Campbell Soup CEO Discusses F4Q2010 Results - Earnings Call Transcript

Posted September 4, 2010

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Campbell Soup Company (CPB) F4Q2010 Earnings Call Transcript September 03, 2010 10:00 am ET

Operator

Good day, ladies and gentlemen and welcome to the Campbell Soup fourth quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). And as a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Jennifer Driscoll, Vice President, Investor Relations. Please begin.

Jennifer Driscoll

Thank you, Mary. Good morning, everyone. Welcome to the Campbell Soup Company's fourth quarter earnings webcast. We appreciate you joining us in advance of a holiday weekend. With me here in New Jersey today are Doug Conant, our President and CEO; Craig Owens, Senior Vice President and CFO, as well as Chief Administrative Officer; and Anthony DiSilvestro, Senior Vice President of Finance.

Doug and Craig each will provide you with their perspectives on our performance for the quarter and the fiscal year, as well as our expectations for fiscal 2011. Following their remarks, we will take questions from analysts and investors.

As usual, we have created slides to accompany our presentation. You will find the slides posted on our website this morning at investor.campbellsoupcompany.com. Please keep in mind that as usual, our call is open to members of the media who are participating in listen-only mode.

As a reminder, our presentation today includes certain forward-looking statements that reflect the company's current expectations about future plans and performance. These forward-looking statements rely on a number of assumptions and estimates, which could be inaccurate and which inherently are subject to risks and uncertainties, all of which are listed in our slides. You can refer to that slide or to our most recent 10-K and other 8-K filings for a list of the factors that could cause our actual results to vary materially from those anticipated or expressed in any forward-looking statements that we make on our call.

Consistent with our previous disclosures, the results presented today all have been adjusted for items impacting comparability. There were no additional items impacting comparability of our results in the fourth quarter of 2010, they are all in prior periods. We will present organic sales results today, which do exclude the impacts of currency and M&A activity, as we believe this is a better indicator of our ongoing business performance. We will also present segment operating earnings adjusted for the items impacting comparability.

Since our presentation includes certain non-GAAP measures as defined by the SEC rules, we have provided a reconciliation of these measures to the most directly comparable GAAP measures as an appendix to the slides accompanying the presentation. These slides, including the appendix can be found on our website as well.

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

Doug Conant

Thank you, Jennifer, and good morning, everyone. Thanks to all of you on the phone and the webcast for joining our fiscal 2010 earnings conference call. I would like to share a few comments on our performance in the fourth quarter and the fiscal year, and our plans for fiscal 2011. Then, I will turn the call over to Craig for a more detailed discussion.

Our net earnings per share increased 10% for the fourth quarter to $0.33, including a favorable tax rate and the impact of our share repurchase program. Our healthy beverages business led the way, posting significant sales growth in the fourth quarter. Our quarter's results brought us to an increase in net earnings per share for the fiscal year of 12%. In a challenging environment, we delivered strong earnings growth, overcoming softer-than-expected sales to finish slightly above the high end of our earnings range and well above our long-term target.

I am pleased with how well we managed our margins this year. I am also pleased with our cash flow performance including more than $1 billion in cash flow from operations this year, despite an extraordinarily high contribution to our pension fund. We delivered those results, while continuing to invest for long-term growth, including spending on our IT infrastructure, wellness and nutrition innovation, and our work in emerging markets.

In a year when sales growth was difficult for the entire food industry and short of our own expectations, we benefited from a great deal of hard work on cost and expense initiatives across the organization. Improved productivity, favorable currency, and our share repurchase program all contributed to our EPS growth this year.

That having been said, we recognized that growing the top line is the key challenge for us and for the food industry as a whole in order to deliver quality earnings growth in a sustainable way. As we enter our fiscal year 2011, I am confident that we have the programs and plans in place to address this challenge.

Leaning into our businesses in healthy beverages and baked snacks, we will offer a full slate of innovation, including V8 V-Fusion plus Tea; upgrades to the company's largest baked snacks brand; Goldfish, which is the largest children's snack cracker in the world; and Arnott's shapes; new varieties and a re-launch of Chunk cookies for Pepperidge Farm and line extensions for Arnott's Vita-Weat just to name a few of our renovation efforts.

