The Kraft Heinz Company
Q4 2010 Earnings Call Transcript

Published: 27 May 2010

[Margaret Nollen:]

Good morning. I'm Meg Nollen, Senior Vice President, Investor Relation for the H.J. Heinz Co., and I'd like to welcome everyone to our 2010 Analyst and Investor Day here in Pittsburgh. For those of you attending today's session, you're in for quite a treat as you're going to meet Heinz leadership from around the world. For those of you who are unable to travel to Pittsburgh today, our webcast is also being simultaneously videocast. This is not your typical Analyst Day, and I simply couldn't let you miss out on the experience. For those of you on a simultaneously listen-only call or webcast, the presentation will be made available by section throughout the day on the Investor Relations page of our website at www.heinz.com, as well as Thomson StreetEvents (sic) Thomson Reuters StreetEvents. Start pages including five-year financial and statistical summaries and Reg G reconciliations are also available on the front page of the IR section of the website. Note that our P&L has been updated for the fourth quarter, and the balance sheet and cash flows will be updated in June, pending the filing of our 10-K. We have a great day planned for you as we elaborate on the familiar Heinz's four-pillar strategy, grow the core portfolio, accelerate growth in Emerging Markets, strengthen and leverage global scale and make talent a competitive advantage. The agenda for the day is in front of your folder and also on the screen. We'll start with the strategic and financial overview from Bill and Art, and then we'll detail productivity initiatives and deleveraging global scale with Bob Ostryniec and Karen Alber, followed by a Q&A session. We'll take a break and then begin the regional reviews at 9

[William Johnson:]

