The Kraft Heinz Company (KHC) Q2 2013 Earnings Report, Transcript and Summary

Good morning. My name is Rachel, and I am your conference coordinator for today. At this time, I would like to welcome everyone to the H.J. Heinz Company Fiscal Year 2013 Second Quarter Earnings Conference Call. This call is being recorded at the request of H.J. Heinz Company. [Operator Instructions] I would now like to turn the call over to Meg Nollen, Senior Vice President, Strategy and Investor Relations. Ms. Nollen, you may begin your conference.

Thank you, Rachel, 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 Bill Johnson, Chairman, President and CEO; Art Winkleblack, Executive Vice President and CFO; and Ed McMenamin, Senior Vice President, Finance will join us for Q&A. 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 the statement. Heinz undertakes no obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by securities law. We may also use non-GAAP financial measures in our presentation as the company believes such measures allow for consistent period-to-period comparison of the business. The most directly comparable GAAP financial measures and reconciliations of these non-GAAP measures are available in the company's earnings release and on our website at heinz.com. Our complete financial highlights pages or stat pages are available on the Investor Relations section of heinz.com towards the bottom of the page. Please note we plan to file our second 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 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 Bill Johnson. Bill?

Thank you, Meg, and good morning, everyone. I'm pleased to join you today to discuss our second quarter results, the company's full year outlook and my perspective on the global environment. Starting with the second quarter. Heinz delivered EPS of $0.90 from continuing operations with organic sales growth of between 3% and 4%, our 30th consecutive quarter of organic top line growth. These results reflect a nice balance between volume and pricing and strength in our 3 engines of growth: Emerging Markets, Global Ketchup and our Top 15 Brands. Second quarter earnings benefited from a favorable effective tax rate that we leveraged to significantly increase investment in marketing and global capabilities to drive further growth. Importantly, we increased marketing spend by over 13% in the quarter on a constant currency basis with a particularly large increase in North America where I am encouraged by our recent momentum. We also continue to ramp up investments behind enhanced Emerging Markets capabilities and our global SAP implementation. Consistent with our efforts to improve global capabilities and enhanced innovation, I am pleased to announce that we are nearing the completion of our European Innovation and Quality Center in The Netherlands, which will open shortly. Our business results, as I said a moment ago, were again led by our trio of growth engines: Emerging Markets, Global Ketchup and our Top 15 Brands. Emerging Markets delivered organic sales growth of more than 13% and would have been up well over 14% were it not for the impact of the planned Long Fong downsizing. Global Ketchup grew 5%. And our Top 15 Brands grew almost 5% despite the exit from T.G.I.F. meals, which reduced organic sales by about 90 basis points. Emerging market results were led by Brazil, reflecting the strength of the Quero brand of tomatoes sauces, ketchup and vegetables and the launch of Heinz tomato paste in China behind the success of Foodstar. These 2 recently acquired businesses have performed well beyond our initial expectations and both appear to have considerable upside. Indonesia, Russia, Mexico and the Middle East also grew quite strongly in the quarter. Taking a closer look at Brazil and China. Brazil delivered organic sales growth of 33% in the quarter with improved value shares in a number of categories, including ketchup, pasta sauces and vegetables. Importantly, we have commenced manufacturing Heinz tomato paste in Brazil and will begin producing Heinz Ketchup locally next month to accelerate its distribution and availability. In China, our ketchup, condiments and sauces business delivered strong organic growth of around 20%, driven by the momentum of our Master, Long Fong and Heinz brands. Our China sauce strategy is focused on these 3 core brands with significant growth potential as we continue to expand across the country. This will be enhanced upon the completion of the Shanghai factory, which will increase our soy sauce bottling capacity in China by nearly 2/3 to support continued growth in the world's largest soy sauce market. Overall, Emerging Markets generated 23% of the company's sales in the quarter. And given our success in Brazil, Russia and China, in particular, we are aggressively evaluating both organic and M&A growth initiatives in these markets. Our second growth engine, Global Ketchup, also performed well in the quarter led by solid sales increases in the U.S., Brazil and Russia. We still have considerable opportunity in ketchup, condiments and sauces, which, as a category, is now approaching 50% of total Heinz sales. We are focused on driving usage and share in our core KC&S business in developed markets while simultaneously introducing millions of new middle class consumers in emerging markets to Heinz Ketchup and our core soy sauce brands. Marketing and M&A initiatives are being increasingly directed against a large opportunity in condiments and sauces where we have proven that we have a clear right to win. And finally, our Top 15 Brands delivered strong organic sales growth of 4.6% in the quarter, led by Heinz, Quero and ABC despite the aforementioned exit from T.G.I.F. meals. Notably, we have seen improvement in our U.S. business with around 65% of our consumer products portfolio now growing volume share. The share improvement reflects increased brand investment and better execution. As promised, we are taking significant action to return the U.S. to profitable growth and we'll continue to do so. We have made