The Kraft Heinz Company (KHC) Q3 2011 Earnings Report, Transcript and Summary

Good morning. My name is Chanel, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the H.J. Heinz Company Fiscal Year 2011 Third Quarter Earnings Call. [Operator Instructions] I'd now like to turn the call over to Meg Nollen, Senior Vice President of Investor Relations. Ms. Nollen, you may begin the conference.

Thank you, Chanel. Good morning, everyone. I'd like to welcome you to our conference call and webcast. Copies of the slide used in today's presentation are available on our website at heinz.com. Joining me on today's call are Bill Johnson, Chairman, President and CEO of H.J. Heinz; Art Winkleblack, Executive Vice President and CFO; and Ed McMenamin, Senior Vice President, Finance. Before we begin with our prepared remarks, please refer to the 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 understanding the company and its results. We ask you to refer to our April 28, 2010, Form 10-K, as well as today's press release, 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 laws. We may also use non-GAAP financial measures in our presentation, if 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 on the company's earnings release and on our website at heinz.com. Please note, we plan to file our third quarter 10-Q this afternoon. Our related financial highlights pages or set pages, including P&L, will become available with the filing of the 10-Q this afternoon. These will be posted on the Investor Relations section of heinz.com towards the bottom of the page. Now on to today's call. Bill will discuss our exciting Brazilian acquisition, and Art will overview our category, regional, segment performances; and Ed will review our third quarter and year-to-date financial scorecards. We've got about 30 minutes of prepared remarks, and then we'll use the remainder of the hour to take your questions. We'd like to request that you limit your questions during Q&A just to one in order to ensure adequate time for all who wish to participate and to ensure we end the call timely today. Now with the formalities out of the way, let me turn the call over to Bill Johnson. Bill?

Thanks, Meg, and good morning, everyone. Art and Ed, per our usual Q3 process, are going to discuss the company's strong third quarter results and then take your questions. But first, I'm pleased to announce a significant transaction that will greatly accelerate our growth in Emerging Markets and in Latin America, in particular. Heinz, as you all have noted in our press release this morning, has agreed to acquire an 80% stake in Brazilian food processor, Coniexpress S.A. Industrias Alimenticias and its Quero brand. Quero is a strong, rapidly growing brand with number one, and the number two positions in numerous tomato-based categories in Brazil and the leading position in vegetables. The brand aligns perfectly with our global portfolio and our core categories, and is already a leader in small, independent stores and shops throughout Brazil. With annual sales of approximately $325 million, Quero will provide Heinz with a tremendous growth platform in Brazil, the world's fifth most populous country with 200 million consumers. We have established a short-term goal of around $500 million in sales through organic growth in the complementary launch of Heinz branded products, which we'll be speaking more about in May. Heinz has been assessing potential opportunities in Brazil for some time, and we are very pleased with the process that resulted in our tie-up with Quero. We expect to build on Quero's already impressive results by leveraging our experience with the modern trade, while also accelerating innovation and marketing to improve the brand sales and distribution. We're also planning to leverage our technical expertise in tomato processing in our Global Supply Chain to achieve synergies. The business will provide an excellent platform to expand sales and distribution of Heinz-branded product across Brazil, some of which will be produced locally for the South American market. Importantly, this pending acquisition gives us instant infrastructure in Central Brazil with a modern factory, a fully automated distribution center, and nearly 1,800 employees. Brazil, as I said, has been on our priority list for some time because of its size, attractive economic growth, large number of middle class consumers and strong growth prospects. As a reminder, Brazil generates almost 45% of Latin America's GDP. The transaction makes Heinz one of a select few CPG companies with meaningful businesses in the BRIC markets in Brazil, Russia, India and China, as well as Indonesia and probably, the only one of our size. The addition of Quero puts our Emerging Markets on track to generate more than 20% of total company sales in fiscal 2010, up from under 10% just a few years ago, and well ahead of the schedule I outlined at CAGNY last year. We expect to close this acquisition within the next few months. We also expect it to be modestly diluted in fiscal 2012 from an earnings standpoint, reflecting our plan to invest in marketing and improve capabilities, but also expect it to be accretive to earnings starting in fiscal 2013. The acquisition will be essentially funded with cash on hand. I also want to point out that consistent with our strategy, this transaction resulted from a relationship endeavor and was not part of an auction process. Overall, this transaction is a major growth step under our Emerging Markets strategy. It is also another great example of our successful buy and built approach, which has delivered great results and dynamic growth in India, Indonesia and Russia. So with that brief overview of Quero until Q&A, I'll turn the call over to Art.