Our healthy beverages and baked snacks brands will also be supported by stepped-up marketing. In this regard, we will be leveraging advertising campaigns that have already shown positive results, such as our Numbers campaign on V8 healthy beverages. We are funding the increased marketing with our expense reduction initiatives, such as our improved indirect procurement effort.
In addition, we will significantly strengthen our competitiveness in simple meals. The primary initiative in our soup business this year is to fire up condensed soup. This initiative will benefit both cooking soups, which are part of our broader meal-makers portfolio, and our eating soups. We will also improve the competitiveness of our ready-to-serve soups through more consistent promotional activity commencing this fall.

Both condensed and ready-to-serve soups will benefit from our new umbrella advertising campaign, which starts next week. This campaign will celebrate the amazing qualities of Campbell Soup in a category-building fashion. We also have competitive marketing support plan for our international soup businesses, including a major re-launch of our Erasco Eintopf Soup in Germany later this month and we will launch a concentrated broth for value consumers in several markets around the world.

Based on the year we just concluded and our plans for next year, we provided an earning guidance for fiscal 2011 today. Specifically, we expect net sales growth of 2% to 3%, EBIT growth of 4% to 5%, and EPS growth of 5% to 7%. Craig will provide further details about our assumptions in just a moment.

As I step back and look at the broader landscape, I see that consumers remain very value conscious and the competition in our industry will remain intense. Our customers likewise have their challenges, growing the top line will remain difficult and it will have to come largely from volume growth not from pricing.

As we look ahead, we are committed to driving sustainable profitable growth and our outlook for the coming year is consistent with that expectation. In the near term, we will drive growth the same way successful food companies always have, through focus, product quality, innovation, strong marketing, and competitive pricing.

Over the long term, we will leverage all the assets at our disposal, including our lead brands in our core categories, regional scale, world-class product technologies, financial strength, and organization excellence. In my opinion, we are extremely well positioned and well equipped to compete, to perform, and to win, particularly in our categories of focus.

With that, I will turn the call over to Craig for a more detailed discussion of the quarter's and the year's performance. Craig?

Craig Owens

Thanks, Doug. I will spend a few movements walking you through the fourth quarter results and segment highlights, followed by comments on our fiscal year-to-date results. Then, I will provide color around our fiscal year results by segment, including the U.S. soup performance and I will conclude by addressing our F '11 earnings guidance.

For the quarter, we reported net sales of $1.518 billion, down 1% versus the fourth quarter of 2009. Excluding the favorable impact of currency translation, organic net sales decreased by 2% due to increased promotional spending. EBIT of $187 million for the quarter is down 6% versus a year ago, primarily due to increased promotional spending and cost inflation, partially offset by productivity improvements and lower administrative expense. Despite the EBIT decline, earnings per share of $0.33 rose 10% versus the prior year.

In the fourth quarter, our reported net sales declined 1%, which reflected increased promotional spending of two points, partially offset by a 1-point increase due to currency translation. To improve our price competitiveness, primarily in North America, we increased our trade spending levels across several of our key businesses. Reflecting this increased promotional spending, organic net sales decreased by 2%.

In the fourth quarter, our gross margin percentage decreased from 40.6% in fiscal 2009 to 40.4% in the current quarter, a decrease of 20 basis points. This decrease was primarily due to increased promotional spending and cost inflation, net of significant productivity improvements.

Higher advertising expense this quarter increased our marketing and selling expenses by 6% from $209 million in 2009 to $221 million in 2010. Administrative expenses declined $17 million due to lower incentive compensation costs.

As I mentioned earlier, EBIT declined 6% in the fourth quarter. Net interest expense increased 13% in the quarter as the cost of increasing the proportion of long-term debt was partly offset by the reduction in short-term rates.

The tax rate declined significantly in the fourth quarter by 9.1 points to 29.8%. The decrease in the rate is primarily due to reduced taxes from a lower level of foreign dividends compared to a year ago. As a result of the lower tax rate, net earnings increased by 6% for the quarter. We continue to execute our strategic share repurchase program, leveraging our strong cash flow. As a result, diluted shares outstanding declined by 2% for the quarter, contributing to earnings per share growth of 10%.

Next, I would like to comment on our segment results for the quarter. In the U.S. Soup, Sauces and Beverages segment, sales decreased 1%, primarily due to a decline in U.S. soup, partly offset by growth in beverages. Beverage sales increased 12%, driven by significant growth in V8 V-Fusion juice, V8 Vegetable Juice, and V8 Splash juice drinks.

