Good morning. My name is Rachel and I will be your conference operator today. At this time, I would like to welcome everyone to the H.J. Heinz Company fiscal year 2010 first quarter earnings release conference call. This call is being recorded at the request of H.J. Heinz Company. (Operator Instructions) I would now like to turn the call over to Meg Nollen, Vice President, Investor Relations. Ms. Nollen, you may begin your conference.

Good morning. Thank you, Rachel. I would like to welcome everyone to our conference call and webcast. Copies of the slides used in today's presentation are available on our website at heinz.com. Joining me on today’s call are Art Winkleblack, Executive Vice President and CFO and Ed McMenamin, SVP of Finance and Corporate Controller. Before we begin with our prepared remarks, please refer to this forward-looking statement currently displayed. This is also available in this morning's earnings release and in our most recent SEC filings. To summarize, during our presentation we may make forward-looking statements about our business that are intended to assist you in your understanding of the company and its results. We ask you to refer to our April 29, 2009 Form 10-K, which lists some of the factors that could cause actual results to differ materially from those in these statements. Heinz undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by securities law. We may also use non-GAAP financial measures in our presentation as the company believes such measures allow for consistent period-to-period comparison of the business. The most directly comparable GAAP financial measures and reconciliations of these non-GAAP measures are available in the company’s earnings release as well as on our website at heinz.com. Please note we plan to file our first quarter 10-Q by the end of the week, and in addition, this will be the first quarter that we will be filing our information in XBRL format. Our related financial highlights pages or stat pages will then become available in the Investor Relations section of the website towards the bottom of the page. Now with the formalities out of the way, let me turn the call over to Art Winkleblack. Art?

Thanks, Meg. Good morning, everybody. We are very pleased with our start to the fiscal year. In line with the priorities that we articulated in May, we focused on profit and cash and delivered strong results in the quarter. We also delivered almost 2% organic sales growth, a solid result in this challenging global economy and in light of the fact as we overlap a double-digit sales increase in Q1 last year. We continue to execute our strategic plan driving growth in our top brands and in the emerging markets, and we are highly disciplined in managing cost and working capital. We invested almost $0.04 in upfront productivity charges to improve ongoing performance, and at the end of the quarter, we very effectively exchanged some high cost debt from much less expensive 30-year bonds. In terms of key financial highlights for the quarter, obviously foreign exchange was a major headwind, but on a constant currency basis, sales increased 4.5%, operating income grew about 6% and EPS was up almost 10%. Ed will give you more detail on the financials in a few minutes, but we’re off to a good start for the year. Additionally, as we told you in May, we are highly focused on driving cash flow and we delivered outstanding results for the quarter. Operating free cash flow was a $121 million in Q1, up a $176 million from prior year. Now, putting the quarter into perspective, we have now driven 17 quarters in a row of organic sales growth. As you can see, the high watermark for this growth was Q1 of last year when we drove double-digit organic sales up 10.2%. As we look forward, Q2 will be another tough overlap and then we should see stronger comparatives in the back half of the year. As…

Thanks, Art and good morning, everyone. Putting the significant impacts of currency aside, I think you'll agree that we had a solid quarter, particularly considering the strong top line growth and 14% EPS growth we reported last years first quarter. First let me hit the highlights on the P&L scorecard. We've added a column to our traditional scorecard to show our results on a constant currency basis. I will reference this in my comments but to ensure that everyone has a complete understanding of the adjustments I'll bridge these constant currency results to our reported results on the next slide. Net sales grew by 4.5% on a constant currency basis but after the impact of a 9% currency headwind, net sales were down 4.5%. Notably, organic sales grew almost 2% as a 6% increase in pricing more than offset a 4% volume decline, as we made trade-offs this quarter temporarily sacrificing some low margin volume to improve overall profitability. Carryover pricing and productivity improvements supported our gross margin, which continued to be challenged by higher commodity costs. Although gross margin at 35.4% is down 80 basis points, remember that Q1 last year had our highest margin of the year. This quarter gross margin was unfavorably impacted by lower margin acquisitions and a $7 million charge for front-end costs on a few new productivity initiatives. Now, as you can see in the table, half of the gross margin decline was due to currency movements. We continue to increase our investment in consumer marketing on a constant currency basis. Operating income increased 5.6% on a constant currency basis, while investing in up front productivity charges of $7 million in cost of goods sold and $9 million in SG&A, for a total of $16 million or about 4% of operating profit. This increase…