Great. Thanks, Bill, and good morning, everyone. Before getting started, I'd just like to add how excited we all are to be establishing a strong beachhead in a strategically important country like Brazil. We're very pleased to have the deal signed. Now let's turn to our third quarter results. For the quarter, we delivered continued strong organic sales from our trio of key growth vehicles: The Emerging Markets, our Top 15 brands and Global Ketchup. Expanded gross margins, off a very strong base last year, delivered solid profit growth with EPS of $0.84 and continued our great momentum in driving cash flow. Now many of you will recall that last year's third quarter was a high watermark in several respects, and included terrific results from the launch of the It Has To Be Heinz campaign in the U.K. and the return of ketchup promotions in the U.S. Despite this tough comparison, we performed very well with constant currency sales up nearly 3%, operating income up 2%, and EPS up almost 4%. Our organic sales increase of 1.7% was again powered by Emerging Markets, which posted 14% organic growth in Q3. And if you tack on the impact of our recent Foodstar acquisition in China, constant currency sales in Emerging Markets were up 22% for the quarter. Organic sales in Developed Markets were relatively flat, with solid increases in North American Consumer Products and Global Ketchup, being offset by decreased soup sales in Europe, trade issues in Australia, and a modest decrease in U.S. Foodservice. Looking at the trend line, I'm pleased to report that we have now posted 23 consecutive quarters of organic sales growth, a testament to our strong sales brands and Emerging Markets strategy. Speaking of strong brands, our Top 15 brands represent about 70% of sales in the third quarter and again, led our organic growth up nearly 4%. Importantly, as we look forward, we fully expect the Master brand from Foodstar in China and the Quero brand in Brazil to join this Top 15 list in the near term. Turning to our core categories on a constant-currency basis, Infant/Nutrition set the standard for growth in the quarter, up nearly 9% driven by strong performances in India, Latin America and China. Ketchup and Sauces, sales grew more than 6%, driven by a solid ketchup growth in many parts of the globe. Growth in this category was also driven by Classico pasta sauce in North America and several new Asian sauces in Indonesia. Additionally, the Foodstar acquisition contributed 2.7 points to this growth. Meals and Snacks posted growth in frozen entrées and potatoes, as well as in Beanz, but was offset by lower European soup sales. But keep in mind that U.K. soup sales grew organically almost 8% last year, powered by cold weather and the launch of "It Has to Be Heinz" campaign. As expected, and in line with our corporate strategy, Emerging Markets has been the single biggest driver of sales growth this year, as they have over our recent history. With this growth, Emerging Markets represent about 16% of our year-to-date sales, despite the devaluation in Venezuela near the end of last fiscal year. And again, we expect this mix to increase significantly as a result of our recent acquisitions. With Quero and Foodstar next year, Emerging Markets should push past 20% of total sales. Obviously, our focus today is on Quero but let's not forget our other recent acquisition, Foodstar in China. Foodstar is a leading manufacturer of premium soy sauce from bean curd in southern China. And now just in case coverage in the South doesn't sound like much, keep in mind that Guandong and Fujian have more than 125 million people. For perspective, that's nearly twice the number of people in U.K., and as we push into Zhejiang, we will be making our great products available to another 50 million people. We closed the Foodstar deal on November 2, and have begun investing in marketing, manufacturing and new capabilities to drive growth. And the great news is that Foodstar is off to a strong start. In fact, we're off to such a strong start that capacity is an issue. As a result, we've accelerated the completion of Foodstar's Shanghai factory to catch up with demand, and as I mentioned, extend our reach into the neighboring Zhejiang province. Importantly, Foodstar joins a very fast growth category of businesses that we already have in China. The combination of all our existing Chinese businesses posted nearly 30% organic growth in Q3. And moving south from China, our business in India posted great growth for the quarter as well, also up nearly 30% on an organic basis. This performance was driven by our rapidly growing nutritional beverages, including the extension of our Complan brand into milks for very young children. Now going back north, Russia posted 16% organic sales growth, as our Ketchup and Baby Food businesses continued to outpace their categories, and expand their already market-leading shares. Finally, Indonesia generated another strong quarter in Q3 with organic growth of 13%. ABC has delivered a good year of new product development and sound performance with the base sauce and Beverage businesses. Now let's shift gears to our flagship, the Global Ketchup business. Organic sales growth for the quarter was 3%, and is nearly 5% on a year-to-date basis. Remember that in the third quarter, we lapped the return of ketchup promotions in the U.S. last year, so it's a bit of a tougher comp this quarter. As we look forward, we will continue working to increase penetration and buy rate to further expand sales of the world's favorite ketchup. And for those of you who missed the Bill Johnson and Muhtar Kent's announcement last week, we're launching a new, more sustainable Heinz Ketchup bottle, using proprietary plant bottle packaging developed by Coca-Cola. It's a great innovation that will both appeal to consumers and help improve the environment. The plant bottle is made from 30% plant-based materials, is fully recyclable and will enable us to substantially reduce greenhouse gas emissions. Starting this spring, we plan to ship 120 million ketchup bottles annually using this technology. And we look forward to exploring other areas of potential collaboration with Coca-Cola. Last week, we also announced that Chick-fil-A is the first national chain to offer Dip & Squeeze at its more than 1,500 locations. We're very excited about partnering with this leader in quality and customer service and early consumer feedback has been terrific. Tomorrow is Free FryDay, that's spelled F-R-Y-Day at Chick-fil-A restaurants for those of you who asked for Dip & Squeeze from 2 to 4 p.m. We encourage you to check it out. And stay tuned for more news on Dip & Squeeze, including a retail launch coming this summer. Now let's take a quick spin around our geographic cycles. We'll start with North American Consumer Products. Constant currency sales growth to 2% is driven by nearly 4% volume increase, reflecting strong growth across our five core U.S. brands, which was only partially offset by lower sales across the market. Importantly, the sales growth resulted in strong market share performance across most of our categories. Net pricing declined by 1.7%, which was driven by our Consumer Value Program. This program included the shift to marketing funds to trade and consumer promotions during the quarter. But remember, we'll be lapping the full CVP implementation in the fourth quarter. NACP profit results were excellent, as higher volume, better mix and productivity improvements more than offset current commodity costs. Volume growth was supplemented by the launch of a number of innovations and product improvements in North America during the quarter. These included new smart wins in T.G.I. Friday's fries and more improvements in enhanced taste, variety, value and convenience. Now let's turn to the U.S. Foodservice. As we discussed last quarter, we had expected the industry and with it our sales, to recover at a bit faster pace. As it is, Foodservice had its best quarterly sales change in five quarters, but was still down about 0.5%. Sales gains in branded ketchup and condiments were offset by weakness in frozen soups and desserts and non-branded sauces. We continue to be very pleased with the bottom line in this business. Improved capabilities and streamlined processes enabled us to grow operating income by nearly 13% in the quarter and 19% year-to-date. One of the ways we're driving brand condiment sales is by expanding the availability of Dip & Squeeze, and launching our new all-natural Simply Heinz condiments, which are packaged in more environmentally friendly material. Now jumping the pond, we've posted solid performance in Europe while lapping a very strong quarter with the launch of "It Has To Be Heinz" in the U.K. For the quarter, constant currency sales were flat, as net pricing of 2.5%, primarily coming from the U.K. and Italy, was offset by lower soup volume in the U.K. and in Germany. U.K. business posted positive organic sales growth against a 7% increase last year, and while lapping a record soup month in January. Russia also posted a strong quarter and notably, the Italian baby food category returned its growth. Constant currency operating income increased to the double-digit rate, driven by strong gross margin gains, which provided the fuel to invest in higher marketing and in Keystone. From an innovation standpoint, we launched several very promising new products in the U.K. that have tested well with consumers. We're particularly enthused about the new Fridge Pack Beanz that Bill highlighted at CAGNY last week. In our Asia/Pacific market, constant currency sales grew 10% driven by strong results in India, China and Indonesia. Overall, volume increased 4.5%, and Foodstar contributed nearly six points of growth. The Australian business continues to face a difficult trade in a competitive environment. We've appointed Nigel Comer, who has successfully led our Wattie's business in New Zealand for many years, to head up our Australian, New Zealand and Japanese businesses. The drop in constant currency operating income in the segment primarily relates to lower profitability in Australia and higher marketing spending across the region. The additional investments in marketing spending is supporting some exciting new products being launched across the Asia/Pacific, including the new U Da Man drink from LOL in Australia, extensions of Green Rice Cereal in China, and new Black Gold and hot chili soy sauces in Indonesia. A portion of our higher marketing investment this year has been in support of our infant formula launch in China. Overall, we're pleased with our progress to date, and we're very excited about the halo effect the advertising is having on our base baby food portfolio, including jar foods, cereals and nutritional supplements, with our total organic sales up 35% year-to-date. In our Rest of World segment, we delivered constant currency sales growth of 10.5%, driven by net pricing in Latin America, which only partially offset the high inflation there. Volume was down 4%, primarily reflecting economic difficulties in Venezuela and the beginning of a labor strike at our factory late in the quarter. We expect to continue decrease in volume and operating income in Venezuela during the fourth quarter, reflecting the economic and labor challenges in that country. Turning to cash, we delivered $438 million of operating free cash flow, representing 160% of net income. This excellent performance was driven by strong profitability, working capital management and continuing financial discipline. We're also pleased to tell you that during the quarter, we completed a $500 million multi-year private bond placement which we'll fund in May, the proceeds of which will be used to help retire a $750 million bond that comes due in July. As you would expect, we're continuing to focus the team on strong operating discipline. With this in mind, we have reduced trade spending to below year-ago levels, kicking price increases where necessary to help offset commodity inflation, and are continuing to drive down our cash conversion cycle. This discipline is helping us post strong results in a difficult environment. Now I'd like to hand it over to Ed McMenamin to cover our financial scorecards. Ed?

