The Kraft Heinz Company (KHC) Q1 2012 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 2012 First Quarter Earnings Release Conference Call. This call is being recorded at the request of the H.J. Heinz Company. [Operator Instructions] I'll now like to turn the call over to Meg Nollen, Senior Vice President of Investor Relations. Ms. Nollen, you may now begin the conference.

Thank you, Kelly, and good morning. I'd like to welcome everyone to our conference call and webcast. Copies of the slide used in today's presentation are currently available on our website at heinz.com. Joining me on today's call are 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 statements currently displayed, which 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 27, 2011, Form 10-K, as well as today's press release today, which should list 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, 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 financial measures are available in the company's earnings release and on our website at heinz.com. Please note we plan to file our first quarter 10-Q later this week. Our complete financial highlights pages, or stat pages, will become available with the filing of the Q and will be posted on the Investor Relations section of heinz.com, towards the bottom of the page. The P&L should be out there today. Now on today's call. Art will review our category and regional segment performance, and Ed will review our first quarter financial results and scorecards. We've got about 30 minutes of prepared remarks and we'll use the remainder of that hour to take your questions. We'd like to request you limit your questions during the Q&A session to one single-part question in order to ensure adequate time for all who wish to participate and to ensure we end the call on a timely basis. So with the formalities out of the way, let me now turn the call over to Art Winkleblack. Art?

