth quarter performance, I’m especially pleased to announce that for the seventh straight year we met or exceeded our financial goals. During the year the sale of Godiva Chocolatier business and our snack foods business in Australia with the sale, with the sale of those businesses we further focused our portfolio around three core categories; simple meals, baked snacks and healthy beverages. These three categories are all large and growing and they delivered on both the top and bottom line. Our strategy to take consumers up to higher levels of satisfaction centering on wellness, quality and convenience is continuing to drive our US soup business. As we announced in July we’ve launched new Campbell’s Select Harvest ready-to-serve soups in fiscal 2009 and the product now is on shelves with new advertising hitting the air just last week. In both Canada and Australia our soup businesses are showing good growth. In Europe our branded [wet] soup business is once again growing and we’ve realigned our portfolio in that geography as well as our management team to provide a sharper focus on driving profitable growth in the years ahead. Meanwhile our emerging market efforts in China and Russia are also going well. Building on our success in fiscal 2008 we plan to expand our efforts in both countries consistent with our discussions at our meeting in July. Moving on to baked snacks, Pepperidge Farm delivered yet another outstanding year in its core businesses of bakery, cookies and crackers. Premium wholegrain bread continues to be in high consumer demand and our consistent record of innovation is providing many opportunities to continue to grow our presence in this fast growing category. Meanwhile Goldfish crackers and the Pepperidge Farm cookie business continue to deliver very solid results. Arnott’s in Asia Pacific also had an especially strong year in its core biscuit business. As I step back and look at fiscal 2009 I’m optimistic about our ability to continue delivering winning results for the following seven reasons. We continue to have momentum in US soup. We’ve grown sales of US soup for six consecutive years including stemming a long-term decline in condensed soup. Number two, we’ve consistently led our category to innovation on the critical front of wellness, especially with our sodium reduction efforts in US soup where we’ve created nearly a $600 million business at retail which alone is larger than our next largest branded competitor and is growing significantly faster. Number three, we’ve built strong growth propositions in baked snakes with our Pepperidge Farm and Arnott’s brands and in healthy beverages with our V-8 brand. Number four; we’ve focused our portfolio on businesses that will provide the best opportunity to drive profitable growth in a sustainable and enduring way. Number five, we’ve advanced our emerging market efforts in Russia and China in a quality way and reshaped our European business profile. Number six, we’re nearing the completion of the SAP resource planning system in North America and we’re beginning to leverage the significant capabilities and efficiency improvements that we are confident it will bring in the years ahead. And finally number seven; we’ve built a leadership team characterized by world class competence in our chosen areas of focus and by world class employee engagement across the board. This team is built to compete in our core categories and it’s built to win. Bottom line, I believe we have the portfolio, the growth prospects and the organization capacity to continue to drive quality growth in the years ahead. As we enter fiscal 2009 we are absolutely focused on continuing our winning efforts. Before I conclude and turn it over to Anthony, I do want to mention the appointment in late August of Craig Owens as Senior Vice President, Chief Financial Officer and Chief Administrative Officer to be affective October 6, 2008. Craig succeeds my good friend and most respected partner Robert Schiffner, who stepped down as CFO August 1, 2008. Craig brings a wealth of general management and senior financial expertise to Campbell for more than 25 years in the food and beverage industry. After coming to know Craig during the search process, I am quite confident he will be an outstanding addition to our senior management team. I believe his experience will compliment our strong and dedicated teams in finance, also in supply chain and IT. He comes from two strong and successful corporate cultures, Delhaize and Coca Cola, and brings a competitive spirit and an understanding of the dynamics of the global marketplace. Craig will be joining us on our first quarter conference call. On that note I’ll be happy to turn things over to Anthony.

[Anthony DiSilvestro:]