progress on Ore-Ida and Classico where we have addressed the value propositions while increasing marketing and innovation behind both brands. We are taking similar action to drive Heinz Ketchup growth in the U.S. and I'm pleased with the response to our outreach in the Hispanic community where we are building penetration and trail through multilingual advertising and more affordable packaging like the $0.99 pouch. We continue to build excitement around our flagship product with new varieties like Balsamic Ketchup and Jalapeño Ketchup, which we are launching on Cyber Monday through a Facebook campaign. Additionally, to leverage our strong brand equity and reduce packaging material, we are also introducing new PET ketchup bottles that are inspired by our iconic 14-ounce glass bottles. The redesigned bottles are being offered in a range of sizes, which you will see on the shelf soon. This is a very clever refresh of our flagship ketchup product that will enhance our merchandising and marketing capabilities. The U.S. team has also begun to make progress in alternate channels like drug and dollar stores through improved distribution and more targeted product offerings aimed at value-oriented consumers. It's important to note that our efforts to strengthen and improve our largest and most important business are being led by a significantly upgraded management team featuring a number of new appointments. Parenthetically, I am pleased to announce that, once again, Heinz has been ranked #1 in overall customer satisfaction among food manufacturers in the 2012 American Customer Satisfaction Index. Heinz led all food manufacturers for the 13th consecutive year. Europe had a somewhat more difficult quarter than we have experienced recently. However, on a relative basis, our results compared favorably to our peers, primarily due to strength in the U.K. behind solid innovation and great results in soup and the strength of our Russian business. In short, we are holding our own in Europe despite an extremely challenging economic environment that I will discuss in a minute. Finally, I want to comment on one other second quarter highlight. This time a year ago, we were discussing challenges faced by our U.S. Foodservice and Australian businesses. And today, I'm pleased to advise you that the actions we took over the past year have significantly improved the results from these 2 businesses. Our second quarter results keep Heinz on track to deliver our previously announced full year outlook for sales and profit. For the full year, we expect at least 4% organic sales growth, in line with our results for the first 6 months; constant currency EPS growth of 5% to 8% on a continuing operations basis, excluding special items in fiscal 2012; and strong operating free cash flow of $1 billion-plus. As a result, we are reaffirming our constant currency EPS outlook of $3.52 to $3.62. But before I turn the call over to Art, I want to share my perspective on the global economy and trends in consumer behavior. Obviously, we are carefully monitoring the Eurozone crisis, like our industry peers, and we are working to assess whether the current market dislocations are of a temporary nature or systemically long term. We are seeing signs that European consumers, in general, are altering their food shopping and dining habits as the continent struggles with the debt crisis, steep unemployment and a variety of austerity and tax regimes. Like their U.S. counterparts, they are adapting to new economic realities and they have developed a strong value mindset as a result. I have challenged our European businesses to see this as an opportunity rather than a roadblock and believe we will continue to resiliently and successfully adapt to the economic trends and new consumer behavior in their markets. Here in the U.S., I have seen some signs of modest economic recovery and improving consumer confidence although there is still great uncertainty as the fiscal cliff looms. I don't expect robust economic growth in the U.S. in 2013, but I am encouraged by the progress in our U.S. business as we invest in our leading brands to drive growth. We need to remind ourselves that we sell staple products that enhance the foods that people enjoy every day, and we can successfully adapt to the new value orientation if we're a bit more flexible and nimble in our thinking. I'm still very bullish about the growth in Emerging Markets where Heinz has grown at a robust 16% rate year-to-date. Importantly, we are redeploying talent and investment behind our Emerging Market businesses and aggressively searching for new opportunities while maintaining an appropriate level of investment in our key developed markets. To win in this challenging environment, Heinz is focusing as never before on meeting the consumers' changing needs, accelerating innovation across our brands and delivering even greater value for our customers. With strong brands and a balanced global portfolio, I believe that we are as well positioned to deliver continued growth in the global economy as anyone. The economy remains challenging to say the least. Our strategic continues to be focused on the long-term prize of a significantly larger Emerging Markets business and global leadership in the very profitable ketchup, condiments and sauces category. Reflecting our focus on driving global growth and shareholder value, I am pleased to announce that Frank Moison, Colgate's Chief Operating Officer, Emergent Markets and South Pacific, has been appointed to the Heinz Board of Directors. As the COO responsible for Colgate's fastest-growing global markets, Frank will bring a strong international perspective, a keen understanding of global consumer trends and extensive SAP implementation experience to our board. In summary, our company remains focused on operating discipline, appropriate investment levels and profitable growth. And I believe we have the brands, the businesses, the talent and the strategy to enhance shareholder value. With that, I'll turn the call over to Art, and will be back later for your Q&A.

