Jennifer Driscoll - Vice President of Investor Relations Denise M. Morrison - Chief Executive Officer, President and Director B.

Craig Owens - Chief Administrative Officer, Chief Financial Officer and Senior Vice President

Eric R. Katzman - Deutsche Bank AG, Research Division Akshay S.

Jagdale - KeyBanc Capital Markets Inc., Research Division David Driscoll - Citigroup Inc, Research Division Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division Edward Aaron - RBC Capital Markets, LLC, Research Division Bryan D. Spillane - BofA Merrill Lynch, Research Division Robert Moskow - Crédit Suisse AG, Research Division Alexia Howard - Sanford C.

Bernstein & Co., LLC., Research Division David Palmer - UBS Investment Bank, Research Division Eric Serotta - Wells Fargo Securities, LLC, Research Division Matthew C. Grainger - Morgan Stanley, Research Division

Thank you. Good morning.

Welcome to the second quarter earnings call and webcast for Campbell Soup Company. With me here in New Jersey today are Denise Morrison, President and CEO; Craig Owens, Senior Vice President, CFO and Chief Administrative Officer; and Anthony DiSilvestro, Senior Vice President of Finance.

Denise will kick us off today by giving a strategic update and commenting on our segment results for the second quarter. Craig will offer his take on the quarter and first half, as well as our expectations for fiscal 2012.

Then after we take your questions, Denise will make a few closing remarks. Before I move on to our important reminders, I'd like to invite all of you to join our webcast next week.

It's February 22, Wednesday at 10:30 a.m. Eastern, when we're presenting at the CAGNY 2012 conference in Boca Raton.

As usual, we've created slides to accompany our earnings presentation. You'll find the slides posted on our website this morning at investor.campbellsoupcompany.com.

Please keep in mind that this 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. Please refer to the slides in our presentation or the company's most recent Form 10-K and any subsequent SEC filings for a list of the factors that could cause our actual results to vary materially from those anticipated in any forward-looking statements.

Since our presentation includes non-GAAP measures as defined by SEC rules, we've provided a reconciliation of the measures to the most directly comparable GAAP measures as an appendix to the slides accompanying our presentation. These slides, as well as our earnings release and selected quarterly financial data, can be found on our website.

And with that, let me turn the call over to Denise.

Good morning. Thanks for joining Campbell's second quarter earnings call.

Six months into our strategic transition, we are focused on building a different company at Campbell. As we said last July, implementing our new strategic direction will require substantial investment.

We're confident that the course we've charted will position Campbell for future success. This morning, I'll provide my perspective on our segment performance and our progress.

Our U.S. Simple Meals and North America Foodservice businesses are tracking favorably, and we expect improved performance in Australia and U.S.

Beverages. We are slightly behind our expectations on net sales but projecting to be within our guidance for full year 2012.

As a reminder, Campbell's primary goal is to create value by driving sustainable, profitable net sales growth. We continue to make progress executing our growth strategies and our focus remains on the consumer.

Our 3 growth strategies are: stabilize and then profitably grow North America Soup and Simple Meals, expand our international presence and continue to drive growth in healthy beverages and bake snacks. As we told you last July, in fiscal 2012, we are increasing our investment in brand building and innovation for the long-term growth of our business.

Overall, to enhance our brand-building efforts, this quarter we increased advertising and consumer promotion expense by 6%, with gains across all of our portfolio. You will continue to see increased advertising and consumer promotion in the back half of this year.

Our innovation investments are also progressing, and I look forward to sharing some of the early results with you at CAGNY next week. Within the U.S.

grocery trade, this past quarter, dollar consumption softened dramatically, particularly in the last 4 weeks of the quarter. For total Simple Meals, this softer consumption occurred across almost all categories, with 32 center store categories experiencing declining trends for the 4-week period versus full year-to-date.

Our hypothesis is that continued pressure on the consumer in the current economic environment increased after holiday spending cycles, and the resulting decrease in personal disposable income has forced consumers to reduce discretionary spending, including food. Overall, consumer outlay for total food and beverage was up only 1% in the 12-week period, and the average number of units per trip declined 3%.

Against this backdrop, I'll offer a brief perspective on our second quarter results. Our second quarter performance was broadly in line with our expectations.

However, sales of $2.1 billion were slightly lower than what we anticipated. As expected, our adjusted EBIT and EPS were down due to the marketing investments we're making, inflation and a higher tax rate.

Now let me offer some perspective on some of our segment results. In U.S.

Simple Meals, we're delivering on our efforts to stabilize profitability. We had a modest profit decline in U.S.

Simple Meals as weaknesses in sauces was partially offset by stronger profits in soup. There are 3 drivers of our soup performance.

Number one, we're achieving price realization via reduced promotional discounting and list price increases. As a result, we're shedding less profitable volume.