Thanks, Meg. And good morning, everyone. We're pleased to take you through our first quarter performance where we posted solid results in a very difficult environment. This morning, we will be presenting our P&L excluding special items, which you'll recall from our Analyst Day are the onetime charges for productivity initiatives planned for this fiscal year. Overall, the quarter slightly exceeded our expectations despite the tough economy in Developed Markets and a more challenged U.S. consumer, all of which has been headline news in July and August. For the quarter, we grew revenue at a double-digit pace. Posted solid organic sales growth driven by our trio of growth engines, the Top 15 brands, Emerging Markets and Global Ketchup. We achieved excellent growth from our newest acquisitions, Foodstar in China and Quero in Brazil. Increased marketing and stepped-up investment in the business, including Project Keystone, our European supply chain hub and other capability building initiatives, and we weathered a very tough commodity cost comparison. In short, we're off to a solid start to the year while continuing to adapt our strategies and tactics to meet the changing consumer dynamic. In terms of key P&L metrics, sales grew nearly 15%. Operating income increased by 1 point and EPS rose 4%. We'll take you through the detail behind the numbers, but these results included solid base business performance, the benefit of favorable currency and the impact of the acquisitions we made late last fiscal year, which are off to a very strong start. But before getting into the specifics, I want to profile some of the key themes running through the first quarter results. These include strong top line growth from Emerging Markets, Global Ketchup, Top 15 brand, acquisitions and currency. Price increases across our portfolio, which still lag very high commodity inflation. Increased SG&A, reflecting our aggressive investments in marketing and business-building capabilities. A slightly lower tax rate, driven by a decrease in the U.K. corporate tax rate. Approximately 3 million more shares outstanding, and a foreign currency tailwind in our key markets. All of this combined to generate solid EPS growth on an X-items basis. Turning to organic sales, our Emerging Markets once again drove the majority of the organic sales increase, posting 13% growth for the quarter. And on a constant currency basis, sales in Emerging Markets were up nearly 40%, including recent acquisitions. Developed Markets generated organic growth as well, led by Europe, Japan and Canada. Europe delivered positive volume and net price growth, with organic sales up almost 5% led by the U.K. and Continental Europe. Australia continues to be a difficult market for us. And in the U.S. Foodservice business, we saw a weakening trend in restaurant traffic, particularly in July. Excluding these 2 businesses, organic sales growth in Developed Markets was a healthy 3% and total company organic growth would have been nearly 5%. Importantly, this quarter marks our 25th consecutive quarter of organic sales growth, which speaks to the strength of our brands and the adaptability of our business in these challenging times. And speaking of our brands, you'll notice that Quero, our recent acquisition in Brazil, and Master which is part of the Foodstar acquisition in China, are now included in our Top 15 Brands. Collectively, our top 15 now make up nearly 3/4 of our portfolio and posted what we are calling internal growth of 6.5% for the quarter. For comparability, this metric includes an estimate of prior year sales for the acquired businesses from the time before we owned them. Note also that 5 of our Top 15 Brands are now emerging market brands. Turning to our 3 core categories on a constant currency basis, Ketchup and Sauces set the pace in the quarter with nearly 14% growth, driven by Global Ketchup and boosted by the addition of Foodstar and Quero. The category also delivered strong growth in Asian sauces in Indonesia and in pasta sauce in North America. Organically, sales for our Ketchup and Sauces category were up 7%. Meals and Snacks grew by more than 3% driven by the Quero acquisition and strong growth in soup and beans in the U.K. This was partially offset by weakness in our U.S. frozen potato business, reflecting the impact of recent pricing actions. And Infant/Nutrition grew by 5% virtually all in Emerging Markets, which grew at a rate of 15% in the quarter. This growth was led by Venezuela, China, India and Russia. Our Emerging Markets continue to grow in importance to Heinz, both organically and through acquisitions propositions, and accounted for around 23% of sales in this quarter. We're delighted with our newest acquisitions, Quero and Foodstar, which together accounted for about 4% of total company sales. Quero had a big impact on our Rest of World region, helping to double sales in that segment. Since we closed the Quero acquisition on April 1, we've been busy integrating the business and positioning it for growth. Previously, top line growth had been limited by production capacity, which prevented geographic expansion in a greater portion of the modern trade. We've made some real progress against these opportunities, while also implementing a small company version of SAP. This month, we began distributing Heinz products through Quero's sales and distribution network, and are planning on producing these products locally over time, so the team in Brazil has been very busy. As you know, this is the first quarter in which Quero has been included in our results. And although new acquisitions are not part of organic growth, using our internal sales growth metric, the team drove 8% sales growth, including more than 20% growth in our core tomato product business while doing all the integration activities and implementing SAP, so we're very pleased with that start. We are also delighted with Foodstar, which we expect to help us reach almost 350 million in sales in China this year. We've owned Foodstar for 9 months now, and it's grown more than 20% versus the comparable period in the prior year. We've added more soy manufacturing capacity and are expanding the Master brand into a third province. As a result, Master now serves a total market population of 175 million people, leaving only another billion-or-so consumers in China to go. We're also launching Foodstar's first new products in more than 2 years, giving us a premium presence in all 3 of the largest soy sauce segments in China. Those are light, dark and Weijixian soy sauce. As I mentioned a moment ago, the growth in our infant nutrition category has been driven by Emerging Markets. We've been winning in these markets with trusted brands; functional innovations like Qingdao [ph] in China and Complan Memory in India; increased marketing investments; and a relentless focus on quality and taste. Turning now to Global Ketchup, we're very pleased with 8% organic growth in ketchup for the quarter while lapping the well-known dollar ketchup promotion that ran at our largest customer in the U.S. throughout most of the first quarter last year. Growth was driven around the globe, led like Venezuela, U.S. Foodservice, North American consumer products and Europe, with a notable contribution from China as well. Now let's take a quick spin around the world of Heinz. We'll start with North American consumer products. Q1 brought fresh economic uncertainty and more challenges for the U.S. consumer. Debt ceiling debates, the downgrade of U.S. Treasury obligations, weak employment and housing markets and wild volatility in the stock market also serve to make consumers here very nervous. In this context, constant currency sales were flat for the quarter, as favorable pricing offset an equal volume loss. This also reflects the lapping of last year's dollar ketchup promotion and the phaseout of Boston Market in the quarter, which on a combined basis, reduced the sales growth rate by about 2 points. During the quarter, we completed our planned price increases and reduced promotional spending across the U.S. business. These actions, in addition to our aggressive productivity initiatives, helped us cover the dollar impact of very high commodity inflation and kept gross margin nearly flat. Operating income was down slightly for the quarter, reflecting the increased commodity costs, and also higher fuel costs for the delivery of our products. U.S. consumer confidence hit a new low in August. This result was even lower than in the depths of the great recession of the first quarter of 2009, and in fact, is at the lowest level since 1980. As a result, U.S. consumers are reacting by cutting back on discretionary spending, shoppers are using coupons more often, cutting back on waste, and paying more and closer attention to what they buy. We're closely monitoring our pricing and product mix to optimize volume and profitability in this environment and working to reach both sides of today's bifurcated consumer group. As you know, we built a track record of successful innovation in North America. We've introduced products that have expanded our sales and market share while building and bringing interest to our categories. We are continuing to build on this foundation and are driving for even greater efficiency in the production of these products, some of which are now being produced in our new state-of-the-art frozen product factory in Florence, South Carolina, which opened earlier this month. In FY '12, we had another strong pipeline of innovation. We're moving further into the nutritional dinner day part with our Smart Ones bagged meals, and extending the T.G.I. Friday's brand in the restaurant quality Single-Serve entrees. Both of these launches are going as planned, with new T.G.I.F. commercials on air, as of mid-July. In Ketchup, the 10-pack of Dip & Squeeze is starting to show up on retail shelves this month, and we've launched the more sustainable PlantBottle, part of our partnership with the Coca-Cola Company. We're also expanding our Classico line with Mexican and Italian inspired white sauces, as well as a new pizza sauce. And we're launching 2 new versions of our very successful category leading Sweet Potato fries. Turning to Foodservice in the U.S. Sales in the quarter tracked to the underlying environment, where 1% sales decreased as favorable pricing did not quite offset the impact of lower volume. With the recent economic news and higher gas prices, we saw restaurant traffic trends change in the quarter from flat to down within our existing customer base. During the quarter, we implemented a second set of price increases to offset commodity inflation. But due to the timing of national account contracts, these price increases will take effect gradually over the coming months. As a result, pricing has not yet caught up with significant commodity inflation and gross margin was down by 50 basis points. Higher fuel costs and S&D also impacted operating income for the quarter. Importantly, Ketchup sales were up 5% in U.S. Foodservice this quarter, despite the declines in customer traffic. Here, our innovation is working to offset the environment, attracting customers to buy and consumers to use more of our ketchup. Dip & Squeeze has been a key element in this equation, and to date has replaced about 10% of our sachet volume. We continue to build distribution of the product and Foodservice. And as mentioned, we're providing more usage opportunities for Dip & Squeeze through U.S. retail, and are now introducing the product into Canada. The PlantBottle has also been a popular item with restaurants and now are represents about 70% of our restaurant tabletop Ketchup business. We've had over 1 million visits to our website, much of it driven by mobile marketing from our tabletop bottle in the 4 short weeks since introduction. Now crossing the pond. We posted strong sales and traffic growth in Europe despite a tough environment there, which includes sovereign debt concerns, austerity programs, civil unrest and very high unemployment in some countries. Organic sales were almost 5%, including volume growth of more than 2% and pricing of almost 3%. These results were led by an outstanding performance in U.K., where the team is selling more products off the shelf at full price. Our meals and value shares are growing across most of our U.K. business, showing that premium brands can still thrive in a difficult economy. We're also pleased with the sales results across much of Continental Europe and Russia, reflecting increased pricing, innovation and impact of additional marketing investment. Also driving a very aggressive change agenda in Europe, where we're investing in significant capabilities to drive further growth and efficiency, most notably Project Keystone and the European supply chain hub, both implementations continue to progress and are going well. In sum, we're very pleased with our performance in Europe for the quarter. There's no shortage of innovation in Europe these days either. We recently launched an exciting, better tasting new line of aseptic baby food in Italy, and continue to extend our Fridge Pack line of Beanz in the U.K. Also in the U.K., we're just launching 2 new great tasting unique innovations: Squeeze & Stir, which combines with hot water to make soup in a cup; and Heinz Pasta Pouches, a premium pasta meal that is portable. It's early days, but we'll keep you posted on these exciting new products. Moving to Asia Pacific, we have a tale of 2 cities. Results in the Asia and Emerging Markets were very strong, but results from developed Pacific markets were unfavorably impacted by poor performance in Australia. For the segment, constant currency sales grew 7% largely driven by the Foodstar acquisition and a modest increase in overall organic sales. Operating income before the benefits of foreign exchange was down about 20%, reflecting a 210-basis point decline in gross margin and increased investments in marketing and talent in Emerging Markets. For perspective, much of the decline in gross margin came from Australia, where we have appointed a new managing director, and are attacking the cost structure to stabilize performance in what has become an inhospitable grocery market. For additional perspective on constant currency sales performance in the segment, you can see that Emerging Markets drove better than 20% growth driven primarily by Infant/Nutrition in China, Complan in India, sweet soy and chili sauces in Indonesia, and our acquisition of Foodstar. And the developed markets of New Zealand, Japan and Singapore posted solid aggregate growth, up 4% on a combined basis, led primarily by Japan. But Australia is the clear challenge for us in this segment, with constant currency sales down 8% for the quarter. Again, we're taking strong action to address our issues there. Within the Emerging Markets we continue to drive strong results through an aggressive innovation agenda. Most recently, we just launched the pouch baby food in China, where we are the first company in that market with a pouch package. And our infant formula business continues to build share in key retailers, as we methodically progress the rollout and support it with strong marketing investments and drive awareness and trial across our entire Infant/Nutrition product line. In India, our Complan brand gained share this quarter, driven the new product innovation including Complan Memory, as well as Complan Nutri-Gro, our line of toddler meals which is now being sold nationally, and a new Pista Badam flavor of Complan that recently entered lead markets, building on the success of Kesar Badam. Turning to the rest of the world. The addition of Quero and the return to labor stability and strong growth in Venezuela enabled this segment to double in size this quarter. In fact, operating income in the rest of the world caught up with U.S. Foodservice in the quarter as we continue to push the mix of our business to high-growth markets. We're also pleased to see double-digit organic sales and operating income growth in the Middle East and in South Africa. Given the worsening economic uncertainty in Developed Markets, we continue to focus on maintaining strong operating discipline. We're taking the price increases necessary to offset inflation, cutting out on profitable trade promotions, increasing advertising support for our brands, cutting costs and carefully allocating capital. These choices will likely continue to have an effect on short-term volume, but are intended to preserve and expand margins for sustainable profit growth. Before I turn it over to Ed, I'd like to update you on the progress we've made on Project Keystone since we last met in May. Most recently, we completed the baseline work in the Netherlands and the Nordics; very successfully implemented the global solution in Belgium, which is our first platform for transaction processing through the important European supply chain hub; and implemented globally sourcing solution through SAP to help drive savings across the company. Looking forward, we are continuing the European rollout, moving in to North America, starting with Canada, evaluating our options for accelerating progress in Asia Pacific and developing an SAP solution for smaller markets. Overall, we're pleased with our progress and are on-track with our plans for fiscal '12. With that, let me turn it over to Ed. Ed?

