The Kraft Heinz Company (KHC) Q2 2012 Earnings Report, Transcript and Summary

Good morning. My name is Erica, 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 Second Quarter Earnings Release Conference Call. This call is being recorded at the request of the H.J. Heinz Company. [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, Erica, 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 available on our website at heinz.com. Joining me on today's call are Bill Johnson, Chairman, President and CEO; and Art Winkleblack, Executive Vice President and CFO. 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 27, 2011, Form 10-K and 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 law. 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 in the company's earnings release and on our website at heinz.com. Please note, we plan to file our second quarter 10-Q on Tuesday, November 22. Our complete financial highlights pages or stat pages will become available with the filing of the 10-Q and will be posted on the Investor Relations section of heinz.com towards the bottom of the page. The P&L is out there today. Now on to today's call. Bill will provide a strategic overview, and Art will review our category and regional segment performance, along with our scorecard and quarterly [ph] results. We've got about 20 minutes of prepared remarks, and we'll use the remainder of the hour to take your questions. We'd like to request that you limit your questions during the Q&A session to one in order to ensure adequate time for all who wish to participate and to ensure we end the call timely. And of course, you can get back in queue. Now with the formalities out of the way, let me turn the call over to Bill Johnson. Bill?

Thank you, Meg. Good morning, everyone. Before Art takes you through the numbers, I will briefly review our second quarter performance, which was led once again by our trio of growth engines: Emerging Markets, our Top 15 brands and Global Ketchup. I will also discuss our expectations for sequentially stronger results in the second half of the year, especially in developed markets where pricing and commodity costs should finally equilibrate. Overall, we are still on track to achieve our full year sales and EPS outlook. Turning to the second quarter. I would characterize our results as strong in Emerging Markets and mixed in Developed Markets. Reported sales grew 8.3%, and we delivered EPS of $0.81 a share before special items. Notably, we saw a combination of continued strength in Emerging Markets mixed with softness in some Developed Markets, primarily Australia, and our Foodservice business in the U.S., where consumer confidence fell to its lowest level in 30 years. Turning first to Emerging Markets. They continued to be our most powerful growth engine as they delivered 16% organic sales growth, which excludes any of our acquisitions. The growth was led by excellent results in Ketchup and Sauces in China, Latin America and Indonesia, as well as very strong performance in Complan and Infant/Nutrition. We have significant innovation still to come, and I want to be clear that I expect our Emerging Market growth rates to actually accelerate in the second half of the year. Importantly, our recent acquisitions, Quero in Brazil and Master in China, also performed well and continued to exceed our expectations in these 2 critically important Emerging Markets. Quero sales grew 8.5% in the first half despite capacity constraints and without the benefit of any marketing investment, which we commenced in early November. Sales of Foodstar's Master soy sauce brand grew around 30%, and I now expect Foodstar to deliver somewhere between $140 million and $150 million in sales this year, well above our plan. In both cases, we are focused on driving top and bottom line growth through innovation, marketing investment, channel expansion and improved capabilities. Overall, Emerging Markets generated the vast majority of the company's organic sales growth while representing over 20% of total Heinz sales. The second growth driver was the performance of our Top 15 brands, which now include Quero and Master. Reported sales in our Top 15 brands, including Quero and Master, grew more than 12% and accounted for around 71% of our total sales. Excluding Quero and Master, the remaining Top 15 brands delivered 3% organic growth in the quarter. The third growth engine was Global Ketchup. Lifted by higher pricing, strong sales results in Europe and higher volume in Latin America, Ketchup delivered excellent organic growth of 6.5% in the quarter and is up 7.4% organically year-to-date as we continue to successfully focus on innovation, new distribution and penetration opportunities. Not bad for a 135-year-old brand. We are keeping our flagship product healthy and growing with innovations like PlantBottle, Balsamic Ketchup and Dip & Squeeze, which was recently recognized with 2 major industry awards for innovation. Dip & Squeeze continues to build strong momentum in Foodservice. Wendy's is the latest customer to accept Dip & Squeeze, and the product is performing very well at Chick-fil-A, Dairy Queen and other quick-serve chains. Importantly, we'll shortly represent 25% of our single-serve Ketchup business, and we are essentially at full capacity. Separately, sales of our new retail 10 packs of Dip & Squeeze have just commenced. This is the first time a Heinz Ketchup innovation developed primarily for restaurants has achieved broad distribution in retail store sales. Finally, Heinz Ketchup with balsamic vinegar will reach U.S. store shelves next month after making a splash in U.K. earlier this year and after a very successful Facebook campaign commenced in the U.S. this week. This launch exemplifies the progress we have made in sharing best practices in new product innovation globally to grow our business. In summary, our trio of growth drivers, Emerging Markets, Top 15 brands and Global Ketchup, helped Heinz deliver our 26th consecutive quarter of organic sales growth. Turning you to Developed Markets. They were a tale of 2 cities with many of our mature market business units posting solid results despite the tough environment, led by another outstanding performance in the U.K. On the other hand, Australia and U.S. Foodservice continue to be very challenged, as Art described last quarter. In Australia, we are confronting a combination of weak categories, relentless promotional pressure and growing private label, as well as executional issues. We have significantly upgraded the management team and are aggressively working to simplify the business and reduce costs. Overall, we are taking action on many fronts to improve our margins. We are eliminating hundreds of SKUs, closing the sauces production facility in Girgarre, downsizing 2 other factories, reducing overheads and are working with suppliers and retailers to improve overall efficiency in terms of logistics and promotions. Turning to U.S. Foodservice. After 2 years of favorable profit trends, this year is clearly proving difficult. We are being challenged by significant increases in commodity costs, promotional price pressure and nonbranded back-of-house products and the lag in price realization at national accounts, as well as a downturn in traffic at key customers. The industry poses structural challenges to growth, and consequently, we are carefully reviewing the makeup of the Foodservice portfolio to determine where we are competitively advantaged. Our branded KC&S business, for example, is performing much better