Great. Thanks, Bill, and good morning, everyone. Today, I'll take you through our Q2 results, provide a brief update on the first half and then discuss our expectations for the second half of the fiscal year. For the quarter, we achieved double-digit EPS growth from all angles. First, on a continuing operations basis, excluding prior year special items, results increased 11% to $0.90. And excluding the $0.02 negative impact from foreign exchange, EPS increased 14%. On a total company reported basis, EPS increase was even stronger, up 23%, reflecting $0.08 of onetime productivity charges in Q2 of last fiscal year. Turning to the P&L scorecard. Foreign exchange reduced the top and bottom line by about 2.5%. Excluding this FX impact on a constant currency x items basis, sales grew 2.9%, driven by organic sales growth of 3.3%. Importantly, all of our segments posted positive organic sales growth in the quarter. Gross margin was up 40 basis points and constant currency gross profit grew 4.1%. We continue to increase our investment in marketing and in additional capabilities. Operating income was up slightly despite the increased P&L investments. And finally, as mentioned, EPS was up nearly 14%. As projected during last quarter's call, Q2 EPS benefited from a favorable tax rate at about 10%. This largely reflects foreign tax planning initiatives. In short, we delivered solid top and bottom line growth while a favorable tax rate enabled us to make significant investments in the business. Looking at the key components to revenue growth. Organic sales growth of 3.3% was driven by both volume and price. Volume growth of 1.4% was led by U.S. consumer products, the U.K., Brazil, Russia and China sauces, partially offset by declines in The Netherlands and Italy. Price improvements of 1.9% were led by Brazil, Venezuela, Indonesia, U.S. Foodservice and Continental Europe. Now excluding the impact of the prior year decisions to exit T.G.I. frozen meals and downsize our Long Fong frozen business in China, organic sales growth was 4.1% for the quarter. And finally, our top line was unfavorably impacted by 2 prior period divestitures and by foreign exchange. Our 40 basis point improvement in gross margin was led by the U.S. businesses along with Russia, Australia and Brazil. Market inflation on commodities was about 4% in the quarter led by tomatoes, potatoes and sweeteners. And looking forward, we expect around 4% market inflation on the balance of the year, largely in line with our original projections. Now let's take a quick look at top and bottom line performance in each one of our key segments. In North American Consumer Product, we are encouraged at the progress the team is making to drive profitable growth. Organic sales were up slightly as volume increased 1.2% and net price decreased 0.8% since we optimized price points on the Ore-Ida and Classico brands. Excluding the impact of selling off the Boston Market license and the exit of T.G.I. frozen meals, U.S. retail sales grew by nearly 4%, our strongest performance in 9 quarters. Importantly, gross margin was up 70 basis points, driven by strong productivity while operating income reflected a significant increase in marketing spending. Our U.S. Foodservice business posted excellent results for the quarter with sales up more than 4% and profit up almost 27%. Net price increased about 4%, driven by pricing actions taken in the second half of last year to offset inflation. And volume was roughly flat overall, reflecting current restaurant industry traffic trends. The business posted strong gross margin and operating income growth as a result of higher sales, effective cost management and the benefit from prior year productivity initiatives. Across the pond, constant currency results in Europe were about flat for the quarter. Organic sales were slightly positive as double-digit growth in Russia was enough to offset the impact of a weak economy and soft category sales in Italy. U.K. volume was up despite cool weather during barbecue season, but net price was down. Importantly, market share gains were achieved in our large soup, beans and ketchup businesses. Higher gross margin was driven by productivity improvements, which outpaced net commodity inflation. And constant currency operating income was flat to prior year, driven by a higher marketing investment, partially offset by lower SG&A spending. Asia/Pacific posted very strong results with constant currency sales up 4% and profit up almost 27%. Organic sales growth was 4.1%. Emerging Markets continue to post strong growth while our developed markets also delivered organic sales growth in the quarter. Volume was up nearly 2%, led primarily by very strong growth in sauces in China and Indonesia, partially offset by Long Fong and the timing of Ramadan. Price was up more than 2%, driven by a double-digit increase in Indonesia to cover commodity inflation. The region achieved strong gross margin growth, up 130 basis points, driven by Australia, New Zealand and China. Both emerging and developed markets posted strong double-digit operating income growth. And as Bill noted, we're very pleased with the turnaround in Australia. Operating income grew significantly this quarter, a result of the targeted actions we took to improve commercial capabilities, simplify the business, reduce costs and focus on better day-to-day execution. Now turning to our Rest of World segment. We posted organic and constant currency sales growth of nearly 20% with all regions delivering double-digit organic sales growth. Volume increased by 6.5% led by Brazil where we achieved strong market share growth in vegetables, ketchup and pasta sauce. Notably, Quero recently became the #1 brand of vegetables in Brazil. Mexico also achieved strong volume growth in the quarter as our ketchup and baby food businesses attained record market shares in October. And net pricing increased by 13%, led by strong pricing in South America. Gross profit dollars increased, but gross margin decreased as a result of high inflation costs in Venezuela. And operating income reflects lower profitability in Venezuela and increased investments in marketing capabilities in Brazil. Now moving to cash. Operating free cash flow was $155 million for the quarter, up $24 million, driven by higher net income and slightly lower capital spending. During the quarter, we repurchased 1.1 million shares at a total cost of $62 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 the results for the first half. On a constant currency basis, year-to-date sales are up 3.5%, operating income up almost 3% and EPS up more than 14%. For the first half, organic sales were up 4%, gross margin has increased and we've continued to invest in both marketing and capabilities. The year-to-date tax rate is about 14% and this helped drive EPS and fund our investments in the business. Now looking at the balance sheet scorecard. Capital spending is flat to prior year as a percentage of revenue. Cash conversion cycle improved significantly, down 6 days to 38 days, largely driven by better inventory management. Year-to-date cash flow of $131 million is below prior year due to the timing of receivable securitization and cash taxes. We expect to accelerate cash flow in the back half of the fiscal year, consistent with our typical annual phasing. Net debt-to-EBITDA is flat to prior year and remains low at 2.1x. And ROIC has increased nearly 200 basis points, reflecting higher net income and the benefits from last year's productivity initiatives. Now let's switch gears and I'd like to make a couple of comments on the second half of the fiscal year. As Bill said today, we are reaffirming our original top and bottom line outlook. In the second half, we expect increased innovation and 4%-plus organic sales growth, accelerating gross margin improvements, incremental investment in global marketing, Emerging Markets sales capabilities and the SAP program and a higher effective tax rate, which is anticipated to be in the low to mid-20s during the third quarter and a bit higher in the fourth quarter. For the full year, we expect a rate of around 20%. EPS should be at about the same level in Q3 and Q4 this year, which is in line with our full year constant currency outlook. So in summary, we're posting solid sales and EPS results in a challenging environment, driving strong top line growth in Emerging Markets, Global Ketchup and our Top 15 Brands, delivering higher gross margin despite the difficult market environment and making significant investments in the business enabled by a favorable tax rate. With that, we'll turn it back to Meg and take your questions. Meg?