Thanks, Art, and good morning, everyone. I'll take you through some of the details that underpinned another solid quarter for Heinz. Looking at EPS, I'll give you three perspectives on the company's results that reflect the impact that currencies and last year's divestitures have had on our comparisons against what was our strongest quarter in fiscal '10. First, looking at the results on a constant-currency basis, EPS was $0.86, up 3.6% versus prior year. Our current period results were impacted by about $0.02 from unfavorable currency movements. More details on that in a few minutes. Reported EPS from continuing operations was $0.84, up 1.2% from prior year and finally, including the $0.11 unfavorable impact from discontinued operations last year, total company reported EPS was up $0.12, or almost 17%. Now turning to our P&L scorecard. Net sales grew almost 3% on a constant-currency basis, and 1.5% after the impact of currency movements. Organic sales growth of 1.7% benefited from both volume and pricing, while the acquisition of Foodstar added another 1.2% of growth. Our gross margin at 37.8% is continuing to benefit from our Global Supply Chain efforts, with an improvement of 30 basis points from our highest margin quarter of last year. Productivity improvements were the main driver, primarily in the U.S., the U.K. and continental Europe. Marketing was lower $2 million this year as investments in our Emerging Markets, the U.K. and U.S. Foodservice were offset by a shift in North America from traditional advertising to trade promotions. As a reminder, last year's marketing was more back-end weighted while this year is more evenly distributed throughout the year. Operating income increased 2.1% on a constant-currency basis, as our improvements in gross margin more than offset investments in Project Keystone. Given the impact foreign exchange has had on it this year, let's take a quick look at currency trends. These charts show a 15-month time horizon on a few of our key currencies. The pound and the euro are well up from last summer's levels, but still down 2% and 8% respectively from Q3 of last year. The bolivar was devalued by 50% last year, and remains at $4.30 to the dollar. While Australia is representative of the Asia Pac currencies, showing strength versus the dollar. This chart lays out the effects those currency movements have had on our P&L. The largest impact continues to be on our revenue line. The majority of which is the devaluation of Venezuelan bolivar, which we've now lapped in Q3. The euro and the pound continued to be the largest drivers of currency impact to EPS, given the relative size and profitability of our European businesses. Currency movements in Asia/Pacific continued to be favorable, but on a smaller profit base. Adjusting for currency translation, EPS would have been $0.02 better. We now have the major currencies locked for the balance of the year, and that's reflected in our current earnings outlook for FY '11. Turning to the P&L. I'll focus on a few of the line items that were not on the scorecard. Gross profit dollars were up almost 4% on a constant-currency basis, benefiting from improved margin, favorable volume and the Foodstar acquisition. SG&A was up 7% on a constant-currency basis and up 60 basis points as a percentage of sales. This reflects our investments in Project Keystone, as well as the Foodstar acquisition. I'll go deeper on the drivers of operating income growth on the next few slides, but I'll cover the activity below operating income here. Net interest in other expenses are favorable $6 million, driven by reduced net debt. The company's 26.1% effective tax rate for the quarter was down 110 basis points, or a little over $0.01 of EPS. The improvement was primarily due to increased income and lower tax rate jurisdictions, along with foreign tax planning partially offset by higher repatriation costs this year. We're now estimating our full-year tax rate to be around 27%, reflecting the recent reinstatement of the R&D tax credit, as well as favorable foreign tax settlement. And finally, offsetting the benefits from the tax line, shares outstanding reflect a 2% increase versus last year, an impact of around $0.02 on EPS, resulting in the delivery of $0.84 for Q3. Now let's take a deeper look at sales. The third quarter delivered constant currency sales growth of nearly 3%, while organic sales grew almost 2%. Volume increased 0.5%, driven by the Emerging Markets and North American Consumer Products, partially offset by soup in Europe, along with declines in U.S. Foodservice and Australia. Net pricing increased sales by 1.2%, as price increases in the Emerging Markets, primarily Latin America, combined with U.S. Foodservice and the U.K. These were partially upset by increased trade promotions and North American Consumer Products and the Australian business. The 1.2% benefit from the Foodstar acquisition in China was more than offset by the 1.4% unfavorable impact from foreign exchange. As I mentioned earlier, our gross margin increased 30 basis points to 37.8% on both the reported and constant-currency basis. Productivity improvements, along with higher pricing and favorable mix in our U.S. Consumer Products business, have more than offset higher commodity costs, and about a 20 basis points headwind from Venezuela. We also realized a slight gain on the sale specialty channel distribution rights from one of our smaller European product lines. As you've been reading in the press and hearing from all of our peers, commodity costs in general have shown an abrupt increase recently. Overall, they are a bit more of an headwind than we expected last quarter, but they are incorporated in our revised EPS outlook. At this point, we'd expect our market basket of commodities to show increase of over 4% this fiscal year, while our procurement teams has developed plans to hold our input costs increases below 2%. Having covered the key components of the P&L, let's turn to the cash flow. As you can see, another strong performance in operating free cash flow at $438 million this quarter. Driving this performance were further improvements in working capital management. Capital expenditures are 2.7% of sales, in line with our plans to increase investments in Project Keystone. The $135 million this year for acquisitions relates to the purchase of Foodstar, and dividends reflect a 7.1% increase we announced in June. Now let's briefly review our results for the first nine months of the year. Looking at our P&L scorecard, all of our key measures compare favorably to last year on both a reported and constant-currency basis. Focusing on the constant currency growth, net sales grew 2.5%, driven by our Top 15 brands which outpaced the company average, growing 4.2% organically. Our gross profit margin was up around 80 basis points, as higher net pricing and productivity improvements were partially offset by higher commodity costs. Consumer marketing was up 2.3% to just over $300 million. Operating income increased 6.1%, while increasing investments in both marketing and Keystone. At $2.37, EPS was up almost 8% on a constant-currency basis, while the dilution from higher shares outstanding was roughly offset by a 110 basis point decline in our effective tax rate, which came in at 26%. Updating the slide I showed you for the quarter to reflect year-to-date impact of currency indicates an $0.08 unfavorable impact as the effects headwinds in the first half were more substantial than recent trends. On a year-to-date basis, organic sales improved 2.1%, with balance support from volume and price. And the same is true for the Emerging Markets, which grew over 15%. The volume increase reflects growth in the Emerging Markets, as well as improvements in North American Consumer Products and the U.K. businesses. These were partially offset by declines in U.S. Foodservice and Australia. Pricing was favorable 1%, largely due to Latin America and U.S. Foodservice, while NACP reduced net price as a result of increased trade spending for the Consumer Value Program which began late last year. The Foodstar acquisition added about 0.5 a point to sales growth, while currency cost us nearly 2% at the sales line. Looking at the year-to-date balance sheet scorecard, capital expenditures of $195 million were 2.5% of sales, up 60 basis points from last year, but still favorable to our 3% full-year estimate. Cash conversion cycle was 44 days, down six days, driven by improvements in all three measures. Operating free cash flow was up almost $100 million from last year, approaching $1 billion through nine months. This performance supports the increase in our full-year estimate to $1.2 billion. Net debt to EBITDA was 0.5x better, driven by lower net debt and higher earnings. ROIC was 19.3%, up 1.1% from this time last year. This excludes the impact of losses from discontinued operations in the prior year of about 80 basis points. And finally, looking at the year-to-date cash flow, the increase versus prior year was due to higher earnings and reduced pension contributions, as well as improvements in payables and income taxes. These increases were partially offset by declines in receivables, largely due to the cash received last year in connection with an accounts receivable securitization program. In addition, last year we received $75 million from closing out swap contracts and the maturity of foreign currency contracts. In summary, an overall solid performance for sales, cash and earnings. And with that, I'll now turn it back to Art to update you on our full-year outlook.