than our brand in the more commodity-oriented lines. We will share more on this during future updates, but for now, we're closing several factories and streamlining back-office activities to further reduce costs and eliminate what has become redundant capacity. We expect substantial improvement in Foodservice profit over the balance of the fiscal year as we lapped the onset of higher commodity costs last year and benefit from the rollover of our pricing initiatives. Together, these 2 actions alone should be worth approximately $20 million to $25 million in incremental operating profit in the second half of the year versus our first half performance. We anticipate substantial improvement in both Foodservice in Australia during the second half in response to our recent actions. Stepping back and viewing North America in aggregate, the combination of steep unemployment and historically low consumer confidence dampened consumer grocery spending in August and September, especially in the frozen food aisle. Importantly, we saw improvement in October, which is continuing into November. North American sales results reflect category weakness across the frozen aisle, as well as price-related volume softness on our item. Overall, our ambient product line performed far better. Consequently, organic sales in North America Consumer Products would have been up almost 2%, excluding Ore-Ida. I am encouraged by the continued growth in Smart Ones' share behind the launch of bag meals and several breakfast line extensions, although the frozen nutritional category does remain soft in line with consumer confidence. We are launching a number of innovative new frozen ambient products in the third quarter that have been tailored specifically to meet the needs of U.S. consumers with tight grocery budgets. Our launch includes several items with compelling price points of $0.99 and $1.99. These products have been developed to deliver the same great taste that we always do and value in affordable sizes while maintaining, and in some cases, building on historical margins. The initiative will feature a new 10-ounce version of Heinz Ketchup and standup pouch packaging with a spout and a suggested retail price of $0.99. Many other products will also be priced around $1, including new retail sizes of Heinz mustard, Heinz Worcestershire sauce and Heinz 57 sauce. Additionally, we have just launched Heinz Home Style Beans by slightly higher than $1 after encouraging results in a number of test stores. Over the years, countless U.S. consumers have requested that we bring back Heinz beans, and we believe this is the right time for the return of this convenient, nutritious and value-oriented classic. Consumers have been turning to comfort foods during the recession, and the recent consumer opinion poll ranked baked beans as the #2 comfort food. In frozen, we are launching a 1-pound bag of Ore-Ida French fries late in the quarter at the suggested retail price of $1.99 to address consumer requests for increased affordability. Data shows that 1/3 to 1/2 of unit purchases in many U.S. product categories are now of small-size SKUs as many consumers are shopping from week to week to stretch their food dollars. Importantly, these new products will enhance our ability to serve the rapidly growing number of U.S. households with incomes below $50,000. As you can see, this income bracket has grown 3x faster than households with income above that threshold. Overall, U.S. consumers remain loyal to Heinz and are extremely satisfied over the quality and value of our products. That fact was reinforced this week when were notified than Heinz ranked first in overall customer satisfaction among all of the 225 companies across 47 industries in the 2011 American Customer Satisfaction Index. Heinz led all companies with an overall customer satisfaction score of 89, which measures performance in quality, value, consumer loyalty and consumer expectations. The Heinz brand topped all brands ranging from Apple and Cadillac to Google and Lexus. Heinz also led all food manufacturers for the 12th year in a row with a score 8 points higher than the industry average. Outside North America, we are responding to consumers' desires to economize on a price-per-ounce basis by introducing Extra Free packs of beans and soup in the U.K. and a 1.5-liter variety of Heinz Ketchup across continental Europe. In Europe, where the economic climate remains volatile, Heinz will also launch a number of products priced around EUR 1, including entry-priced varieties of Plasmon, the leading brand of baby food in Italy. In addition to innovation, marketing is a key to unlocking growth in our core portfolio. Marketing spend is up strongly year-to-date, and I expect it to increase at a high single-digit rate for the year to help drive stronger organic growth across the second half. In addition to continued marketing investment behind our leading brands, we remain committed to our sizable investment in Keystone, our global initiative to upgrade and standardize processes and systems. We continue to take a long-term view of the company, and these investments will position us well in the future. Looking forward to the remainder of the year, we expect our second half results to benefit from improved results in U.S. Foodservice in Australia, rollover pricing and a relative easing of commodity inflation, stronger volume, as well as even greater growth in Emerging Markets than we experienced in Q1 and Q2. We are making progress in our value engineering and productivity initiatives, and I am pleased with our results in this area. And as always, we will not sacrifice quality and safety in the name of savings. SG&A comparisons in the second half should be easier as well than they were in the first half. As you will recall, in the back half of last fiscal year, we were affected by some nonrecurring expenses such as the closing cost of the Quero acquisition, increased investment to drive innovation and fund expansion in Emerging Markets, and we significantly stepped up our investment in Keystone. Our investment in Keystone is a critically important component of our productivity initiative, but it does represent a substantial headwind. Nevertheless, as I stated earlier, we remain on track to achieve our previously announced constant currency EPS outlook of $3.24 to $3.32 for the full year, excluding special charges for our onetime productivity initiatives. Heinz continues to expect constant currency sales growth of 7% to 8% and EPS growth of 6% to 8% for the full year, excluding the special charges. We also expect strong operating free cash flow of approximately $1.15 billion for the year excluding charges on more than $1 billion on a reported basis. Overall, Heinz continues to drive strong growth in Emerging Markets, our Top 15 brands and Global Ketchup. We are taking decisive but prudent actions to reduce cost and develop markets, and we are continuously analyzing additional programs to drive increased shareholder value. Furthermore, we are evaluating numerous M&A opportunities in the emerging world to build on our already strong momentum. With our continuing focus on operating discipline and productivity investments, we believe we are well positioned to continue driving solid organic growth, led by our trio of growth engines: Emerging Markets, our Top 15 brands and Global Ketchup, which, by the way, continues to support our troops via the Wounded Warrior program, which is working very well for us. Thank you. And with that, I'll turn it over to Art.