Thank you, Meg. Good morning, and welcome to our 2010 Investor and Analyst Conference. One change on the agenda, we'll do the Q&A right after the Infant/Nutrition section. So those of you who'd like to get out of here and catch the planes, without listening to our people strategy and me, are able to do so. Today, more than 20 executives from our senior management team will share their insights about Heinz's businesses and brands around the world and our plans to drive continued growth in fiscal 2011. Many of you know that I consider the Managing Director position the most important in our company, which is why you will hear from so many of them throughout the day. My purpose today is to briefly recap our outstanding performance in fiscal 2010, discuss the outlook for 2011, which commenced on April 29, and provide an overview of our global strategy to drive continued sales, profit and cash flow growth. My message today is unmistakably clear. We delivered very strong result in a challenging and volatile global environment in fiscal 2010. And with our proven strategy, brands and team, we plan to do it again in 2011. Fiscal 2010, as we announced this morning, was another excellent year with record sales of $10.5 billion, organic sales growth of more than 15% in Emerging Markets, over 3% in our top 15 brands and more than 2% over all. We had a 50 basis point improvement in gross profit margin reflecting increased pricing and higher productivity, strong earnings per share of $2.87 from continuing operations despite the unfavorable impact of currency and higher commodity cost, and solid growth and are already a top-tier return on invested capital. Obviously, we're pretty pleased with our results, which included a solid finish to the year as Art will detail. We achieved profitable volume growth in the fourth quarter while investing heavily in marketing to drive growth and the support to launch of several new innovations. Additionally, we also underwrote several new productivity initiative to further improve margins and further simplify the supply chain going forward. Overall, fourth quarter sales grew 8%. Net income from continuing operations increased around 8% with a reported EPS of $0.60. And we achieved our 20th consecutive quarter of organic sales growth. In simple math, that's five straight years of organic sales growth, which we plan on extending in fiscal 2011 and beyond. Importantly, we also generated record operating free cash flow of almost $1.1 billion, while investing significantly in our pension plans and our businesses. Strong cash flow has become a true Heinz hallmark and it provides us with great balance sheet flexibility. Additionally, it supports continued dividend growth. And in that context, I am pleased to announce our plans to increase the annualized dividend to $1.80 per share, a more than 7% increase effective with the July payment. With this increase, our dividend has grown almost 67% over the last few years. And in that time span, Heinz has returned more than $3 billion to shareholders through dividend payments. Our excellent fiscal 2010 performance reflects solid execution by our business unit teams. In a tough economy, we achieved constant currency sales growth within our guidance of 4% to 6%, increase our marketing spend by more than 25% to strengthen our brand equity and drive sustainable growth. And we delivered EPS from continuing operations that exceeded the top end of our revised range of $2.82 to $2.85 after raising the outlook twice during the year. Our increased profit reflected both excellent operational performance and improved currency translation. From my perspective, there were three notable highlights during the year. Number one, Emerging Markets clearly established themselves as our most powerful growth engine now and well into the future of this company. These markets generated virtually all of the company's organic sales growth for the year and 30% of our total reported sales growth, despite the unfavorable impact of the devaluation in Venezuela. The momentum in the fourth quarter was particularly encouraging on organic sales growth of around 21%. I will have much more to say about our Emerging Markets growth strategy in a few minutes. And you'll hear from many of our Emerging Markets leaders throughout the day. Number two. Our top 15 brands once again demonstrated strength and resilience amid intense competitive promotional activity, delivering higher organic growth for the year and a solid 4% increase in the fourth quarter. Overall, as I highlighted during the November earnings call, our volumes were stronger in the second half, as we nimbly adjusted our strategy in response to the changing market dynamics to emphasize profitable volume growth after focusing on price in the first half to offset higher commodity cost. Volume improved from the first to the second half across most of our businesses, particularly in the U.S. retail and in the U.K., where we significantly increased consumer marketing investment and ramped up the pace of innovation. Number three, we continue to generate top-tier cash flow results, which has enhanced our strategic flexibility while allowing us to reinvest in our businesses and brands, contribute over $ 500 million to our company pension plans and support our policy of returning cash to shareholders through dividend increases. As we leave fiscal 2010, I continue to be pleased with the leadership, the depth and the talent of our teams and their proven ability to execute our four-prong strategy of growing the core portfolio, accelerating growth in Emerging Markets, strengthening and leveraging global scale, and making talent an advantage. Turning now to fiscal 2011. We expect to deliver another year of strong growth on a constant-currency basis. Our outlook is based on the successful track record of our people and the thoughtful plans we have developed to drive continued growth. On a constant-currency basis, we expect sales growth of 3% to 4%, an increase in gross margin of at least 50 basis points, operating income growth of 7% to 10%, EPS growth of 7% to 10%, and another year of strong cash generation with operating free cash flow in the range of $1 billion to $1.1 billion. The majority of our sales, as most of you know, are generated outside the U.S., around 62% in fiscal 2010. And consequently, our reported results will likely be affected by the recent weakness in most currencies versus the U.S. dollar. Two points

[Arthur Winkleblack:]