Thanks, Art. And good morning, everyone. I'll take you through our Q1 results, which reflects strong top line performance and incremental investments to sustain that growth. Let's look first at the EPS. As we announced in May, we're investing in productivity initiatives this year which we expect will make the company stronger and accelerating productivity on a global scale. We anticipate that for fiscal 2012, we will invest at least $160 million of pretax income, or $0.35 a share on these initiatives. As a result, we will be reporting our results in fiscal 2012 adjusting for these special charges. To summarize for Q1, EPS excluding these charges was $0.78, up 4%. This includes almost $0.02 of incremental costs for Project Keystone. As a reminder, we expect $0.08 of incremental cost from Project Keystone this fiscal year, which is not treated as a special item. Stripping out the $0.05 favorable impact from foreign currency this quarter, EPS excluding special items is $0.73, down $0.02 from last year. Finally, reported EPS was $0.70, which includes the charge of approximately $0.09 due to productivity initiatives we incurred in Q1. Here you can see the makeup of the productivity charges we incurred so far, and where they're reflected in the P&L. Included in reported operating income is $15 million for severance and employee benefit costs relating to the reduction of the global workforce. $17 million related to asset write-offs for the closure of 4 factories. We're expecting to exit at least one more factory this year, and are evaluating several additional opportunities to reduce costs. $9 million of other implementation expenses, primarily professional fees and relocation costs related to the establishment of the European supply chain hub. Overall, we recorded charges of $41 million pretax, $31 million of which was recorded in cost of goods sold and $9 million in SG&A. The after-tax impact of these charges was $28 million, or $0.09 per share, and the entire amount was reported in the nonoperating segment. We believe that our results excluding these special charges, provide the most useful perspective for evaluating our performance, and we will use this benchmark for the rest of the financial discussion. Now let me focus on our P&L scorecard. With the benefit of a tailwind from currency, we were able to increase our investment in the long-term health of our business while delivering operating income and EPS growth, despite a challenging global economy. Net sales grew by almost 15%, aided by the recent acquisitions, as well as currency. Organically, sales grew 3.1%, driven by pricing. Gross margin was 35.7%, with higher pricing and our productivity improvements offsetting much of the commodity inflation. As we progress through the year, we expect pricing and productivity to offset commodity cost increases, but this will build throughout the year and, primarily, in our second half. We continue to increase our investment in consumer marketing, particularly in our Emerging Markets and the U.K. Overall, marketing increased by almost 15% and 8% on a constant currency basis. Operating income was up 1%, but on a constant currency basis, down 4.5%. Our incremental investments in marketing and Project Keystone alone, were the equivalent of over 6 points of potential profit growth that we chose to invest for the future. At $0.78, EPS was up 4%, but down 2.7% on a constant currency basis, as a result of our incremental investments. As you can see, both the pound and the euro are up substantially versus last year, which has a significant benefit to our European operations, which account for nearly 30% of global sales. To varying degrees, most of the markets we compete in have shown similar trends. Here you can see what those currency movements have meant to our P&L. With the currencies of almost all the countries we operate in showing substantial strength versus the U.S. dollar, both revenue and EPS show around a 7% lift from the exchange. Since our foreign operations tend to have a lower gross margins than our domestic businesses, the translation benefit to the overall P&L does cause a 20-basis point reduction in average gross margin. Continuing with a more detailed look at the P&L, I'll touch on some of the items not on the scorecard. Gross profit dollars were up 12% and 6% on a constant currency basis, with about 2/3 of the growth from acquisitions. Although these acquisitions contributed to gross profit dollars, they did reduce company-wide gross margins by 40 basis points. SG&A was up 15% on a constant currency basis, reflecting increases from acquisitions, investments in Project Keystone, as well as higher distribution costs due to fuel prices. Other SG&A costs in our Developed Markets were virtually flat, reflecting our focus on tight cost controls, while we continue to add resources in our Emerging Markets. Operating income was up slightly from last year, while investing nearly $25 million in incremental marketing and Keystone spending to drive growth. Net interest and other expense improved by $10 million, primarily due to decreased currency losses, while we continue to benefit from low interest rates. The effective tax rate for the current quarter was 24% compared to 25.3% last year, primarily due to a statutory tax rate reduction in the U.K. This year will likely a show quarter-to-quarter volatility in the tax rate. We currently anticipate a rate in the low 20s for Q2 and an overall rate for the year, roughly in line with last year's tax rate. Finally, shares outstanding are up in the first quarter by about 1%, but we expect the full year impact of shares outstanding to be neutral. Looking at the key components of sales growth, as I mentioned, we delivered organic sales growth of 3.1%. Price improvements, particularly in Venezuela, the U.S. and the U.K., drove overall price by 3.8%, while volume declined 0.7% as increased volume in the Emerging Markets, as well as the U.K., Continental Europe, Canada and Japan, were more than offset by declines in the U.S. and Australia. Overall, the Emerging Markets led to sales growth, driving 13% organically, and representing 23% of total company sales. The acquisitions of Foodstar and Quero contributed 4.6% to overall sales growth. And finally, foreign exchange added 7.2% to our top line. As I noted earlier, our gross margin declined 90 basis points to 35.7%. In isolation, market prices for commodities would have cost us over 350 basis points for the quarter, but strong contributions from pricing and productivity offset much of this inflation. The impact of the acquisitions accounted for about 1/2 of the gross margin decline versus last year. Looking specifically at commodities, we've seen inflation in almost all of our significant inputs, particularly sweeteners, oils, dairy and resin. The overall result has been a market inflation for the quarter of around 8%. Now let's move to the balance sheet scorecard. Capital expenditures were 2.6% of sales, up 40 basis points from the prior year, with a higher spending rate expected for the balance of this year. Operating free cash flow of $97 million was down $120 million from last year, largely due to the timing of payables. Net debt to EBITDA improved 0.1x driven by lower net debt, and I'm pleased to say that S&P recently raised the company's debt rating to a BBB+. ROIC was 18.8%, down 20 basis points from this time last year. However, the base business continues to improve, as the recent Brazilian acquisition reduced the company's overall ROIC by 60 basis points. We should recover over time as profits in Quero continue to build. As I mentioned earlier, operating free cash flow was down $120 million versus last year. This reflects lower earnings as a result of the productivity initiatives and increased QOWC requirements, particularly in payables. Included in our results was $10 million of outflow for the productivity initiatives. I touched on the $75 million of capital expenditures earlier, and dividends reflect the 6.7% increase we announced in May. Finally, net treasury stock purchases up $44 million, reflect the acquisition of 1.6 million shares of stock at a total cost of $87 million. In summary, our performance for this quarter is slightly better than our expectations, and reflects the planned incremental investments back into our business to help support future growth. With that, I'll now turn it back to Art to update you on our full year outlook.