Good morning, before I begin my review I’d like to make a few comments regarding the basis of presentation of our results. The current year has 53 weeks compared to 52 weeks in fiscal 2007. I will highlight the impact of the 53rd week on net sales for both the quarter and the full year. As a reminder in March, 2008 we completed the divestiture of the Godiva business. The results of this business are reported as discontinued operations in the income statement for all periods presented. In April we announced a series of initiatives to improve our operational efficiency and long-term profitability including selling certain salty snack food brands and assets in Australia, closing certain production facilities in Canada and Australia, and streamlining our management structure. As a result of these initiatives Campbell expects to incur aggregate pre-tax costs and charges of approximately $230 million primarily through fiscal 2009. During the fourth quarter we recognized pre-tax costs of $10 million related to these initiatives. We recorded $3 million in restructuring charges and $7 million of associated costs related to accelerated depreciation in cost of products sold. The aggregate after-tax impact was $7 million or $0.02 per share. For the full year we recognized pre-tax costs of $182 million associated with these initiatives of which $175 million is included in restructuring charges and $7 million in cost of products sold. The aggregate after-tax impact was $107 million or $0.28 per share. Our results in the current and prior year included several items that impacted comparability which I will discuss. Our reported net earnings in the quarter were $89 million compared to $61 million a year ago and reported net earnings per share were $0.24 in the current quarter compared to $0.16 per share a year ago. Adjusted net earnings per share in the quarter were $0.26 compared to adjusted net earnings per share in the fourth quarter a year ago of $0.14. Adjusted net earnings per share for the year were $2.09 compared to $1.95 for the prior year. Our review will begin with a discussion of results from continuing operations while highlighting items impacting comparability. I’ll then review the result of discontinued operations also highlighting those items impacting comparability. Finally I will discuss reported net earnings per share and our adjusted net earnings per share which exclude all items impacting comparability. Let’s being our review of continuing operations for the fourth quarter, net sales for the quarter increased 13% to $1.715 billion. The change in sales breaks down as follows

[Operator:]

(Operator Instructions) Your first question comes from the line of Eric Katzman - Deutsche Bank

[Eric Katzman:]

Regarding the broad strength in the portfolio albeit in the seasonally small period what does that say about the category. I know you’ve been reluctant to kind of give numbers on the category but it seems like Progresso is doing well, you’re doing well, are you seeing moves from the consumer back to soup as a relatively inexpensive meal? Just talk a bit about that dynamic please.

[Douglas Conant:]

Anecdotally we’re seeing traction for the category and for our business but I must say a lot of it is driven by the innovation we’re bringing to the category. We have ramped up our gravity fed shelving program and our numbers are up versus last year and condensed ready-to-serve and convenience segments we have ramped up our new product profile with Select Harvest and the launch of V8 aseptically packaged soups. So there’s a lot of activity that’s starting to drive increased interest as well. So its hard to [tease] out how much is a natural flow into the category as consumers look for value and how much is in response to the initiatives we’ve put out. But overall I’m cautiously optimistic that the category is well positioned in the store.

[Operator:]

Your next question comes from the line of Jonathan Feeney - Wachovia

[Jonathan Feeney:]

On next year’s guidance, I’m trying to figure out what kind of pricing versus volume you’re assuming. You’re talking about above trend sales growth and I think we all know there’s some inflationary factors there but how much are you planning for on the pricing side and should volume actually accelerate?

[Douglas Conant:]

On the pricing side, we’re driving off a principal that pricing and productivity needs to offset the cost increase and we don’t get into specific forecasting on pricing and volume but that principal will be in play in fiscal year 2009. We’re determined to make sure that we do a better job of protecting our margins this year then we did last year.

[Jonathan Feeney:]

I guess to address the volume question are you seeing any unusual behavior or improved performance out of the store brand competition as consumers might seek value?

[Douglas Conant:]

No we’re not.

[Anthony DiSilvestro:]

Just to add, in terms of fiscal 2009 as I mentioned, we expect gross margin percentage to be flat however we do expect on a dollar basis the combination of pricing and [inaudible] to exceed cost inflation.

[Operator:]

Your next question comes from the line of David Palmer - UBS

[David Palmer:]

Could you provide any detail on your projected productivity savings in fiscal 2009 either dollar numbers, I know you’re talking around it at around gross margins, but is there a step change that’s going on this year or is that maybe—do you think its maybe further out with regard to your incremental savings and furthermore could you give any sense of how much of a step change there may be this year in reinvestment in those start-up markets?

[Anthony DiSilvestro:]

Looking forward to fiscal 2009 we do expect to see a modest increase in the level of productivity savings to be in the range of $140 million to $150 million.

[Douglas Conant:]

As far as the investment in emerging markets, we are—this past year we roughly spent about a $0.05 a share in those markets. In fiscal 2009 we expect to double that investment to roughly $0.10 a share and we’re doing that while still delivering our expected range of 5% to 7%.