Thanks, Ed. Now with three quarters done this year, I'd like to update our outlook for the full year. As Bill discussed at CAGNY, we have increased and narrowed our reported EPS range for the year, from $295 million to $305 million, to now $304 million to $310 million. This reflects better-than-expected currency dynamics for the year and improved operating performance. Now it's important to note that these projections do not include any one-time costs associated with closing the Quero deal in Brazil. To the extent that the deal closes in this fiscal year, we could incur about $0.03 of transaction-related costs. Bill also announced that we expect to deliver $1.2 billion in operating free cash flow for the year. This would be up $200 million from our original target and an all-time record for Heinz. And turning to revenue, we've mentioned through the year that we thought our sales goal was the most challenging part of our outlook, and expect it to come in at the low end of the range. We now believe that constant currency sales growth for the year will be between 2% and 3% due to the impact of a month-long labor stoppage at our main plants in Venezuela, and slower than expected recovery in U.S. Foodservice industry. The good news is that union employees are now back on the job in Venezuela, and we are back at the bargaining table to work toward a mutually beneficial agreement there. Looking at Q4, we expect to make a number of investments to continue to fuel future growth. The first is the launch of nine SKUs of T.G.I. Friday's single-serve meals that we previewed at CAGNY. As Bill noted, our retail partners are excited about the coming launch, and believe that the new products could help jump start the category. The second is to launch an ongoing expansion of Dip & Squeeze in Foodservice. The third is our continuing investment in Project Keystone as we drive stronger processes, consistent with capabilities across the company; and the fourth is investment in our new acquisitions. We are already moving quickly to improve capabilities and enhanced marketing in our Foodstar business. In summary, the business is continuing to perform well in challenging times. Our top line performance is driven by our trio of growth engines: Emerging Markets, Top 15 brands and Global Ketchup. Our bottom line continues to benefit from our culture of strict operational discipline, and we are on track to deliver our full-year earnings and cash flow targets. And we're continuing to build a runway for further growth as we invest for the future. With that, now we'll open it up for your questions.

[Operator Instructions] Your first question comes from the line of Terry Bivens, Morgan Stanley [sic] [JP Morgan]. Terry Bivens - JP Morgan Chase & Co: You mentioned considerable investment during Q4. So as I look at the SG&A line, in your third quarter as I recall, it was down but it was flattish. How much do you expect that to be up in Q4? And if you could give us some kind of indication as to how strong your consumer marketing element of that will be?