Thanks, Bill, and good morning, everyone. Today, I'll take you through our Q2 results with brief update on the first half and the shape and phasing in the P&L as we look forward to the remainder of the fiscal year. Overall, Q2 results reflect the strong top line performance, continuing investments to drive future growth and productivity and significant challenges in Australia and U.S. Foodservice. In short, we are largely in line with our expectations and driving growth despite a very challenging environment in developed markets. Let's first ground you on our EPS performance on a reported constant currency and x-items basis. To summarize for Q2, reported EPS was $0.73, which reflects $0.08 of charges for onetime productivity investments announced back in May. Stripping out special items and the favorable impact of foreign currency this quarter, EPS was $0.78, flat to prior year. Note, however, that this includes the higher cost for Project Keystone that we discussed back in May. And finally, EPS, excluding special charges, was $0.81, up 4%. Now before going through the P&L x items, let's quickly review the special charges for the quarter. They included $14 million of severance and employee benefit costs for reducing the global workforce, $12 million of asset write-offs associated with the closure of 5 factories and $11 million of other implementation expenses primarily related to the supply-chain hub in Europe. Overall, we recorded pretax charges of $37 million or $0.08 per share. The entire amount was reported in the non-operating segment of our financial statements. And turning to the P&L scorecard x items. Revenue growth was driven by recent acquisitions, foreign currency and organic sales growth. Gross margin was down 180 basis points, reflecting the results in Australia and U.S. Foodservice, as well as what we expect is the toughest commodity overlap of the year. We continued to invest in marketing, up about 9.5%, and operating income was down, more than all of which was due to Australia and U.S. Foodservice. OI for the rest of the company was up by more than 5%. In terms of currency movements, we benefited by $0.03 from foreign exchange, driven by the pound and the euro, which have exhibited surprising strength in the face of sovereign debt concerns on the continent. These currency movements offset a portion of the very high inflation we experienced in the quarter. Taking a look at the P&L, let's focus on the few lines I haven't yet reviewed. Increased SG&A reflects the impact of acquisitions, increased capabilities in Emerging Markets and investments in Project Keystone, partially offset by aggressive cost management in developed markets. Below operating income, higher net interest expense was more than offset by currency gains this year. And as we projected on last quarter's earnings call, our effective tax rate was very favorable for the quarter, benefiting from effective international tax planning and positive international audit settlements. Looking at the key components of revenue growth. Organic sales grew by 1.5%, and constant currency sales grew almost 6%. Volume was down due to Australia with declines in restaurant traffic in U.S. Foodservice as a result of price increases and promotional timing in the U.K. and U.S. Price improvements of about 4.5% were driven by the U.K., the U.S., Latin America and China. Our recent acquisitions are performing very well and increased company sales by 5%. This was partially offset by the exit of the Boston Market license in the U.S., and foreign exchange contributed almost 2.5 points to sales growth. As I noted earlier, gross margin declined 180 basis points, half of which related to Australia and U.S. Foodservice. Overall, margin inflation on commodities was about 10% this quarter. This double-digit inflation represents more than 400 basis points of margin in Q2, and we expect this inflation rate to be the high watermark for the year. While we delivered solid pricing and productivity gains, they only partially offset this very significant inflation. Market inflation on commodities was driven primarily by sweeteners, resin for plastic bottles, beans and dairy products. While we continue to expect moderating cost comparisons in the second half, full year market inflation is now expected to be about 7.5% or 50 basis points higher than our projections back in May. This represents an additional hurdle of about $0.05 of EPS. As high as our inflation rate was in Q2, the CRB commodity inflation index increased at an even higher rate. It was up 15% in our second quarter, 5 points higher than the market rate of increase on our commodities. It is important to note this sharp increase in inflation in the back half of last year. This is what gives us confidence that our cost comparisons will become progressively easier through the remainder of our fiscal year. Now let's take a quick look at the top and bottom line performance in each of our key segments. First, in North American Consumer Products, we posted relatively flat results from a very difficult market. Organic sales were up slightly at 0.3%, offset by a 2% impact from the exit of the Boston Market license. Operating income was down about 1 point. We generated solid sales growth in frozen entrées, ketchup and another sauces, offset by lower sales of Ore-Ida frozen potatoes and Classico pasta sauce. Our growth in frozen entrées was driven by share gains since the category was down, reflecting exceptionally low consumer confidence in the U.S. Gross margin was impacted by commodity inflation, which outpaced pricing and productivity gains. Given the tough economy, we aggressively manage discretionary spending and are adapting to the changing environment. As Bill discussed, we are addressing the Ore-Ida price/value equation and launching new products with more compelling price points. U.S. Foodservice business had a difficult quarter and a very tough environment. Overall, sales were down almost 3%, and OI declined 33%. As Bill said, Q2 sales were impacted by declines in customer traffic and promotional timing. Compounding the weak traffic trends, commodity inflation in U.S. Foodservice impacted gross margin by more than 500 basis points. We expect better performance in Foodservice over the back half of the year with improved price realization, moderating commodity inflation, increased productivity and a better overlap in SG&A. Despite the headlines coming out of Europe these days, Heinz posted very solid results in Europe with constant currency sales up almost 3% and operating income up about 3.5%. The U.K., Germany, Nordics, Eastern Europe and Russia set the pace for sales growth in the region. Organic sales growth and gross margins were up based on pricing and increased marketing. We continued to deliver strong growth on our flagship Ketchup product in Europe. For the quarter, organic sales of Ketchup were up about 6%. The growth across much of the region was partially offset by reduced organic sales in Italy where the key baby food categories declined during the quarter. Importantly, we continue to drive our aggressive change agenda across Europe. As part of this, we move forward on Project Keystone with the rollout of new processes and initiation of the project in Germany, brought the Netherlands and the Nordic into the supply-chain hub model and broke ground on the new European innovation center, which should be a key catalyst for faster and more effective new product development in Europe. Overall, we delivered very solid results in the tough European market and continued to invest for the future. The Asia Pacific region posted mid-single-digit constant currency sales growth but incurred sizable reduction in profitability during the quarter. Emerging Markets continue to drive strong growth, driven by Complan in India, ABC sauces in Indonesia and by both baby food and western sauces in China. Additionally, we're seeing great growth in Foodstar. Lower profit reflects the performance in Australia. As Bill mentioned, we're taking very aggressive action in this market. With the new Managing Director in place, we're improving commercial capabilities, dramatically simplifying the business, reducing the cost structure and focusing on better day-to-day execution. Underscoring the dichotomy in sales growth trends in this segment, constant currency sales from Emerging Markets grew 31% in the quarter, while Australia's top line was down on the double-digit rate. And the other developed markets in the region were basically flat. August and September were particularly difficult in Australia, following a price increase with better trends in October and early November. Turning to the Rest of World segment. Constant currency sales more than doubled, while operating income grew more than 150%. This growth was driven by a very strong performance in Latin America, reflecting price, volume and share growth. The strong start with Quero in Brazil, largely related to good growth in the sauces category. And importantly, we just recently launched the first TV advertising in the company's history. And finally, we're launching new baby food pouches in Mexico and Central America. Moving to cash flow. Our operating free cash flow was $131 million for the quarter. This is down versus last year but in line with our plan expectations. The reduction versus fiscal 2011 largely reflects the impact of higher inventories and onetime productivity charges. Capital expenditures at 3.6% of sales were higher than last year, but again, in line with expectations for the year. Finally, during the quarter, we repurchased 1.4 million shares at the total cost of $73 million, partially offset by cash from options. This is in line with our stated goal of keeping diluted shares flat for the year. Now let's take a very brief look at results for the first half. Year-to-date P&L show sales up 11.5% and EPS up almost 4%. These are in line with our expectations, but the shape of the P&L is different than planned. Gross margin is lower, which is offset by a lower tax rate and strong performance in the U.K. and Emerging Markets. In terms of the balance sheet, year-to-date cash flow of $228 million is below prior year due to inventory, cash taxes, capital spending and special items. We expect to accelerate cash flow in the back half, consistent with our typical annual phasing. Net debt to EBITDA is up slightly, reflecting our emerging market acquisitions late last fiscal year, but remains low at 2.1x. ROIC is down, also due to the acquisition. But excluding the Quero deal, ROIC would be up 10 basis points. Now I'd like to make a couple of comments on the full year outlook. As Bill said earlier, we remain on track for the full year sales and EPS outlook that we discussed back in May. On a constant currency x-items basis, we expect sales growth of 7% to 8% and EPS growth of 6% to 8%. And we continue to expect operating free cash flow of $1.15 billion before onetime productivity charges. And clearly, given the economic headwinds we are facing and the difficulties we are encountering in U.S. Foodservice and Australia, we expect to get to our full year EPS target in a different way. Specifically, versus the original plan we discussed in May, we expect a lower gross margin, driven by higher commodity inflation and challenges in Australia and U.S. Foodservice, offset by stronger results in Emerging Markets in the U.K., reduced SG&A costs through tight management of discretionary spending, lower net interest expense from lower market rates and strong treasury management and lower taxes with a global effective tax rate in the mid-20s related to a very effective foreign tax planning and favorable international audit settlements. And I want to reiterate what I said last quarter. We expect Q3 EPS to be higher than Q2 and Q4 EPS to be higher than Q3. And before summarizing, I want to update you on special items for the year. As you'll recall back in May, we discussed productivity initiatives that would have an impact of $160 million of operating income, $0.35 of EPS and $130 million of cash flow. We believe we are on track for these projects in terms of timing, costs and benefits. And in order to even more aggressively address the difficult environment in which we are operating, we have continued to look for additional opportunities to simplify the business and drive shareholder value. As a result of this effort, we've identified additional projects in FY '12 that will cost $55 million of OI, $0.15 of EPS and $20 million of cash flow. These projects are expected to result in the closure of another 3 factories worldwide. We'll talk more about these projects in the coming months. So in summary, we're posting solid sales and EPS results in a very challenging environment; driving top line growth in Emerging Markets, our Top 15 brands and Global Ketchup; continuing to invest in the business for sustainable long-term growth despite the environment; and expecting stronger organic growth, easing commodity headwinds and more favorable cost comparisons in the second half. With that, I will turn it back to Meg and take your questions. Meg?