Thanks, Bill. Good morning, everyone. How is everybody? All right, ready to roll. Well, today, I'll take you through a review of fiscal 2010, starting with the summary of the full year results, and then just a brief recap of Q4 performance. I'll follow that with a summary of our targets for fiscal 2011. And as Bill indicated, we're very pleased with the strong results that we delivered for the year. From a constant-currency P&L perspective, sales grew 4.3%, which was driven largely by growth in Emerging Markets. Operating income improved 6.3% despite sizable marketing and productivity investments, and EPS rose 9.3%. Importantly, while driving these strong P&L results, we had another great year in balance sheet terms. We delivered an all-time Heinz record for operating free cash flow of $1.08 billion, up 23% despite significant incremental pension funding. ROIC improved another 30 basis points, reflecting our continuing focus on returns to shareholders. Overall, a very good result in this tough economic environment. And turning to EPS, as you recall, we've experienced a lot of foreign currency movements this year. And we divested three small businesses that have been recorded as discontinued operations. Thus, it's important you get grounded in the dynamics of our P&L for the year. Taking out all the noise from changes in foreign exchange and the impact of discontinued operations, EPS increased $0.25 or a very strong 9.3%. This is captured on the left side of the page and will be the focus of my discussion today. But for completeness, you can see that our results from continuing operations on a reported basis were down $0.04 after you include the impact of foreign exchange on each year. And finally, total company reported EPS was down $0.18, primarily reflecting the loss on sale of our discontinued operations. Now let's focus then on continuing ops. As usual, we provided our P&L scorecard and have shown the year-on-year changes on a reported and constant-currency basis. Excluding currency, sales grew by more than 4%. Gross margin climbed almost a full point. We increased our marketing investment by 25%. Operating income rose better than 6%, and EPS improved by more than 9%. We're very pleased with these overall results in light of our continuing investment in the business and particularly, in the gross margin improvement, as we overcame commodity inflation and the unfavorable across currency rates in the U.K. In order to continue in providing transparency on how we're looking at the business, here, we've provided the impact of currency up and down the full P&L. Interestingly, after all the fluctuations in foreign currencies this year, the net effect of translation changes actually helped us by $0.02. The real issue was the U.K. transaction cross rates. That cost is about $0.10 of EPS. Additionally, as you recall, we lapped the $0.21 gain on translation hedges we generated in fiscal 2009, combining the $0.02 favorably with a $0.10 and $0.21 unfavorabilities results in a total currency hit of $0.29 versus the prior year. Now turning to the full year P&L, I'll just point out a few lines. First, SG&A was down 10 basis points as a percentage of sales, even after Keystone and productivity-related investments. Second, net interest and other expenses were up 47% on a reported basis, largely reflecting the overlap of the $107 million mark-to-market gains on translation currency hedges in fiscal 2009. Excluding these gains, net interest cost declined, primarily reflecting lower average interest rates. And third,, you can see that our full year tax rate was slightly less than 28%. This was about 60 basis points lower than prior year and reflects continued strong tax planning. Now shifting to revenue. As Bill mentioned, we posted our fifth consecutive year of organic sales growth, up 2.1% on top of the 6% growth we posted in the prior year. Volume decreased 1.3% as the company focused primarily on generating profit and cash in the first half of the fiscal year. Volume was down 3.9% in the first half, went up 1.4% in the second half. The modest full year decline primarily reflects softness in the U.S. Foodservice industry and a decline in Australia. U.S. Foodservice alone accounted for 70 basis points in the full year decline. Net pricing increased sales by 3.4%, largely due to the carryover impact of the fiscal 2009 price increases that were required to offset commodity inflation. Acquisitions increased sales by 2.2% basically reflecting the purchase of the Golden Circle business in Australia late last fiscal year. And foreign exchange translation rates increased sales by about a have a point. Now turning to full year sales by segment, every region, except U.S. Foodservice posted sales gains on an organic, constant currency and reported