Number two, we're delivering and supporting meaningful levels of innovation. We launched 27 new products this year compared with just 3 last year.

And number three, we're driving advertising and consumer promotion behind our big brands and consumer behaviors. Our overall U.S.

Soup business performed as expected with some puts and takes. Condensed soup and broth sales were better than expected.

Ready-to-serve soup sales did not meet our expectations. Increased list prices and the reduction of heavy promotional discounting resulted in significant price realization.

This created wide price gaps against branded competitors that impacted our volume and market share. We believe that we can be more competitive in RTS and still continue the momentum of profit improvement in the soup business.

Our strategy to increase brand building and reduce heavy discounting is working and drove the fourth consecutive quarterly profit increase for U.S. Soup.

We anticipate that sales trends in the second half will improve as the heavy discounting is now behind us. We achieved our largest net gains in soup distribution in more than 4 years, total distribution points on-shelf increased mid-single digits.

We recognize that we still have opportunities to build distribution in value channels. We're setting up our U.S.

Simple Meals for future success, and we'll talk more about that at CAGNY next week. Before I leave Simple Meals, as you know, we've made some leadership changes at Campbell and Mark Alexander now leads our Campbell North American business.

Mark has a proven track record of success. He has managed businesses all over the world, including soup businesses in the United States, Canada, Europe, Asia and Australia.

And now, Global Baking and Snacking. Global Baking and Snacking turned in a similar performance as the prior quarter but with slightly different drivers.

We made a choice to increase marketing investments in our Pepperidge Farm business. Our cracker business responded well, garnering gains in sales and market share.

Goldfish sales increased double digits. However, pricing contributed to softening in our cookie business during the peak holiday season.

In bakery, industry consolidation has made for challenging category dynamics, including competitive pricing pressure. Overall, we can compete with our position as a premium player with strong brands and the greater agility that our size enables.

In Australia, consumers have sharply curtailed their spending this year, and Arnott's had a tough first half. We started to see stronger sales in January.

We expect improved performance in the back half of the year, driven by a strong promotional calendar and a robust set of new product introductions. Turning now to U.S.

Beverages. As you saw in the second quarter and the first half of this fiscal year, our U.S.

Beverage business is not always without challenges. We had a significant decline in EBIT due primarily to increased advertising and promotion and cost inflation.

We expect the rate of inflation to abate in the second half, and profitability will continue to improve. And we also have a number of new product introductions slated for the second half.

We've had plenty of experience navigating the V8 business through cyclical upswings and downswings, and we've learned that the best way to maximize the health of this business is through brand building and innovation but also to defend what we've built. Recently, our V8 V-Fusion business has been pressured by new competition in the fruit and vegetable segment.

Our investments to defend it have led to earnings pressure in the short term, but this is the best course for long-term success. And despite a weak shelf-stable juice category and intensified competition, V8 is outperforming the category and gaining share.

We reiterated our annual guidance this morning. The guidance reflects the strategic transition we're making, including investments in brand building and innovation, reallocation of existing resources to fund growth and headwinds in the first half in our U.S.

Beverages and Australian business. As I said earlier, we view fiscal 2012 as a year of investment for Campbell.

We remain very focused on the superb execution of our 3 growth strategies to create a meaningfully different company over time. Now I'd like to turn the call over to Craig for his analysis of our financial results and an elaboration of our expectations for fiscal 2012.

Thank you, Denise. Good morning.

I'll spend a few minutes walking through the second quarter results and segment highlights, followed by a brief look at our first half results. And then I'll provide an outlook for the year and reaffirm our full year sales and earnings guidance.

For the quarter, we reported net sales of just over $2.1 billion, down 1% versus the second quarter of 2011. In aggregate, there was no currency impact this quarter, so organic sales also declined by 1%.

We reported a 2% decline in organic sales in our first quarter. We recognized some additional restructuring charges in connection with the program that we announced last June.

Excluding that impact, EBIT decreased 8% this quarter to $332 million, primarily due to significant cost inflation, lower volumes and increased marketing investment, partly offset by higher selling prices and productivity improvements. On a segment basis, sales gained in the North American Foodservice division, and U.S.

Beverages were more than offset by decreases in International Simple Meals and Beverages and U.S. Simple Meals.

Earnings fell across all of our segments except for North America Foodservice. Earnings per share were $0.64 this quarter, a 10% decline as compared with the second quarter of 2011.

The 1% decline in net sales reflected a decrease in volume and mix of 3 points and a negative impact of increased promotional spending of 1 point, partly offset by an increase in pricing of 3 points. The majority of the pricing gains have come from our list price actions in U.S.

Soup and in our Baking and Snacking segment taken to partially offset the impact of inflation. With respect to promotional spending variances, higher rates of spending in Baking and Snacking and in our U.S.