Great. Operator?

[Operator Instructions] And our first question comes from the line of David Palmer with UBS.

Guys, first question on Ore-Ida since that's obviously been a struggle. That brand has had some volume issues. It's somewhat surprising if you were to take a step back. Ore-Ida is a power brand in your portfolio. So to see it struggle the way it is, you would have thought that this brand is not just about the functionality of like the microwavable fries and that the private label risk to it would not be as great as it appears to have been. What's the prognosis for the brand, I mean, is -- and the plan to sort of get the volume turned around with that brand?

Yes. I think, David, the thing to keep in mind on Ore-Ida is that private label has always been a big piece of this category, and it's probably one of the more price-sensitive brands we have in the company given the gap that has increased. We took significant pricing on Ore-Ida. Nobody else moved at all on Ore-Ida. That is being corrected now as we're seeing private label prices move up, and our own prices are being addressed through D&A and through discussions with customers regarding what's better for the category. The second is, I think our plans were a bit feckless and pallid. I don't think they worked very well. I think they were pretty boring. And so we've got a lot of things in place. First, we are adding some additional D&A into the business to bring price points back down. Second, we're adding some marketing money back into the business to restore some advertising in the second half of the year, which we know drives this brand pretty well. Third, we have the small-size package coming. We started producing this month. It will start shipping in January at $1.99 price point or probably lower in some accounts, depending on what they want to do with it. And at 1 pound, it offers a family of 4 terrific value, and we know that, that will drive solid business while helping us in maintaining our margins. Fourth, we have a lot of new product activity coming, much of which we'll talk about in our next call because a lot of it doesn't occur until Q4. We've just launched 2 new sweet potato fry items in Crinkle Cuts and Straight Cuts. They've just gone into the -- or just going into the market now. We've got Ore-Ida casseroles coming probably in January. So there's a lot of activity on Ore-Ida. The issue on Ore-Ida for me was that we moved too slowly. And I just did not feel that our marketing teams moved quickly and aggressively enough, but I can tell you, in the last 2 or 3 weeks since we've taken a number of these actions, our shares in the accounts where we've done a lot of things have moved up upwards of 250 to 350 basis points, 2.5, 3.5 share points. So I'm not concerned about getting it fixed. I'm just a little annoyed that it took us as long as it did.

And then just as a separate question on the smaller package sizes in general. Why are smaller sizes the answer? I mean, what is it in your analysis and your consumer work or even what you're seeing in terms of activity out there that make you think that smaller package sizes are what will help the volume trend?

Because that's where the consumer is going. The consumer data, and I mentioned in my comments, says that half of consumers now are buying smaller sizes with lower and more compelling price points in virtually every category in which we operate. We've seen it in Europe. It's now starting to come to the U.S. Partly, that's a function of a number of consumers shifting to dollar stores. Partly, it's a function of price point management with consumers shopping week to week. Partly, it's a function just of general economic malaise that we get back from our consumers and focus group research. But ultimately, we're seeing a lot of the categories downsize. Historically, what you would have seen is price per ounce management on the part of the consumer where they would have gotten the larger value sizes, but we are seeing a dramatic shift to smaller sizes, which is the reason we're launching the 10-ounce pouch ketchup, Doy pack ketchup, which really, we've been doing in the rest of the world for quite a period of time. We've brought beans into the country. We are doing a lot of stuff on sauces, bringing in some of the Foodservice items, rebranding them, putting them in the retail side, which allow us lower price points with very good margins. But compelling price points seem to be key as people are shopping week to week or paycheck to paycheck. And so our research clearly points out that consumers want smaller entry sizes and they want more compelling price points. And so we can give them both while protecting our margins and really driving the businesses forward.

Our next question comes from the line of David Driscoll with Citi Investment Research.

Bill, really want to just question here about risk, whether this is real or perceived, and hear your answer on my focus really in Europe. So Bill, can you discuss how you expect the Heinz portfolio to respond to a recession in Europe? Volumes were down, I think, about 2% in the quarter, and economic conditions are likely to deteriorate significantly in the coming quarters. I get this question more than I get anything about your operations. Folks are just focused on this like a laser? And how do you respond to it in terms of what you think the downside could be? In many cases, it's beans and simple items that you have, but people seem to think you guys have a lot of downside on volumes next year because of economic weakness. What are your thoughts?

