The Kraft Heinz Company (KHC) Q1 2013 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 2013 First Quarter Earnings Release Conference Call. This call is being recorded at the request of the H.J. Heinz Company. [Operator Instructions] I would 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, Chanel, and good morning. I'd like to welcome everyone to our conference call and webcast. Copies of the slides used in today's presentation are available on our website at heinz.com. Joining me on today's call are Art Winkleblack, Executive Vice President and CFO; and Ed McMenamin, Senior Vice President, Finance. Before we begin with our prepared remarks, please refer to the forward-looking statement currently displayed. This is also available in this morning's earnings release and in our most recent SEC filings. To summarize, during our presentation, we may make forward-looking statements about our business that are intended to assist you in understanding the company and its results. We ask you to refer to our April 29, 2012 Form 10-K and today's press release, which 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 measures are available in the company's earnings release today and on our website at heinz.com. Our complete financial highlights pages or stat pages are now available on the Investor Relations section of heinz.com towards the bottom of the page. Please note, we plan to file our first quarter 10-Q later today. Finally, we'd like to request that you limit your questions during the Q&A session to one single-part question in order to ensure adequate time for all of who wish to participate and to ensure we end the call timely. Now with the formalities out of the way, let me turn the call over to Art Winkleblack. Art?

Thanks, Meg. Good morning, everyone. Today, we're pleased to take you through our first quarter performance, which marks a great start to fiscal 2013. In the quarter, we delivered robust organic sales growth, again, driven by our trio of growth engines: Emerging Markets, Global Ketchup and our Top 15 brands; year-over-year gross margin improvement for the first time in 5 quarters despite the tough economic environment and higher commodity costs; continued investment in the business including marketing, Project Keystone and more boots on the ground in Emerging Markets and strong constant currency profit growth driven by higher operating income and a lower tax rate. On a reported basis, results were unfavorably impacted by foreign exchange. So overall, we're off to a very good start for the new year. On a constant currency basis, net sales grew by more than 4%, operating income increased 5% and EPS rose more than 15% on a like-for-like basis, which excludes the impact of last year's charges for productivity initiatives. In short, strong results in a very challenging environment. Importantly, Q1 marked our 29th consecutive quarter of organic sales growth at nearly 5%. I think this is an important indicator of our focus on growth, the strength of our portfolio, the effectiveness of our commercial programs and consistency of performance. Our trio of growth engines, Emerging Markets, Global Ketchup and our Top 15 brands, once again drove our organic sales growth. I want to briefly hit some highlights in each of these areas. Our Emerging Markets posted organic sales growth of almost 20%. The growth was led by Quero in Brazil, Foodstar in China and Heinz in Russia. Importantly, in Russia, Heinz is now the #1 brand in both ketchup and total condiments. We also had strong organic sales growth in Indonesia and India. Overall, Emerging Markets represented a record 26% of Heinz sales in Q1, which is our high watermark in the year for Emerging Market mix given the timing of Ramadan. Of note this quarter in Brazil, enhancement of business processes and the implementation of SAP allowed us to eliminate the 1 month lag in closing the books there, so our results include an extra month in Brazil which was partially offset by the planned sales reduction in Long Fong related to the significant streamlining we executed in that business last quarter. And turning to Global Ketchup, we posted 3.7% organic growth, overlapping more than 8% organic growth last year. Our Emerging Markets of Brazil, Russia and China delivered strong double-digit growth, driven by both the retail and Foodservice channels. U.K. led our developed markets in ketchup growth, aided by innovative line extensions like ketchup with balsamic vinegar and now Indian spices. Turning to our Top 15 brands, we posted nearly 6% organic sales growth in Q1. As a result, these core brands have grown to nearly 3/4 of our total portfolio. That's an important advantage for us in that it allows us to more tightly and effectively focus our commercial resources and investment dollars. Now let's take a quick look at each of our geographic regions. Turning first to North American Consumer Products, our results reflected solid and encouraging performance in the U.S. Excluding the 2 product lines we exited last year, Boston Market, which is included in divestitures, and T.G.I. Friday's frozen meals, organic sales in our core U.S. business were up more than 3%. The solid growth is reflective of stronger market shares, and indeed we grew volume share in 9 of our 12 U.S. retail product categories over the last 12-week period while increasing our average net price. I'm pleased to report good progress on Ore-Ida as well, where sales increased as a mid-single digit rate during the quarter. We've been working with our trade partners to optimize Ore-Ida pricing on the shelf, and this is beginning to have a positive effect. We also posted mid single-digit sales growth in Smart Ones and a 2% volume increase in Ketchup. Operating income was off slightly to prior year, impacted by higher commodity cost, sales mix and an increased investment in marketing. And finally, we went live on SAP in Canada during the quarter and incurred some start-up challenges there. U.S. Foodservice delivered excellent results for the quarter. Organic sales grew about 2.5%, driven by price increases implemented last year to cover inflation. Encouragingly, volume was stable and the trajectory has been improving, driven by more favorable QSR trends and our success in penetrating noncommercial channels. Operating income grew at a double-digit rate, reflecting higher pricing and lower costs, clearly aided by the benefits from last year's restructuring initiatives. And as Ed will discuss shortly, we completed the sale of our U.S. Foodservice Desserts business this quarter as we continue to enhance our focus on branded Ketchup & Sauces. Turning next to Europe. The segment generated very solid constant currency results for the quarter with sales up 1.5 points and profit up almost 8%. Organic sales growth was 2%, driven by pricing. U.K. and Russia continue to drive very strong growth, particularly on ketchup, while sales in Continental Europe and Italy continue to be impacted by weak economies and categories. During the quarter, we increased marketing and continued to drive the European change agenda in order to meet the evolving environment there. Additionally, we successfully implemented Keystone in Germany while also divesting a small unprofitable soup business in Germany and consolidating back-office activities into the Netherlands. Moving to Asia/Pacific. Constant currency sales grew by more than 4%, led by Indonesia, India and China and by soy sauce from a category standpoint. This growth includes the negative impact of streamlining Long Fong, which cut the size of that business in half as we executed -- or exited 2 of 4 factories and focused on higher-growth, higher-margin products. The region posted 30% profit growth, reflecting improved net pricing, productivity, sales mix and a strong rebound in Australia, which was aided by last year's restructuring initiatives. Additionally, we continued to increase investments in marketing and in sales capabilities across Emerging Markets in the region. The Rest of World segment reported 32% constant currency sales growth for the quarter driven by very strong year-over-year growth in Brazil, plus the extra month, as well as double-digit growth in Mexico and the Middle East. Venezuelan sales were down for the quarter as a result of the macroeconomic issues in the country. Rest of World delivered 3% constant currency profit growth, lapping more than 100% growth last year, with Brazil's strong performance being partially offset by weakness in Venezuela. And I've mentioned several recent actions we've taken to continue streamlining, reshaping and strengthening our portfolio. These included: completing the sale of our U.S. Foodservice Desserts business, which we announced at Analyst Day in May; exiting subscale frozen businesses in U.S. retail by divesting the Boston Market license and discontinuing T.G.I. Friday's premium frozen meals; divesting a small, unprofitable soup business in Germany; and rightsizing our Long Fong frozen business in China. Now these and many other actions we've executed over the last decade has helped focus the portfolio on those brands and categories where we have the capabilities and position to win. Ketchup & Sauces are the crown jewel, which now represent almost half of our sales. This is an important shift in the portfolio, which we're continuing to drive aggressively. Now with that said, I'll turn it over to Ed to cover the rest of the financials. Ed?