Yes. Terry, I do -- G&A was up in the third quarter, and we do anticipate that it will be up in the fourth quarter as we continue to invest in a number of areas, particularly Keystone. So we feel good about that. In marketing, we've got some very significant investments going into China, as you know, behind infant formula. And we continue to support our brands well, particularly, strongly in Emerging Markets. Having said that, it won't be as high as what we did in the fourth quarter. Because as you recall, the fourth quarter last year was a very significant increase in marketing and spending. So while we feel good about the overall number, it will probably be somewhat less in the fourth quarter than it was last Q4.

Terry, on SG&A, SG&A was actually up in the quarter and G&A was up significantly. Now we don't break that out for you, we mix it in with the SG&A numbers. But G&A was up significantly, reflecting the investments. In fact, I think if you talk to my management team, the one line of the P&L I keep pressing them on is SG&A, because of the investment in Keystone and some of the other areas. So if you go back and look, I mean, gross margin was up 30 basis points, could have been up 50 basis points, and SG&A was up 50 basis points year-on-year. And so I think from that perspective, I think SG&A is a line that you will continue to see move up until we get Keystone fully implemented and rolled out. And the big expenses will come, as we said, this year in the third and fourth quarter in particular, and then moving through next year as we get North America brought in, as I said in CAGNY last week.

Yes. I think a bit of moderation on that is the reduction of marketing that it was a big push at the end of the year last year, as you might recall. I think an incremental $50 million of marketing dollars. So while we will be spending incremental, probably to not that same level. I think all of this is going to somewhat wash out.

Your next question comes from the line of Jason English of Goldman Sachs.

A couple of quick questions. One is on price front. As inflation pressure builds, and maybe as you talked a little bit about in the fourth quarter, if you feel that you're in a position now to maybe shed some light on what fiscal '12 may bring, and how comfortable you are with price in markets like Europe. It sounds like Australia, New Zealand may also be a tough environment.

I think, as we mentioned last week at CAGNY, we have priced in a number of areas. We've taken pricing on ketchup, condiments and sauces in the U.S., frozen potatoes, we've moved up on select Foodservice product, we have taken some pricing in the U.K. and in other markets where commodities has provided some cost pressure. So we're moving, and not until we've done very deep analysis on elasticities and things like that. So we feel comfortable with where we are on pricing. We'll continue to watch it to the extent that commodities continue to accelerate, we will take a look at what we need to do on that front. So again, pricing has come in this industry over many, many years and many, many decades. So we will deal with what comes.

Yes. And as I said last week, Jason, and you probably are not going to get any more color then last week, because we were pretty clear in where we've taken price. We've taken it across a number of the businesses in Europe. We've taken it across a number of the brands in the U.S. There's still obviously some that we're not prepared to talk about. But generally, as I said last week, there's no way anybody is going to be able to avoid the pricing mechanism given the impact of commodity costs. They are just too high. And right now, they're really difficult to predict going forward, even with some of the turmoil in the world. So you'll continue to see, I think, us independent of what anybody else does as I continue to say, price against these commodity costs. And the hope is, and the plan is, and the strategy is, that we don't chase them.

One quick follow up, and this is less Heinz-specific, it's a little more macro in nature. Thinking about Emerging Markets where you guys have a good sense of the consumer there, food is obviously a higher portion of income outlays for those consumers and we're seeing a fair amount of inflation across those markets. How are you seeing the consumer respond? And any volume concerns related to that?

I think Art showed you four, or five charts that said, obviously, we're continuing to do pretty well in those markets. Again, put Venezuela aside because of some unique aspects of that issue. But I think as you look at those, we're up double digits in all our key Emerging Markets. And we've been able to push price through. I think the other thing you have to keep in context is, that in those markets, unlike the Developed Markets, you're also seeing wages and salaries lifted in concert with the increased impact of inflation. That's the benefit of markets that are growing, as opposed to markets that are static with high levels of unemployment. So thus far, it has not been an issue. Now the UN tries to make an issue out of some of this stuff by talking at a macro business about staple products in some cases like wheat, flour, sugar, rice. But from our standpoint and the targets we reach predominantly, the middle-class and up, it has not been an issue thus far. I'm not saying it won't be, I'm just telling you thus far, we have not seen it.

It's really been consistent with the past few years. We've seen quite a bit of inflation and quite a bit of pricing in those markets where they're higher, frankly, in the trade in those markets. It's hard doing business and therefore, one of the things that makes operating in Emerging Markets an advantage.

And by the way, I think we've done more than a beachhead. I think we've opened the boat and we've stormed the shores.

Your next question comes from the line of Diane Geissler of CLSA. Diane Geissler - Credit Agricole Securities (USA) Inc.: I wanted to ask a little bit about Brazil as a market. One of the things I've learned since I joined the firm I've joined, is that though there are a lot of countries that fall in the group Emerging Markets, they are all different. So you have had a lot of experience in Indonesia, China, Russia, et cetera. Can you talk about how Brazil as a market is maybe different, some of the markets you're in now? And what sort of skills that you're going to bring to achieve success there? Whether it's a different trade channel, different issues with infrastructure, et cetera, roads and whatever. If you could just address that?

I think, Diane, there's a couple of things to note. One, this business is virtually half of its business in tomato processing, and tomato products, which is something obviously, we bring great global capability and expertise in. So from that standpoint, it's right down our lane. The second big piece of it are vegetables, jarred, canned vegetables, which we do in New Zealand, which we do in Australia, which we do in Poland, which we do in a number of markets. And we think there's substantial cross opportunities. The market itself, GDP growth has been 10% to 15% over the last, say, five or six years on average with the exception, obviously, of the one bad year for all of us. We expect it to be about 7% to 10% going forward. While the infrastructure is not where we would like it to be in Brazil, it is actually better than some of the other Emerging Markets we're in, and we have a lot of experience in Venezuela that we find very applicable to Brazil. What we do like, it's got great growing areas. It's also got significant opportunities and upped the trade for us, because the business we're buying is predominantly down the trade and we're going to push into up the trade. The emerging trade there between Carrefour and Wal-Mart is becoming a much bigger piece. The middle class is growing rapidly among the 200 million people. This business has been around 25 or 26 years, and has been growing at a compound average rate between 10% and 15%, despite very little marketing and despite no up the trade presence. So from our standpoint, we find Brazil to be a market we've spent a lot of time learning about, we understand the infrastructure. This company has a world-class distribution base, which was very important to us in the new warehouse and distribution center they've built. They've got actually state-of-the-art ponds in front for wastewater removal. And so it is a really fantastic fit. And we find that the environment, particularly given the size of some of the cities like São Paulo and Rio and so forth, in some ways, better for us and more conducive. But I want to be clear, we have spent a lot of time looking at Brazil, studying Brazil, understanding Brazil before we made a move like this. But I think Brazil, in some ways because of the stability of their economic system and the government they have in place even with the recent presidential change, is a market that we feel very confident and comfortable going into. And as you know, the currency has strengthened precipitously, as have most of the Emerging Market currencies like the rupee and the renminbi. But the real has strengthened, even in the last several weeks, and is now BRL 1.65, BRL 1.66. So market, we're very comfortable with infrastructure-wise and talent-wise. Diane Geissler - Credit Agricole Securities (USA) Inc.: Did you say that business has been growing at a 10% to 15% rate?