Well, my first thought is I've been hearing that for quite a period of time, and I don't mean to be Solomonic and create some level of wisdom beyond that of the market because, clearly, we're not smarter than the market. Having said that, I think our U.K. performance, which has fundamentally defied gravity, is being driven by a number of things. One, we probably have the best sales organization in the U.K. We have great insights and great leadership. We have a lot of innovation coming. We've got the Squeeze & Stir soups, which just launched in July and are doing really well. We've got the pouch pasta products at a lower price point, which are doing really well in the U.K. The U.K. team was courageous, took a lot of price. Therefore, their marketing spend is also up and oriented against a very powerful brand in the Heinz brand in the U.K. And so we're doing very well. We've got a new Aunt Bessie's lineup coming in December -- November, December that looks very strong in the U.K. And I know you'll all be in a hurry to try the new Duck Fat Roast. They're delicious product. They can't get me to try it, but I'd be glad to share it with you the next time we're all together. In the continent itself, I mean, we grew volume in Germany, France, Spain, the Nordics, I mean, Poland, Russia, literally across the board. And the third thing is that the ketchup continues to grow very quickly across most of the European market. I also indicated we're introducing different pack sizes in the U.K. We're introducing pack sizes with free units across the rest of the continent. We're looking at areas priced around EUR 1. In Italy, we've got a lot of new product activity coming. They've got the new Aseptic line just now shipping, which is a big breakthrough from a product standpoint for the consumer. We're going back to individual packs in Plasmon so that we can price down against a consumer who's basically telling us they're buying fewer of everything and they what a lower price point. And so we can protect both margins and our consumers and allow them to continue to buy. But I just don't see the downside in Europe for our business. Now the other thing we've done, remember with project score [ph], we are consolidating our supply chain in a central location in Europe, which will make us far more efficient. And a lot of that efficiency is going to be spent back in support of these businesses. And we have a great deal of new product activity coming. We're also growing very rapidly in the Eastern markets. Poland has come back quite strongly. Our Russian Ketchup shares this quarter hit all-time highs. The Heinz brand itself hit a 39 share in Ketchup in Russia, which is an all-time high. Our total collective Russian business hit a 57 share in Ketchup in the key accounts. So we are continuing to drive volume in areas where we think we have competitive advantage. And if we have a recession area environment in Europe, for most of the Europeans, it's not going to be any worse from a consumer standpoint than they already perceive things to be, because the things we hear back in focus groups in our research in Europe is that the Europeans don't believe they ever came out of recession. And in fact, if you look at the latest Nielsen data and their online surveys where they do a lot of consumption and consumer work, consumer confidence declined in virtually every market we operate in, in the developed world last quarter. It went up in the developing world where we are really focusing a lot of our efforts. But I feel actually pretty good about Europe. For the company itself, our second half organic sales are going to be considerably stronger than they were in the first half, driven by a lot of innovation, a lot of targeted promotion. And we have terrific leadership in Europe. And so if any of our businesses can withstand the recession, I think the European guys are well positioned.

And David, one thing I would add to that, remember that we're putting in the Europe R&D center, which historically did not have that capability. The R&D effort has been very fragmented. So by pulling that together, we think we will have much better insight and much better capability to react to the marketplace whatever comes.

One quick follow-up. Are the new dollar items margin neutral to your business?

For the most part, yes, both in the U.S. and in Europe. Some of them are margin enhancing, and I won't get into the specifics. But most of them are margin neutral or better. There are a few exceptions but not many.

Our next question comes from the line of Alexia Howard with Sanford Bernstein. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: I wanted to ask about the 2 acquisitions, Foodstar and Quero. It seems as though Foodstar is getting off to a rocketing good start with the sales growth being at 30%. Quero seems to be solid at least of an 8% to 9% level but obviously not quite as fast as Foodstar. I mean, does that represent the upside? Is there more upside from the Foodstar acquisition? Or is it that you're waiting to get going on Quero? And what are the biggest sort of surprises or lessons learned from each acquisition so far?

Well, I think -- and let's talk about Quero first. Quero grew 8.5% in the first half. It's up over 10% in October. It will be up over 11% into Q3. You've got to remember, in Quero, we spent the first 3.5 months integrating the business. We have not spent marketing. I believe we spent about $400,000 in total marketing in the first half of the year on Quero. We were short of capacity, particularly in corn processing. And so we are now in the process. We've just turned television on for the first time ever, the first second week in November. We are just taking the Heinz brand into Quero. We've added capacity. Our supply chain team, global supply chain team, just came back from a visit to the factory outside of São Paulo and are raving about the opportunities, particularly on pouch and on tetra pack where we can run tetra pack faster than we can run cans in many parts of our business. So I think in Quero, you will see a substantial increase in second half sales as a function of the marketing investment and a lot of the new items we're putting in place. On Foodstar, my concern on Foodstar is not growth. My concern is how we're going to stay up with it. We grew 30% on the Master brand and Guanghe brand in the first half of the year. October sales were up 69%. November sales are running at about that level, north of 50%. The Shanghai factories come online, but it is nowhere near ready yet to handle the kind of growth we are seeing in Foodstar. Foodstar is a function of a lot of things, a lot of new product activity, significant levels of advertising again, which we haven't started yet in Quero. We've gone into our third province. So we're in Guangdong. We're in Fujian. And we've gone to Zhejiang. And so I think, excuse me, Foodstar, I mean, we have a tiger by the tail. The other thing on Foodstar that's really helped us is also the Guanghe brand, which is in the white bean curd market. The red bean curd market is where the growth is, and we are just now launching into the red bead curd market. We have a lot of new product activity to take us in the other 3 segments on soy sauce. It mean, Foodstar is a business, frankly, that every time we have an update with the Chinese team, we take the number up and ask ourselves how we're going to continue to supply it. And that -- I don't mean to be flip on that. That is a concern we have. This business is just growing so rapidly. And we're still only in 3 provinces. We're hitting less than 200 million people in a country of 1.2 billion. But Quero itself in the second half will grow substantially faster as we infuse marketing. Foodstar will continue its growth in the second half. And as I said at the outset, our Emerging Market businesses in the second quarter were up 16% organically. They're up between 14% to 15% for the first half. I expect our Emerging Market businesses organically to be up somewhere between 10% and 20% minimally on that growth rate in the second half of the year as we lap the purchase of Foodstar, as we continue to drive significant growth in China. We have a lot of innovation coming in China, a lot of innovation coming in Poland. We have launched cheese sauce in Russia, which is doing spectacularly well. This is a product that actually is out used by -- versus ketchup in McDonald's in Russia, which we supply. And so there's just a lot of activity in the Emerging Markets. And while, obviously, we do have some concerns about the economies in those markets, if anything, I think our growth rate in the second half of the year will be dramatically better on these businesses. It's just a lot of activity. The other thing in Quero we've done is we've infused new management-added capabilities to the business that we do not have before. And in fact, interestingly enough, the Brazilian team has been on the phone with the U.S. team, giving them insights on how to drive Doy pack ketchup and how to drive other businesses like they do in Brazil. So I mean, I think from those 2 acquisitions, we feel pretty sanguine about where we're going.

The next question comes from the line of Thilo Wrede with Jefferies & Company. Thilo Wrede - Jefferies & Company, Inc., Research Division: Bill, can you maybe give us a little bit more color on what you're doing differently in Australia these days, what changed from last year and really where is your confidence coming from that the business in Australia will improve in the second half?

Well, the good news it has no place to go but up.