Thanks, Art, and good morning, everyone. I'll take you through the first quarter financial highlights, which reflect strong constant currency growth in our key P&L metrics. But before I go through the results, as Art referenced earlier, in May we completed the sale of our U.S. Foodservice frozen desserts business. It resulted in a $0.07 charge to EPS, which along with last year's results are reflected in discontinued operations. Now let's walk through the financials. Here, you can see 3 different views of EPS. But any way you look at it, we delivered double-digit growth. Starting on the left, our results from continuing operations, which exclude the productivity charges last year, reflect 10% growth to $0.87 this year. On a constant currency basis, EPS would have been $0.91, a 15% increase from the comparable base last year. And finally, on a total company reported basis, EPS was $0.80 this year, up 14%. The balance of the presentation will focus on the company's results from continuing operations compared to last year's results excluding productivity charges. And as a reminder, in Q1 of fiscal '12, the productivity charges were $41 million pretax or $0.09 of EPS. Turning to the P&L scorecard, constant currency sales were up over 4% but down 1.5% after a sizable foreign exchange headwind. Gross margin was 35.9%, up slightly as higher pricing and productivity improvements were able to more than offset commodity inflation. Looking forward, as we progress through the year, we expect pricing and productivity to continue to outpace commodity cost increases, and margins will build significantly throughout the year. We continue to increase our investment in consumer marketing, which was up 4.5% on a constant currency basis with the incremental spending split evenly between developed and emerging markets. For perspective, we expect a sizable ramp-up of marketing in Q2 and throughout the year. Operating income is up 5% on a constant currency basis as higher organic sales growth and effective cost management offset unfavorable commodities while also supporting increased marketing and incremental investments in both Project Keystone and Emerging Market capabilities. After the impact of currency, OI was about flat. EPS of $0.87 benefited from the effective tax rate of approximately 18% this year compared to 24% last year. In Q1, and to a greater extent in Q2, the expected benefit from foreign tax planning initiatives and our full year estimate for the tax rate remains in the low 20s with higher-than-average rates in the second half of the year. Looking at the key sales drivers. Our organic sales growth of 4.8% was fairly balanced between volume and price. Volume improved 2.5%, driven by Emerging Markets, led by a very strong performance in Brazil, as well as improvements in the U.S. and the U.K. The Brazilian results reflect exceptional normalized organic growth of 45%. It was further aided by an additional month's results. The majority of the benefit from the additional month was offset by the planned exits of T.G.I. Friday's frozen meals in the U.S. and the streamlining of the Long Fong business in China to focus on only more profitable products and regions. Higher pricing at 2.3% was driven by price increases in most of the Emerging Markets, particularly Latin America and China, as well as in the developed markets of the U.S. and U.K. The divestitures of the Boston Market brand in the U.S. and a small soup business in Germany decreased sales by 60 basis points. And finally, foreign exchange reduced our top line by 5.6%. Looking at sales by category. Ketchup & Sauces, our most important category, led the way with nearly 6% organic growth. Meals & Snacks reported overall organic growth of 3.1%, and notably, both the ambient and frozen segments were positive with contributions from both volume and price in each. Infant/Nutrition recorded 2.3% organic growth, driven by a 12% increase in Emerging Markets. Art covered each of the segments' performance in detail, but here you can quickly see all of our segments delivered positive organic growth this quarter. As I noted earlier, our gross margin was up slightly from last year with a 10 basis point improvement to 35.9%. The market basket for our commodities was up almost 4%, primarily due to sweeteners, most notably in Indonesia, tomatoes and beans in Europe, as well as glass globally. Solid contributions from pricing and productivity more than offset this inflation. Now let's move to the balance sheet scorecard. Capital expenditures were 3% of sales, up 40 basis points from last year, and we're still anticipating spending of approximately 4% of sales for the full fiscal year as we support growth in our Emerging Markets, as well as the continued rollout of Project Keystone. Cash conversion cycle delivered a substantial improvement of 6 days driven by receivables and inventory and represents a record low CCC of 36 days, around 1/3 of where we were a decade ago. In line with our expectations, operating free cash flow was an outflow of $25 million. This reflects $42 million of cash paid this quarter for fiscal 2012 productivity initiatives. While last year, QOWC benefit from the timing of drawdowns on our accounts receivable securitization programs. Net debt to EBITDA at 2.1x was up slightly to prior year, driven by modestly higher net debt. And I'm pleased to point out that Fitch recently raised our debt rating to BBB+. ROIC was nearly 20% for the quarter, up 110 basis points from this time last year, driven by our 10% increase in net income this quarter. In summary, we're pleased with our results in Q1, delivering almost 5% organic sales growth, constant currency operating income growth in excess of 5% and double-digit EPS growth. With that, I'll now turn it back to Art to update you on our full year outlook.