Between 10% and 15%, with the exception of the latest year. They run out of the capacity, they were out of capacity, which we obviously, will address very shortly, and that's part of our plans as we will do some other things. And we'll talk specifics about some of the intent at the May meeting. But they were out of capacity, we are adding capacity. I fact, they've been adding capacity. The other interesting thing about this business, they are also implementing SAP. And so we are buying a business that will be involved with SAP. They're in the process of turning it on in the next 30 to 60 days. So from that standpoint, it gives us a base from which to look at the rest of our Latin American businesses in terms of consolidation opportunity using their systems and processes. It's an extremely well run company.

Your next question comes from the line of Chris Growe of Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc.: I just wanted to ask you, in the quarter, the North American business obviously had a very strong margin performance. And I know and I guess to a degree, with the softness on the top line in the Developed Markets, do you think more of the marketing investments, say in 2012 and really, going forward, should be committed to the Developed Markets to get kind of a top line growth? I mean, obviously, the Emerging Markets are doing very well, they are investing pretty heavily as well.

Chris, you and I have had this discussion probably 100 times, and as I said last week, I'm not going to give you any insights to fiscal '12 quite yet. We'll come back and talk about that in May. Having said that, one of the things we're looking at marketing is returns on marketing, and where we can get growth and if you look at our Ketchup business globally, our Ketchup business is doing extremely well, and we're investing pretty aggressively behind Ketchup. We're also investing aggressively behind Frozen with the launch of TGIF and some of the changes in Ore-Ida, and they seem to be responding fairly well. In the U.K., we lapped a very difficult soup quarter from last year. We had no expectations of doing frankly, as well as we probably did during the quarter. But marketing is something we continue to look at, and as I said at CAGNY, and I'll go back and almost quote it verbatim, you should expect continued investment going forward in marketing, and that's as specific as I can be at this point until we get to the May session. Christopher Growe - Stifel, Nicolaus & Co., Inc.: I was not trying to get fiscal '12 guidance either, Bill. But I guess what -- it's just a bit of a follow-up and I'll leave it there, it's just that as you're reducing promotion across the business, is the intention to put it into advertising? I know it's also a means of trying to overcome some of this cost inflation as well.

Well, it's a little bit of everything, Chris, but we will put money where we get the best returns. And there's no point in spending good money after bad, as numerous examples exist around the industry showing that. And as I said last week, all the money in the world behind a bad idea is still a bad idea with a bad result. And in that context, we will put money where we're getting a return. Obviously, Ketchup is giving us those kinds of returns as are Frozen, and we'll be very selective with it. But I don't think there should be any rush to judgment about we're going to move money from the Developed Markets to the developing markets, nor do I think there should be any rush in judgment that we're simply going to cut D&A and drop it. We will reinvest it against areas we think that provide us the best returns for the shareholders.

Your next question comes from the line of Alexia Howard of Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., Inc.: As I look back on the, I guess, the number of bolt-on acquisitions that you've done in recent years, the pace of those seems to be accelerating in Emerging Markets. Could you talk a little bit about the lessons that you've learned about what works, what doesn't work so well with these bolt-on acquisitions? And also, as you look forward, the pace of these acquisitions, is it a very target-rich environment? Are you going to give Asia and Latin America a bit of a time to digest the recent ones? Or is it that you'll get going off to more as quickly as you can?

Well, I think in response, there's a couple of things to note. One, as I said at CAGNY last week, we have never seen more opportunities than we're seeing now, and we've been very selective, as I've also indicated last week, about our choices. Foodstar is a business that fits right in the middle of our heartland core category of condiments and sauces. Quero is virtually the same thing, Meals & Snacks and condiments and sauces, particularly with its strong Ketchup business, its strong Pasta Sauce business, and its Tomato Sauce businesses. And so I think you'll continue to see us focus on those areas and in those core categories. I do think that there are a number of lessons. And frankly, we probably don't have enough time to articulate them. But the key thing is buy a good brand. And in Brazil, by the way, the Quero brand is virtually 100% of the sales that I mentioned at the outset, which means it will move into our Top 15 brands next year. Foodstar has two brands in Guanghe and Master. And so as you look, we're trying to buy concentrated brands, buying good management. The second thing we're trying to do is not buy businesses that have been grown simply through SKU proliferation. Interestingly enough, the Quero business, which is $325 million right now, has about 100 SKUs. The Foodstar business has less than 40 SKUs, so we're trying to find really focused businesses with strong growth prospects with good manufacturing capabilities. The things we've learned are you have to put management in immediately so that they can learn the business. Because ultimately, the owners that sell these businesses decide that they'd rather go do other things, or they lose interest. So you need to get management in quickly. You need to bring financial processes and discipline in. And the biggest lesson we've learned and it's one we probably should have known but we really learned a lot of it through China this year, is you have to get your investments upfront. Not only in capital but in marketing. And in some of our businesses, we probably waited too long in our zeal to try to sort of balance the profit hit from these businesses from a dilution accretion standpoint, rather than investing aggressively upfront like we're doing in Foodstar which, as Art said, we're running difficultly on capacity, although the new factory will be up in a couple of months and we'll do the same thing here. So the biggest lesson: Good management, focused portfolios, strong brands, good infrastructure, manufacturing capacity and invest upfront, don't wait.

Your next question comes from the line of Eric Serotta, Wells Fargo.