And it has been so bad. I will tell you, in the second quarter, the bigger hit to the company, in my view from an unexpected standpoint, was in Foodservice. We actually were anticipating the Australian issues we experienced. As Art mentioned, we've changed the management team in Australia. We are doing an aggressive job of looking at cost. We've shut down the Girgarre factory, which is a tomato processing plant we've had in a Australia for a number of years. We've downsized 2 other facilities. We're reducing the number of SKUs. We have greatly improved our relationships with the 2 retailers there. That's a tribute to Nigel Comer who came over from New Zealand to sort of dress up the business in terms of trying to get it fixed. We lap at the end of the third quarter, the discontinuance of tuna by 1 of the 2 major customers last year. So we don't have to deal with that after the month of January. So we get a big pickup going forward from that. We've got a lot of innovation coming and just a lot more clarity in terms of the focus. I mean, the reality on Australia, it's almost come to the point that it's become fairly immaterial to us going forward because it has taken such a hit. A lot of activity in Australia, and I feel much better about the prospects for Australia going forward than I have in several years, but the key thing is the improved relationships with the retailers and our ability to start working with them on more efficient and effective promotion activity and the focus on the right brands. We are really renewing our focus in Australia on Infant/Nutrition where we think there's significant opportunity and the category is doing well. A lot of activity in new packaging and opportunities to reduce price points in beans and in soup. And then just a lot of activity across the business. And so I think with the new leadership, we just -- we've seen -- I said to them on a call the other day, I've seen a bounce in their step that I haven't seen in the last couple of years. So I think from that standpoint, the second half of the fiscal year in Australia will perform on a relative basis versus first half dramatically better. And the good news is that our expectations that you've seen that we've shared with you in terms of where we think the year will end are not really expecting a lot out of Australia in the second half. Thilo Wrede - Jefferies & Company, Inc., Research Division: Maybe if I can ask one quick follow-up. I mean, just listening to you talk about all the regions, all the different categories that you compete in, it sounds like everything is already great or is just about to become really great. Do you have any concerns about your business right now?

Sure. I have many sleepless nights. The concerns I have relate to the global economic environment. The concerns I have relate to the productivity initiatives we're under doing, and will they become a distraction? The concerns I have always relate to the retention of our management team, in the businesses where we're doing well like Europe, Emerging Markets and those kinds of businesses. I worry about complacency and people taking it for granted. Yes, there are a lot of areas. But I can tell you, Thilo, in the second half of the year, our organic sales are going to be up dramatically more than they were in the first half of the year. And the thing that I think people are forgetting in the second half of the year, we lapped 2 big labor situations last year, one in Latin America, one in the U.K. We've got a lot of new product activity coming that we didn't have in the second half of last year. We lapped the SG&A where we really started commence spending on Keystone aggressively towards the end of Q3 and all through Q4. We had a lot of additional investments in other areas last year. And as Art mentioned, we obviously had the Brazilian close in the month of April. So there's a lot of things going on in the second half of the year. But I don't want anybody to misunderstand my comments. I am not at all sanguine about the prospects for the industry and about our business without a lot of work. We have good leadership in place now. But I can tell you and you should recognize that with the additional productivity charges, which are focused, you should assume, I'm not going to detail yet where because employees haven't been talked to, but you should assume their focused on our problem businesses. This is going to continue to be an ongoing struggle in an industry right now that's not being helped by the global economy that is dealing with significant commodity inflation which lessens for us on a relative basis in the second half. I mean, and just gave you some perspective. The Foodservice inflation in the second quarter was over 11%. In the second half of the year, it's about half that. And our pricing, we just took our third increase on Foodservice last week. We'll roll over into the next 6 months. So I don't want anybody to misunderstand my comments. I do feel very good about our emerging market prospects, and I think 16% organic growth in the second quarter should not be taken for granted. And I think we'll substantially improve on those numbers in the second half given the, hopefully, no repeat of our labor situation last year and a lot of new product activity and the fact we lapped the Foodstar purchase. So there's just a lot of stuff going on. But as the people who work for me, I'm sure, will be glad to tell you in a private moment, you should not think we go into these calls with our business units with a big smile on our face.

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

Bill, I wanted to follow-up on -- you've listed a number of markets in Europe where volume was up. I mean, am I misunderstanding that? It looks like volume was reported down 2.9%. Where was the significant volume decline that offsets all of those positive performances on those countries?

U.K. and Italy. But the U.K. got more price than it did volume. They took significant pricing at the end of Q1 through Q2. And as a result, they have continued to turn around and spend some of that back. But volume was down significantly in response to that. The categories were down. And in Italy, the baby food category has declined pretty significantly over the last 3 to 6 months, and so we saw some volume decline there. We did take some pricing, but it was not enough to offset the volume. But the U.K. and Italy were basically the only markets in Europe to see volume down for the quarter.

And as far as -- you mentioned Emerging Market volume -- revenue of 16%. Can you give a -- I know you haven't historically wanted to get into Emerging Market volume, but can you give us a sense how that splits between volume and pricing? Because I know there's been some significant price mix issues, currency issues.

No.

There is both.

We are also getting a fair amount of price, but we also had very strong volume in the quarter. And I think in the second -- and let me put it to you this way. Price was more than volume. In the second half, I think volume will be the same or close to price. So you should just assume more price than volume in the first half. The reason I don't like breaking it out is because these markets move all over the place on a quarterly basis depending on the NPD. But volume was up. Price was up. In the second half of the year, volume will be up commensurately more than price in the Emerging Markets.

Yes. And I guess just one last follow-up, please. The reason I ask this is looking on a stacked basis, the way you guys reported it, looks like volume on a consolidated basis for the company is down something like 7% since 2008. So basically, since before the recession. And I mean, certainly, I understand exactly where the company is going. But I'm wondering 3 years from now, is volume going to continue to decline at that rate? Would you expect as we sort of migrate from Developed Markets into Emerging Markets?

No. It'll go the other way. In fact, you'll see it go the other way in the second half of this year as Emerging Markets become more and more important and as we plateau against some of the other businesses. The bulk of the volume decline over the last couple of years has been related to Foodservice in Australia. I mean, Foodservice volume, this is not new news, has been declining for 3 years. Our expectations for Foodservice were that we would see a turnaround in the industry this year and that the structural dynamics that have worked against us so aggressively would reverse. They have not. And so the bulk of that volume decline in Q2 was Foodservice, and to a lesser degree, Australia from a volume perspective. But there is no doubt, Jonathan, that you're going to see a significant shift. I mean, one of the things, again, I'm not trying to be Solomonic here and I'm not trying to express the wisdom of the ages, but one the things that I think we need to all to keep in mind is the reason we have pushed so aggressively into these Emerging Markets is because of a recognition on the difficulty of being able to drive sustained growth in some of these businesses going forward. And again, in the second half, you'll see -- I mean, the second half of our year is going to be interesting relative to the first half. What you're going to see in the second half for the year is dramatically improved organic sales versus the first half and a higher tax rate than you saw in the first half. So you're going to see almost the opposite situation. But Foodservice in Australia, but again, in my view going forward, lesser on Australia, more in Foodservice, is really where the focus has got to be. And if I break out Foodservice by the branded piece versus the nonbranded piece, the branded piece is essentially flat. And where we are seeing the pressure in food services on proprietary brands that are made specifically for customers where we've lost price leverage because of the environment and the capacity available and in the categories where we don't bring branded leverage. Similar situation exists in Australia. And as I said, U.K. volume was down significantly, and it goes all over. I think in Q3, you'll be interested to see what U.K. volume is. I'm not going to tell you, but I think you'll get an interesting perspective as we come back next quarter in the report. But again, there is no doubt that our shift into Emerging Markets was not done on an ad hoc opportunistic basis. It was done strategically and with intent because I will tell you, my own view is that the developed world is going to get increasingly difficult in which to operate just because of the concentration of retailers in all these markets, the difficulty in categories, the pressure consumers are feeling, the ethnic and demographic shifts occurring in all these markets. And so you're going to see us push more aggressively and with greater alacrity into these Emerging Markets because we have to, and that's why. So I think nothing we've seen this year, other than I will say Foodservice, has surprised us. Foodservice has disappointed me because I expected the industry to turn. It has not.