Thanks, Ed. Before I turn it over to the Q&A, I'd like to just say a couple of final remarks here. Overall, we're off to a very good start to the year with strong constant currency growth in sales, operating income and EPS. We delivered excellent cash flow performance and maintained strong discipline on inventory. Currency rates obviously remain a significant headwind, and we're continuing to invest for the future with ongoing spending on Project Keystone, up front productivity charges and increased consumer marketing on a constant currency basis. For the full year, we reiterate our constant currency guidance of 4% to 6% growth in sales, 6% to 8% growth in operating income, 5% to 8% growth in EPS, and 850 to 900 million in operating free cash flow. Based on the flow of the year, last year, and the timing of our key initiatives this year, we expect second half sales comparatives to be better than in the first half. I'll point out again, that our strong and sharply focused portfolio should be well positioned to capitalize on continued growth in emerging markets, and normalization of foreign currency rates over time. Additionally based on yesterdays close, our dividend yield stands at an industry high of nearly 4.5%. Thanks. Now, I'd like to open it up, turn it over to the operator and take your questions.

(Operator Instructions) Your first question comes from David Palmer with UBS.

Obviously, you confirmed guidance for the year, but there was likely performance in the quarter that was above or below plan in your thinking, what could you maybe give us highlights and low lights on that, and secondly, with regard to pricing and mix in the quarter, obviously you had six points across the globe. How much of that was price and mix and perhaps could you give us a rough idea of how pricing might fall off through the rest of the year, if indeed you expect that to happen and if there's any major differences between the regions on that, that would be helpful? Thanks.

David, I think in reality we did exactly what we set out to do. We focused on profit and margins and cash flow and that's exactly what we got, so I'm particularly pleased with the strong cash flow and the margin performance. The thing that I was pleased to see was that, while we were overlapping 10% sales growth last year, we still delivered organic sales up 2% for the quarter, so I think that was good. In terms of highlights and low lights, I don't think anything was too far off what we expected, certainly North America had a good strong first quarter both on the retail side and on the foodservice side. Pricing was strong for the quarter as you pointed out. Overtime that will dissipate just based on the fact that our pricing has been carryover pricing from prior year as opposed to new pricing, but all in line with our expectations and our plans. I think the key that we continue to look at and work toward is hitting the right balance between consumer marketing and trade spending and trying to hit the right price points in this difficult economy.

So you still think that by the end of the year you'll be having some price mix lift, but perhaps just smaller than what we have here in the first quarter?

Yeah, I think that would probably be fair to say.

Lastly on Europe, your volume down four was actually heartening given the comparison I think was up six and comparison get a heck of a lot easier for the rest of the year. How should we be thinking about that line, a straight two year trend would imply significantly positive volume numbers in Europe, but perhaps it's not the right way to think of it?

Yeah, I think we did have pretty good volume performance there given the very, very strong Q1 of last year that we had. If you think about Europe the European continent is stronger, the further you go North and East. We had good strong results in places like Germany and Poland and particularly strong in Russia. We are pleased with the Italian market as well while the birth rate in Italy isn't doing us any great favors so we did pretty nicely there. Northern Europe, the Benelux countries were pretty solid. The weaker parts of the economy are really France and Spain, Spain having a very difficult time economically. In the UK some pretty good strong performance in some of the categories particularly from a value standpoint, but volume continues to be challenged. So, I think we will see how the year progresses. We're off to a good start as I mentioned, but I think we don't have any dilutions that the European continent will continue to be a tough place to operate and so we're trying to again do the right thing from innovation standpoint, continue to invest in marketing and also make sure that we're bringing the right kind of value and price points to the consumers.

Your next question comes from Alexia Howard with Sanford Bernstein.

Good morning everyone. Hi. I have a question about uses of cash and the prioritization of that going forward. It seems to me I don't think there were any share repurchases this quarter. You've obviously made a couple of smaller bolt-on acquisitions over the last year. Could you just talk a little bit about now that the cash flow does seem to be strengthening nicely, and if margins start to improve through the course of the year that could continue from here on, but how are you thinking about uses of cash?