[Operator:]

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

[Judy Hong:]

In terms of the input costs outlook for fiscal 2009 you’ve talked about 9% to 10%, can you tell us how much of that is covered or hedged at this point so we get the view on how much visibility you have on that number and then in terms of how the recent commodity pull back impacts your ability to take further pricing in 2009 and whether you’re seeing or hearing any push back from retailers in your ability to continue to take pricing going forward.

[Anthony DiSilvestro:]

Depending on the commodity that we’re looking at our hedge position ranges somewhere between 50% and 100% and probably averages somewhere in the middle and just to expand on this 9% to 10% inflation in 2009, we are seeing escalating rates in a number of items including items such as beef and corn and vegetables and tomato paste, those two are impacted by fertilizer costs as well as [nat] gas costs to process them. And we’re also seeing escalating rates of inflation on a number of packaging materials such as cans, glass and resins.

[Douglas Conant:]

I believe most of the peer companies are also seeing on average higher inflation for the coming year then they saw last year. And so as our—the customers with their own brands. So right now we see a market that is trying to price and leverage pricing and productivity to cover costs and I expect that’s going to continue this year. I don’t see any—I have not seen any change in the behavior of our customers in this regard.

[Judy Hong:]

Are there any price increases that you’ve announced recently that will come through in the next month or couple of months?

[Douglas Conant:]

We have taken prices up in some areas in our Campbell USA operation recently given the cost pressure and they should be working their way through the system during the first half of this year.

[Operator:]

Your next question comes from the line of Eric Serotta - Merrill Lynch

[Eric Serotta:]

On new product shipments in the fiscal fourth quarter, was the change in new product shipments material on a year-on-year basis? I know you usually ship late July at the tail end of the quarter.

[Anthony DiSilvestro:]

The number of new items that we shipped this year was a little bit higher then last year but in terms of sales dollars it wasn’t meaningful.

[Douglas Conant:]

Also in terms of the inventory levels with our customers it wasn’t meaningful either. It was very comparable to prior year.

[Eric Serotta:]

It seems that your primary competitor in ready-to-serve took pricing later in the season then you did. My understanding is they’ve only implemented it fairly recently, do you expect to see a different pattern in terms of year-over-year share performance versus your competitor in ready-to-serve this year given that you’ve put your pricing into the market earlier?

[Douglas Conant:]

We’re in unchartered waters here in terms of the way the pricing has materialized and the competitiveness of the category. Every year we go in expecting to be very competitive on the share front. I would say we expect to be more competitive then we have been on the share front but I wouldn’t want to—I wouldn’t forecast share given that we really don’t talk about it because we’re prohibited to given our relationship with certain customers.

[Eric Serotta:]

Do you think that the RTS category is strong enough that even if you don’t see significant share gains this year that you could put up some decent growth through your new products and the like?

[Douglas Conant:]

We know the category will respond to innovation and we’re putting our best foot forward on innovation this year through Campbell Select Harvest with meaningful spending and also with our V8 soup line and significant attention to Chunky. So we expect the ready-to-serve category to be very vital as well as condensed and broth.

[Operator:]

Your next question comes from the line of Robert Moskow - Credit Suisse

[Robert Moskow:]

Can I ask you to focus a little on beverage, the sales growth in the quarter was positive but it seems to be growing at a slower rate then during the course of the year, you had a great growth rate thanks to the relationship with CCE, what are your expectations for this year and why do you think the growth rate kind of slowed a little bit in fourth quarter?

[Douglas Conant:]

We had a couple of things going on in the fourth quarter; first of all we’re lapping some huge numbers from prior year so we anticipated some degree of slowdown given the numbers we were lapping. The second issue is that we basically didn’t have enough capacity to ship V8—we had more demand for V8 V-Fusion then we had capacity and we pulled back our spending in the fourth quarter as we were trying to build inventories and meet the needs of the market. So we were lapping big numbers, we pulled back the consumer spending and we shipped what we could but we couldn’t ship to meet the demand. We are operating more beverage capacity on line and so I think as we bring the capacity online, restore the spending, and continue to build out on the Coca Cola, Coca Cola Enterprises alliance that we should be back on trend with that as we go through this year. We’re cautiously optimistic that we’re going to resume the kind of strong growth we had in the first half of the year.

[Robert Moskow:]

So it could be double-digit growth?

[Douglas Conant:]

I don’t think we want to forecast what we’re expecting but I think growth is as we said.