Great. Thanks, Ed. And just a couple of remarks before opening it up to your questions. Importantly, we are reaffirming our FY '12 outlook. This reflects our confidence in a number of actions that we've taken and are planning to take to yield a stronger second half. These actions include more flow-through of pricing, continuing innovation, productivity initiatives, cost containment actions and tax planning. All of these are expected to allow us to continue our aggressive investment programs while delivering our bottom line target. While currency is tracking positively on a year-over-year basis, it's too early to adjust our full year ForEx outlook. And just a quick comment on the shape of the profit curve for the year. We're expected to be a bit atypical with a stronger second half, benefited by the timing of pricing and prior year ketchup promotions in the U.S., improving productivity and less onerous commodity cost comparisons. And for Q2, we expect the EPS to be in line with or just slightly higher than prior year, due to the timing of pricing, the phaseout of Boston Market, a difficult commodity cost overlap and continued tough conditions in U.S. Foodservice in Australia, offset by a favorable tax rate. Beyond the second quarter, EPS is expected to build sequentially. So to sum up, our Q1 reflects continued solid performance in a challenging environment. Our key growth drivers, Emerging Markets, Top 15 Brands and Global Ketchup, are producing strong and consistent growth. We have strong operating discipline, which will keep us focused on making the right volume, profit trade-offs and to address our challenges in Australia. Overall, it's still early in what's shaping up to be another interesting year, but we're confident in our brands, people, skills and ability to respond to the consumer as she reacts to world events. And with that, I'll turn the call back over to Meg for Q&A. Meg?