Yeah, good question, Alexia. I don't think we're thinking about it much differently than when we talked to you in May. The reality is obviously we're first and foremost prioritizing on cash for dividends. As you know, we increased the dividend this year, while many other companies across other industries were taking dividends down. So we're pleased to have taken that up. So dividends continue to be up. We are also looking for more small bolt-on acquisitions that fit into our three core categories and/or would strengthen our emerging market presence Then finally, given the volatility in the economy, we're still looking strongly at debt reduction and keeping some dry powder available for whatever might come.

If I could just slip in one quick follow-up. On sugar prices obviously we're getting a lot of questions right now, given the spiking that's going on there. Are you hedged out on that? How concerned are you about the way that particular input has been moving recently?

Yes. Sugar prices aren't a big factor for us; they were up in the quarter but not a huge factor for us. We are hedged in a number of places, that's a local buy. As you know, we use different sugars fructose in the United States and sucrose outside of the United States. So it varies, but it's something that is part of our commodity headwind, but given our positions, contractual positions and things, not overly concerned with it.

Your next question comes from Jon Feeney with Janney.

I particularly want to dig in on the Europe situation, just kind of get an update. I think that's probably where you had the most dramatic sort of shift down if you look at the second half of last year’s fiscal? Specifically, conversations with retailers have gotten kind of contentious across the board with a lot of major EPG companies. Could you just update us in terms of how you're feeling about the second half of this year in Europe specifically and how any recent conversations or market feedback you've gotten from European retailers or even consumers play into that?

I don't think there's much new to report there. It hasn't been an easy situation for many, many months now. Certainly, we're not expecting any great rebound in most developed markets around the world in terms of GDP and things like that. So I think it's going to continue to be tough. The only thing we can do is to continue to do the right thing by the category and to try to work with the retailers on win-win propositions for all involved. We're trying to drive the right balance between consumer marketing and hot price points, certainly in this economy, places like the UK and the US hitting certain price points is more critical than ever. So we're looking hard at pack sizes and things that could allow us to hit certain price points. So we're trying to bring value to the consumer, while also doing the right thing for the category because some of this I think Bill would use the term profitless prosperity, put some of the categories in a lose-lose position where a lot of the promotion spending in the category is down. So we continue to work it, and it just varies across the region as to how those conversations go, but never easy.

I think one thing you mentioned was the tough discussions last year. Last year is when we took most of those price increases. This year, I think we're not going to see many price increases in the developed markets. So those tough discussions are largely behind us.

From pricing standpoint I think that's right, and again, we continue to try to add value and bring innovation to the categories.

Just one other area when I think about the second half of this year is particularly is US Foodservice. Now, a volume decline a six on the kind of pricing you've taken seems like a kind of category like performance considering how much pressure there is there. Where are your sort of exposure points within the foodservice arena in the US and what should we look for in terms of recovery as a sign that your business is going to get better? Is it quick serve? Is it casual dining?

I think as we look at the business and you look at some of the traffic trends in casual and even now in QSR to some extent, there is nothing particularly positive going on in that arena where the unemployment where it is. We're not counting on any great rebound in that area. So we expect traffic to continue to be a headwind for us and the general industry to be down. Additionally, we're also trying to be very disciplined on what the SKUs. We go to market with. We've done a lot of SKU rationalization and we'll continue to do that. So I think as we said in May, we don't really expect any growth, and in fact, probably a little bit down in terms of organic sales over the full year, but where we do expect to make real gains is at the profit line where a lot of the hard work that the guys have put in and simplifying the business, improving processes, getting the innovation engine growing again. There's lots of good things going on there that I think will allow us to grow profit somewhat this year. It won't be large, but after the last couple of years with profit declining pretty significantly, we're pleased to see that sort of bottom out and then start heading back northward. So we're expecting positive things, but I wouldn't take the 25% growth that we saw in Q1 and then extrapolate that.

To your point, Jonathan though, while our volumes may look in line with industry, there's offsets there. So there really is some very strong innovation going on. The partnership with our national accounts and key distributors, the work that our guys are doing to refocus this business and get back to the branded proposition is really paying off and stay and I think a lot of the effort that has been made over the last six, nine, 12 months in our foodservice business has been masked by the general industry malaise. So a lot of kudos and credit to the work that they've been doing, but there's some growth in there and we're very excited about that.