[Operator:]

Your next question comes from the line of Christine McCracken - Cleveland Research

[Christine McCracken:]

We seen a lot of data on food inflation in both Russia and China and I’m wondering if you could give us a sense if that’s good or bad. Typically when we see a trade down here in the US that less expensive meals it benefits your soup business but I’m wondering if you’re seeing any impact in either of those markets?

[Douglas Conant:]

Right now we have good value propositions in each market and we’re seeing very solid trial numbers and repeat numbers from both markets based on the offerings at the price points that we have and the marketing propositions we have so there’s no evidence that there’s an inflation affect on our proposition.

[Christine McCracken:]

Have you been forced to take the same type of pricing there? Can you talk about your costs as you enter those markets?

[Douglas Conant:]

We are pricing to maintain our margins there just as we are here and also it’s important to know in both Russia and China the important consideration is the fact that salaries are rising faster then food prices so the emerging middle class is able to afford to handle the food prices.

[Operator:]

Your next question comes from the line of Christopher Growe - Stifel Nicolaus

[Christopher Growe:]

I just wanted to clarify a point you made earlier about pricing, you said you made some price increases in I think you said Campbell US, so that was not soup I presume in terms of incremental pricing, that was the other elements of the category, of the division?

[Douglas Conant:]

It was broadly speaking it was across the Campbell portfolio and it included some soup items.

[Christopher Growe:]

Related to that, you’ve taken up your expectation for cost inflation in 2009 and I guess you’ve gotten some incremental pricing here in the US, so do you think your pricing today will cover your costs as you know today including the cost savings coming through?

[Douglas Conant:]

We have a lot of confidence in our ability to manage our way through this, and hit our earnings targets with good spending so I think the guidance we’re providing today would suggest that we have sufficient pricing to cover costs.

[Christopher Growe:]

On international and if you would regard this as a disappointing quarter given that underlying sales were down and to what extent you think you need acquisitions there or maybe more marketing dollars or something to kind of spur the growth in international overall for you?

[Douglas Conant:]

Actually I feel very good about international. I wouldn’t read into the quarter. We’ve had a lot of puts and takes for the quarter but if I look at the year, for the first time in a long time, we’ve got our European soup business growing again both on a top line and a bottom. As we peel back the UK and Ireland and really focused on our core soup businesses on [inaudible] and Europe we’ve started to deliver better results. I feel the same way about Asia Pacific where we had a very good year on Arnott’s and biscuits but also delivered excellent growth in Campbell’s soups. And I feel the same way about Canada and Mexico as well where we delivered good top and bottom line growth so overall I feel like we have a more solid portfolio here. We’ve stripped out the parts of the portfolio that were dragging and holding us back. We’re always vigilantly looking for opportunities to add to the portfolio and if we see one we will but we’re going to be very careful on that front. We’ve now got a portfolio that we think we can manage and drive for profitable growth.

[Operator:]

Your next question comes from the line of Vincent Andrews - Morgan Stanley

[Vincent Andrews:]

On the international, foreign exchange was—added 4% to your sales this year and with the dollar strengthening, how are you thinking about the dollar on a go forward basis and what’s baked into your algorithm for next year for the dollar?

[Anthony DiSilvestro:]

I think out outlook for the dollar is to be relatively stable for where it’s been of late and not a big move either way but certainly obviously that could change. We’ll have to watch it very closely.

[Operator:]

Your next question comes from the line of Edgar Roesch – Soleil Securities

[Edgar Roesch:]

I just wanted to focus on Pepperidge Farm for a second, it would seem that maybe pricing is going to be the bigger driver of top line growth in fiscal 2009, is that a fair assessment or can you touch on some of the volume drivers and maybe some new products that will drive that?

[Douglas Conant:]

We expect solid growth again from Pepperidge Farm. We’ve had four straight years of very solid growth but we are in unchartered waters on pricing. We basically on many of our bakery items had to take a price up five times this past year—any where from three to five times and we don’t know how long the category can manage sustain this kind of pricing but right now are expectations are that we’re going to have good volume growth, that pricing will compliment that growth. There’s no evidence to suggest that won’t happen but we are getting into unchartered waters on price. We expect a solid year with good volume and mix impact and added impact from pricing.

[Edgar Roesch:]

Some of the drivers of the volume would continue to be--?

[Douglas Conant:]

We continue to do very well on wholegrain breads and we have some initiatives there to strengthen our wholegrain propositions. There are initiatives and increased spending against Goldfish which is doing quite well on the national expansion of baked naturals in our cracker business and some solid blocking and tackling in cookies. So we’ve got a good solid innovation platform across all three key areas.

