Highlights From Campbell Soup (CPB)'s Q1 Conference Call: Sales Growth Guidance Increased 1%

November 23, 2009 1:59 PM EST

Campbell Soup (NYSE: CPB) reports Q1 adj-EPS of $0.87, 6 cents better than the analyst estimate of $0.81. Revenue for the quarter was $2.20 billion, which compares to the estimate of $2.28 billion. Up 1.06% today.

Highlights From CPB's Q1 Conference Call:

• Raises its FY10 sales growth guidance from 3-4% to 4-5%. Adj-EPS are now expected to grow 9-11% from the FY09 adj-EPS of $2.21.
  
• (CEO) In last year's first quarter, we had strong organic sales growth of a positive 6%, led by exceptional U.S. Soup sales growth, up 12%. This year, our approach was to wait until October to step up our marketing support to very competitive levels."
  
• For the full-year, we expect soup sales growth behind solid marketing support, although sales will flow a little differently by quarter. Our earnings increase in the first quarter was fuelled by significant improvement in margins, led by productivity and our supply chain and some carry forward pricing.
  
• Hence the result of our strong start, and our outlooks for the coming three quarters including currency, we're raising our adjusted EPS guidance for fiscal 2010 from our targeted long-term guidance of five to 7% growth to the nine to 11% range. We also increased our dividend last week, reflecting our optimism for the long-term prospects of the business.
  
• (CFO) We reported first quarter net sales of $2.2 billion, down 2% versus the prior year, organic sales adjusted for currency, acquisitions and divestitures declined by 3%.
  
• 
  Inflation has moderated significantly versus last year rising at just under 2% for the quarter.
  
• Rising cost for tomato paste and steel cans were partially offset by deflation in grain-based commodities and energy cost.
  
• Initiatives to reduce operating expenses began last year and are continuing.
  
• In the quarter, expenses were down 5% despite higher pension cost.
  
• Our U.S. Soup, Sauce and Beverage business had a net sales decline of 5%, against very robust comparisons from last year.
  
• Sales growth was positive in the last part of the quarter as we activated our soup season marketing programs. The 3% decline in sales in our U.S. Soup business followed an increase of 12% in last year's Q1.
  
• Ready-to-serve soup sales were down 7% compared to the growth of 7% a year ago as this was the segment most impacted by the timing of our marketing and introductory initiatives. Consequently,
  we believe that we have a good support for our brand including the relaunch of Chunky soup.
  
• In Baking and Snacking, net sales for the first quarter grew by 4% due to currency and the acquisition of Ecce Panis.
  
• 
  Net sales from International Soups, Sauce and Beverages declined 2% with organic sales adjusted for currency and a divestiture declining 1%.
  
• We also invested $44 million in capital expenditures and paid a dividend totaling $88 million for the quarter.
  
• Last week, we were pleased to announce an increase in our dividend of 10% to $0.275 per quarter based on our long-term outlook for the business that are focused on total shareholder return.
  
• While most of my fiscal year depends on our performance during the next two quarters, our first quarter performance and favorable currency movement give us an improved outlook for the year. In line of all those factors, we now expect net sales growth of 45%, and adjusted EBIT growth of six to 7%. Our revised guidance for adjusted net earnings per share is nine to 11% growth versus our original balance of five to 7% growth. In addition to the benefit of higher EBIT, our improved outlook for interest and taxes is reflected in this guidance.
  
• All of our guidance includes the impact of currency, and while we don't explicitly guide against the currency expectation, at quarter end spot rate, currency would have had a three to 4% favorable impact on net sales, adjusted EBIT and adjusted EPS for the full fiscal year.
  
• (Q&A) I guess, my first question has to do with -- I guess that's my only question. My first question has to do with the kind of the timing of the new product launches last year, you went into that in some detail, but I think that's why the stock is kind of flattish versus a very strong market today and maybe you could just go a little bit more detail as to kind of how some of the timing worked on the products and then when you mentioned that the growth in the business is stronger as the quarter ended and as it moved into November, can you quantify that a little bit to give some comfort to folks that in fact the top line in the core soup business is as strong as you say?
  (A)Just reflecting on last year's first quarter, first. We had several -- many new SKUs that were associated with our launch last year where we were cutting into the shelf at the end of July and going into the first week of August and Select Harvest with our new Swanson stock entry and with our V8 soups. So there was a real emphasis on getting cut into the shelf early and establishing a beachhead there at the very beginning of the quarter. This year we're basically flowing in inventory against -- in the Chunky with replacing the existing items with stronger entries and we were simply waitingfor that flow in to take place so that we could have at least 65% of the ACV established with the new Chunky items at retail. Our estimate was that that flow in would be activated by the end of September, the first
  October. So we focused on spending against that anticipated flow in of product and as things worked out that way, we have had a exceptionally strong -- we had a very strong October on top of a strong October a year ago. I want to say soup sales were up about 10%, and we see momentum continuing into November. So we feel like we are now on track in terms of the soup performance for the year. Now the benefit is that when we do our ROI analysis against our spending profile in soup, we get a higher ROI the more, the closer we get to the actual soup season. So we learned last year, while we did get off to a good start, we didn't get the kind of returns in August and September from soup spending that we expect to get from October, November, December, January and February. So we think we're doing it smarter, we think we'll get a better return on our investment, and we clearly have some momentum going in to Q2.
  
• And then just as a follow-up on a somewhat unrelated, I guess is the -- for many years, you talked about SAP as a capital item, and then obviously as an expense as you were rolling it through the P&L in the U.S. and Canada. And I think, this is now two conference calls in a row where you've highlighted that actually SAP is a benefit -- has been a benefit to margins and productivity. Can you give a little bit more detail on that and then I'll pass it on?
  
• (A) Well, Eric we've been talking about a lot of the work that we have going on in the supply chain. We talked last year at CAGNY, we talked at the Analyst Day in July. And I guess while we do some analysis around what SAP is bringing directly and we're -- we feel very confident that we're getting a payback on a pretty substantial investment that we did. The real power of SAP is as an enabler, I guess some of these other things that we're doing in the supply chain, it gives us better visibility, it gives us more standardized reporting, it gives us some more agile system.And so if time goes on, it becomes harder and harder to tease out if this is an SAP benefit per se or this is a benefit to the -- that spends enabled by SAP, but really has to do with some of the initiative work we're doing around continuous improvement program that we've got in the plan. So I think as we move through time, the score keeping on SAP specifically has become -- becomes less and less meaningful and we just look at our enabler number, our enabler number this year this quarter was about 100 basis points ahead of the inflation number, and that's partially of course, because the inflation number is down a little bit from where it was last year, but it -- I think it also reflects the momentum we're gaining in the supply chain with the work that we're doing across the broad front.
  And building on that, we do review all of our significant investments and SAP is certainly one of those. We do a regular review of how we're performing versus our original plan. And I can assure you in that last review, we were very pleased that we were actually exceeding our savings expected from SAP. So we're running on the right track there. But Craig's point is dead on. The going-forward proposition is going to be to see that reflected in our enabler [ph] number going up and up over the next couple of years.

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