All right, Rachel?

[Operator Instructions] Our first question is from the line of Ken Goldman. Kenneth Goldman - JP Morgan Chase & Co, Research Division: I guess the obvious question is on the tax rate. Can you just help us understand how sustainable a rate of about 20% is going forward? I realize some of these are onetime and some of these are permanent, but as we think about perhaps your cash going forward into '14 and '15, maybe any parameters you can help us with on that would be appreciated.

Yes, Ken. I think as we mentioned on the last earnings call, we feel very good about the tax work that we've done to date and where we're coming out for the year. We expect this year to be around 20%. And I think at this point, our plans in FY '14 call for a rate that's somewhere in that same zip code. So we believe it's relatively sustainable and each quarter and each month, each year, we continue to work on new foreign tax planning initiatives to keep the rate low and in line.

Yes, I think, Ken, as we continue to expand even more outside the United States and particularly in some of these emerging markets that have low flat taxes, there are real opportunities for tax planning and our guys do a very good job of exercising those opportunities and leveraging them. So our view is going forward, as Art said, for certainly next fiscal year, I think we feel pretty good about being fairly consistent with this year. I'm not going to say anything beyond next fiscal year because I have no idea what's going to happen to tax regimes around the world. But certainly, for the next 6 quarters, the 2 this year and next year -- the 4 next year, we should be in pretty good shape.

Your next question comes from Alexia Howard. Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division: Can I ask about the frozen entrée business? I know we only get a sliver of the Smart Ones brand within frozen entrées, but it looked quite weak this last quarter. Could you talk about what you're seeing for Smart Ones overall as it enters adjacent eating occasions, or is it actually still under a lot of pressure competitively?

Well, let me step back and let's talk about the category for a minute and then I'll come back and talk specifically about our business. The category over the last 5 years has lost 20 million cases, about 1/3 of the total category volume. It's lost $500 million in sales. Within that period, our overall business, as we define it, is up 2.5 to 3 share points. Currently, what we're seeing is very strong performance on our breakfast business, good performance in some of our sides in terms of the snacks. And our base entrée business, we are not promoting as aggressively as maybe we could and that's a decision we've made. And so the focus has really been in frozen on getting Ore-Ida and our snacks business growing, which we did very successfully in the second quarter. So generally, Smart Ones was not as strong in the second quarter as I think we would have liked. We'll see how the season plays out. But my bigger issue, Alexia, continues to be the nutritional category where the industry has lost about 1/3 of its sales over the last 5 years. And so rather than chasing volume in a category that's still not sure where it's going, we're planning on innovation. We're doing a lot of good things, particularly in breakfast, which is the fastest-growing daypart in the freezer case and really focusing our other efforts on Ore-Ida and our frozen snacks businesses, which are performing quite well.

Your next question comes from the line of Thilo Wrede. Thilo Wrede - Jefferies & Company, Inc., Research Division: Could you talk a little bit about the success or -- how the DOYPACK is doing in the alternative channels in the U.S., especially given that dollar stores seem to be slowing down?

It's doing very well in the Hispanic markets where we've supported it with multilingual advertising, Spanish language advertising, particularly on the West Coast, parts of the Southwest and on the Northeast. And so I would say it's been a key component of our success in this market. It's moved into the top 10 SKUs that we sell in those areas. In other markets, I think we need to do a better job of getting a more prominent distribution. But generally, it's playing in line in most markets with where we thought it would be and the Hispanic market's doing much better. I think outside the U.S., DOYPACK continues to be an incredible boon to the business. In Indonesia, it's -- majority of our growth is coming in condiments and sauces, which is being led by DOYPACK; same thing in Russia. The launch in Mexico has been nothing more than a heroic success. In fact, we can't supply baby food in Mexico. We've just started up another line in Guadalajara, but we are literally out of stock. We launched 3 SKUs in baby food last year. We're now up to 5, soon to be 7 or 8. Our share is now in double digits. And the same thing on ketchup where we're now close to a 20 share in Mexico from 0, 3 or 4 years ago. And again, most of that is being driven by DOYPACK. We've launched it in the U.K. So DOYPACK is going to be a clear component of the company's success going forward, particularly given the price point. And in the U.S., I'm pleased with where we are in the Hispanic markets and I think we'll see more upside going forward from DOYPACK. And I think the other thing you can count on is a lot more DOYPACK initiatives around the company, both in developed and emerging markets, going beyond just ketchup. Thilo Wrede - Jefferies & Company, Inc., Research Division: But does the slowdown of dollar stores, does that concern you given your desire to grow more or get more presence in alternative channels?

It would, Thilo, if we had a big presence in dollar stores, which we don't. I mean, we are just now getting into dollar stores. We cracked Dollar General on Ore-Ida with a substantial distribution gain on 1.5-pound Ore-Ida bags. And so for us, as a company that's grossly underdeveloped in dollar stores, no, it is not an issue for us yet. It is still a significant opportunity for future growth. And frankly, DOYPACK is still not fully penetrated in dollar stores. It's done very well in the bodegas and very well in the Hispanic-branded markets around the U.S. So no, for us, it is not an issue yet. Talk to me in 2 years and maybe at that point in time it will be. But no, I don't think right now I'm concerned about that. I'm concerned about getting it on the shelf in dollar stores.

Your next question comes from the line of Chris Growe. Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division: Just my one question that would be in relation to the North American business and you certainly have made some pretty heavy marketing investments. I think we're starting to see some sales recovery, it sounds like, some momentum in the business. I think you've outlined, Bill, a higher gross margin for the quarter. I just wanted to understand if that division -- I guess to get your assessment of the progression of the top line and then if you think that business can grow its profits this year given the investments you're making.

Yes, a couple of responses to that. First, if you back out T.G.I.F. in the quarter, the U.S. business was up over 4 points in volume growth. So the U.S. business is responding to the marketing, which is, frankly, a balance of promotion and media and traditional marketing support. And I think we feel pretty good about where we're headed from a volume standpoint once we get the noise of T.G.I.F. behind us and we do have to address the Smart Ones question that was raised earlier. I think from a profit standpoint, I would be very pleased this year with the U.S. company coming in plus or minus a few points versus last year. It will just depend on how much investment we make in the second half. We had a significant increase, and I want to underline the word significant in the second quarter. We don't break out marketing spending by business unit for a lot of obvious reasons. But it is not unreasonable to say marketing spending in the U.S. was up well into the double digits in the second quarter, the bulk of that behind ketchup and the Hispanic advertising and some advertising in the Southeast and Ore-Ida in addition to some stuff we have done on Classico and frankly on snacks. So I think I feel better about the prospects of the U.S. going forward from a top line standpoint and a share standpoint. The most recent share, as I said, 65% volume growth in my comments. But in the last 4 weeks, volume share growth was almost 78% of the total business, so we are seeing a response. But there's no doubt that we are intentionally pressuring profits in the U.S. this year as we work to restore the top line growth. Fortunately, we're able to do that not only because of the tax rate, but because of the strength of the Foodservice business and the strength of our Emerging Markets businesses in terms of growing the bottom line. So I think one of the benefits of running a portfolio company like we do is it gives us an enormous amount of flexibility in terms of where we reprioritize investment. And so I think you'll see significant investment increases in the U.S. as we continue to drive the top line. Christopher R. Growe - Stifel, Nicolaus & Co., Inc., Research Division: We've talked before at great length about Smart Ones and the frozen entrée business. I guess my question is in relation to that business, is it a marketing -- is it increase in marketing or is it more about increasing promotion to really address that, if you will, or fix that issue in that business?