Looking at the full-year guidance, it still seems like you have a fairly wide range, given that there's only two months left in the fiscal year. Could you talk about some of the puts and takes that would sort of, other than the obvious, that would cause you to be at either the upper or the lower-end of that range? Are there any specific customer issues, or anything other than the obvious ebb and flow of business that would cause such a wide range of outcome?

Yes. The Middle East and Latin America come to mind, as do currencies and Emerging Markets, and we're lapping a very tough quarter last year in CP. So there are a number of things. And the reason we gave ourselves the range is it reflects the pass through of currency. But we also said it reflects the knowledge we have right now of the issues in the Middle East and Latin America. And you tell me where's it going to go? We just don't know.

I think the EPS number that we're expecting in the fourth quarter is well ahead of the EPS in the fourth quarter last year. So a good, healthy growth, but we do expect to invest in the business, as I outlined in the prepared remarks. So I think all those things are good. And as Bill mentioned, a key variable is really in Latin America or Venezuela with the labor situation, the guys are back at work. But the contract is yet to be done, and so we're looking to see how that comes out. But Venezuela has an impact.

Any investments behind TGIF and Dip & Squeeze will be variable based on the distribution we gain and based on the number of SKUs the customers take and so forth. We've built in, obviously, projections. I will tell you that the T.G.I. Friday's business is going in far better than we anticipated. It has been incredibly well received, as has Dip & Squeeze but TGIF, I have to tell you, has been, frankly, surpassed what we thought were pretty bullish expectations.

The other thing, Eric, the tax rate will be higher in the fourth quarter, as Ed mentioned. And depending upon timing of audit settlements and things like that, that's a line that's always a little bit variable.

And Bill, just on T.G.I. Friday's selling being better than expected, where do you think that volume is being sourced from? It doesn't look like freezer cases are getting any larger, or more freezer cases are being added in traditional channels, at least.

Well, the good news is it's not being sourced from us.

Your next question comes from the line of Eric Katzman of Deutsche Bank.

I guess in terms of -- Chris may not have pushed you on 2012, but so far, Bill, you've given us a number of negative comments around 2012, whether it's inflation, Project Keystone investments, the Brazilian acquisition dilution, shares outstanding, I assume are going to continue to creep up a bit. So the extent that you're willing to talk about or note the negatives, can't you give us some thoughts about the positives, without necessarily pinning you down as to what is working for you next year?

Absolutely. I'll be glad to give you a positive. I have a slum billion full of positives. And the positives include the launch of TGIF, which have a positive benefit on the company next year; the launch of Dip & Squeeze, which will be fully distributed by this time next year across a number of accounts. The innovation activity we're seeing in Europe and across the company, the continued performance of growth in the Emerging Markets, which we expect to be every bit as good next year as this year. And the reality is that while you see Brazil and China in terms of Foodstar and Quero as maybe negatives, we see them as incredible positives, not only in terms of the creation of the top line but the creation of long-term profit and top line growth. I mean, put in perspective that next year, and I said this in the script, so I don't mind talking about it, next year, we expect Emerging Market sales, short of something else happening, to be north of 20% of the total sales of the company. If we continue to drive the growth in those markets that we've given in the past, I think you can start to get a sense of the top line impact that both Foodstar and Quero can have in terms of engaging that number. We've got a lot of activity planned that we'll take you through in May. There's a lot of good stuff going on, Eric. I just want to point out, and you guys wrestle with quarters, I wrestle with the health of the company and the long-term prospects, Quero and Foodstar, very positive moves. But Keystone will bring huge benefits once we get it in place. Unfortunately, it's lengthy and it's time-consuming and it's difficult, it's very complicated. We've got a number of opportunities for investment next year, which we'll talk to you about in May. So I mean, I see overall the health of the company next year being pretty extraordinary. I do think there are some things that we need to continue to be open about, and one is the investment in Keystone, two is the dilution impacts from Foodstar and Quero, and the reason we're not breaking those out now is because we're still working on the plans, and we'll take you through those in May in specifics. But we talk about the negatives because we try to be open and transparent. We don't see them as negatives, we see them as investments, necessary investments for the long-term health and growth of this company. They can be interpreted as negatives, they're certainly not meant to be negatives, they're meant to be the reality of hey, we're investing to continue to drive the performance this company has seen over the last six or seven years and to continue to distinguish ourselves from our peer group.

Think about innovation as being a real engine for us, constant currency sales growth, an engine for us, productivity, we're continuing to focus on with our global supply chain. And frankly, pricing, but we'll see how that all shapes out. So I think, as Bill said, lots of good things going on, and while we invest for the long-term as well.

And just one quick follow up on the Brazilian acquisition and the accounting of it. Can you give any sense as to the margin structure of the business, and then the 20% that you don't own, are you going to start a minority interest line? Or is that going to flow through other expense and net on a pretax basis? How is that going to be accounted for?

Let me address the margin issue and I'll let Ed address the accounting issues, because I think there's some clarification that's needed. From a margin standpoint, this business is comparable at gross margins to our other Emerging Market businesses. It's in the businesses as we operate in terms of tomato processing and in some of the other areas that we think we can bring enormous capacities and capabilities to that will help us. So from a margin standpoint, we're very pleased with where this business is, and I think long term, expect significant improvement in it, given it's the business we know best.

Eric, on the 20%, we already have a non-controlling interest line open for a couple of our other joint ventures. That 20% will be -- this share of that profit will be reflected down there.

Indonesia is an example of that.

The accounting changed on that, a year or so ago on that, Eric, and you'll know notice it all the way at the bottom of the P&L. So you actually get a net income number, and then there's -- then you subtract net income attributable to non-controlling interest to get to company net income. So it's a little bit different, but just take a look at the P&L, you'll see it there at the bottom.

If you remember from an accounting standpoint in the old days, you could take the one-time costs associated with the deal, put it on the opening balance sheet. That is no longer the case and that's why I mentioned the potential one-time cost that will come either in the fourth quarter or in the first quarter depending upon the timing of closing the deal.

Your next question comes from the line of David Driscoll with Citigroup.

Bill, I wanted to just start off with some two big-picture questions for you on the acquisition. The first question is, and I think you were pretty clear about it, but just wanted to make 100% sure I understand, the first course of action once you acquire -- once you close the deal will be to work on launching Heinz branded premium ketchup in Brazil, is that the right way to think about? I think gave a target of $500 million in the first full year of ownership of the business, is that right?