basis. Organic growth was led by our Rest of World and Asia/Pacific segments, which were powered by double-digit growth in Emerging Markets. And importantly, our big North American Consumer Products and European businesses posted positive organic growth in a tough economic environment. U.S. Foodservice results reflect softness in restaurant traffic trends and SKU rationalization done to streamline the business and improve profitability. Gross margin increased 50 basis points to 36.2%. Two major factors driving the margin improvement were pricing and productivity gains. Some of the key productivity initiatives include a global procurement leverage, indirect procurement, waste reduction and yield improvements. Primary factors that partially offset these improvements were higher commodity costs, transaction cross rates and lower margin acquisitions. Now commodity inflation for the year was driven by higher prices for metal and glass packaging and potatoes, tomatoes, sweeteners and beans, partially offset by savings on resin for plastic packaging, dairy and oils. Now turning to operating income, each segment posted constant currency profit growth, except for a 1% decline in the Asia/Pacific. In percentage terms, profit growth was led by our Rest of World and by U.S. Foodservice segments. Both very solid growth in both North American Consumer Products and Europe provided the greatest increase in dollar terms. U.S. Foodservice delivered a very strong profit improvement this year as a result of the team's efforts to streamline the business and drive efficiencies. Operating income was up 16%, as pricing, productivity and favorable commodities more than offset unfavorable volume, marketing investments and increased pension and incentive costs. Constant currency operating income in Asia/Pacific was virtually flat, as strong increases in India, Indonesia and New Zealand were offset by lower profit in Long Fong in Australia. Again, globally, constant currency operating income rose by more than 6%. Now let's move to the full year balance sheet scorecard. And all I can say here is that we posted excellent results, improving every one of our key measures. We reduced CapEx by 30 basis points. We improved our cash conversion cycle by eight days. We generated almost $1.1 billion of operating free cash flow, a new record for the company. We reduced net debt to EBITDA to 2.2x, and we increased after tax ROIC by 30 basis points. Now you'll note that this excludes the 90 basis point impact from the loss on discontinued operations. So for the balance sheet, a great result across the board. Now turning to cash, operating free cash flow increased by $200 million. The key is that we reached this record high even after infusing more than $0.5 billion into our company pension plans. With this incremental funding in place, our plans are now fully funded from a GAAP perspective. Overall, operating free cash flow was 123% of net income, placing us again at the top of our peer group in terms of cash flow generation. Now let's take just a quick look at our performance for Q4. Q4 results were slightly above the high end of our expectations. On a constant currency basis, sales increased 2.8%, gross margin improved 110 basis points and marketing increased over 56%. Reported operating income was up about 2% but declined 1% on a constant currency basis, due to our significant investments in marketing and charges for productivity-related initiatives. These productivity investments were partially offset by a $15 million pretax gain on the sale of a plant in the Netherlands. Now for the quarter, organic sales were up 2.6%, reflecting higher volume of 1.6 points and increased net pricing of 1%. Acquisitions contributed a bit to the top line and currency translation increased sales by 5½%. Now looking at net sales by segment, the Rest of World, North American Consumer Products and Asia/Pacific posted organic sales growth for the quarter. Excellent growth in the Rest of World reflects pricing gains in Latin America and strong volume growth in the Middle East and Mexico. Organic sales in Europe were down slightly and U.S. Foodservice sales declined, again reflecting industry trends and SKU rationalization. Overall, Emerging Markets continue to be the real growth story, posting 21% organic growth for the quarter. Now with FY '10 completed, I'd like to provide some context as to what the company has achieved since fiscal 2006. In a nutshell, it's been a great run. Organic sales grew at an average annual rate of 4½%, and we posted a new all-time record for reported sales in FY '10. EPS has grown 40%, which represents a cumulative average growth rate of almost 9%. We generated $4.6 billion in operating free cash flow, which is an average of 110% of net income, and