Sauces business were partly offset by a reduction in our U.S. Soup spending.

As many of you know, over the last month or 2, we have seen a softening across many categories within the U.S. grocery trade.

Our categories and consequently our sales have been negatively impacted by this trend. For the second quarter, our gross margin decreased by 100 basis points to 38.4% from 39.4%.

This was primarily due to cost inflation and unfavorable mix, partly offset by higher selling prices and productivity improvements. Overall, our inflation rate and cost of goods sold was approximately 7% in the quarter.

Our lower-margin segments have outperformed our higher-margin segments, contributing to a negative mix impact. While we've implemented higher prices and achieved productivity gains, these have not been sufficient to offset inflation and negative mix.

Our gross margin performance is below our own earlier expectations, primarily due to higher rates of promotional spending in Baking and Snacking and in U.S. Beverages.

Our marketing and selling expenses increased 2% to $297 million compared with $291 million in the prior year. This increase was primarily due to higher advertising and consumer promotion expenses.

Selling expense was lower. As part of our new strategic direction, we're investing in brand building and innovation to drive profitable sales growth for the company.

In the second quarter, we increased advertising and consumer promotion expense by 6%, with increases across many of our key brands. Administrative expenses decreased by $2 million to $152 million, reflecting the benefit of cost savings from restructuring initiatives, partly offset by higher incentive compensation and benefit cost.

Below the operating earnings line, net interest expense fell by 16%, a decrease of $5 million, reflecting an overall reduction in long-term interest rates. The adjusted tax rate increased to 33.7% from 27.1% in the prior year.

The prior year rate benefited from tax credits associated with foreign earnings. Reflecting the higher tax rate, adjusted net earnings were down by 13%.

Adjusted EPS benefited from a 4% reduction in diluted shares outstanding, declining 10% to $0.64 per share. Second quarter segment sales results and the core organic growth rates are shown year.

U.S. Simple Meals sales declined 2%, reflecting lower sales in both U.S.

Soup and U.S. Sauces.

U.S. Soup sales fell 2% this quarter as volume performance was impacted by higher selling prices and decreased promotional spending.

Our sales performance was better than retailer takeaway, and this reflected the impact of movements in customer inventory levels relative to the prior year. We ended the quarter with retailer inventory at normal levels and comparable to prior year.

Within the U.S. Simple Meals segment, sales of the U.S.

Sauces segment decreased 2%, Prego pasta sauce achieved 6% volume-driven sales gains, benefiting from increased advertising support and promotional activity. Pace Mexican sauce declined 7%, reflecting the impact of increased private label activity, and other Simple Meals brands also declined.

Global Baking and Snacking sales decreased 1% due to declines in Arnott's. Pepperidge Farm had increased sales, primarily due to crackers, led by the double-digit growth in Goldfish snack crackers, partially offset by a reduction in cookie and bakery products.

The performance of our Arnott's business was negatively impacted by higher promoted and non-promoted price points at retail and a weak consumer environment. Although still down, the sales trend at Arnott's was much improved compared to the first quarter.

Within International Simple Meals and Beverages, organic sales declined 4%, primarily due to declines in Europe and Canada, partly offset by gains in Latin America and the Asia-Pacific region. In Europe, where there has been a challenging economic environment, sales fell primarily due to volume loss in France and Germany.

Reflecting improved top line performance and outpacing the category, U.S. Beverages sales increased 4% versus prior year.

Gains were primarily driven by growth in V8 Splash drinks and V8 V-Fusion juice, partly offset by weakness in V8 vegetable juice. Contributing to growth this quarter were the launch of new items, including V8 V-Fusion Smoothies, as well as higher levels of advertising to support the new campaign with Jackie Chan.

Sales of North America Foodservice increased by 9%, primarily due to volume-driven gains in fresh chilled soups sold at retail. Operating earnings for U.S.

Simple Meals decreased by 2% to $174 million this quarter. This reflected lower earnings in U.S.

Sauces, including incremental spending on Simple Meals innovation, partly offset by gains in U.S. Soup.

For the segment, lower volumes and increased advertising and consumer promotion expenses were partly offset by an increase in gross margin percentage and lower selling and administrative expense. Our strategy to reduce the level of promotional spending in U.S.

Soup to improve profitability is working. We have now achieved 4 consecutive quarters of earnings growth.

Earnings within Global Baking and Snacking declined by 12%, reflecting decreases in both Pepperidge Farm and Arnott's, primarily due to cost inflation and increased promotional and marketing spend. This was partly offset by higher selling prices.

Within International Simple Meals and Beverages, earnings declined 16%, primarily due to increased cost associated with our market expansion investment in China and lower earnings in Europe and Canada. Operating earnings for U.S.