Your next question comes from Ed Roesch with Soleil Capital.

Can you just remind us on the up front productivity spending? How much are you expecting to do this year, and then, are those initiatives that you use in the targeted 2% or 3% productivity gain?

Ed, we're always looking for opportunities from a productivity standpoint to improve the portfolio. We saw some good opportunities in the first quarter to do that. So we reduced headcount in certain areas. We took out a plant in Mexico. So I think doing the right thing for the business. I wouldn't say we have an expectation for going forward as to exactly what we will or won't do, but I will say we always look for good projects that have a high return. So we'll post you as the year goes along, but so far we're pleased with the projects that we did identify and execute.

Art, those contribute to your stated 2% or 3% productivity goal or are those somehow on top of that number?

I think it will help get us there for sure. How exactly we're awfully early in the year, how exactly the numbers play out I wouldn't venture a guess but we're feeling good about the ultimate measure there on that productivity which is our gross margin, so I think track the gross margin and you'll see the benefits coming through.

You mentioned tin plate, could you just tell us what the expectation is for the year, how much that should be up?

I wish I knew the exact specifics on that and it was one of our largest increases this year that was also a large increase in the back half of last year so my recollection is that toward the back half of the year, that overlap ought to start normalizing a bit, but I can't remember exactly where we are contractually on that.

I think we're looking at plus 10% on metals. We don't usually get into the details of it but it's a substantial increase. That’s already mentioned metals, potatoes and tomatoes are the big drivers of the increase this year.

Okay, thank you and one last one Art. Just I know the environment is challenging on the financing side but I was just curious about the [A.R.] securitization and that seems like sort of a one type of move to do that and it is a great boost to cash flow but other than a tricky environment and everything, can you just kind of speak to why the timing is right to do that now?

Yeah, well I think first of all, it really, the A.R. securitization on a net basis didn't do anything for our operating free cash flow because we fundamentally used that money to put into our discretionary funding of the pension plan so those two pretty much net to zero, but the A.R. securitization we felt like it was a great diversification of our debt portfolio. It's a very cost effective mechanism, not much over LIBOR and as you know, LIBOR is very, very low right now, so it's a good cost effective debt mechanism. It's not quite as low cost as commercial paper but it's a whole lot less expensive than bonds. It allows us to sort of moderate our dependence or usage of commercial paper, and it's kind of a rolling financial mechanism that doesn't have a set maturity date, so I think from a lot of angles we're very pleased that we've got it in place.

Your next question comes from Chris Growe with Stifel Nicolaus.

Just a couple quick, kind of follow-up questions for you. The first one, Art relative to your volumes they were down a little more than I expected this quarter but would you still think there could be volume growth for the year? As pricing received is what I'm thinking later in the year?

I think as we look at it and I think back in May we talked about volumes being relatively flat for the year, our toughest overlap as we discussed a little bit earlier is really in Q1 and Q2, so I would expect volume to be down through the first half. Back half probably better than that and we'll see how it shapes, whether the year comes in slightly differently in terms of the shape and what not of the P&L, I don't know yet. It's early in the year, but again, I think we feel pretty good about the organic sales results that we've posted and confident in the full year.

I think on a retail basis, your comment probably trends more true, Chris, where there continues to be the negative push is on the foodservice side both with the industry as well as with the SKU rationalization we're doing.

The other side of it is we're very excited about what's going on in the emerging markets not only from an organic sales standpoint but volumes in a number of those markets was very good. So to the extent, we can continue to push down the path on our strategy to drive the emerging markets. We are [heavy and] up the investment in those markets to really sustain some good volume growth.

Then I just had a question for you on the cost savings and the $250 million you called out with back in May. Is that a kind of a divide by four and that's what comes through each quarter is it going to phase in throughout the year? I guess it also relates to what you're calling upfront costs. Could those pick up as well to get out those cost savings or how should we look at those two factors for the year?