Well, I've been pretty consistent, Chris, for almost 4 years saying I'm not going to chase a declining market and I continue to believe that. So we're monitoring the market and trying to be as balanced and nuanced as we can in terms of how we prioritize our investment dollars. And right now I'm getting a significant positive return on Ore-Ida, I'm seeing a good response in frozen snacks and I'm seeing a terrific growth upside in ketchup. And so as a consequence of that, we'll put the investments behind where we're seeing the growth. If I put a lot of investment behind Smart Ones and I'm chasing a declining market, there's just not going to be the return I want. So as I said, breakfast is doing well. You continue to see us focus on breakfast. We've got a lot of new activity coming during the season in terms of innovation and some new products. And then we've got some interesting things over the longer term that you'll see over the next 6 to 12 months in Smart Ones. I certainly don't want to imply that we're walking away from the business because we're not. It's critically important to us. But I think you can read into that, that the dollars we're allocating for investment in the freezer case we're going to put first where we're getting our best return, which, in this case right now, is Ore-Ida and snacks and we'll manage the Smart Ones business the best way we can. And right now I will tell you that I still think innovation and marketing behind Smart Ones is the way to go rather than get into a football promotion initiative that ultimately nobody wins. But until the category starts stabilizing again, I just hate like heck to chase volume.

Your next question comes from the line of David Palmer.

I was just going to ask a question that was a little bit in line with what Bill was just addressing, which was you mentioned 2/3 of the business is having volume growth, and are you going to focus on bending that trend on the remaining 1/3 like on Smart Ones? And it seems like for now you're going to focus your incremental spend on the -- what perhaps has a higher ROI in the near term, which is on the 2/3 that's already had a little bit of momentum. Is that a fair characterization?

Yes, I think so. And again, David, as I said during the last 4 weeks, we're at 78% of our businesses and volume growth in the U.S. And so what we're trying to understand is where we're getting the best leverage both from a top line standpoint and a bottom line standpoint. That's one of the reasons you saw the margin improve in the quarter because our investments behind our leading margin brands, which would be ketchup and Ore-Ida, gave us a good response in the quarter and I think so we're going to continue to balance it. And I've been very pleased with the turnaround in Ore-Ida. I continue to believe ketchup is still an opportunity in the U.S. I think the new package launch in the U.S. behind something we have an internal name for that basically leads to transforming the ketchup category is something that we're very excited about. We've launched 38- and 34-ounce sizes, and in specialty items in 14-ounce sizes the consumer response in research has been extraordinary. The Hispanic response in terms of where we are with our marketing efforts has been great. So what we're doing is we're choosing and prioritizing against where we think the greatest leverage is to the P&L and to the top line. And so yes, I mean, it's not necessarily an issue of triage, but it is going to be an issue who's going to give me the best return for incremental dollars.

And then separate question on gross margins in the Rest of the World segment. Could you perhaps talk a little bit about that and what your outlook is in that segment, please?

Yes, it's a story of 2 tales really, 2 cities. Virtually every other business in the Rest of the World segment grew margin, including Brazil, which grew their margin significantly. It was an issue of Venezuela. And part of the issue in Venezuela relates to the timing of the elections and the trade backing off in terms of buying product and the inflation rate, which we have not been able to price up to in the Venezuelan market. So I think if you back Venezuela out of the Rest of the World, you'll see a dramatically different margin growth story, particularly in Brazil where I was very pleased; we grew margins 200 to 300 basis points in the quarter in Brazil. I think the second thing that you need to keep in mind is we are coming off in the Rest of the World an incredible quarter last year. We are up 150 basis point slam and a 150% last year on operating profit. And so we knew Rest of World from a bottom line standpoint was not going to have the kind of quarter we had last year. But I have to tell you the Brazilian business has been nothing more than a continued surprise to me in terms of how well it is doing. We're seeing continued growth in Mexico, great performance in the rest of Latin America x Venezuela and really strong results coming out of the Middle East. And so I feel pretty good about where we are. But Venezuela is the story of the Rest of World in the second quarter in terms of the dilution on margin. And that will address itself over time as they finish the elections in December on a state basis and then we get some clarity on what's going to happen going forward.

And David, just to follow up on yours and Alexia's question on our nutritional meals' performance. We do some extensive analysis behind the scenes because we'll take it SKU-by-SKU. And as you guys know, and Alexia, you alluded to, Smart Ones gets reported across probably 4 subcategories and -- be it breakfast, et cetera. We're seeing a much better performance all-in than what you're seeing from just the entrée or meal portion of that business since we have shifted the portfolio more towards some of these daypart opportunities. So we actually are doing well relative to the category. Picking up share.

Your next question comes from the line of David Driscoll.

Can you guys update us on the incremental investment plan for the year? When you laid out the year back on the fourth quarter Analyst Day, the plan for the year was to incrementally put $120 million into the business, $70 million into marketing, and I think about $50 million into a number of areas to increase your capabilities. So I'd like to hear about both areas. And then, one thing I would say, I think to my numbers right now, I've got marketing for the first 6 months of the year up about $10 million or about 4%. So if everything is in line and that would suggest a fairly massive marketing reinvestment in the final 2 quarters, and I'm curious if that plan has changed at all.