Beverages were down 21%, reflecting significant cost inflation, primarily in juice concentrates and packaging materials, as well as higher advertising and consumer expense, partly offset by productivity gains. North America Foodservice continues to achieve strong growth, with operating earnings up 33%.

Higher earnings have been primarily driven by volume gains, higher selling prices and productivity improvements, partly offset by cost inflation. U.S.

Soup sales for the quarter decreased 2%. Within soup, sales of condensed soup increased by 5%, with gains in both cooking and eating varieties.

Ready-to-serve sales, where price elasticity is most evident, declined 12%. RTS sales in the quarter benefited from the introduction of Slow Kettle soups.

Broth sales also increased on volume gains of aseptically packaged broth and the successful introduction of our Swanson Flavor Boost product. Before I move on, I want to comment on a topic that has received increased attention lately.

As you know, bisphenol A or BPA is widely used in metal food packaging to help preserve and protect food and to maintain its nutritional value and quality. We believe that current can packaging is one of the safest options in the world.

However, we recognize that there is some debate over the use of BPA. The trust that we've earned from our consumers for over 140 years is paramount to us.

And we've been monitoring and working on the issue for several years. Because of this, we've already started using alternatives to BPA in some of our soup packaging, and we're working to phase out the use of BPA in aligning of all of our canned products.

The cost of this effort is not expected to be material. The U.S.

wet soup market share results from the latest 52 weeks, based on IRI panel data and Campbell's internal estimates is shown here. Campbell's market share decreased 2.4 points to 60% as we focused on stabilizing soup profits.

The share loss was driven by ready-to-serve soup as our market share from condensed was down only slightly and broth was actually up. Other branded players gained 1.5 points in total, and private label gained nearly 1 point.

The overall category was down in dollars by 0.9% in the past 52 weeks. Our soup sales declined 4.7%, underperforming the category due to anticipated volume loss associated with our reductions in deep discounting and our list pricing please.

Other branded players increased sales by 5% during the period, while private label sales rose 6%. Looking at our first-half results now.

Reported and organic net sales decreased 1%. Excluding items impacting comparability, adjusted EBIT of $750 million was down 7% versus a year ago.

As with the quarter, this decrease was primarily due to significant cost inflation and lower volumes, partly offset by higher selling prices and productivity gains. A 5% decline in adjusted EPS was less than the EBIT declined as we have continued to benefit from utilizing our excess cash flow to repurchase shares.

Diluted shares outstanding fell by 4%. Cash flow from operations was $478 million compared to $483 million in the prior period.

This decrease reflected the impact of lower cash earnings, partly offset by the benefit of lower pension contribution. During the first half of the year, we utilized our positive cash flow to repurchase 5.3 million shares at a cost of $173 million under our strategic share repurchase program announced in June 2011 and our practice of buying back shares to offset those issued under our equity-based compensation programs.

Net debt was $2.6 billion, a decrease of $240 million. Reflecting our expectation of improved sales performance in the second half of the year, we're reaffirming our full year guidance.

We expect net sales growth of between 0 and plus 2%, a decline in adjusted EBIT of between 7% and 9% and a decline in adjusted EPS of between 5% and 7%, putting adjusted EPS in the range of $2.35 to $2.42. We are now forecasting that our gross margin percentage will decline about 1 point compared to 2011.

As I mentioned earlier, this is due to higher rates of promotional spending in our Baking and Snacking segment and in U.S. Beverages.

Our guidance has not changed because operating expense, including marketing, is now forecast lower than our original expectation. That being said, we're still planning significant increases in our advertising and consumer promotion in the second half of the year.

Thank you very much. With that, I'll turn it back over to Jennifer to start the Q&A.

Operator, we're ready for the Q&A. Could you give us our first question?

I guess my question revolves around your outlook. And it sounds like a little bit more confidence in the second half, fiscal sales doing a bit better and yet, as I'm sure you're aware, a lot of companies are grappling with consumer and lower volumes.

And you kind of made reference to that as well post the holiday, so that would refer to just January. So I guess, why exactly do you feel that sales can hang in there when it seems like the consumer is going the other way and retailers are cutting back on inventory and the whole industry seems to be in the midst of really, really tough times?

There's a number of factors, Eric, that give us reason to believe that second half will be better. First of all, in our U.S.

Soup business, we are continuing with much higher levels of marketing, advertising and consumer promotion in the second half of the year versus where we were last year. In addition, our -- we are now cycling a period of time that does not include the heavy discounting that we've had in the base for the last 4 quarters.

We also have price realization on U.S. Soup that will come through versus year ago.

In Australia, where we've had a tough first half, we have a much stronger promotion calendar in half 2 and several new product launches. And we have already seen evidence as recently as January that the performance of that business continues to get better.

In Beverage, our cost inflation comparatives improved and we're also introducing new products. And we're continuing to support that business as well with advertising and consumer promotion.