Jonathan, the other thing I'd point is the SKU rationalization that we've done over the last few years on a very conscious basis, particularly in these Developed Markets, particularly in places like Foodservice, as we have gotten the focus more and more on our Top 15 brands. So we tried to cull the herd, if you will, in some of these smaller brands and get refocused on Top 15 brands, which have grown nicely.

The only other thing I'll remind you of, Jonathan, even with the volume declines, we've had 26 consecutive quarters of organic sales growth, and we've made some conscious trade-off between price and volume. But again, I come back to my comments. In the developed world, those who are not pushing it aggressively into Emerging Markets are going to wake up one day and find out that the world left them behind.

Yes. And Jonathan, we can follow up later today, but I'm not showing volume down for the company that far. The only way I could get there is if you're including divestitures. So volume actually has been, I think, flat to slightly up if you include particularly the '08 year. So anyways, we'd be happy to follow up with you.

Our next question comes from the line of Diane Geissler with CLSA. Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division: I want to ask on the productivity, the new productivity plan. I think the original plan you announced in May, you had a 2.5 year payback. Could you just confirm that you're still on track regarding that? And then should we assume sort of a similar payback on the new plan given that you're not giving a lot of details, and I understand why, but if you could help us with what we should think about there?

Yes. To your point, Diane, we are on track with the plans that we laid out. Certainly, the projects we talked about back in May, as I mentioned, they're on track in terms of cost benefits and timing. The new programs, which we won't go into much, probably should generate an incremental $15 million or so of pretax profit on an annualized basis over time. So we expect a good solid return out of those programs as well. And more to follow on that later. Diane Geissler - Credit Agricole Securities (USA) Inc., Research Division: Okay. Can I just -- for clarification on the new products that you announced today in terms of the smaller pack types. You said margin neutral to maybe slightly positive. But is there -- how should we think about the top line impact? Do you report your volume in tonnage or units? And does that have -- will that have an impact on your volume number on the top line?

Diane, you don't have enough time for me to explain the machinations. It's dollarized volume basically. It's dollarized volume. And the impact on the top line should be favorable providing that the sales are incrementally, that they're gap fillers in terms of places and people we are not reaching. And right now, our portfolio tends to skew more middle, upper income. We are very underdeveloped in the dollar stores. And so these are opportunities for us to reach a segment of the population that historically we have underserved. And so I think from that standpoint, this should represent some incremental upside for us going forward. I think the other thing is, I also said I want to be clear on this, that not all of the items. There are some exceptions to the margin enhancing and margin neutral. I won't get into specifics, but there are a few exceptions to those. But we should make up for that in terms of the incrementality. I mean, we haven't sold beans in this country in -- I can't even remember the last time we sold beans here. And I've been here almost 30 years, and I think the last time we sold beans was maybe the '70s or early '80s in the U.S. And so we tested it. It has done very well. We have a whole line of products like that coming. And I think as we get into the third quarter call, we'll be able to specify and detail for you the items. But I think you'll find them very interesting. Frankly, some of them had me scratching my head as we looked at it, but the North American company and European companies in particular have gotten my messages regarding my concern over the top line in developed markets and the fact that we do serve this underserved population segments.

Our next question comes from the line of Rob Moskow with Credit Suisse. Robert Moskow - Crédit Suisse AG, Research Division: My question had to do about the supply chain. If you look historically, Heinz has not been a very CapEx-intensive company. CapEx has been pretty much in line with D&A. We've had examples of other staples companies that had supply chain problems recently. Bill, as you go through the supply chain and are now closing more facilities, is that increasing the amount of capacity or the amount of utilization that the other plants have to take on in the absence of those? And what have you done at those plants to make sure that they're capable with up-to-date machines to handle the increased load?

Actually, Rob, I'm glad you asked the question. I think all of you know how I feel about CapEx in this industry. I think it's been abused over the years. I think it's been spent needlessly to add capacity and do other things that have not given consumers return or shareholders returns and haven't helped consumers. In our case, one of the rules I outlined at the outset of this initiative was I was not simply picking up equipment and moving it from one edifice to another. So in other words, most of this -- there are maybe 2 small exceptions. Most of this volume will shift from factories that were grossly underutilized into factories that were slightly underutilized without the need for a lot of CapEx in terms of new equipment. Now there are a few exceptions. Closing Girgarre required us to do some things in New Zealand, and moving some things out of a couple of the factories in Australia allowed us -- forced us to put some capital in New Zealand, which I did not like doing. But I can tell you, and I'm sure Art and Meg will tell you in a private moment, that this didn't come without a great deal of angst. I hate these kinds of initiatives. I don't like doing them. I think they're abused. I think we are a company that was criticized for that for a number of years. So one of the rules I outlined for everybody was I was not simply picking up or buying new equipment to put in another factory. We could not take the volume and move to a facility that was underutilized or had excess capacity. It was going to be very difficult to convince me to close some of these facilities. That is in, in essence, what we have done. In a couple of cases, we've had very low utilized factories where we have decided that our customer relationships coming out of those factories or the cost to serve a customer were not conducive to the kinds of margin and returns we wanted. And so we've shifted away products from a few of those customers and from a few of those businesses, and as a result, are not really being required to shift much of anything from a utilization standpoint. Our CapEx for the first half of the year is up about $53 million to $55 million. Our inventory is up about $130 million. And those are the big uses of cash in the first half of the year. Rest assured that I'm not happy about that, and I've made it abundantly clear to my team and the supply chain that this isn't just simply about, gee, I now have -- I had 80 buildings, now I have 75 buildings. This is about getting a lot better and more efficient. And I think we'll be there. So the good news for us is while these things are always somewhat distracting, the reality is they have not required us to do anything above the norm to protect the safety and quality of our company. And as a consequence, knock on wood, we have not suffered the same kinds of issues that others have.

The other thing I think that this allows us to do is really focus our time, attention and resources on those remaining plants. So when you've got very low utilization plants that's not helpful from a focus standpoint, so we've got a very stringent balanced scorecard in place that we monitor quality, safety, sustainability, along with the usual costs and other measures. So we feel like we've got a very good program in place, and by strengthening the focus on the remaining plants, I think that will be good news overall. Robert Moskow - Crédit Suisse AG, Research Division: Can I just ask, do you guys visit the plants frequently to make sure that you've got good safety measures in place? And what kind of process do you have to do that on an ongoing basis?