Thanks, Ed. Now just a couple of remarks on our outlook before we open it up to your questions. With Q1 behind us, let's take a look at what we expect for the balance of the fiscal year. Beginning with Q2, we expect another quarter of organic sales growth at around 4%; improving gross margin based on the combination of net pricing and productivity more than offsetting commodity inflation; implementation of our planned incremental investments and marketing, Project Keystone and sales capabilities in Emerging Markets to drive top line growth and further strengthen our foundation for the future. Marketing spending in particular will increase significantly in Q2 behind a number of new initiatives in the U.S., U.K. and emerging markets. The Q2 tax rate will be very favorable at a low double-digit rate based on the flow of our foreign tax planning initiatives. And note that while our tax rate will be quite favorable through the first half of the year, we still anticipate that our full year tax rate will be in the low 20s. And foreign currency will continue to be unfavorable. Overall, we expect constant currency EPS growth of around 10% in Q2. Importantly, for the full year, we are reaffirming our FY '13 constant currency targets. This reflects the strong start we made in the first quarter and our confidence in our brands, our people, our plans and our ability to respond to ever-changing market conditions around the world. So to sum up, our fiscal year is off to a strong start. Our key growth drivers, Emerging Markets, Top 15 brands and Global Ketchup, continue to provide strong and consistent growth. The savings from last year's productivity initiatives are coming in according to our expectations. We expect sequential improvement in our year-over-year gross margin results. And finally, we're on track to execute the $120 million of planned investments we discussed in May to help drive the business for sustainable long-term growth. With that, I'll turn the call back over to Meg and then I'll -- we'll open it up to your questions. Meg?

Great. All right, Chanel, we're ready for questions.

[Operator Instructions] Our first question comes from the line of Chris Growe, Stifel, Nicolaus. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: I just wanted to ask a couple of quick questions. And the first one just relates to the Emerging Markets. You had obviously a very solid growth again in this quarter. I'm curious if you're seeing any slowdown in some of the markets like China, where we keep hearing about a slowdown. Certainly, it's been more focused on industrials, industrial sort of companies, but I'm curious if you've seen that kind of linger into the consumer world.

Chris, as you saw, we posted 19% organic growth in our Emerging Markets. And I think even if you take out some of the one-time decisions like the extra month in Brazil and things, it was still at about a 15% organic growth. So we feel very good about where emerging markets are going. And I think to your point, a lot of the discussion of slowdown in China, and I guess they've slowed down the GDP growth rate of about 8% at this point, which most countries would love to have. But I think it's more on the industrial side. Frankly, the exploding middle class in these emerging markets are just coming into their own in terms of ability to afford packaged food, and so I think we are very, very well positioned and we feel very good about the ongoing trajectory of what we think the growth rates will be of our kinds of products.

And particularly when you look at Russia and Brazil had outstanding results this quarter. And we continue to see them grow. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: I have just one quick follow-up, if I could, just to be clear on the revenue guidance for the year. Does that -- or you're calling for at least 4% organic revenue growth guidance, does that include the T.G.I. Friday's exit? I guess Boston Market has little lingering here in the first quarter. And then also, there's 2 less -- you had 2 less shipping days last year. Those comparison factors, are those embedded in that 4% guidance?

Yes, that's all rolled in, Chris. Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division: All rolled in, okay. Just wanted to make sure of that, okay.

Right. So really, if you strip those away, it's significantly higher than 4%.

Yes.

Our next question comes from the line of David Palmer of UBS.

A quick housekeeping question. I didn't pick up on the slide, the marketing reinvestment of $120 million, is that front-weighted for the year?

Is it what?

Is it front-loaded?