The plan has not changed, but you're looking at actual currency as opposed to constant currency. I mean, we were up 13% in the second quarter and we're up year-to-date between 8% and 10%.So I think we're tracking right where we thought we would be. And I will tell you some of that marketing may be deployed a little differently in the second half of the year. We may put some back in promotion depending on the market and depending on where we are. But we are still on track for the investments, significant investments, and boots on the ground in the Emerging Markets. And it's really interesting, if you look at the 3 markets that benefited the most, China condiments and sauces, Russia and Brazil and so those are our 3 best-performing Emerging Market businesses along with Indonesia during the second quarter and through the first half of the year. I mean, Russia sales organically were up around 14%. Obviously, condiments and sauces that you saw in China up around 20% and Brazil up around 33%. So we're seeing a very good response from that. We've made significant investments in SAP, particularly in Canada and now in Europe. We've just turned Spain on following the success in Germany. So we continue to roll out those investments. Marketing spend, as I said, on a constant currency basis, is up 8% to 10% so far this year, very strong in the second quarter. So we're about where we thought we would be, David. I think the qualification I'll give you is in the second half, if we see better leverage on the promotions side that's where we'll go. Now having said that, I want to be clear that promotion spending as defined by deal spending for the company is not up year-on-year through the first half of the year. I won't be any more specific than that for a lot of reasons, but we are not up. So the opportunity to deploy differently will be predicated on the category, the country, the business and where the opportunities are. But we're still tracking for a double-digit increase in marketing spending on the year on a constant currency basis, which is how we defined it in May, and through a substantial improvement in capabilities around the company and we're seeing really good returns on that. Even SAP in Europe, we're starting to see a very positive response from the investments into Benelux a couple of years ago. Spain has gone in extremely well. Germany has gone in well and it allowed us to consolidate the German business into the rest of Continental Europe when we sold the Sonnen business earlier this year. So our plans have not changed. The prioritization of how those dollars are allocated may be modified a bit in the second half.

Your next question comes from the line of Robert Moskow. Robert Moskow - Crédit Suisse AG, Research Division: So if the investment is still $120 million, but you are getting a little bit more of a benefit on the tax rate than you expected -- I guess the prior guidance was 21% or, well, flat year-over-year and now it's a little lower -- shouldn't you have a little more money to reinvest? And what form do you think that would take? Do you think you would -- would it be going from $120 million of reinvestment to $140 million or something like that?

Well, right now we're going to stick with the guidance we have because we haven't moved any of the numbers relative to the guidance. And so I think in that context, Rob, I don't want to be any more enlightened or enlightening in terms of how we're going to do that. The other thing you got to remember, I mean we're dealing with the world right now that we can't figure out. I mean, the turmoil in the world. You tell me how the fiscal cliff is going to be resolved. You tell me how Europe is going to be resolved. You tell me what's going to happen to currency in the second half of the year. You tell me what's going to happen to consumer confidence. And so right now we're sort of sitting pat until we get a better sense certainly as we approach the end of this calendar year and into the beginning of next calendar year how all this stuff unfolds. I mean right now in Europe you're dealing with various austerity and tax regimes that aren't working very well and the efficacy of those is being challenged. We've got consumer unhappiness throughout the European continent, but particularly in Southern Europe and in the Iberian Peninsula. We're seeing similar things happening in the U.S. as foodservice traffic now sort of reflects the anticipation of what's going to happen with the cliff. I don't share the confidence in our political process that others seem to be believing in. And so I think from our standpoint, we're just sitting until we know where we are. The other thing I will tell you, tax is never a certainty. While we feel pretty good about where we are, things happen and so I think we just want to keep where we are going and work from that. I'm pleased with the execution of the company. I'm pleased with where we're headed. I think Emerging Markets continue to look very promising. And if anything, I will continue to invest in more boots on the ground in Emerging Markets before I probably put more into specific marketing. I mean, the boots on the ground is giving us a very solid tangible return in all these markets. I'd like to see us do a little bit more in Indonesia and maybe a little bit more in India. And then we have a lot of other initiatives in place. Robert Moskow - Crédit Suisse AG, Research Division: Can I ask a question on cash flow to Art? It's down $98 million year-to-date for operating free cash flow, but net income's up. The tax rate is down. Your CapEx is pretty stable. What was the driver again for the cash flow, and should we see a big improvement? I think you're guiding to $1.1 billion in cash flow for the year. Has that changed?

Yes, Rob, what -- a lot of it's timing related, associated with cash tax payments. As you know, book tax versus cash taxes is often very differently timed. So that's certainly part of it. Also, the timing of some of our securitization activities is different this year than in prior years. So net-net, we expect a strong back half. We're projecting to $1 billion-plus in terms of operating free cash flow. And I think we want to maintain some flexibility there in terms of the level of capital spending, particularly as it relates to Emerging Markets. So I think $1 billion-plus we feel good about at this point.

Your next question comes from the line of Jonathan Feeney.

Bill, I wanted to get back to the volume a little bit and particularly your strategy surrounding that. When I look over the past 4 years, it's been -- did you see some significant volume declines across basically Europe, certainly Foodservice, and North America. And now here, it's notable the first quarter, I believe, in a while where you've had a negative price mix in those, so you were moderating pricing, you've seen sequential improvement in volumes. So I wonder if -- it seems like broadly in the food industry now, consumers have reacted to brands lowering price by improving volume. That's what the data is telling us and is there -- do you expect a period where you're going to invest in price a little bit more to drive more volume? I know you've called out some categories that you don't think are worth it, but do you intend to keep that going and accelerate volume through? It seems like these price investments are working in that direction.