And I think the other thing in Beverages, we're continuing to take steps in the supply chain to improve margins. So I believe across all the businesses, we're taking into account that it is a tough environment, and we're making the necessary plan changes to make sure we're delivering despite that.

Okay. Just as a follow-up, and then I'll pass it on.

Condensed seem to be surprisingly strong in the quarter versus the IRI data that we see and some expectations. But I'm kind of wondering, is it a function that the price point on condensed is so low given the -- and the value that the consumer sees that, that's really started to come through?

Because obviously, Smucker, General Mills and others have kind of -- if they took the pricing over a certain threshold, it seemed like the volume just collapsed coincident with that. And maybe condensed is the opposite because it's normally featured during the winter at sometimes 10 for 10 or things like that.

So maybe you could just comment on that, and then I'll pass it on.

Yes, there's no doubt that condensed soup benefited from the fact that we have -- with the increased pricing that we've taken in the category and RTS, especially, condensed has come through to the consumer as a better value. Coupled with a strong holiday on condensed soup, we did have a good quarter.

So I do think that it is a better value at this point. I don't know, if you have anything else that you want to say, Craig?

I think maybe a little bit of the difference between the consumption numbers that you referenced and the sales takeaway in condensed, we said in the discussion here that inventory movement, and it's really prior year inventory movement that was a little unusual, helped us a little bit in terms of shipments versus consumption. And that was probably more prevalent in condensed than it was in RTS.

I was just trying to get your sense of the overall trends in food volumes. I mean there's been a lot been said about that most other companies are experiencing volume weakness.

Can you just give us a sense of what you're seeing from the consumer? So with all the insights that you have into the consumer, what are you seeing in terms of their buying patterns, how they changed and perhaps how is Campbell reacting to that?

That would be helpful.

Yes, well, we are obviously tracking 39 categories in the center store. And of this 39, 32 had trends in the last 4-week period that were much lower than the full year-to-date trends.

So there clearly is something going on. And as I said in my opening remarks, I believe it's just post-holiday pressure.

Consumers are making choices. And one of the biggest discretionary budgets they have is their food budget, and so we believe that, that is largely responsible for what we're seeing.

Basket size is down 3%, so units per buyer is down, and spending is down. So they're clearly making different choices.

Have you made any changes to your strategies short-term? Because this is a more recent event.

I know you have your long-term plans, which you've made clear to us. But have you made any changes recently, given the trends you've seen?

I would say the most changes that we've made have been in the Australia business. In the United States, we've been able to navigate this because this has been with us for a while.

Yes, I would sort of separate big strategic moves where I think Denise is exactly right from sort of the day-to-day in the marketplace. I mean we've seen -- in this past quarter, we've increased our promotional activity and spending a little bit in Pepperidge, where we've seen category weakness in bakery.

And I mean, we're sort of constantly adjusting the dial on a small level. But I agree that we haven't made any big significant strategic...

Right. Overall, we're staying on course.

I wanted to ask a little bit more about the advertising spend and the plans here. So back at Analyst Day, you mentioned that there was the effort to do both an increase in the advertising budget and in R&D.

And I believe the sum total of that number was about $100 million. So far, year-to-date, I think -- correct me if I'm wrong on this, Craig, but I think the number is still slightly down on advertising.

So Craig, Denise, can you pull this together for me and tell me how you're tracking against that original goal? And perhaps it's been my hypothesis that because the weather was so warm, maybe spending a lot of money on advertising with the fourth warmest winter on record is not the best use so maybe you delay it to next year.

So can you take this and kind of give us an update?

Yes, let me talk first about sort of process that we used when we referenced that number and where we are against that spending. We literally, in our annual planning process, identified $100 million, some of which we allocated initially in the planning process and some of which we actually kept back in a fund to be allocated as we went through the year.

And the use of all that $100 million was a combination of improving our brand-building activities, particularly against some of those brands, where we felt like we have not been sufficiently funding them, and increased innovation activity. We said at the time that, that amount would show up in all kinds of different parts of the P&L.

Some of it is in freight spend actually because that's where we've spent slotting fees for new products. Some of it is in SG&A because it's helping to support some of the new product platform teams that we've put in place.

Most of it, of course, is -- winds up on the P&L in marketing and R&D. That program, that $100 million program, is very much on track.

In fact, we're spending maybe a little bit ahead of $100 million rate for the year. We're pretty encouraged by some of the results that we see from it, and we're sticking to our guns there.

Now in the rest of the P&L, as we said in our guidance statement here, we're a little bit below our -- as we forecast the full year now, we're going to be below our original expectation in terms of marketing spend. We have -- we are benefiting, for example, in R&D, from the restructuring activity that we did toward the end of last year where we took out some resource and some spending that we thought wasn't giving us productive payback.