Yes, let me clarify. The $120 million, David, if you recall from Analyst Day, about $70 million of that was marketing and the rest in other investments within the business. And the marketing really is going to, as I tried to allude to, will ramp up through the remaining quarters. So marketing spending was up on a constant currency basis in Q1, but it will be up very significantly in Q2 and then in the remainder of the year, basically timed with the timing of our programs, the ideas and ready for the initiatives. So we're feeling good about the trajectory in the plans for going forward.

Yes, you're going to see Heinz spend in marketing like you've never seen us before, and we're very excited about all of the launches and the brand support that is coming out. And in fact, we're going to show you a lot of that at the upcoming Back-to-School Conference. So get ready, it's on. Heinz is on the Olympics. We've done a number of things, so very exciting.

Yes. So we fully expect to spend at least that $70 million of incremental marketing that we talked about in May.

The Europe division, you mentioned that conditions were tough there. Are conditions, in your opinion in terms of the consumer, getting worse there? And are you expecting even budgeting for increasingly difficult consumer environment through the fiscal year in that region?

No, it's -- David, it's kind of interesting how Europe is sort of a tale of 2 cities for us. If you go to either end of the continent, we're performing extremely well. So Russia and the East in particular had a great quarter. We feel really good about the momentum in Russia both from a top line and a gross margin standpoint. And the U.K. business continues to be a fortress for us given the strength of our brand equities there and the power of the innovation and execution within the business. So at both ends of the continent, we feel very good about things. To your point, it's a tough market in the middle of the continent. Continental Europe and Italy, consumer confidence is low, unemployment is high. And so it's a challenging market there, and I think we continue to evolve our products and our packaging to meet that environment. And I'm really pleased that we got a good strong head start on driving the European agenda with what we're doing with Keystone, what we're doing with the supply chain consolidation.

Innovation Center.

And with the Innovation Center, so lots of things going on to address it. So I'm not so sure that we expect things in the middle of the continent to get too much worse, but we're sure not expecting it to get better anytime soon.

And the profit growth that was high-single-digits organic, the story there is largely the productivity and the restructuring from last year flowing through? Or is that a significant push and that's still that promotion efficiency efforts that you're -- that's been ongoing?

I think it's all of the above. So we're certainly getting restructuring benefits that we had expected, so that's a good thing. We're continuing to drive productivity initiative this year, particularly with value engineering. Strong organic top line growth in some of our markets is certainly helping out as well. And again, with regard to Europe in particular, it's driven at both ends of the continent.

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

First, a quick housekeeping item. Brazil, can you quantify the impact that had in both the top and bottom line this quarter, just the 1 month move?

Yes, the 1 month was worth roughly $35 million on a gross basis. And keep in mind, though, that a lot of that was offset by the decisions we made in Long Fong and the exit of T.G.I.F. meals, but roughly $35 million at the top line. The bottom line is less than $0.01, so basically immaterial.

Right. And then that's just because we're reinvesting in that market the profits back in to grow and capture the middle-class growth.

That's helpful. And a question on North America. Dave Woodward has been there for not too long, yes. I imagine he's still trying to get his feet firmly planted. Any early read on what we may expect to see differently coming out of that market with the new leadership?

I think Dave is bringing great energy and enthusiasm to the role, and he's working to drive what he would call a demand-driven recovery. So I think he's focused on the big brands and you saw that we've exited a few of our smaller less advantaged brands, so we're really gearing the focus on those big brands. We're getting the price value offering correct across the portfolio. Once we do that, we're increasing the marketing support behind those key brands. And then undergirding it all, we're driving strong productivity to provide some fuel for growth. So I think we're doing the right things. You saw that volume shares were up in 9 out of 12 categories, so we're pleased with that while our average price is up, so investing in the business, driving some innovation and we're -- I think there's work to be done. But we're pleased Dave's on the case.

And do you think you can still get to your mid single-digit constant currency profit growth guidance for the full year with some of those initiatives?

I think all of those things that we've talked about are in our guidance for the full year, which are what we're affirming today. So I guess in answer to your question, yes.

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

I'd like to start off with the gross margin outlook. I think you guys had said that you expect a 50 to 100 basis point expansion on the year. The quarter was up something about 20 basis points. So can you bridge how the pacing goes? Ed, I think you even mentioned in your script about the dramatic expansions that go forward because of pricing and productivity. But can you guys just expand on this a little bit so folks can get a little comfort that these expansions are on track with your plan?

Yes. Yes, David, let me hit that first and Ed can add some color. Our gross margin was largely in line with our plan in the first quarter. We do expect the year-on-year increase in gross margin to gain sequentially. I mean, that's really driven by 3 key things. I think you'll see somewhat better pricing in the back half on a net price basis. We'll have a different and more favorable business unit and product mix as well. And we've got this heavy focus going on in terms of value engineering that combines with the restructuring programs and savings that we had from last year. So all of those things worked to our benefit. The other thing we're seeing, over time, we're seeing the gross margins improving in our newer businesses, in Quero in Brazil and Foodstar in China. As usual, when you buy these businesses, the gross margins tend to start out relatively low, but the opportunity is to drive those northward. We're certainly seeing that, and so we expect that to continue. The other thing I might add is that we're beginning to leverage the scale and efficiencies of our consolidated European supply chain hub, so we feel good about where we're going there. We had our new global head of procurement, John Dickson, join not too long ago and I think he's starting to make some traction. So net-net, we feel good about the levers and the trajectory as we look forward.