after-tax ROIC improved by 390 basis points to 18.7%. By all measures, the company has performed extremely well, and we're looking forward to next year and the years beyond. So speaking of next year, let's change gears. Let's turn our attention to fiscal '11. In this portion of the review, I'll take you through the key elements of our plan for the new fiscal year. We'll start with our constant currency outlook and then talk about the potential impact of continuing currency volatility. Key message here is that we expect to continue the strong constant currency business momentum we've achieved over the recent years. And as Bill mentioned, we expect sales growth of 3% to 4% led by Emerging Markets; operating income to increase by 7% to 10%, driven by higher volume, supply-chain productivity and an increased gross margin; EPS growth of 7% to 10%, as interest rates rise modestly this year; and another very strong year for cash, generating more than $1 billion of operating free cash flow. I'll start with a simple sales algorithm. For perspective, we expect to see a continuing tough environment in our large developed markets in Europe and in the United States and strong growth of the middle class in Emerging Markets. Putting it all together, our plans call for volume growth of 2% to 3%, driven by growth in Emerging Markets, the impact of new products launched in the fourth quarter of fiscal 2010, more value-based innovation this year, the continuation of our higher marketing investment levels and a flattening of volume in our U.S. Foodservice business. In this environment, we expect very little pricing. Prices are expected to be roughly flat in developed markets, where we should get some pricing in Emerging Markets largely to cover expected commodity inflation there. Assuming no impact from currency, this would put our sales at nearly $11 billion. As Bill mentioned, Emerging Markets are a key growth driver for us. Their importance to our business continues to stair-step upward, and we expect that at least 16% of our sales will come from these markets in fiscal '11. Last year, given the impact to U.S. Foodservice on our developed market results, Emerging Markets generated basically all of our organic growth. And for fiscal '11, we again anticipate 15% plus organic growth from these businesses, and that they will drive the lion's share of our overall growth. Another revenue driver is the marketing investment behind our biggest brands. Over the past four years, we've increased marketing by almost 2/3 or an average growth rate of about 13%. And as we've said before, looking at past recessions, it is those companies that continue to invest in their products and brands that emerge from a downturn even stronger. With this in mind, our plans in FY '11 again call for strong brand support. We expect marketing to be at or above our heavy-up spending level of fiscal '10. In addition, we expect our R&D investment to continue climbing, as we increase our focus on infant nutrition and value-based innovation. And in this environment of tight consumer spending and difficult pricing, productivity continues to be extremely important. Thus, we've appointed a global supply chain leader and a global procurement leader to accelerate our productivity efforts. Between our global initiatives and local projects, we expect gross margin to increase by about 50 basis points. We expect productivity to improve the gross margin by nearly 200 basis points, which should more than offset expected inflation of between 120 and 170 basis points. This also would allow any net pricing to fall through the higher-margin results, and Bob will provide further insight on our productivity plans in a few minutes. Now turning to commodities, we expect the net inflation that hits our P&L to continue to slow. Commodity inflation peaked in FY '09 at about 12% and declined significantly in FY '10 to around 6%. For FY '11, we anticipate the market for our basket of commodities will increase by approximately 2%, but that through the work of our global and regional procurement teams, we can reduce that impact to 1% or less. Overall, we expect packaging and dairy costs to increase significantly, but that they will be largely offset by reductions in tomatoes, potatoes and oil. Importantly, in F '11, we do not expect cross-currency rates to be a significant factor to our results. So we'll not have the same headwind in the cost of sales this year that we endured during fiscal '10. Another part of our productivity story is Project Keystone. As you remember, we're on a march to upgrade our global processes, further automate our activities with SAP and better leverage our global scale. Karen Alber will give you a more complete update on the program shortly, but the highlights for FY '11 include