It's a mix of categories and a mix of countries and a mix of businesses. I think, generally, historical truths are true, which is that if you lower price, consumers will respond. But I think a lot of what we're doing is being driven by mix and the way the sizing, the price points in terms of smaller sizes and in terms of different kinds of recipes and so forth, Jonathan. But yes, I mean I think, as I said a few minutes ago, in response to David's question about marketing spend in the second half, if we believe we can generate a better return by leveraging more promotion as opposed to just generalized traditional marketing, that's the way we will go. But it will depend on the business. In ketchup right now in the U.S., we're getting a great response from very traditional advertising as we are in Ore-Ida after balancing where we needed to be on price. In the Emerging Markets, we're getting very good price and the thing you got to remember in those markets is you have general inflation, which is also being reflected in wages and so forth. So the consumer is not as put off by price and private label is not a big issue. But I think, generally, even in the developed world, private label's no longer showing the kind of growth they did and it's really going to be a function of creating value in the mind of the consumer whether that value manifests itself in terms of better innovation, premium product, superior performance or a combination of promoted volume and/or better price points. It's just going to depend on the category and on where we think we're getting the best return. And clearly, in some of these businesses, price is going to be a better lever than other businesses. Clearly, in other cases, marketing's going to be the better lever and what we're trying to do is evaluate on elasticity basis exactly where we get the greatest leverage.

Okay, great. At the risk of sounding contumacious, I'm going to ask one follow-up question. Do you -- can you give us the volume number for the Top 15 Brands organically that you gave us for sales? Meg, do you have that or can follow up off-line?

I actually don't have that number. Again, the Top 15 Brands, if you exclude and I think in this case you'd have to take T.G.I.F. out, we're well up over 5% organically. And since much of that was driven by ABC, Brazil and the Heinz brand, I would guess off the top of my mind that 1/3 of that's volume-related and 2/3 of it's price-related, but it could be more like 40-60. There is volume growth in there and there is some price growth in there because of the mix of the Emerging Market businesses in there.

Your next question comes from the line of Jason English.

I wanted to circle back to the cash flow statement and build on some of Rob's questions. CapEx is running a little bit lighter than I think your initial 3.8 -- sorry, 3.8% to 4% guidance for the year. Is what we've seen in the first half more reflective of where the full year is going to come in or should we stick with that 3.8% to 4%?

I think we'll be right around the 3.8% to 4%. We could be 3.7% or we could be 3.9% because we have a lot of investments in the second half of the year in the Emerging Markets. We're just finishing the Shanghai factory, which I'm hoping will be open early in the new calendar year. We have started the Foshan, China baby food factory, which we're going to try to have open in 2015. We've got a lot of investment going into India. We also have SAP investment coming in the second half of the year. And obviously, the finalization of the Innovation Center in Europe. So there's a fair amount of capital investment established in the second half the year. Frankly, my perspective is the lower I can keep that number, the happier I am as everybody who works for me knows. The reality is given the pressure we have on volume in the Emerging Markets, we have to provide capacity. As I said, we put a new pouch line into Mexico, we have a second one coming very shortly. We have a new pouch line going into Brazil. We're going to have a second one of those coming very shortly. We've got -- we are starting to produce ketchup in Brazil in the next 30 or 40 days. I think you've also got a fair amount of activity in the Asian markets, China, in particular, is an area we're going to have to continue to invest in, but -- so I think we'll be right around that number. To be honest with you, if I had my druthers, I'd try to bring it down. But right now given the SAP implementation and capacity needs I have in the business, I can't. The final thing is we're pretty much out of capacity on Dip & Squeeze. We're going to look at a fourth line on Dip & Squeeze. Where that line goes is yet to be determined. It'll be interesting to see where that line goes. I think you should not assume that line is automatically going into the U.S. but that is a line that we will have to start talking about in the second half of the year because we're out of capacity and the Emerging Markets are all yelling and screaming at me for Dip & Squeeze capabilities. So it's mainly about SAP implementation and about adding capacity in the Emerging Markets where we're getting significant growth.

One more question, and I'll pass it on. You're maintaining your full year organic sales growth guidance of 4%. Your prior year comparisons become a little more onerous as we get to the back half. Bill, can you detail some of the initiatives that you have in place that are going to -- that's going to help you drive that growth?

Yes, I think there's a couple of things to keep in mind. One, we're spending lot on marketing. We'd better see that kind of volume growth in the second half the year. Secondly, innovation in the U.K. is up 50% year-on-year in the second half. We have a significant amount of innovation in the Emerging Markets, particularly behind pouch initiatives. We've got a significant amount of innovation coming in the U.S., more of which I'll detail at CAGNY. We have a lot of activity in other parts of Europe as well, particularly in Eastern Europe and Russia. So there's a significant amount of new product activity in the second half of the year and a significant response to the marketing spending that we've initiated in the first half the year, much of which really didn't begin until the second quarter and you'll see a follow-through in the third quarter. So I think in that context, I feel reasonably sanguine. Let me underline those 2 words, reasonably sanguine, about strong volume growth or strong organic sales growth in the second half of the year. The Emerging Markets, as I said, last year at this time, relative to the second half, should be much stronger in the second half of this year than they were in the first half of this year. We're seeing huge pickup in Brazil. Hopefully, the new ketchup line will be ready. We've launched Heinz tomato paste. It's doing very well. The enabling lines we've now put in Mexico will allow us to start shipping baby food more aggressively. What we're doing in Indonesia with the launches in the second half, which are all predominantly condiments and sauces launches; a lot of activity in terms of our expansion of our food -- of our condiments and sauces business in China, as well as some food service initiatives; and the focus on ketchup, the continued strength of ketchup in the European continent; and then just the general success of Russia should help us drive volume in the second half of the year. I feel pretty good about the third quarter. The fourth quarter is really where we're going to have the big measurement year-on-year. But the forecasts coming in from our operating teams are all pretty optimistic about volume growth. There is organic sales growth in the second half of the year. So right now we see no reason to back off that. And I'll remind you, we have generated about 4% through the first half this year and that's without the benefit of some of the marketing that you'll see in the second half.