Well, we have an ongoing QRMP process. We have the best safety scores of any company in our industry. We review them with the Board twice a year. We have a safety group as part of our risk management process. We have a quality group that's headquartered in the U.K. But it's our global group that visits every single factory and also spends a lot of time in the new facilities. And I have to tell you, I think I made the comment earlier, our people have just revisited the Quero factory and are coming back raving. I mean, Quero has something we don't have anything else in the world, and that's a biomass generator, which we're using excess sugarcane now to fire up and saving us a ton of money. But if we can figure out a way to put corn husks through there, we can literally get free energy in our biggest factory. So there's a lot of activity. I will tell you, Rob, and people who have worked for me a long time know, safety and quality are the 2 single biggest issues that I focus our team on all the time. I think employees have the right to expect to work in a safe environment, and I think our brands are only as good as the quality of reputation we have. And we sit with our Board twice a year and the Corporate Social Responsibilities Committee and give them a detailed update on this. And in my own personal goals, of which I have 4, 25% of my own personal goals are related to quality and safety. So you can be assured that we take this highly seriously. All of this reports in to Mike Milone who, in addition his operating responsibilities, then brings an operating mindset to ensuring that these are areas of great focus and detail. And believe me, this is one of the things that goes through every one of the single productivity initiatives that we approve.

Our next question comes from the line of Rob Dickerson with Consumer Edge Research.

This is just kind of a quick housekeeping question for Art. I just -- I do quick math, and I know you said originally, you were at $0.05 or $0.07 tax benefit for the year. It looks like already you have $0.08. And then I just used kind of like-for-like tax rates from last year. It looks like you've already gotten about $0.09 this year in tax benefits. So really, I just want to see if you could provide some type of detailed tax estimate for Q3 and Q4, one. And then two, is there any updated guidance for EPS with FX?

What we're talking about was for the goals. They are constant currency. So set aside the currency, I think you should see where our currency rates are at now, yes, we have gotten, I don't know, $0.07, $0.08, something like that on a year-to-date basis. We've really don't expect to get anything more out of currency over the back half of the year, no. You tell me where the pound and euro go and where the economies go. It's always a tough question. But at this point, we don't expect much from currency in that regard. And as Bill mentioned, from a tax standpoint, we'll actually see a tax rate that's probably in line or slightly higher over the back half of the year, certainly as it compares to last year. And as I mentioned, the key is that for this fiscal year and frankly for next fiscal year, we expect to have a mid-20s kind of tax rate.

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

Okay. First question is, the $1.15 billion in operating cash flow that you mentioned, does that include or exclude the charges for the restructuring and the updated figures there?

It excludes it. As I said, it would be $1 billion reported and $1.15 billion excluding the charges.

Okay. Second, I think you had mentioned, if my memory is correct, on the acquisitions, Quero and Foodstar, that those would be kind of earnings neutral for the year. Is that kind of still how you see it? Or are those actually contributing now versus -- and that's kind of offsetting some of the other challenges?

Yes, I think that's a fair question. In the first half, they contributed. We will spend a lot of marketing money in the second half on Quero. We didn't spend any of the first half until we got the business and the capacity where we wanted. And I think for the year, you should assume, Eric, they will be neutral to slightly better.

Okay. Last thing, at the Analyst Day, you gave fiscal '13 guidance. I mean, are you kind of withdrawing that? Or at this point, it's just too volatile world to comment? How do we think about that $3.60 to $3.70 number?

Right now, I'm not saying anything about it. I don't see it -- it's just way too early to draw any conclusions in terms of making any changes. So right now, I think you should assume that we're holding to that number until I tell you something else. But we're not going to give you guidance until May. And we never do, Eric, and you know that. I get pressed at CAGNY. I get pressed in the Q3 call. And it is a volatile world, and things are changing. And so in May, we'll give you updated guidance. But right now, I just don't see any reason to move off that guidance. But I want to be clear that, that doesn't mean we will or we won't. I'm just saying that right now, it's just way too early. And our second half is going to be pretty good, I think. And so I hope I'm not proven wrong. But certainly, based on where I expect us to be from the earnings standpoint, sequentially better in Q3 and Q4, and where I expect us to be from a sales standpoint, sequentially better and good organic sales in the second half and where I expect uss to be in Emerging Markets and the U.K. perspective. I just think right now, it's just too early to make any changes to it.

And our last question comes from the line of Jason English with Goldman Sachs.

First, quick housekeeping item. I know it's on Slide 55. You guys showed in FX benefit the EBIT of roughly $8 million, but at pretax, it was $15 million. What is that $7 million delta?

Probably...

I can tell you what's on Page 56 and on Page 55, but I don't -- or 54, but I don't what's on Page 55. So we're having to pull that out to take a look at it.

I suspect it's gain on transaction -- or translation hedges, currency hedges, would be my guess.

Yes, that's exactly what it is.

Okay. And on sharper price points, you're price point initiative, with your innovation, I think this was something you talked about when we went into the recession. It was an issue that you guys were going to pursue. What's different this time versus then? Is it more breadth of products, your ability to penetrate different channels? Or maybe you can just elaborate on that.

Yes, we never did it. The U.S. has been very slow to react. And so you'll see most of it starting in the third quarter, late in the third quarter. And so there's nothing different about it. It's just -- it's taken us longer in the U.S. to get to where we need to be. And you'll see a flurry of activity in Q3 that, in my view -- and the U.S. company knows how I feel this, in my view should have happened in Q2. So there's really nothing different about it, Jason. It's just a delay.

Okay. And one final question. It's a quick one. I just want to make sure I heard the answer to my question correctly. It sounds like this mid-20s tax rate is sustainable at least into next year?

Yes, that's the way we're viewing it. So yes, sort of mid-20-ish this year and next.

Thank you, all, for participating. I know it's a tough time of the year. I do hope that you appreciate the fact that we spend the time with you that we do. As you know, there's never been a question asked that we won't answer. There's never been a topic brought up we won't address. I have an opinion on everything, including the Steelers and the Bengles, if anybody's interested. So have a happy Thanksgiving and a happy holiday. And we continue to appreciate your interest in the company and your patience and forbearance with us.

All right. Well, we'll be seeing several of you in the coming weeks. Heinz is expected to report third quarter earnings on February 17, the Friday before CAGNY. So that's new. We'll then be presenting at CAGNY on Wednesday afternoon, February 22. And additionally, we'll be presenting at CAGE in London on Tuesday, March 20. With that, Mary Ann and I will be around all day to take any further questions and follow-up calls. The main number for Investor Relations, (412) 456-6020. And we want to wish you all a warm and wonderful Thanksgiving holiday. Thanks, everyone. Have a great day.

Thank you for your participation on today's conference. This concludes the presentation. Everyone may now disconnect, and have a great day.