[Bob Ostryniec:]

Thanks, Art. Good morning. I appreciate Art's insights on currencies and commodities, because as the great Yogi Berra once said, it seems like a nickel isn't worth a dime anymore. As the Global Supply Chain Officer, it's my challenge to leverage our global scale and drive productivity initiatives, so that we can save many more nickels, dimes and even dollars as we look into the future. Turning to our strategy, our global supply chain footprint encompasses four regions, of which North America and Europe account for 75% of the $6.7 billion cost of goods sold. Between our cost of goods sold and our $2 billion of indirect and other spend, our global productivity initiatives will address roughly about $8 billion of spend on an annual basis. We started our supply chain transformation back in 2005, when we consolidated various supply-chain networks, we introduced our Six Sigma principles to our various factories and we began the talent upgrade across the organization. Building from these learnings of our regional focus, in 2008, we launched the global supply chain task force, which focused in on driving sustainable productivity, improving our capital efficiency and A CI culture with best-practice sharing. This structure gave us the validation to move forward with the current global supply chain organization, which we're going to leverage our global scale to drive top growth, margins through higher productivity and cost containment. During the last two years, we focused on four key initiatives that will enable us to achieve our productivity targets. Number one was indirect procurement. We partnered with Ariba, who was a third-party expert to assist us in launching our indirect cost out program, which drove $135 million over the last two years. Some examples were in information technology spend where we consolidated our hardware and software central link and leverage the volume to drive a 10-plus percent volume price reduction. Sales and marketing spend was an area of sourcing has not been involved within the past and with their early engagement of media buying and bundling various brand budgets together, we were able to save about $20 million. Our largest cost category, direct materials, we established global spend teams in our major spend categories such as resin, packaging and tomatoes. The team focused on sharing risk management information globally, which has enabled us to beat the market indices over the last two years, leading to a favorable market price variance of $250 million. We've also established our supplier performance management program in Europe and in North America, which focuses in on our top 100 suppliers, where we have monthly scorecards and quarterly top-to-tops where we review quality cost and service. In manufacturing, we launched our global continuous improvement program or what we're calling our Heinz Global Performance System, otherwise known as HGPS, across 23 factories. And in these factories, we've already seen a 10-plus percent increase in efficiencies, a 3% increase in yields, and these improvements, as well as various automation has enabled us to reduce our manufacturing footprint by 11%. Finally, in logistics, we focused on warehouse consolidations by reducing our footprint by 28%. And in transportation, we in-sourced our traffic management to have better control and visibility of not only our outbound but our inbound freight. These initiatives have led to $50 million of savings, while increasing our customer fill rates. You've just seen some of our largest accomplishments over the last two years, and here is a snapshot of our five-year supply chain transformation in North America and Europe. You can see factories and SKUs were reduced by 20-plus percent. Revenue per plant increased by 46%, while improving our safety record by 47%. We've also invested in capabilities by training over 650 Black Belts and Green Belts throughout the entire organization. All of this has enabled us to drive 3% productivity year-on-year, or 2x the previous run rate. As you can see, we have been working our way to the global structure over the previous two years. Now that we have the global organization in place, my purpose will be, number one, to provide the strategic leadership across the regions and supply chain. We're going to implement common standards and metrics across all the factories and the distribution centers. There's a saying, if you do not measure it, you cannot improve it, and I truly do believe in this. We're going to enhance our global procurement capabilities to include the rest of the world, and provide a vehicle to share best practice capabilities between the regions. With a portfolio of 75 factories, one area's factory's strength can be another factory's area of learning. I'd give an example, over the last 60 days, myself, our Chief Procurement Officer and various other members have been traveling through the regions of Australia, China, India and Indonesia, and I can tell you, we're excited about the opportunities that we see out there, by putting in some of these global initiatives, common metrics and not only sharing best practices between those regions, but taking best practices we saw in those regions to our developing regions and vice versa. And the last initiative I'll focus on is leveraging talent and knowledge. In the last 60 days, we have made a number of key moves that have aligned our talent and expertise with needs across the globe. For example, we have just moved our global HGPS leader down to Australia as the Director of Manufacturing. He'll be responsible for the five factories in Australia. Imagine the quick implementation of HGPS in those factories with his functional expertise of being on the ground in Australia. We've also taken a seasoned veteran Director of Procurement from Europe and he will lead our procurement operations in Asia. Once again, we'll take that expertise and put it in a region. And last but not the least, we've taken an HGPS leader out of the United States and he will read our HGPS program in the Emerging Markets. With all of this, we have the momentum, we have the process, the tools and the structures, the design to achieve the $1 billion worth of productivity and reduced inventory levels, without impacting our service. Now let me show you a few initiatives that will enable us to meet these objectives. From a best-practice viewpoint, these are just few of many best practices for us to share across the regions to deliver quick wins for our businesses, taking the learnings from our European finished goods inventory reduction initiative to all the other regions, or the waste-reduction program that North America implemented, which reduced shipping damage and obsolescence by 50%. Our HGPS and Keystone will provide consistent global metrics, which will enable us to benchmark all 75 factories and functions across the regions, along with aligning our incentive system. Example, we can now compare factory data such as yield, labor and other spend between our two largest ketchup facilities, Freemont and Elst, which has and will continue to spotlight areas of improvement for each of these factories. With our sourcing capabilities now in place, we're now ready to take the next step in cultivating collaborative sourcing. We are in the process of identifying partners in key categories such as resins, metals and proteins, so that we can leverage our scale. I also believe there will be additional opportunities to share manufacturing assets. An example we have applied this practice already is an agreement with Simplot, where they produce some french fries for us and we produce fries for them, utilizing each other's asset base to its fullest potential. A significant advantage that we have at Heinz is our tomato agricultural team, which consist of agronomists located throughout the world. Over the years, we have been promoting agricultural best practices, traceability from seed to fork and developing various geographic sources of our tomatoes, which gives us a competitive advantage of our tomato purchase, which is our second largest spend category. These activities have led to significant field yields, disease-resistant plants and efficient usage of water across the globe. We are committed to continue developing these regions in the future, as a way to ensure long-term sustainable supply of tomatoes. In summary, we have a track record of delivering, which gives us the confidence of meeting our FY '11 targets of 3% productivity and a three-day reduction in inventory. We do see additional opportunities on our Emerging Markets by rolling out the global initiatives that I've spoken of such as our HGPS or our indirect cost out program, which will enable us to meet our $1 billion of cost out target by FY' 15. Now let me turn it over to Karen Alber, who will discuss our Keystone implementation plan. Thank you.