It's a little bit more back half oriented is my recollection on that, Chris and we've got I think we're very pleased with the productivity that we've gotten in our manufacturing operations and in distribution and logistics, so we're off to a strong start there and I think ahead of the game in some of those cases. One of the harder things to determine in this volatile commodity environment with some commodities coming down, some going up, is what is the procurement productivity number vis-à-vis the market and so we're sorting through that, but net-net we feel good about our productivity profile and again, we had mentioned that despite some acquisitions that had lower margins and the impact of the UK transaction costs, we expect our gross margin to be at least flat this year which I think is a good result.

Your next question comes from David Driscoll with Citi Investment Research.

Art, sales in the quarter is certainly better than I expected. You beat the consensus by about a nickel. Foreign exchange by my calculations given where current rates are is at least $0.10 better than I think the $0.46 negative impact that you gave in the May call. Interest expense looks like that should be about a nickel benefit versus the 3% increase that was at the top end of the range. Commodities as you cited both in your prepared comments and certainly what we can all see are trending down and does look like it could be a material impact as the year progresses forward. When I add each of these pieces up, it really is quite material in terms of how much better the situation is today than where we were back in May. You didn't change the guidance and I'd just like to explore that a little bit. Is it simply it's only the first quarter, David, and it's too early to do that or is there something here that I'm missing because again, these amounts do appear to be quite material.

No, I think you've got it exactly right, David. It's early in the year. We're only three months in. It's a volatile economy. It's a volatile situation in terms of the currencies, they're up, they are down, they are sideways, and also, where the consumer goes. I think you're seeing consumer, they start to feel better and then they feel worse in a lot of these developed markets and so all we're saying is it is quite early in the year. We do feel good about some of the things that we're seeing. Let's hope currency stays where it is or better, but boy I'll tell you, I don't know how to predict that one. This year is just a tough year to peg from that aspect. As you mentioned on the interest expense side, we had most of the benefit of the doctors' exchange built in, but it does allow us to hopefully pick up a little bit there and we'll see where rates go from there. So anyway I guess you've said it pretty well. Few things are looking positive, but little early in the year and we'll just keep our powder dry and see how the quarters trends out.

It feels very good right now. Thank you for those comments. One final question. I apologize if you did say this earlier. Can you just be as specific as possible about the pacing of pricing? There was all price increases at various points last year and I want to make sure I get the pattern reasonably right over the next three quarters?

Yes. We don't particularly give quarterly guidance on that, David, but I think it will certainly lessen throughout the quarters. I think each quarter we'll step down from a net pricing standpoint at least the way we're seeing world now. So I'd draw it on a relatively straight-line probably.

I think largely there's no new pricing going on with the exception of higher inflationary markets. So if you go back to last year and we can do this off-line but if you just take a look at the progression of pricing last year, it should then trend in opposite back down through the rest of the quarters this year.

Your next question comes from Eric Serotta with Consumer Edge Research.

Art, I was hoping you could answer a broader conceptual question about what's going on in the industry now. It seems like you clearly were executing on the strategy of sacrificing volume for profit. At the same time, it seems that most of your peers, I don't want to say your direct competitors because certainly some of the direct competitors are doing just the opposite. A lot of the large cap US peers seem to be saying the same thing that they're sacrificing volumes for profit as well. I guess, I'm wondering why do you think that overall volumes for the industry are so weak. With that as a back drop, why do you think the industry volumes are so weak given the continued trade down to food at home?

Well, I think if you look probably in most categories, the base business is pretty strong. A lot of our categories we're seeing the base hanging in there with category growth or whatever the category fortunes are. What you're seeing in many cases is a drop off and sometimes significant in incremental or promoted volume. That's as people choose not to play on the deep discount and given where commodities have gone, the other thing is you saw in the chart that we showed is that private label is a factor. We've seen private label growth and we've talked about it for a number of months. It really did surge in 2008 and the first part of 2009. The good news is that we're seeing that moderate, but it is still quite a bit higher than where it was and some private label continues to grow. So I think it's incumbent upon the manufacturers to keep innovating, keep doing the right thing to justify the brands and to bring innovation to the category. That ultimately will be the right answer, also to make sure that we sharpen our pencil on some of the price points. As we look forward, we'll be looking to strike a good balance between the consumer marketing side of it and a little bit sharper on some of the price points in certain products, where we want to make sure we hit an important price position.