All right. Operator, we're ready for Q&A.

[Operator Instructions] Our first question comes from the line of Terry Bivens from JPMorgan. Jessica Schmidt - JP Morgan Chase & Co: This is Jessica on for Terry. I'm just wondering if there's anything you've seen so far, with either in Foodstar in China or Quero in Brazil that surprised you? And then, net of investment, how quickly do you think these businesses can contribute to the overall profitability?

Yes. We're thrilled with the start that we're seeing in both Foodstar and Quero. We're making great progress in terms of the integration. We've got the right people in place. The organization is coming together nicely. You can see the gains we've made in the top line in over 20% in Foodstar. And a very solid 8% in the early going in Quero, 8% or 9% there, despite the fact that we're doing a lot of integration work, rolling out SAP, doing all those things. So everything we're seeing there makes us much more bullish, even than we were before, and we've had positive expectations coming in. And from a profit standpoint, they're doing well. They're slightly accretive for the quarter, which is a little better than we have originally anticipated. We don't expect a lot of profit from them this year. But net-net, we're off to a real good start and slightly helpful to EPS.

Your next question comes from the line of Alexia Howard of Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., Inc.: Can I ask about Australia? First of all, how large is that business for you overall? And did we see a marked deterioration this quarter? It seems that, that story has been around for a little while, has it got a lot worse recently? When do the comparables get easier?

Yes. Australia, a sizable portion of our Asia Pacific group, but a bit less than $1 billion roughly in sales. I wouldn't say it has precipitously gotten worse or anything like that. This is, as many of our peers have talked about, it is a very difficult environment. The reality is with 2 key customers there has become, as I mentioned, an inhospitable environment for grocery manufacturers, very difficult market. And so it's a -- with it being such difficult market, we're going to take the measures that we need to do to address that. And so we've seen our margins squeezed as the pressure comes on. And so what that means is we're continuing to upgrade talent, as I mentioned, we've just now appointed a new managing director there. We've done a lot to strengthen the talent in that organization. We're taking some very aggressive actions in terms of structuring the business and in terms of the cost structure. Because in an environment where the 2 customers are going to squeeze it that hard, I think being very, very cost competitive is going to be critical. And so that is going to be forcing our hand to do the right things from that angle. But we've got good plans in place. We expect much stronger back half than first half. But it will take us some time, and we're continuing to bang our way out of it.

Your next question comes from the line of Robert Moskow from Crédit Suisse. William Sawyer - Crédit Suisse AG: This is Will Sawyer, in for Rob. I wanted, Art, to ask a little bit about Europe. Obviously that's a challenging macro environment. But like you said, your performance was very good during the quarter, if you could just give us some or detail on how you're winning there?

Yes. I think Dave and the team are working hard, selling more product off the shelf at full price. They've done the job, in terms of taking pricing. They're also reducing their trade spending by cutting off the unprofitable promotions, so we're trying to do that smart. We're continuing to ramp up the innovation in that market, I mentioned a bunch of the innovations there. U.K. had a particularly stellar quarter, and clearly a tough market there. So that will continue to be a challenge, but the guys are doing all the right things. We're very pleased with the team there and what they're doing. And in the continent, we're seeing some pretty good results as well. Some of the things, local jewels as the guys would call it, Sprinkles in Continental Europe, some of the soup products all going well. And the, really, the thing that is going so well across the entire company, but particularly in Europe, is ketchup. Roel van Neerbos has been driving, not only that -- the Global Ketchup initiative across the globe, but obviously there in Europe. And we're seeing some great results there and we continue to think that we've got great opportunity to drive the Ketchup business. And as you know, that has very nice margins to it. So that has value to our benefits, both to the top line and bottom line. The team's banging away at it, also we've got a very busy agenda there. And as you know, we are putting in the supply chain hub, we're driving Keystone. We're building out the new innovation center, which will ramp up innovation even further in that business over the coming years. So a lot's going on. We're pleased with the results. But again, to your point, a very challenging environment, so we don't take that lightly and we're going to have to keep hammering away.

Clearly the benefit of strong brands in Europe, particularly the U.K.