[Karen Alber:]

Good morning. Thanks, Bob. Before Bill makes the comment for me, I'm assuming you're probably going to have a hard time seeing me behind the podium. So I think, I'm going to ditch the podium. I think, they designed it for maybe Art and Bob, not for me. But anyway, good morning. I'd like to share a little bit with you today about our Keystone program. And as you can see, we've got a pretty extensive scope on what Keystone is going to cover to capitalize on our game plan to leverage global scale. We'd also like to capitalize on our ability to maintain our local market excellence as we move forward. So the Keystone program has been developed to both leverage the scale as well as maintain that local market excellence. We've also incorporated our SAP success thus far into our learnings and our plans to date. Leveraging global scale is a significant key enabler to our overall strategy as you can see here in our third pillar. So it is a key part of our overall strategy for the organization. The global process design and wall-to-wall SAP will actually cover three major things that we're actually going to do. First of all, provide the organization with improved information and insight. Secondly, as you've heard, improve our ability to share best practices and resources. And then certainly, build the capabilities collectively across the organization versus on a market-by-market basis. Harmonizing our processes and systems is a key critical part of our strategy moving forward for Heinz. There are numerous strategic benefits to these effort. As mentioned, we are looking at this on an enterprise scale and seeing great benefits. Our business units can adopt best practices versus spending the time and money to build this on their own. From an M&A perspective, our SAP implementations have proved very beneficial. A few examples to date have been

[Margaret Nollen:]

All right. Any questions?

[Terry Bivens:]

I'm Terry Bivens from JPMorgan. Bill, we talked a little bit about this last night, but could you give us some more color on the hedging policy or, I guess, unlike '09, you've decided, I guess, at this point in time, not to do it as we go forward into '11. What was the decision process?

[William Johnson:]

There are two elements. Transactions had been hedged certainly in the U.K. for the first quarter and other markets across the year. So from a transaction standpoint, I think, if anything, we'll maybe be slightly positive this year, probably close to immaterial to slightly positive. From a translation standpoint, time was the issue. Because of the accounting rules and the mark-to-market rules, the currency started to move at the end of April. We could not take a position at the end of April, because all that would have been reflected in the prior fiscal year. So rather than chase a falling knife, we're going to wait this out and see how this plays out. We got a bit of a balance today, the Aussies is up pretty significantly, the pound's up significantly this morning, vis-a-vis the euro. So I think the prudent approach right now, Terry, is to wait this out and see how this goes. Lots of moving parts here that also make this a very difficult time to do it. The last time we did this, there was a clear trend and downward bias that had been in place for a while, and we were coming off very high numbers and we're trying to protect the budget. Now the trends are completely unclear. The Aussie dropped by $0.08, primarily as a function of tax issues in Australia, which the government appears to be at least temporarily backing off on with pressure from the HP and others. And so I think as we look at these, it's just the timing was an issue. And right now, I just think we'd put ourselves in jeopardy to try to guess this market. As I've said to someone last night, I could sit here and give you a 30-minute debate on it'll go down in a 30-minute upside argument also. So I think we're just going to wait this out the best way we can. If we start to see a clear and discernible trend in some of these markets, we may get back to you. But from a translation standpoint, we are fundamentally for the most part unhedged.

[Christopher Growe:]

Bill, I wonder if you just can speak to just kind of conditions in the EU, and how you at look 2011? You look into your fourth quarter, the volumes are a little softer in the fourth quarter. And just sequentially, is that an underlying weak consumer environment? Do you see that continuing in 2011? How will Europe kind of play out in coming year?