Okay. Then I'd follow up with a question on cost savings and input costs. The cost savings question, I believe this year, you're looking for total cost saves of $250 million. Can you just update that? Is that still the number? Is it any better? And then what did you realize in the first quarter? And how does the pacing of that go throughout the year? And then just a quick update on input cost inflation, how much is hedged and what's the rate of market inflation that you guys typically quote? I know you said the quarter, but what's the full year?

Yes, in terms of productivity from particularly the supply chain, I think we're on or better than target so far. And we believe we've had some opportunity there; we'll see as the year goes along and we'll play that out. But productivity is running according to plan or better. And in terms of market inflation, I think the market inflation estimates are still pretty much in line with what we had talked about at Analyst Day, and if I'm recalling right, that was around 4%.

Yes. I think you've seen a lot of inflation in a lot of commodities out there. And fortunately for us, we've locked in a good portion of our year. So the market inflation could be somewhere in the neighborhood of 4-plus, 4% to 5%, but that's highly dependent on several of these crops out there. The big impact, as Ed had mentioned previously, sweeteners and in particular, Indonesia. So palm sugars, it's very, very strong right now on pricing. So -- but the good news for us is that we have -- that will come in largely in line with expectation because we have largely taken that off the table.

Yes, I think that the procurement guys have gotten ahead as they saw things going up. And we're covered a bit more than we would normally be this time of year, and the way things are looking, that's very advantageous. I think also going back to the productivity issues, we were going through the major plant moves and that sort of thing last year, the guys -- the operations guys were focused on that. Now that they've got that running, what they're focused on is the normal type of productivity that's sort of been followed through a little bit that they can really focus on and really will start delivering benefits in the second half of the year on top of the productivity restructuring charges from last year.

Yes, I think that's well put. And David, you've heard the headlines about corn prices because of the heat and drought and things like that. But to Meg's point, we are virtually all hedged on a lot of those key commodities. So we really are pretty confident in our outlook on the commodity cost.

Yes, to your question on sculpting, back-half loaded.

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

I knew you covered this a little bit. I just want -- can you give me a detail about what are the 2 or 3 big factors that drive the swings in this tax rate? Because it's just you have a real look -- I mean, was -- is this consistent with what you thought coming into the year the taxes would flow this way? And what causes them, the inter-quarter variations so much? And I'm just thinking how much of that laps into -- is it structural stuff that laps into fiscal '14 and '15 or stuff that is dependent on some of the factors, discrete to 2013?

Jonathan, if you'll go back to last year, we had a similar discrete transaction in Q2. We were able to execute a similar transaction in Q1 of this year, and we're planning for another one in the following quarter. Some tax planning initiatives are spread over evenly over quarters and over years, others are very discrete, but the 2 that we're referring to here are discrete. What the tax guys are looking at is to continue to examine programs into the future years to try to keep that rate down in the low 20s.

Absolutely. And we have the benefit this quarter. As we did last year 1Q, the U.K. again took its corporate tax rate down some 200 basis points, doing the right thing to incent businesses. And so we're very pleased with that. But you see the benefit of that because that has a bit of a retroactive impact and a one-time big benefit in the quarter.

And I think that's another advantage of our having most of our sales overseas. These foreign tax opportunities do present themselves, and we have a team that's scaling the world to look for taking advantage of that.

Yes, I think that's -- the key point is given our significant global mix of sales in international, that allows us a lot more tax planning opportunities in those foreign jurisdictions, and frankly, the foreign jurisdictions seem to understand that a lower tax rate is a good thing for their economy. So that's where they're moving to do. To your other points, we constantly look for opportunities to drive down the tax rate. Over the long term, you saw that we had a low tax rate in the low 20s last year we expect it to be this year, and we're certainly working on initiatives to continue that going forward in the future years now. We'll talk more about that as the year goes along, but that is certainly the expectation and the plan that we would continue driving those kinds of numbers.

Remember, Heinz is 2/3 international or non-U.S. sales, so we're going to -- our tax rate will vary accordingly.

Yes. By the way, I wish that the timing of these things was perfectly predictable and even through the quarters, but that's just not the reality of the way taxes work.

Our next question comes from Thilo Wrede of Jefferies & Company. Brian Cullinane - Jefferies & Company, Inc., Research Division: This is actually Brian on for Thilo. Just -- and most of my questions have been answered, but just wanted to touch on the Dip & Squeeze patent lawsuit. Any product risk there? Is there any update on what's going on there?

We view that as a frivolous situation, and we will be defending it rigorously and we're not overly worried about it.

Our next question comes from Ken Goldman, JPMorgan. Kenneth Goldman - JP Morgan Chase & Co, Research Division: So to follow up on the tax rate, the implication there, it sounds like if you're talking about, I don't know, 12%, 13% for the second quarter, if I'm hearing the low double-digit number right, to get to about a 23% number for the year, you have to do about 30% tax rate in the back half of the year. I just want to make sure that math is correct.

It'll be upper 20s. Kenneth Goldman - JP Morgan Chase & Co, Research Division: Upper 20s.

Right, but the tax guidance for the year is flat, and last year was 21.7%. So okay? Kenneth Goldman - JP Morgan Chase & Co, Research Division: Okay, got it. That's helpful. And then the question I have, as a follow-up to that, would be a lot -- there's a lot of companies out there now that have a lot of international sales. You certainly are in that group and you've done a great job building your global portfolio to get there, but not every company is able to define these discrete transactions, as you call them, as often as you do. And I think the credit goes to your tax department genuinely for finding them but I'm curious, what do you credit that to? What are you able to do that without disparaging other companies that maybe other companies aren't able to find, it does seem like you're able to get lower taxes than other companies on an average basis, even other companies that may have even more of international exposure than you do. So I'm just curious if you can help me understand that a little bit.