We're starting to run out of time. I know there are a lot of you with questions. Can I ask you to please limit it to one question and we'll try to fire through them pretty quickly here.

I have a housekeeping follow-up, if you don't mind. Just wanted to clarify; is the gain on the TRS included in your guidance and where were the costs of the exchange that you did with the doctors on the P&L and how much was that?

A bit of the gain on the TRS covers the one-time cost of the doctors. The lion's share of the cost is associated with over the 30-year note and it comes through that way. So you'll see it's more of an exchange where we took the high cost and rolled that into 30-year notes.

So it is built into our numbers.

Yes.

Your next question comes from Ed Aaron with RBC Capital Markets.

I wanted to talk to you about inflation piece, that 6% you mentioned is below your target. I've been operating under the assumption that Q1 would probably be a high watermark for inflation this year. Is that a correct assumption as far as how you see the world?

No. I think a lot of it is the timing of contracts. So while the market is certainly moderating on a number of things, not all but a number of things, what you're seeing is the impact of our contractual setup both in last year and this year. So I wouldn't expect to see a huge decrease in the commodity inflation and we're obviously watching that carefully and trying to manage that as tightly as we can. We would love to drive some upside there, but we're not seeing a lot of that yet. We've got a sizeable portion of our products locked in for the back half already. So there's lots of factors that play in there.

When you look at last year, a portion of our productivity was locking in some of the commodity costs before they went up. So we were paying for cost was a lot less than what you were seeing in the market as those contracts were aloft later this year, even though the markets maybe dropping in some cases those costs that we'll be paying in the later parts of the year may be higher than the currencies last year..

The currency transaction piece should be helpful in the back half versus this quarter certainly, right?

Yes. The early part of last year, currency transaction was not a huge headwind and then as the year progressed, it got pretty tough. So yes, right now we would be a little better than we were at the end of last year.

We'll knock on wood that we get some stability in some of these currency rates.

It's hard at this point I would say to say that any of the currency movements are quite a trend yet.

Your next question comes from Andrew Lazar with Barclays Capital.

I think back at the meeting in New York in May, you talked about the likelihood or an estimate of sort of the trade or promotional spend piece maybe rising this fiscal year, I think it was 30 to 40 basis points or so. I think it was Bill's point I was trying to get across that as you're going to focus on trying to do the right thing around that balance between volume and profit and the whole pricing dynamic that hopefully Heinz and maybe the industry could hold on to a reasonable portion of that given it was justified when you all took it. So I'm trying to get a sense given what you've seen around sort of volume trends recently and maybe the competitive environment more broadly. Is that still a reasonable place to be and I'm trying to get at the pricing environment and promotional environment and if that will remain manageable for lack of a better word?

Yes. I don't know if it's ever manageable, but it's one of those things where when you have a very strong brand position, you certainly stand a much higher chance of holding pricing than maybe not. In terms of promotional spending, I think Bill had mentioned a range of about 30 to 50 basis points and I think that's probably accurate. It may be on the high end of that. We'll see how things go. As we mentioned in May, the good news is that we now have much, much better processes systems and frankly talent dedicated to managing that. So to the extent, we make some targeted investments in certain areas, we have the ability to watch and monitor the return we get on those whereas in the past maybe we wouldn't know. Anyway, so, yes, I do expect promotional spending to be up somewhat this year.

Your next question comes from Brian Spillane with Bank of America.

I wanted a clarification on the Serotta's question about the interest rate swap. The $20 million mark-to-market gain is included in the guidance you've given for net interest expense?

Sure.

Yes.

Then just one other if I could. On the pensions, now that you've made the discretionary pension contribution, is there a P&L benefit associated with that, as you book a rate of return on that contribution?

Yes. That was built into our planned guidance that we talked about in May. So if you'll recall we did a bit of discretionary funding in the fourth quarter of last year and then planned some for the first part of this year and there will be a bit more in the rest of the year as I mentioned of about 200 million of discretionary.

Had we not put in the discretionary funding, the pension costs would have been up pretty significantly. I think in May we mentioned that pension costs be up about $0.02 on an EPS basis.