So you've got ups and downs and puts and takes across the P&L. It's fair to say that the incrementality of this $100 million is not going to be as great as we originally thought it was.

That was referencing back to my point that I made in the guidance statement, that marketing for the full year would be somewhat lower than our own expectation. But it's sort of the difference between the daily, weekly, monthly management of the P&L, our opportunity to find cost savings in various parts of the P&L, offsetting and being reallocated versus that $100 million program.

Denise, can you just maybe make a comment on the winter weather and how that factors in to how you spend against it? Because I'm just curious on whether or not you guys are react to the weather and say, maybe we don't want to spend as much right now because it was so warm.

Well, we're absolute advocates of global cooling. But actually, we acknowledge the fact that the weather was warmer, but we also sell a lot of soup in warm weather climates.

So we've got to deal with that, and we are. I think where we're going, particularly with our soup business, is we want to increase usage of the product in some positive need states, not necessarily the negative ones like when people are sick or when they're cold.

So we're not going to be use weather as an excuse. We're going to use it as just another environmental factor.

No question in a seasonal business that it's had an impact. It's had some impact on our European business.

But I think Denise's point really is that in terms of resource allocation, we've tried to continue the brand-building activity that we think is sensible. And we're seeing some good results, particularly in our soup business from the advertising itself.

Right. I wanted to also give you a little bit more perspective on the $100 million.

Just so that you know, we spent the money on everything we expected to, and we haven't held anything back. We aren't budgeting on things that haven't come through yet.

You'll see some of those next week. And we're going to continue to invest this money when we're ready to spend it.

But we feel really good about the fact that it's the right appropriation for the ideas that we have.

I just had 2 quick questions for you. I wanted to ask about the shift to alternate channels.

I guess I can see the consumption decline occurring in the IRI and Nielsen data. I guess I'm surprised that people are really cutting back to that degree.

But can you talk a little bit more about the alternate channel performance and really as it pertains to Campbell? Or maybe if you a broader view on how that shift is occurring for the consumer and what that means for you?

Yes. We know that alternate channels right now in the industry are performing about 7 to 8 points above traditional channels.

And that shift is occurring, again, across most of the food business. I would say that our -- we have opportunities in the value channels in particular, and that the IRI data is probably about 60% coverage for us.

Okay, that's helpful. And then my question just was I guess maybe to Craig.

Just to understand, the retail inventories now are at the right level. Was that a benefit across the business?

Was it just for soup? If you have a little color on maybe how much it benefited the business?

Yes, it was primarily within soup. And again, it's really last year that was unusual.

We came into the second quarter last year with pretty heavy inventory levels. And so in the year-over-year comparison, you saw less take out of inventory this year than you did last year.

And yes, it's very much a soup idea and maybe a little bit of it in the sauce business, but it's primarily a soup issue.

Is it a couple of points benefit to soup or is that too much?

It's probably about a couple of points benefit to soup.

You mentioned in your prepared remarks that condensed and broth were better than you expected. RTS was maybe a little bit worse.

And I -- Denise, I think, I heard you mentioned that you expect to be more competitive going forward on RTS. Were you referring entirely to your plans for more innovation in marketing or did you mean that maybe you went a little bit too far in managing your price points higher and have plans to course correct that a little bit?

Yes, I think the combination of the list price increases we took, the higher promoted price and then less frequency of promotion on RTS all at once was -- created the result that we got. And we believe that we can still work with the levers that we have to work with, improve the profitability of the business based on what we're cycling last year and be more competitive.

And we are going to continue to increase our advertising and consumer promotion on this business, as well as the innovation.

Do your trade spending plans for the back half of the year, have they changed at all in ready-to-serve?

Well, change versus what? You mean that we adjusted our trade?

We're not going to go back...

We manage our trade spend pretty dynamically. So if you're asking if the total envelope changed, I don't think we're going to get down into that level of detail on our planning.

But we have clearly devoted some more resource to RTS as we've come through the very end of this last quarter and start into the next quarter.

Right. We will not go back to the heavy discounting though.

Just wanted to, I guess, follow-up on soup in general and just -- as the year started, that you'd raise prices on ready-to-serve and some of the other, that the advertising and some of the new product innovation was going to follow. So I guess 2 things.

One, are we at the point now where you feel like you've got most of the resources in place, meaning your spending on advertising at a level that was sort of commensurate with what you were expecting? I'm assuming there's going to be some more news on product front coming forward.

And so what we're kind of -- what we're looking at now and going forward is more reflective of what you were envisioning in terms of increasing the spend levels behind your soup business to support the pricing.

Yes, that's exactly the point we're at.

I think, as we go forward -- so again, we've just now cycled the previous year of less deep discounting and the comparisons will get a little clearer as we come across into the second -- I'm sorry, into the third and fourth quarter in the second half of the year.