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

You mentioned it's a bit too early to adjust your currency forecast or your EPS, including currency impacted forecast. But if I remember correctly, you were looking at something like $0.05 to $0.07 on the year, and you did about $0.05 in the quarter from currency. Just wondering based on current spot rates or forward rates, whatever, whichever you would feel more instructive, what would the benefit for currency be for the year?

Eric, keep in mind that currency last year sort of ramped up through the year, so really our easiest overlap is in Q1. If currency stayed exactly where they are right now, it would give us a bit more benefit than we had originally planned. But I've got to tell you, with the volatility we are seeing and the sovereign debt issues and the list goes on and on, I'm really not going to speculate right now as to where that could go. We've got volatility not only those European currencies, but some of the Latin American currencies. So we're going to -- we're just going to keep an eye on it. And as and if we get upside from currency, we'll let you know how and if we would use it.

Your next question comes from the line of Ed Aaron of RBC Capital Markets.

I guess this is shaping up to be an unusually back-half weighted year, I think it's best to be taken into consideration the quarterly tax flow dynamics. And I guess I'm struggling a little bit to get comfortable with that, because you actually got a decent amount of pricing through in the first quarter, and I was hoping you could maybe help me understand it by perhaps giving a little bit more color on the quarterly flow of the cost inflation that you expect to run through the P&L this year?

Yes, I mean, if you think about it, the cost numbers or the inflation numbers were up around 8% for the first quarter. We expect that to continue to be a tough overlap in the second quarter. That will start to ease off through the back half of the year, at least that's our expectation, and again, who knows. But that is certainly what we're expecting. So that becomes easier. The other piece of it is, and we mentioned this when we talked to you guys in May, that the pricing would lag a bit. And in fact that is proving to be the case. Particularly in places like Foodservice, where you've got national contracts in place that slowly roll over time. And so I think you will see through the back half, the pricing become more robust and the commodity inflation become less. That's the way our plan has always rolled out, so we're kind of tracking to the plan that we have laid forth.

And the other thing is, that the value, value engineering projects and that sort of thing, sort of ramp up through the year as you start with a group phenomena and implement them throughout the year. So that does much greater benefit in the back half of the year than it does initially.

Your next question comes from the line of David Driscoll, Citi Investments Research.

Art, you waited -- I'd like in your presentation that consumer confidence item, you talked about sovereign issues, debt issues and so forth. But your constant currency sales growth guidance is unchanged. So I feel like there is perhaps a little bit of a disconnect here, in terms of one of the biggest questions I think is out there is, how do we feel these kinds of pressures and then not see companies kind of update their sales guidance by, perhaps, lowering it on expectations of consumer pressures? This is a fairly large encompassing question, but as best you can, can you give us some thoughts as to why you would be as confident today in the constant currency sales growth guidance as you would have 3 months ago, given the fact that we've seen some very significant changes in the markets since that point?

Right, right. Good question, David. I think as you look at it, we gave constant currencies sales growth guidance of 7% to 8%, Q1 we were right at the top of that, the end of that range. And so as we look forward, and nobody's got a perfect crystal ball, but as we look forward, we fully expect that our sales growth will continue to be sort of at the top end of that kind of range. Where I think this changing economic environment will really impact is, potentially, in the gross margin area, where it will be tougher from a net price standpoint. Commodities are suddenly as high as we expected, or maybe even a little higher. And so as we look forward, I think the real where it will impact is more in the gross margins. So if you think about it, the way we're looking at the fuller projection, we are not changing anything official yet. But I think, hopefully, we'll be toward the upper end of the range on sales and maybe towards the lower end of the range on gross margin. But it's early in the year, we're only 3 months in, so we'll see how things play.

And maybe following -- go ahead, Meg.

No. I was just going to say, the teams, we've learned a lot over the last few weeks with the consumer. And so there's a lot of innovation that is being brought forward, different from what we would have planned, say 3 months ago. So really looking at sharp price point entries, getting to the bifurcated consumer, making sure that we've got product offerings for both. So we've got great innovation at the top line, new flavors, dinner formats, et cetera. And now we're looking also to drive that top line with some other product opportunities, maybe at the lower end of that scale. And to Art's point, that could drive a mixed shift for us, but we do feel good that we can grow even in this environment.

But I think Meg makes the right point on the sharp entry price points and sizes that allow people to play. Because you're seeing folks that are living paycheck-to-paycheck, and so it's less about the price per ounce and more about the entry price point. And so we're looking hard at that.

One follow-up, then, pursuant to the foreign exchange question. Would you agree then that if, given all this macroeconomic news and how difficult the environment appears to be getting, the foreign currency issue maybe provides some level of cushion. So I think if I read between the lines, you don't raise any guidance today, even though foreign currencies look to be considerably better than the $0.05 to $0.07 guidance provided 3 months ago. However, because of the macro side of it, it's too early to raise guidance because you might see more gross margin pressure. Is that a fair way to characterize things?

Well, I guess, who knows where the foreign currency goes. It's been awfully volatile. And so again, I'd be hesitant to try to peg anything going forward. But the other piece of it is, you know that this is a big investment year for us. And we see some great investment opportunities that will do the right thing for the long term of this business. And so that's the other thing we continue to look at. And so there's lots of levers and lots of things that we'll consider. But again, it's early in the year, and now we're 3 months in, there's 9 months to go, and we'll see how it plays and we'll keep you posted as we go.

I think if you look at currencies and -- they went up through last year, but as you look at the first quarter this year, you can get pretty excited from day-to-day and then pretty unexcited from day-to-day. So there's not a strong pattern. We saw a pretty big pickup during the latter half for last year. But during the first quarter this year, it's volatile. So I think it is too early to make a call for the year.