Your next question comes from the line of Ann Gurkin. Ann H. Gurkin - Davenport & Company, LLC, Research Division: I wanted to ask about Emerging Markets and opportunities for M&A and the opportunity or the potential you could hit your 30% target earlier than fiscal '16.

Ann, if we don't hit it before fiscal '16, I will be incredibly disappointed and highly annoyed with a lot of the people that work for me. We have a -- this is the first quarter I can say this now in a while. We have so many active M&A initiatives in the Emerging Markets, we literally had a meeting last week to decide how we're going to put them in priority. We have a number of very close-in initiatives underway in the 3 markets I mentioned in my initial comments as well as other markets where I think we need to improve our footprint. For perspective, I just came back from a 15-day around-the-world trip where I was in various parts of Asia and various parts of Europe, and we are aggressively looking at and aggressively in the process of M&A activity. And yes, I will be very, very disappointed if we're not 30% before fiscal '16. I really will. And there's no guarantee obviously. People really don't care about my level of disappointment. But I will tell you that I would be surprised and unhappy if we're not there first given what we have both organically in terms of the opportunities with the new capacity we're adding and the M&A initiatives we have underway. Ann H. Gurkin - Davenport & Company, LLC, Research Division: That is very helpful. And if I can sneak one more in there. How are price gaps with Ore-Ida in the U.S.?

They have narrowed a bit. They're still there, but they have narrowed a bit. And as a result, in addition to the marketing, the Justice League for Potatoes marketing, which I frankly was not real high on, it's done a very good job of opening the gates that mothers or families had closed in terms of children wanting the Ore-Ida has done very well. So the Ore-Ida business is responding well. There's still a gap, but we've narrowed the gap to where it needs to be.

Your next question comes from the line of Karen Lamark.

You mentioned North America making inroads in the drugstore and dollar store distribution channels. How much did that contribute to sales in the quarter? And maybe if you could give us some color expectations on sort of the cadence of the sales over the next few quarters. And then a follow-up on that.

All right. I don't know how much it contributed in the same quarter. It wasn't much because we're just now in the process of getting it on the shelf, certainly in Dollar General and some of the other stores. Pharmacy is coming along quite well. We're still grossly underdeveloped in both channels. So I would say it's more a second half story than it is a first half story. And to be honest with you, I don't have any idea how much it was in the second quarter. I don't think it was very significant based on what I'm hearing from the operating team. So I think it's still going to be a second half and fiscal '14 story for the company. But we're so far behind where many of our peers are that it's still a big opportunity. And in terms of volume going forward, I mean, clearly -- and I assume you're talking the U.S. but if you're not, please let me know, I feel reasonably -- again, reasonably good about the activities we have in the second half of the year. I think the management team in the U.S. has done an excellent job on refocusing on innovation. I was at the Innovation Center in North America a week ago Friday and spent the whole afternoon with them reviewing a litany of the new product initiatives underway and some of the activities that will start hitting the market late in this fiscal year, which will add some benefit in Q4, but really should have the bulk of their benefit next year beyond pipeline fill. So again, a lot of -- excuse me, a lot of activity in potatoes, a lot of activity in sauces and a lot of activity in some other areas that I think will be interesting. If you look at our business, the strongest category growth in any of our businesses in developed markets is vinegar and barbecue sauce, and the U.S. Vinegar is growing as a category at a double-digit rate, as are we, and so we're going to leverage that and look for opportunities there as well. So again, I think there's some opportunities in the second half of the year to drive better volume than we did in the first half in the U.S. company.

All right. Well, I see we're almost out of time and I know we're right up against another call. I know there's several of you in queue, I apologize. We're going to take one more.

Certainly, your next question comes from the line of Eric Katzman.

Okay, I guess with time short I'll give one question. Bill, you've been adamant about giving out the cash flow in terms of dividends versus share repo with -- it seems like a high likelihood that rates are going up on dividends. How do you and the board feel about the approach to the distribution of the cash?

Same way. I mean, I think right now, if you go back to the Senate bill, the Senate bill capped dividend tax at 20% plus a 3.8% Medicare tax. The President wants to take it through ordinary income tax. The Republicans want to keep it at 15 points plus a 3.8%. So I think there's likely to be some kind of compromise on dividend tax. Secondly, most of our investors, Eric, are still telling us they'd prefer to see it in the form of dividends and share buybacks. And so our strategy continues to be, in terms of the deployment of cash, M&A, and as I said we have an aggressive pipeline full of M&A. A lot of initiatives underway, several of which I hope would get done sooner rather than later, but we'll see. As you know that's a tricky game. And then the second use would be cash and then obviously we'll continue to buy back stock in order to prevent dilution from outstanding shares. But right now we don't see a change. I don't know how the fiscal cliff is going to manifest itself, how it's going to manage out. Obviously, if we start hearing from our investors and we start seeing a dramatic shift, then we'll be flexible in terms of what's going to create the most value. It's just right now our belief is based on what we're hearing that dividends are still the best way for us to deploy cash back to our investors. That may change. And if it does, then obviously we'll modify our approach but right now that's where we are.

Okay, well, as we roll up for today, we want to -- we look forward to seeing many of you over the next few weeks. And our next scheduled event will be at CAGNY where we'll be presenting Thursday, February 21 and Bill will kick off the day at 8 a.m. So with that, all of us at Heinz would like to wish you and yours a warm and happy Thanksgiving, and a joyous holiday season. Make it a great day.

Thank you. Ladies and gentlemen, that now concludes your conference call for today. You may now disconnect. Thank you for joining, and enjoy the rest of your day.