No, no, no, no. I said, short term. Our goal is to get the $500 million. And I did not articulate Heinz Ketchup. I said we will be launching Heinz branded products over a period of time. The first priority is to get management in, in place in terms of finance and control functions and compliance functions and marketing and so forth while we're equally, and while we start investing behind the Quero brand and in the development of Heinz ideas for the market. The second thing we're doing is obviously, they've been buying Heinz seeds but we're going to bring them up-to-date with the Heinz seeds that are proprietary to us to help the crop improve the yields and obviously, improve the ultimate output of their products. I mean, they are a strong company. The brands we bought, the brand we bought, is number one and number two in virtually every category from a volume standpoint, and only two categories falls below that from a dollar sales standpoint curve, I mean, the value standpoint. So I think the reality is that management, investment, processing capability, technical health and then the launch of some businesses, either the import of those businesses or local production of those businesses or the export of some of the businesses. I want to make one comment about their business that's going to be very interesting to watch in our company. They have uniquely developed a tetra pack package of Beanz and they've got about three or four varieties in tetra pack beans, something we've struggled to do as a company over the last decade or so. And so we can take some of that knowledge and that know how, particularly with tetra, they are way ahead of us in terms of working with tetra as a company, and we can apply that knowledge elsewhere in our organization. So this is another example of a two-way street between an Emerging Market business that's actually got factual basis to help us improve in other areas of our company, while we help them.

Bill, you also mentioned at CAGNY that Brazil benchmark is very low on Infant/Nutrition consumption, I think something like 10.5 kilograms per child. It was right next to the China one. Obviously, this business has nothing to do with that at the moment. But would it be logical for us to conclude that over the course of time, you would want to layer Infant/Nutrition on to this operation?

Well, I can try to -- obviously, my response was short and [indiscernible], but I think what I'll leave it to is the fact that we'll tell you in May.

Final question for you, Bill, it's just simply, do you ever worry about having enough management time and talent to execute all these acquisitions at the pace you're going?

That's always a big concern, that's why we'll try to press on in the company, to continue to develop talent. That's why it's part of our strategic plan, that's the fourth pillar but maybe the most important pillar is to continue development, growth, recruitment of talent in the company and spreading them out. Fortunately, we have a fairly talented group of people in Venezuela, some of which speak Portuguese quite well, and we can deploy as needed. But, yes, that is always the ultimate issue, David, not only in finalizing and putting the people in place in the deal, but actually getting the process through. I mean, we've now done two pretty sizable deals in the last six months in Emerging Markets. And as I said, and I think I was pretty clear at CAGNY last week in one of the Q&As, we have a number of deals that we're looking at, but we've had to spread them out because we simply don't have the resources to get them done. We have the financial wherewithal, but not the resources. So, yes, that is a key question and something we wrestle with virtually, daily.

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

I just wanted to ask on the Asia/Pacific organic sales of 3.9%, can you remind us were there any sort of issues in the quarter that don't have that number down that low that you might have called out last quarter?

Yes, I think the impact in Asia/Pacific in terms of the overall segment was Australia and New Zealand. If you look at Asia, we're up double digits. So it's really the Pacific has slowed down, and Asia is booming.

Your final question comes from the line of Andrew Lazar, Barclays Capital.

I think we all appreciate the growth that you're getting from the Emerging Markets and the recent acquisitions just announced in Brazil. But then one of the original slides in the deck showed at least in the quarter like this, all of the growth came from those markets and obviously, your core, if you will, was flattish in the quarter. How do you ensure that, that -- it seems like that's really the place where you get the highest incremental return, right, on sort of investment? How do you ensure that, that at least stays in the modestly positive territory and would you expect sort of that core business to be positive in fiscal '12? Is it just a matter Foodservice kind of coming back a little bit? Or how do you get there?

Andrew, I think there are a couple of charts that show that the profit growth in Europe, in North America and in Foodservice for the quarter were very strong despite, as you point out, flattish volume with the exception of North American Retail, which was pretty solid. Secondly, if you look at two of our major cores, I mean, you talk about the core, but our top 15 brands have been growing very robustly at around 4% organically year-to-date, and Ketchup is up around 5% organically year-to-date. So those two businesses, the top 15 brands which were 70% of the sales of the company and generally are our better mix items and Ketchup, which is not generally our better mix item, but is really among the best in the company, are all continuing to do well. And clearly, we've got an issue this quarter with soup in Europe between Germany and the U.K. and I just pointed out that the softness in Australia and New Zealand in the quarter. And I think fundamentally, you back out Venezuela in Foodservice and we show better results. But the areas we focus on most, the top 15 brands, Emerging Markets and Ketchup are all doing very well, and that's really where the focus is. And so I would expect over time, the top 15, or the top 16, or 17 brands, that 70% number could grow and increase in its level of importance, which is good for the shareholders and good for us. And so that's really where the focus is. So while I'm not obviously ecstatic about the performance in the developed markets, the slide did point emerging versus developed, it did not point out emerging versus top 15 brands and versus Ketchup, which as I said, is doing very well.

When you look at the Developed Markets that we talked to, Foodservice, Germany, Australia, they tend to be our lower margin Developed Markets. So again, that's what's -- you suffer a little bit at the top line, but still driving strong bottom-line.

And I think stabilization of the food service industry, it does seem to continue to be coming back a little bit better to the extent that, that flattens out, that will certainly be a positive impact on us.

Guys, thank you for your questions. Just quickly, to wrap up, we'd like to note that Heinz will be presenting at the cage conference, so CAGNY Europe so to speak in London, Monday, March 28 at 11:45 local time. Joining me will be Art Winkleblack and Dave Moran, head of our European business. The presentation will be webcast and available on heinz.com. And then the May date we continue to refer to will be our Heinz Analyst Day. We'll be hosting it in New York this year. Again, it's the New York Stock Exchange. That will be Thursday, May 26. That will be a morning event and we'll get more details to you shortly. As always, Marianne and will and I will be around all day today and tomorrow to answer any of your follow-up questions. The IR mainline is (412)456-6020. Have a great day.

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.