Your next question comes from the line of Jonathan Feeney of Janney Capital Markets.

I wanted to -- actually, I was going to ask a question, but you brought up a much better issue than what I was going to ask. So I'll just forget that. Meg, you talked about that bifurcated consumer, and both Meg and Art, I'd love to actually delve into that low-end consumer that I would guess is driving a lot of, say, the trade down behavior in the face of pricing or elasticity -- well, however you want to look at it, we know they're eating something, we know they're just spending less as they do it. I would guess that's the low-end consumer, and I would guess that positions your portfolio in a certain way. Maybe good for some brands, bad for others. I guess, what data do you have to like explain that? Do you think that the low-end consumer is driving a lot of this pressure, particularly in the U.S. and Europe? And do you think, what areas of your portfolio are sort of benefited and hurt by that, if it's the case?

Sure. Well -- and I'll start off with that. What we're seeing is a -- there's a portion of the population that has a very limited amount of funds. And we estimate somewhere between $40 and $50 a week to feed a family of 4, which is really stark, when you go to the grocery store and realize how tight that is. Value to that particular consumer is something completely different than mainstream or affluent. And value to that consumer is a price point. It doesn't matter what the cost per ounce is, it matters, "Can I afford to buy even a small portion of that this week?" And having small sizes, convenient sizes, convenient channels, convenient stores, pharmacies, dollar stores, quick small trips that are close to home as opposed to going out for the big loads at the supercenters. So there's very different behavior that's occurring. In fact, we are almost saying it's almost a trifurcation, if you will. Because we're seeing a consumer that is truly struggling, and value means something different. Our core portfolio in the U.S. tends to skew towards the more affluent. So you see Heinz products doing very well across mainstream, across the affluent, in the club stores, et cetera. There is a huge opportunity for us and we see it. We originally anticipated more of a recovery scenario. Now that we're seeing things get tightening again, we're looking very hard. We had a lot of plans that we're looking at it for, a lot of ideas, so these are things that are very close and ready to go that we want to execute quickly, but we're going to make sure we hit it right. By getting into the right channels, getting into the right size and format for a different consumer. And we want to make sure that we are appealing abroad. In Europe, across our other Developed Markets, a very similar story. And so our brands across Europe are very strong, and particularly in the U.K. And it's something we've been working on a Master-branded campaign across the U.K. to let the consumer know, that we're there for them, and have worked very hard though to shore up brand equity, but to make sure that we've got right serving sizes. We've gone more towards value sizes, larger sizes there. But of course, we have smaller sizes. We've got more of a tiered approach across Europe.

The other thing we're trying to do is keep top of mind. So we're continuing to invest in the marketing side of this, and the advertising message to make sure that we're the thing that's top of mind as people head toward the stores.

Just, Meg, to follow-up on your description, which was very helpful. Can all of that be accomplished? You mentioned price point, sizes, value. Can all that be accomplished in the context of flat operating margin, flat operating profit for Heinz as a whole, at least as it relates to the North American and European businesses?

You don't necessarily have to be trading off margin with smaller pack sizes and more competitive entry price points. You have to engineer it smartly with the cost structure and with the size related to the price. So it doesn't necessarily mean you're going to trade down margin.

This is somewhat new in the Developed Markets, but we've discussed this several years ago in relation to the emerging markets where we found out that people were not buying on a price per ounce, but buying per usage. So I think this is one of those times where we leverage -- able to leverage some of the experience we gained from the emerging market, bring it back here, for something that's not necessarily intuitive to the average American.

Your next question comes from the line of Bryan Spillane of Bank of America.

In looking at the comments you made about earnings expectations for the second quarter, the tax rate is going to be that low. I guess that implies that you expect the operating profits to be down again year-on-year, is that correct?

Yes, I think operating income will be a bit challenged in the quarter. Largely again, because of the gross margin dynamic. Because of the timing of the pricing and the timing of the commodity impact and the timing of some of the investment spend. So if you think about it, you've got all those things going on. And so over the year, I think even the investment spend overlap becomes easier as opposed to harder.

Well, last year, we kind of ramped up Keystone as we went through the year. We've kind of reached that peak, and so now the overlap is much more challenging in Q1, Q2.

So then the implied operating profit growth in the second half, which I guess, just rough math, it's got to be somewhere close to 15% for the second half to get to flat for the year...

Yes.

You'll have Foodservice probably come in below the plan that you originally -- I think you had 8% to 10% profit growth for Foodservice for the year, but the upside is going to be, I guess from Europe. And then also the productivity savings coming through in the back half of the year and the Keystone spending moderating, is that the right way to think about the second half?

No. Those are some of the key elements. Acquisitions should be gaining momentum through the year as well, so we would expect that to occur. And last year, if you recall, we had a very heavy investment spend in the fourth quarter that, really, it is a much different flow this year, much more front-weighted than back-weighted. So lots of different dynamics, but yes, it's a much stronger OI outlook in the second half than first half.

Your next question comes from the line of Karen Lamark, Federated Investors.

I just want to follow-up on the U.K. and maybe you answered it when you talked about the bifurcation of the consumer. But I'm trying to reconcile the macro pressures in that market with your results, and the confidence in your outlook. Is there something incremental, promotions, distribution, how are you sustaining the pricing and the volumes?

Good innovation, for sure. And I think very disciplined effort on the part of the guys to do the homework around trade spending. We brought in an outside firm to help us pull that apart and figure out where we were making money and where we weren't. We've implemented the recommendations coming out of that study, and I think that is being very helpful to where we can be good partners to our trade customers and help them and help us. So there's no reason to be doing these promotions that don't make anybody any money, and I think we've gotten much more effective at that. So a combination of innovation, pricing, good management and trade spending.