[Operator:]

Your next question comes from the line of Terry Bivens – JP Morgan

[Terry Bivens:]

If you look at what you reported versus what we see in Neilson, the implication is double-digit growth in unmeasured channels is there anything you’re doing differently in Wal-Mart versus the regular grocery chain that might help us look at that?

[Douglas Conant:]

Unmeasured channels goes well beyond Wal-Mart, it includes a lot of club activity and other outlets. I don’t comment on specific customer behavior. I would say that we have some solid strategies that have been consistently working in unmeasured channels which is why our net sales have historically tracked well ahead of what you’ve been able to track in terms of consumer take away and while our inventory levels have remained the same with our customers. So we’ve got good solid plans working there and I really don’t want to get into how we’re driving the business.

[Terry Bivens:]

Obviously General Mills has put their foot in the broth category and as you look at the first half you had a very good first quarter, extremely good second quarter, are you worried about how the broth business is going to evolve as we move into winter?

[Douglas Conant:]

Not at all, it’s a great growth category for us. We’re ready to deal with any and all competitors. We expect a very strong year in broth and stock this year. I’m not at all concerned about it. But our presence will be felt in that category this year.

[Operator:]

Your next question comes from the line of Mitch Pinheiro - Janney Montgomery Scott

[Mitch Pinheiro:]

Regarding emerging markets, does the current more antagonistic political environment in Russia change your thinking about how you invest in that market? And in light of the, you mentioned about $0.10 a share of costs for FY09 in emerging markets, has there been any change in your posture that these emerging markets will begin to contribute maybe in that three to five year time period?

[Douglas Conant:]

Related to the political climate change, as we went into this market we were prepared for this. We weren’t expecting the [halcyon] days to go forever. We had our eyes wide open here and our business proposition we believe is going to work in this time and in more turbulent times. I believe that at least on the consumer products front, there is big demand for these products and the companies that are able to deliver them faster, better and more completely then the others, will win. So we have a lot of confidence in our ability to service the Russian market in this climate. I think if we were in the oil and gas or mining business we might have a—or forestry business, we might have a little more concern. But not in the soup business, so we’re confident there.

[Mitch Pinheiro:]

You spend about $0.05 in 2008 in emerging markets, now $0.10 in 2009; does that change how you’re thinking about when these markets contribute to earnings?

[Douglas Conant:]

We continue to operate with this three to five outlook but you better believe we’re looking to make it more [inaudible] sooner but we’re just wrapping up year one in these markets and we’ve had a lot of learning and we’re to implement and leverage that learning in year two and we’ll see. We’ve seen nothing that would say that we shouldn’t be able to turn the corner in these markets in three to five years.

[Operator:]

Your final question is a follow-up from the line of David Palmer - UBS

[David Palmer:]

This is a general question about how you’re thinking strategically about growth, it seems like in food and restaurants the companies that have strong brands that also participate in categories or in price tiers that scream value are doing really well, McDonald’s dollar menu might be an example, you might think Kraft Mac and Cheese might be another example, you have condensed theoretically with your big advertising budget, one of the biggest brands in grocery you should be able to use that as a weapon—I know people have kind of touched on this, but are you thinking that way? And then on the other side of the coin in terms of the trade down risk, you had a rough year in microwavable, any strategy to shore that up from what presumably would be trade down risk?

[Douglas Conant:]

In terms of condensed, we clearly recognize there’s a value proposition there and we’re going to exploit it. We’re exploiting it in two ways, one directly with the consumer but also partnering with our customers who are hungry to exploit value driven categories and they see the value that condensed soup can bring in this environment. So a lot of this is partnering with our customers in addition to the consumer proposition. So we see the value opportunity and we’re going to make the most of it. In the ready-to-serve category its interesting and we haven’t cracked the code on this completely, what we do know is when we emphasize our canned ready-to-serve products our microwavable and cups tend to do a little less well. When we emphasize microwave the canned products don’t do as well. So we’ve got I think a more enlightened business proposition here where we’re going to be building both in a targeted way but we have to work our way through that. I am not concerned about the net performance of our sales in soup. We’ll manage the mix in a way that’s profitable for us and in terms of mix management if we sell more condensed soup and more canned ready-to-serve soup, we’ll be fine. And we’ll manage our way through it.

[Leonard Griehs:]

Thank you everyone for joining us today.