Operating earnings decreased 6% to $139 million this quarter from $148 million in the year-ago quarter. This decrease was primarily due to an increased promotional spending, partly offset by productivity gains. U.S. soup sales for the quarter decreased 5% with sales of both condensed and ready-to-serve soups declining 7% due to volume decline and increased promotional spending, while sales increased 9%.

In Baking and Snacking, organic sales were unchanged for the quarter as gains in the Indonesian biscuit business were offset by a decline in Pepperidge Farm. Sales in Arnott's were comparable to a year ago as higher volumes were offset by increased promotional spending. The favorable impact of currency drove a 6% improvement in operating earnings.

Organic sales for the International Soup, Sauces and Beverages segment declined 4%, primarily due to declines in Europe and Canada, partly offset by gains in the Asia-Pacific region. Operating earnings decreased from $19 million to $6 million due to declines in Europe and Canada, again partly offset by margin-driven earnings growth in Asia-Pacific. Reflecting continued weakness in the foodservice sector, organic sales declined 9% in our North America Foodservice segment. Earnings increased $3 million in the quarter compared to prior years - compared to the prior year, primarily reflecting our cost reduction efforts.

Turning now to the full year fiscal results. Reported net sales increased 1% with organic net sales down 2%, primarily due to declines in the U.S. Soup, Sauce and Beverage segment. EBIT of $1.36 billion is up 7% versus a year ago, primarily due to improved gross margin and favorable currency, partly offset by lower sales. We achieved earnings per share of $2.47 this fiscal year, an increase of 12% versus the prior year. This EPS growth reflects the increase in operating earnings, the benefits of using our positive cash flow to fund our share repurchase program, and a slightly lower tax rate.

Our reported net sales grew 1%. We had a 1-point decline from volume and mix and a 2-point negative impact due to higher promotional spending. Increases in promotional spending more than offset small price increases in the highly competitive environment with value at the top of consumers' minds. Organic sales decreased 2% as declines in the U.S. soup, primarily ready-to-serve, and North America Foodservice were partly offset by strong gains in U.S. beverages.

Currency translation, primarily the Australian dollar and Canadian dollar, contributed 3 points of sales growth to the full year. Our gross margin percentage increased from 40.2% to 41%. This 80-basis point improvement was primarily due to productivity improvements in excess of cost inflation. Marketing and selling expenses for the year decreased from a $1.077 billion to $1.058 billion, primarily due to lower advertising and consumer promotion costs, partially offset by the impact of currency.

In several businesses, we reduced advertising expenditures and shifted those resources to fund promotional activities in order to maintain price competitiveness. While advertising costs are down from a year ago, advertising impressions in the U.S., as measured by gross rating points, increased as we took advantage of lower media rates. Our total marketing support, which includes promotional spending, is up for the year.

Administrative expenses increased by 2% from $591 million in 2009 to $605 million. The increase was primarily due to the impact of currency and higher compensation and benefit cost including pension expense, partly offset by the benefit of the company's cost reduction efforts.

Below the operating line, net interest expense was unchanged for the fiscal year. The tax rate was 31.3%, 70 basis points lower than the year-ago rate, reflecting a lower level of foreign dividends. For the full year, net earnings increased by 9%, diluted shares outstanding declined 3% for the year, resulting in earnings per share growth of 12%.

Now, I will comment on the segment results for the full year. In the U.S. Soup, Sauces and Beverages segment, sales decreased 2%, reflecting a decline in U.S. soup, partly offset by gains in beverages. Beverage sales increased 4%, driven by double-digit volume gains in the second half of the year.

V8 V-Fusion sales increased double digits due to increased advertising and successful new item launches, including Cranberry Blackberry and Acai Light varieties, and a new 8-ounce slim can package. Sales of V8 Splash juice drinks increased, while sales of V8 Vegetable Juice declined for the full year. Prego pasta sauce sales grew reflecting the continuing success of our Heart Smart varieties, and sales of Pace Mexican sauce declined.

Operating earnings increased 2% for the segment to $943 million from $927 million a year ago. This increase was primarily due to productivity-driven gross margin gains and lower advertising spend, more than offsetting the impact of lower sales.

For the full year, U.S. soup sales decreased 4%. Despite the increase in sales of condensed cooking varieties driven by increased home eating occasions, sales of Campbell's condensed soups in total decreased 2%. Sales of ready-to-serve soup declined 9%, reflecting negative category trends in both canned and microwaveable varieties. Broth sales increased 3%, also benefiting from the growth of in-home meal preparation and from consumer demand for our 100% natural product offerings.