I mean, we have a team downstairs that is very focused on it. In addition, we have a lot of outsiders that come in and present opportunities. We -- when we go into the various countries, we try to get very familiar with what their law is, what the opportunities are. We engage local tax experts and we take it very seriously. It is an opportunity when you're -- when you've got the geographic stance that we have to take advantage of that. So most of these ideas are not internally generated. We listen attentively to other people with ideas, see if they work with our portfolio and try to capitalize on them the best we can, so a very active team.

Yes, I suspect our business unit mix is an advantage for us. But I think at the end of the day, we have a great tax team that does exceptionally good work. Kenneth Goldman - JP Morgan Chase & Co, Research Division: And very quickly, Meg, when you talk about expecting constant currency EPS growth of about 10%, what's the base on that? There've been some divestitures, some SKU rationalizations, is it the $0.81 base? Or how do we look at that from 2Q '12?

Yes, it is based off the $0.81 roughly, yes.

Our next question comes from the line of Matthew Grainger, Morgan Stanley.

So I just wanted to get your thoughts on the pricing and promotional environment in North America, how you characterize things at the moment. Are you feeling any more or less confident than you were 3 months ago in being able to achieve whatever level of pricing is -- was embedded in your initial fiscal '13 plan? And should we consider the level of pricing we saw in North America in Q1 to be sort of reflective of what you're looking for, for the full year?

Matt, it's -- I mean, to your point, it's a competitive world out there, there's no doubt about it. And the developed markets including the U.S. are certainly a challenge. But I think it's all about balance. This isn't -- it isn't a black-and-white thing and it varies by category and it varies by country. So it goes business-to-business, and we're trying to be very nuanced in our approach. So list pricing actions, in some cases, are not in the cards. On the flip side of that, we have driven, I think, very effectively against making our promotion spending more efficient and more effective, in many cases, both for us and for our trade customers. So I think Dave Moran has been doing a nice job with his team over in Europe on that. Dave Woodward certainly is focused in that arena. We're focused on it in Australia as well. So I'd say it's a difficult environment, but we're -- I think, we've got the tools and the knowledge to be more nuanced and more effective at it than maybe we would've been in the past. And then fundamentally, you probably got more pricing power in Emerging Markets just based on the fragmented trade environment and the more fragmented competitive set we see in those markets. So we believe we're on track to our plans for pricing, but it's certainly not an easy environment.

Yes, I think as always, the consumer is going to pay for what they perceive to be value, and we have to get that value equation right. In some cases, that means prices go up. In some cases, that means we get a little more competitive. And the key is the innovations, the brand support driving the consumer to the shelf, doing all the right things by the brand. And I know Dave Woodward and the North American team is striving for this long-term sustainable growth in their business, so stay tuned.

Okay. And a very quick housekeeping, apologies if I missed this, but have -- can you provide any sort of updated FX guidance either on the sales or EPS line for the full year?

I think when we talked to you guys in May, we had expected that the FX would be an impact of about $0.06 for the full year. You saw that we got hit with $0.04 just in Q1 alone. If recollection serves me correctly, if the rates stayed around where they are now, you might see another $0.05 over that $0.06 that we were talking about, another $0.04 to $0.05. Having said that, we tend not to really adjust our outlook for ForEx this early in the year because you're starting to see a lot of volatility. And frankly, over the recent days, we're seeing some of the currency rates move slightly in our favor. So it's hard to say, it's early in the year yet, but I think there's probably another $0.04 to $0.05 if nothing changed on currency for the full year.

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

So just a couple of quick questions for you. I guess the first is just on cash. I know you said, I think you put in the prepared remarks and discussed that you'd have cash of $1 billion-plus now. I know it could be a very small change, but before you were saying I think $1.1 billion. And in line with that, I also saw I guess the cash balances at the end of the year was a little bit higher than we're seeing in Q1. So I was wondering if you could just kind of provide a little color as to why there should be incrementally more pressure on operating free cash flow.

Yes, let me be clear. We didn't consciously change anything in our guidance. So what we said in May, that is our outlook for cash flow. I think Q1 was impacted by 3 things, as Ed alluded to. First, we had the carryover productivity spending from the restructuring activities last year. That was $40-some million, which took our cash negative for the quarter. Capital spending was up a bit, and then there was some timing of receivable securitizations. But if you remember, we are a very back-half-oriented company. If you go back over the history of Heinz over the last 10 years, given the crop cycles in the Northern Hemisphere, we tend to be back-half-loaded in terms of cash flow. So we feel like we're on track for that. We've got a strong history of delivering cash. So we're tracking to it. As always, a lot of hard work to be done but we're on track. Your other question was on cash balance? Refresh my memory, Rob, what...

Right. The [indiscernible] but that's just we're buying inventories as crops are coming in, we're setting up for the year, so that's -- and the carryover productivity cash, so that's normal.

That's normal cyclicality.