Yes. The key on the interest expense guidance if you go back and look and I had to do a little digging even myself, but our guidance was that net interest expense would impact our earnings growth 1% to 3%. So that range's of 1 to 3 factored some of the work that we've been doing on the debt portfolio this year.

Your next question comes from Terry Bivens with JPMorgan.

Just a quick question on the frozen business, Art. I know Wal-Mart paneled that, it can be a bit fake sometimes, but it does look like you guys have come down from a very high growth rate there, and I guess last year as I recall you were a BPI there. I'm just wondering, when do you lap that and if you could just kind of briefly touch on current state of affairs in the frozen business given its importance to your US business?

Yes. I think, Terry as I mentioned, the category is a difficult category in the US and it's clearly correlated to the economy and we've seen it before and it continues. The category has been down for more than a year now. So it is a difficult category. We are seeing very deep promotional activity by some of our competitors, that is impacting things, which is interesting because the category continues to be down while a lot of promotional money is being sent. So we would rather not participate in that to the degree we can stay away from it. The other factor there is the timing of our product launches and some of the marketing that we did last year was early part of the year this year. It's back half of the year. So to your question, I would expect our back half comparatives to be better and frankly in some cases, we're going to have to get a little bit more sharp on some of our price points to continue to drive the business. So it's a number of factors there. Over time we still feel very good about it. We're bringing innovation to the category which we think is the right thing. As long as the economy will stabilize at some point, we'll see that category return to some growth and also probably return to strength of the Weight Watcher classroom business.

Your final question comes from Eric Katzman with Deutsche Bank.

I guess first just to comment. Art, I don't think it's right for you not to give some guidance on the up front cost. I mean every other company in the industry that absorbs the cost gives us an outlook, and this isn't random type of stuff. I mean, you aren't going to just randomly shut down some facility in the UK tomorrow and then book it into the second quarter. So I think going forward, you should be able to give us some guidance as to what kind of charges you're going to take through the P&L. Second, just the question is North American consumer margins of 25%, that's higher than I think I ever remember coming out of that business and obviously some of that has to do with the promotion pullback. So sequentially as the year progresses, should we assume that that margin declines as you're kind of forced to deal more with the promotional environment particularly in frozen? Thanks.

What we're trying to do there, Eric, is obviously trying to base sales. So that's been a key factor in the margin performance, along with the fact that we are getting very strong productivity improvements. The supply chain is running well. We're bringing down the inventory. I think we're doing a lot of the right things within consumer products. In terms of the margin going forward, I don't recall and probably won't give any guidance on where the margin goes from there, but just understand that in certain cases we will get a little bit sharper in terms of the balance between pricing and consumer marketing. So I'm not sure I would count on any particular margin as we go forward. So the other piece of it is and I think you'll see stronger marketing in the second half which obviously has a cost associated with it. So we've seen our gross margins there bounce back to where they had been historically. So we feel good about that. We're trying to drive the business through a lot of productivity, and we'll see where the pricing front comes out versus volume.

Why shouldn't we view 25% as kind of, I mean I just looking over the history of the industry, I mean, any time a category or a segment gets to that level, I mean it seems to me that that's just a concern. It's as if you're milking the business.

No. Keep in mind, the cost structure, we tend to be very, very good at managing costs very aggressively and that goes all the way up and down the P&L. So if you look at some of the overhead load that a lot of other of our peers maybe carry, we're more effective on that. So I take your point, you don't want to be driving an unsustainable margin. Clearly, we don't believe we're doing that. We're looking to try to be as tight with cost as we possibly can in order to allow us to do the right things in the marketplace.

Some of this is a function of us walking away from those promotions. So you've seen some of the lower margin business. We've made a choice. We're balancing things. So this quarter in particular I think you see a very high emphasis as we showed you our base sales are incredibly strong in the retail business, and I think that's a piece of it. So as the environment tends to rationalize and get a little smarter and we execute more balance throughout the rest of the year, but marketing expense was very high in the first quarter last year as we were supporting Fruit Inspirations launch, you're going to see some very strong Smart Ones marketing and innovation in the back half so stay tuned. So, guys, I just need to wrap it up. We've gone way over our time. Thanks so much. We'll be available all day in Investor Relations for your calls. You can reach us main number 412-456-6020. Look forward to talking with you today and next week. Have a great day.

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