And that alignment is basically just happened very recently. Even going into this quarter, you still weren't quite aligned on that.

Right?

That's exactly right.

That's correct.

And then just if I could, just one follow-up. The condensed performance, even if you had shift-out a couple of points for inventory, condensed actually performed pretty well this quarter.

And that's even in the face of having some competitor price points on ready-to-serve that were still pretty aggressive. So could you just talk a little bit about why you think that occurred, and has condensed benefited also from just the umbrella advertising on Campbell's?

Yes. Well, we believe that our advertising has been much more effective, particularly the anthem spot that we have across the portfolio.

And we've also introduced advertising on the icon condensed soups, which we have walked away from for a while. And the emotional impact of moms love serving and kids who love eating.

And that has been pretty effective for condensed soup. And as I mentioned earlier, we had a good holiday.

So you're starting to see -- the messaging is beginning -- you can show evidence or you can see signs that as you turn the messaging on, you're actually starting to get consumers to respond to it?

Yes, that's right. And what I failed to mention also is our Healthy Request business continues to perform very well.

I guess just from the outside, Denise, it's just very hard to look at fiscal '12 as an investment year when I'm looking at SG&A, and it looks like it's going to be barely up this year. I know there's a lot of puts and takes, but it looks like R&D spending actually will be down.

A lot of us thought that there was something kind of big on the horizon from a product perspective to kind of revitalize soup. But with R&D not looking like it's up, and Craig saying that it look -- I thought I heard Craig say that one of the projects that you thought you were going to invest in, you decided not to do.

So did something change in terms of the level of investment?

Well, first of all, Rob, a correction. No project has been canceled.

That's the important point here. All of the new initiative spending has been funded.

It's been funded at the level that we anticipated. In fact, we have funded some new initiatives that we didn't even have fully baked and ready to fund versus the time that we talked to you in July.

What we did say is there's going to be less incrementality that's going to show up in the P&L. Because in the base business, we've made some decisions as we've come through the year, in some cases, to reallocate spending in a different way; in some cases, to take out spending that we didn't think was effective.

So nothing has been canceled. With respect to R&D, I believe that R&D is likely to be up slightly for the year, but again you're seeing 2 things going on.

One is some new initiative spending is going into R&D, and the other is some resource that we took out of the R&D spending line, as we did the reorganization of the business last year in a way that we do not take has hurt our innovation capability but has simply gotten rid of some nonproductive spending, basically.

I got you. So that was the low sodium, right?

It's also some of that, yes.

Yes, okay.

It's also important to recognize that much of our innovation spending, for example, the funding of our innovation teams, that expense sits in the marketing, overhead line within marketing and not within R&D.

And that has R&D resources on it, mix shift.

Yes. Exactly.

Okay. But even marketing and selling isn't really materially higher.

So I guess really what I'm getting at is, is this the level of investment, the $100 million is done and there's -- it's not going to happen again in fiscal '13, like there's not another $50 million or $100 million coming in fiscal '13?

No. You'll continue to see us invest, particularly in half 2, and we believe that we've gotten then the level of advertising and consumer basically to where we want it.

And we'll continue to shift mix over time, but there won't be big slugs of money.

But we benefit from the fact that it's now eventually in the base. As Denise said in July, we felt like that our operating margin numbers had gotten up to a level that we just didn't think were sustainable if we were going to do the kind of reinvestment in the business that we wanted to do, so adjusting the base essentially does give it to you for the next year.

Right?

Absolutely.

I got it. And advertising, what do you think advertising is going to be up this year?

Because I think you started the year saying that you definitely -- your advertising can fall into a level that was unacceptable the year before.

Yes. So I don't have a specific advertising number, although we are going to start -- in terms of forecast, I think we are going to start being a little bit more visible in terms of our A&C spending as we go forward.

So we're working on that. A&C will be up.

It's up 6% in this quarter, and it will be up for the year.

It will be up significantly more.

Very good news on the BPA front. I guess my question is more of a strategic nature.

Would you consider separating the soup, sauces and beverage business from the baking and snacking business? Or would it be that operational de-leveraging, would that be too great and prevent such a move from creating value?

We've heard a lot of companies announce splits over the course of the last several months. You yourselves sold Godiva, I guess, several years ago.

Pringles has just sold for a great multiple, and Pepperidge Farm is a similarly strong brand. Is it something that you considered, and what do you think the pros and cons are around that kind of a decision?

No, we are focused on 3 categories in the company, and we believe that operating as one company is the best future for Campbell's.

I believe Campbell is already a pretty big spender on advertising as a percentage of sales. I don't know if you disclosed that, but I thought it was pretty high single digits.