Okay, perfect. And then I guess the second question is just a bit broader is you pre-released yesterday, EPS constant currency is up a little over 15%. You're saying, I guess, for Q2 that you expect a low double-digit tax rate, but then for the full year, you expect similar to what you guided to at the Investor Day. So that should be in line going up in the back half. It sounds like there's a little bit more investment coming in Q2 and really in the back half. So if you're not increasing guidance on constant currency from $0.05 to $0.08 even though you did 15% in Q1 and then Q2 would seem like you would have to be a little bit higher than guidance, too, just because of the tax rate again, is it -- is what -- are you just playing it safe in Q1 because it's early in the fiscal year? Or is what we should be expecting and modeling is basically a deceleration of EPS growth in the back half of the fiscal year really because the tax rate rolls off?

Well, keep in mind 2 things, that first, the tax rate does get higher in the back half, no doubt about that. So that's largely a timing issue. But we are investing heavily in the business in the back half of the year. So some of that $120 million investment is more back-half loaded than front half just given the timing of the initiatives. So it's a combination of investment and then the timing of tax. But I think look back at our history, we have always shied away from moving guidance in the first -- our outlook in the first quarter. It's still early yet in the year. We'll see how things continue to progress. It's a volatile world out there, so I think we'll talk to you further on that in the end of Q2. But as we say, we have a history of trying to invest in the business to make sure that our growth is sustainable over the long term.

Sure. So as you're modeling, don't get ahead of your [indiscernible] please. This is a company that focuses on its targets. We've got a pretty broad target, $3.52 to $3.62 constant currency guidance. And when the company tends to exceed, we tend to reinvest to drive sustainable growth. So we've got a lot of very strong investments this year. And -- but to Art's point, it's the first quarter.

Right, certainly.

Our next question comes from Andrew Lazar, Barclays.

I just wanted to follow up quickly on I think it was Ed's comment where he'd mentioned that in frozen, I think both volume and price were contributors in the quarter. Just want to make sure I have that right, and if I do, when was sort of the last time you had that combination or that balance, if you will, in the frozen space? And was there anything in this quarter in particular that was either one-off about that, that I shouldn't expect that type of better balance going forward through the year, whether it's promotionally oriented or what have you? Or are we just getting back to a better balance given some of the changes in the price points and things that you're doing?

You did hear right, that is what I said. When the last time that occurred, I can't tell you offhand.

It's been a while, Andrew. There's a lot of discipline, there's been a lot of hard work by the brand team, doing the right thing on the shelf, a lot of great innovation that's out there. There are so many nuances in the Nielsen data that we know you can't see. The main thing I would point out to you is Nielsen data is cash register ring [ph]. And so if the retailer makes some adjustments to their margin levels, that will reflect in Nielsen data. You think it's us, but it's not us. So Heinz is doing the right thing. The frozen team's working hard, the innovation's driving. But to your point, we haven't seen that balance. I'll have to go back, I don't have -- it's one of the factoids I don't have with me. You stumped me. But we'll go back and look for that. But kudos to the North American frozen team, they're working really hard.

I think, Andrew, the -- yes, to that point, we're pleased that both frozen and ambient were up. Ambient was up a bit more than frozen, but frozen being up nonetheless, and I think part of that is that we continue to focus the portfolio on our bigger brands. And so this is all about investing behind the core brands, the power brands that we can get some real bang from the profit [ph]. And I'd -- over time, I'd like to continue that because that's where I think the growth can be driven quite successfully.

And also keep in mind that the Long Fong business that we discussed was actually a headwind to the frozen volume during this quarter.

Right. Last thing, and it's immediately more qualitative, but I think you also, in addition to a change at the top of NACP, you've also had a fairly recent change in head of sales there with John Hans and trying to get a sense of perhaps what's kind of most clear and present in terms of opportunities that you get a sense coming from him as well.

I think Dave's bringing a high level of energy. He's plugged in, he's got a track record of strong innovation and doing some great things in the U.K. We have every expectation that he'll do that in the U.S. as well. And so -- but it's early days and implementing changes that he'll continue to figure out exactly what he wants to do, and we'll keep you posted.

Yes, I think John is very excited about the emerging channels. There's been a lot of work that's been done, or alternate channels if you will, by the North American team, the U.S. team. And so he's really embracing that and the opportunity that's present for Heinz because that's not an area we had focused historically.

Yes. And keep in mind, John came out of the U.S. business a few years ago and he was one of the guys who was instrumental in kicking off the trade promotion reduction program that we've talked about at USCP for a number of years.

That discipline and rigor. So it's a welcome to John back to the U.S. and a lot of good initiatives underway.

Our next question comes from Robert Moskow, Crédit Suisse. Robert Moskow - Crédit Suisse AG, Research Division: I guess my -- we did some work on operating income growth trends in the packaged food industry, and I'm sure you've seen this, too. But Heinz's income growth has only been, by our math, about 10% over the last 5 years when I strip out acquisitions. The group is 28%. And I guess this is another quarter where operating income is flat, albeit there's a currency hit. And as I look at the guidance for the rest of the year, it doesn't look like operating income is going to be a major driver of earnings growth. And it's what I use in my models to do my valuation, and I think it encompasses a lot of what drives value. I'm just wondering internally, how important is the operating income growth to executive compensation? And when you look at your performance versus your peer group, are you seeing the same thing?

Yes, Rob, operating income growth is a key element of our compensation for all of our executives that run businesses. So yes, there is no lack of focus on it. I can't recognize the operating income numbers that you're talking about. Certainly, there's ForEx noise in there. There's divestiture noise in there.

Investment.

And investment in the business. So I think all of those things play in, and we may need to compare notes on that front. But operating income is a key focus for us. And frankly, even with strong investment this year, we expect very solid operating income growth.