And I think last year, if I recall, in the early part of last year, we had taken some pricing. The price gaps versus competition sort of broadened our expectation, eventually, that they would see the same cost we did. And I think as we -- time passes, those gaps have somewhat narrowed in the first part of this year that helped us.

Your next question comes from the line of Chris Growe of Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc.: I had just a quick question for you regarding the Emerging Markets. I guess, if you look at the underlying sales growth of 13% in the quarter, with -- in rough terms, I'm sure you can't give these out, would profitability be about in line with sales. I guess what I'm trying to understand is, the degree of investment behind the Emerging Markets, is that marketing, people, infrastructure, is that all happening pretty early in the year, and will it sort of easily move throughout the year?

Yes. The reality is, we've got better growth at the bottom line than the top line. We're vesting heavily in the business, but when you've got that kind of strong top line growth, it allows you to do some things within the P&L and still deliver a darn good bottom line. So we feel very, very good about the Emerging Market, top line, bottom line, and the investments we're making. Christopher Growe - Stifel, Nicolaus & Co., Inc.: Okay. And then just somewhat related to that, I guess, if you look at the acquisitions initially, Quero and Foodstar, were going to be diluted to earnings, I think you're talking about maybe a slight bit of accretion now. Is that just better profitability or has something changed, kind of -- the idea was to market pretty heavily behind those businesses out of the gate, is that still something you're planning to do?

Yes, I think once we're ready, we will certainly get after the marketing side of it. Now in Quero, for instance, we have not yet turned on the marketing because from a capacity standpoint we're not quite there yet. Tomato processing, we've improved capacity, but we haven't done it yet on the corn side of things and some of the vegetables. Once we're ready with the capacity and things like that, we'll turn on the marketing. So in answer to your question, the improved outlook, profitability-wise, is not by spending less marketing, it is about good, strong top line, and good efficiency as we go in. And the integration process is working well so far.

Your next question comes from the line of Robert Dickinson of Consumer Edge Research.

Just a quick question on really strong pricing. Obviously, you've had a -- you've made a lot of comments just around gross margin, what's happening in COGS. And I think it seems as if that's actually fairly standard at this point for most other companies heading into Q2. With that said, if your guidance -- I'm pretty sure your guidance originally was for total company pricing for the year to be around 2.5% to 3%. If that's the case, should we be modeling now on a higher level like we saw in Q1? And I guess, two, are you finished pricing in Europe? And then, three, the 4% to 4.5% commodity outlook you had earlier in the year, has that gone up?

Well, I'm not sure we ever broke out price from volume. Our expectation that we laid out was 3% or 4% in organic growth.

I think it was in your -- it was at your Analyst Day when you did the bridge. I think you did a bridge between the bridge from fiscal '11 gross margin to fiscal '12 you said pricing, 2.5% to 3%, and deflation was down...

From margin standpoint, yes, yes, yes. How much pricing we get, I think is yet to be determined. I think if commodities continue to be high, or in fact increased further from here, we're likely to take more pricing in certain markets on certain brands. On the other hand, if commodity is slowed, then we'll feel a bit less pressure to do that. So I think we're going to retain our flexibility on that, and just see what makes sense over time. Again, we're early in the year, and we will see what transpires, both from a commodity standpoint and a somewhat related item where currency goes from there as well.

Okay, fair enough. So then, at this point the 4% to 4.5% is where it stands?

Yes, I mean, I think what we talked about from a market inflation standpoint for the year was around 7%. We're running higher than that on a year-to-date basis, and we'll see where we go from here.

Your final question comes from David Palmer, UBS.

Just a quick question on Ore-Ida. I understand that, that business has been hit a little bit by private label share losses, and that might be partly due to the retailer brands being slow to follow price increases. Why -- we haven't really seen private label being a big problem for all of U.S. packaged goods this year. Are you surprised by the level of trade down hit for that brand this year? What is the prognosis for that brand, perhaps getting some stabilization in market share? My hope, of course, is that this brand can be a source of improvement as we go through fiscal '12.

Yes, yes. I think if you recall, we took some pretty aggressive pricing early on, on that, and got out ahead of the market. So we have had a pretty sizable price gap in that arena. That's not really surprising, given the private label contracts and, again, private label is our key competitor there. Private label contracts are on sort of discrete time frames. So over time, you may see those contracts roll off and potentially prices of private label go up over time and that gap closing. We'll see. But at the end of the day, we did what we think is right for the category and right for us, and so we took price. The good news is we're back on air now. We were -- we were really off air for awhile in Q1, so we're back on air. And some of our comments earlier about entry price points and pack sizes and things like that are certainly things we're looking at with regard to our Ore-Ida. And we're continuing to drive the innovation, particularly on Sweet Potatoes. I think we've got a lot of things going there. But pretty sizable price gap, and we'll monitor that and do what we need to do to make sure that the business remains healthy.

All right. Okay. So just looking forward, of course we've got the Barclays Back-to-School conference. We'll be presenting the morning of Thursday, September 8. That will be Art Winkleblack and Mike Milone. And then, September 21 and 22, Bill Johnson, Art Winkleblack and myself, will go across the pond over to the BofA Merrill Lynch Global Consumer Retail conference, one-on-one conference there. And of course, we'll be around all day. Mary Ann and I in Investor Relations to answer all of your questions. Thank you.

Thanks everyone.

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