The following chart is a look at category performance in the U.S. during the fiscal year 2010 based on IRI Panel Data and Campbell Internal Estimates.

Continuing high unemployment and a corresponding low level of consumer confidence have resulted in declines in consumer spending. These trends have impacted the food industry as a whole. Consumers are making fewer store trips. They are shopping more closely to their list and reducing stock-up purchases and trading down the lower-cost alternatives.

Broadly speaking, our data indicate that consumers are purchasing fewer items and spending even fewer dollars on grocery. In fact, food volumes in the grocery channel declined throughout our last quarter and dollar spending has a longer negative trend. For the soup category, these dynamics have had a negative impact, particularly on our ready-to-serve cans and microwavable products which carry higher average selling prices. The overall category has declined by 4.7%; our sales have declined 5.2%. We have outperformed all other branded players by 2 percentage points.

While we have been impacted by the ready-to-serve category trends, our meal-maker businesses, condensed cooking soups, and broths have had much better performance due to their strong value and the trend toward consumers eating more at home.

As you can see in the following chart, private label share in soups still trails that of other mature food categories, sitting at only 12%. Campbell's dollar share in wet soup was 63.6%, reflecting a modest 40-basis point decline in the past year, driven by ready-to-serve soup. We gained dollar share in the condensed soup - in both condensed soup and broth and we realized growth in total volume share for the company for the fiscal year. All other branded players had a collective share of 24%.

For the full year in Baking and Snacking, organic sales were comparable to a year ago as volume gains in both Pepperidge Farm and Arnott's branded businesses were offset by increased promotional spending.

In Pepperidge Farm, we delivered strong sales gain from Goldfish snack crackers, however cookies declined. Sales in our Australian Arnott's business increased, driven by both Tim Tam Chocolate Biscuits and Shapes savory crackers. The favorable impact of currency and earnings growth in both Pepperidge Farm and Arnott's drove a 22% improvement in operating earnings.

Organic sales in our International Soups, Sauces and Beverages segment for the full year declined 1%. The decrease was primarily driven by declines in Europe, reflecting lower sales in Germany and Canada due to lower sales volume of ready-to-serve soup, partly offset by gains in the Asia-Pacific region. The sales increases in Asia-Pacific were due to volume-driven gains in Japan, Australia, and Malaysia. Despite the lower organic sales, operating earnings increased by 18%, primarily driven by the favorable impact of currency.

Excluding the impact of currency, margin-driven earnings growth in Europe and the Asia-Pacific region was the most - was mostly offset by the decline in Canada. Consistent with the quarter, North American Foodservice was impacted by the weak economy for the full year with organic sales down 5%. Earnings increased $2 million from $53 million in the prior year to $55 million this fiscal year, as we aggressively managed the cost of this business to protect profitability.

Cash flow from operations of $1.057 billion compared to $1.166 billion in the prior year. The current year cash flow includes a $260 million contribution to Campbell's U.S. pension plan, the impact of which was mostly offset by improved working capital performance and higher cash earnings.

Capital expenditures decreased from $345 million to $315 million. The capital expenditures for this year included the expansion of our world headquarters, capacity increases for both Arnott's and Pepperidge Farm, and the ongoing implementation of SAP in Australia and New Zealand. Looking ahead, we expect capital expenditures in 2011 to be approximately $300 million for the fiscal year.

In fiscal 2010, we repurchased 14 million shares at a total cost of $472 million under our strategic share repurchase program authorized in June 2008, and under the company's ongoing practice of buying back shares sufficient to offset those issued under incentive compensation plans.

Net debt ended the year at $2.526 billion, a decrease of $47 million. We anticipate a continuation of the challenging economic environment with high unemployment, low consumer confidence, and value-focused consumer shopping behavior. Reflecting this outlook, we expect growth and net sales of 2% to 3%, primarily volume-driven for the full fiscal year 2011.

We expect growth in adjusted EBIT of 4% to 5%, which reflects an increase of 40% or $17 million in our U.S. pension expense and a forecasted inflation in cost of sales of 2% to 3%. Our projected 2011 growth rates in sales and EBIT are 1% below our long-term targets. We expect adjusted earnings per share growth of 5% to 7%, consistent with our long-term growth target.