Yes. Rob, I saw -- we saw your note come through, and I just haven't had the time to focus on it yet. A, I think the number is understated. We'll get with you on it and see if we can't figure out. But b, understand that this is a company that's investing, and remember that Keystone has been gearing up over the last 5 years. And we've got -- we've been spending to really get highly efficient and leverage the scale of this organization. We have tremendous productivity coming in the coming years from Keystone alone, but it is a key goal of this organization to get our margins in that top tier, and we're going to go after it. So I saw that come through, but we'll be happy to work with you and narrow that down for you, help you out. Robert Moskow - Crédit Suisse AG, Research Division: I'll show you what -- how I came to it. But here's another challenge for you guys. I've heard reinvestment a lot today and certainly at the Analyst Day, too. But then I look at the reshaping of the portfolio like the exit of T.G.I. Friday's, exit of Boston Market, exit of -- streamlining Long Fong. These are areas where a few years ago, there was significant investment in those projects. So have you -- I guess that's my challenge. It's like do you feel like this amount of reinvestment that you're doing now, we're not going to look back 3 years forward and say we have to streamline again?

No. I think, Rob, we're getting focused on those core Top 15 brands, so we're really trying to focus where the biggest payback is. But I mean, to your point, over time the world changes and the realities change. Consumer traits change. Industry trends change. We will always try to be out front of those trends and those changes so that we're not getting dragged along behind trends. We're anticipating and we're getting out in front of them. We think those are the right things to do to continue to strengthen the portfolio. The investments are going behind our biggest brands, not some of these smaller brands. And I think one of the key statistics to keep an eye on or metrics is that percent of our total sales that are in those Top 15 brands, because those are the big powerhouse brands that I think have the leverage and the scale and the brand position to win. And so more and more, if we can focus the portfolio on those brands and then focus our resources, marketing and otherwise, on those, I think it's the right thing to do. But we're going to continue to evolve and adjust with the world that we're faced with.

Absolutely. And we've been talking to shareholders over the last several weeks and months frankly, who have actually praised us for moving quickly and making decisions. So we're trying some new things, and if they work, we continue to support them. If they don't, we make our move and we shift those dollars and reallocate them. And so I think Heinz is allocating its capital and its marketing dollars well, and the investment in systems is mandatory. It's something we have to do. As you know, we don't have a single ERP system where we can consolidate our global world, and that makes our world more difficult. And we've got to get that inefficiency out, so that spend is necessary. Regarding other investment spend, we evaluate. We're highly disciplined. And as you know, Bill thinks this industry overspends in given areas and he's going to make sure that we're getting a return for this money. And if we're not, he's going to -- he'll pull it and he'll move it elsewhere. Robert Moskow - Crédit Suisse AG, Research Division: Okay. Let me ask you just 2 quick modeling questions. One is the Venezuela, how much of a drag if that on fiscal '13 compared to what happened last year? And then lastly, marketing spend, you say you're going to be up $70 million. Quantitatively, is it going to look a little bit less because of currency?

Let me say something about Venezuela first. I mean Venezuela was down in the first quarter, as I recall, both sales and profit-wise. You've got an environment there that's a little bit up in the air. They've got a big election coming up in October, and I think consumers are sort of sitting back and waiting to see how things trend. So that may stabilize as we go forward. Venezuela is not a big business for us, so it's not a huge impact, but it's not -- yes, and it certainly didn't help in Q1. In terms of the marketing spend, on a constant currency basis, we've talked about at least $70 million. To the extent that currency moves in the other direction, it could moderate from there. But I'll tell you, I suspect that we're going to have enough great ideas and enough good brand initiatives that we may go past that $70 million, we'll see. Robert Moskow - Crédit Suisse AG, Research Division: Okay. So when I look at I think $460 million of advertising expense or marketing expense in fiscal '12, should it look more like $530 million for fiscal '13 when it's all said and done?

On a constant currency basis?

Yes, yes, that would be right.

Our next question comes from Ann Gurkin, Davenport. Ann H. Gurkin - Davenport & Company, LLC, Research Division: I just wanted to ask one more thing about M&A opportunities. Any change in the pipeline, time line expectations for opportunities for M&A either domestically or internationally?

Well, good question. We're working on -- it is a very active pipeline. We've got a lot going on, on that front. And frankly, we're thrilled with the performance of our 2 most recent acquisitions in Quero and Foodstar, so we'd love to get more just like them. Obviously, I can't speak about specific opportunities, but there's a number of them that we're working. The pipeline is very full. We -- especially in Emerging Markets, we tend to be very thorough and patient to ensure that we end up with the right strategic fit and we don't overpay. So we're excited about it. We're working on things. We'll keep you posted. We continue to work and focus on Emerging Markets and then also in our -- really 2 of our core categories, Ketchup & Sauces and Infant/Nutrition. But lots going on, and again, we'll keep you posted as time unfolds.

Yes, it's frustrating you can't get them across the line. These are relationships and negotiations, but we're not going to rush it. We're going to do the right thing. All right. Well, we look forward to seeing many of you next week at the Barclays Back-to-School Conference in Boston, where Art will present Wednesday, September 5. The time slot is now 9:45 a.m. And as always, Mary Ann and I will be around today to answer any follow-up questions. The whole IR team, the main line is (412) 456-6020. Have a great day.

Thanks.

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