So perhaps you could describe why you believe, not just quarter-by-quarter but big picture year-over-year, why there will be a volume response from incremental ad spend? And maybe this is a kind of thing that maybe you can get on a flywheel here of reinvestment and stabilize the volume in your core soup business.

And I guess related to that is, do you think you have the product in getting the message where you want it, where you're going to have a pretty good ROI from this incremental ad spend that you're talking about, particularly in the next half of the year?

Yes, the advertising levels, as you pointed out, are pretty robust and especially relative to other Simple Meals. But it's not just the level of advertising, it's the quality.

It's the messaging, and it's the news. And so if you think about certain amount of advertising on the base business to remind consumers to buy the product because it's not necessarily top of mind all the time.

But then you couple that with the innovation we're going to continue to bring to the marketplace and using the advertising lever to communicate that news and excitement, we believe that over time, that's the best way to build the business.

I guess what I'm really getting at here is, with your core business, the volume has been going the wrong way for a few years. I think folks are wrestling with, is this a company that is sort of over-earning until they stabilize that business?

And what that reinvestment needs to be is that, is it fair to think that you need to spend a lot more to get that stabilized? That's where I'm really going -- getting at there with that question.

Yes, we know that we can advertise the business for a longer period of time in the year than we have been in the past, and that's part of what we're correcting this year. We do think that where we're arriving is the right level coupled with the innovation we're going to be bringing to market.

Wondering whether you could provide a little bit more detail as to what changes second half versus first half, in terms of the RTS business. I realize that the comps get easier, but you were down pretty significantly against some comparisons that were not that great in the first half.

Craig mentioned that you have some room or some flexibility to adjust price points, but you're not going to do anything aggressive. Why should that get materially better in the second half versus the first half?

We do know what -- we do know, in the second quarter this year that the list price increases coupled with the higher promotion price points created price gaps that were too wide. And so we've worked to adjust those.

And we do know that we didn't have enough promotion frequency in the first half, and so we're working on that as well. And so with those insights, we believe with some modifications, we'll have a better outcome on RTS.

The other thing is we were very heavily discounting RTS last year in the base, and we're cycling that.

Okay. And within RTS, could you talk about which brands were sort of your primary problem areas?

Is it still Select Harvest or is Chunky seeing some weakness as well, and also trends in the microwave platform, which your competitor effectively walked away from?

We had weakness sort of across the spectrum there, Eric, in microwavable and Select Harvest and in Chunky. One bright spot was the introduction of Slow Kettle has been pretty well hitting its marks, so that was a positive.

But honestly, RTS was weak across the portfolio.

And we do believe that some of the benefits in condensed came at the expense of some RTS.

So just wanted to focus on U.S. Beverages.

Are you seeing any moderation? And obviously, it's still competitive, but are you seeing any moderation in the competitive conditions there?

And then as you look out across the balance of the year, how do you feel about the sustainability of the type of top line growth that we saw in that segment during the quarter?

Yes, I'm not expecting that beverage competition will get any easier. But that said, for the investments that we've made in our beverage business, our products are up in sales and they've grown share in an immensely competitive category.

So we're going to continue to run our play. Where we do think things will improve is in the profitability as the inflation that we've experienced in the first half starts to abate as we cycle the second half.

And very quick follow-up. Any initial thoughts on sort of the consumer receptivity to the Smoothie launch?

Very good. I mean we're very encouraged by the results of that launch.

Very, very early days.

Very early but good. Before we conclude our second quarter call, let me leave you with a few thoughts.

We continue to advance our 3 growth strategies this quarter. Our U.S.

Soup profits improved, which is important to us. Australia biscuits are regaining their footing.

On the other hand, while U.S. Beverage sales increased, profits were down significantly.

So we have some more work to do, but the first half served only to reinforce our conviction that brand building and innovation are what is required to deliver the profitable sales growth we want, and that has our undivided attention. The important point is that we're committed to building a different company at Campbell's, a company that creates value by driving sustainable, profitable net sales growth.

And we're focused on executing our growth strategies and have plans to improve our performance in the second half with increased advertising and consumer spending, new product innovations in U.S. Simple Meals, Beverages and Global Bake Snacks, a stronger promotional calendar in Australia and we also expect inflation to abate in U.S.

Beverages. And as we said last July, implementing our new strategic direction will require substantial investment to fund a radically different innovation process and to reinvigorate consumer-focused brand building.

Thanks again for joining us today and have a nice holiday weekend. And with that, Jennifer will now conclude our call.

Thanks, Denise, and thanks, everyone, for your participation on our second quarter earnings webcast. As a reminder, a replay will be available beginning in approximately 2 hours.

If you are a reporter and have questions, please call my colleague, Anthony Sanzio, at (856) 968-4390. Investors and analysts should call me, Jennifer Driscoll, at (856) 342-6081.

This concludes today's program. Have a great 3-day weekend, and you may now disconnect.