[William Johnson:]

Well, I think you have to look at Europe in two segments. The second half in Europe last year was obviously much better than the first half. We're still going through a lot of SKU rationalization in the European businesses, particularly in the Continent and the U.K. We've got some repositioning of some brands going on in those markets. I mean, I feel relatively optimistic on a -- not a completely optimistic view of Europe this year. Europe for me is going to be an issue of a couple of things. How bad the austerity programs get, and what's going to happen to the consumers as a consequence of that. Britain announced in Australia program the other day, Italy followed yesterday and whether or not those start to impinge upon the consumers ability to spend, the good news is, I mean, where at the bottom of that chain. The last thing will go will be food. And so, I think, from that standpoint I think the plans we have in place this year, the innovation we have in place, puts us in pretty good position. I think the second thing, if you go back to Europe and you look at our ketchup performance, 9.5% organic growth, 6% volume growth last year in a very difficult environment, yet we're only selling one out of every five bottles sold in the continent. We have very specific plans to help alleviate that and to drive that. So if we get to two bottles or 1.5 bottles, are significant upside on ketchup. I mean, we have a lot of peer companies that would love to be up here talking about 100-year-old brand that's still is growing in a compound rate of almost double digit in a market that most of the market views as not very good, and that's Europe. So I think with the increased focus on ketchup this year, I also feel pretty good. I think the other thing you have to look out in terms of dampening last year, when we made the Benedicta acquisition, a lot of that business was private label. And we took a strategic decision last year to basically get out of the private label piece of Benedicta. And so we had a very significant SKU impact from that in France in particular, but also across the continent. So from that standpoint, we are not anticipating or counting on a great deal of top-side growth from Europe. But I think we'll see flattish volumes, maybe slightly up this year of the European businesses. We've increased spending behind the It has to be Heinz program, we've increased spending in Continental Europe, behind a lot of innovation they've got and ketchup is the primary focus. I mean, the ketchup upside in Europe is pretty significant. I mean, I would be surprised if you weren't surprised to see an almost 10% organic growth rate in Europe last year out of our ketchup business when we've only been there for 90-some-odd years, and six-points of volume and we are not close to optimizing the potential there. And that deal is within Spain where we've had significant issues with customers and where the economy obviously is in a doldrums. But there are significant upside in ketchup, and that's going to be the primary focus for us in Europe. So I'm as optimistic as we can be. I'm certainly think we're better positioned because of the focus on that brand versus most of our peers.

[David Palmer:]

Dave Palmer, UBS. It seems like you're excited about reinvesting in marketing and advertising in some of these opportunities overseas, whether it be condiments or some infant nutrition and some of the marketing elasticities into volume that you're getting overseas. How do you balance that and the returns you see there with what you get in the U.S. and not overly sort of orphaning that U.S. business in ways that you might be spending through a trough period in terms of those returns? Does that make sense?

[William Johnson:]

Yes, you'll see some of the orphans up here later today. I think what they'll show you in the U.S. is the plans behind Ore-Ida are very exciting. We got lot of new news and innovation coming in Ore-Ida, and brand's responding quite well. Kristen Clark will show you very exciting plans behind small ones. So I don't think, David, I would look at it that we're shipping all the investment out of U.S. market. Over the last two years, our marketing spending in the U.S. has grown significantly. Total support between marketing and deals and allowances issue in the U.S. will be up pretty significantly again. I think you may see more of a balance in the U.S. because of the pressure from the trade and the customers in terms of how we allocate funding. But we're also going to put money where we get the best return. You expect us to do that, our shareholders expects us to do that, our Board expects us to do that and I expect us to do that. And if you look at some of our volumes in the fourth quarter in the Emerging Markets with one small exception, we literally had double-digit volume growth across almost all of our Emerging Markets, obviously, Venezuela had an issue with currency and with the devaluation. But if you look at all our other Emerging Markets, particularly in Asia, you're looking at 13%, 14%, 15% volume growth, we've had 15% volume growth in Russia. So we had very strong volume performance. Now the balance act is, why not feed those animals that are growing the fastest and running the fastest, and then make sure that you're not disinvesting or not starving the other animals that are critically important to you and I think we've done a pretty good job of balancing that. But this is going to be an ongoing question, frankly from your part to us, because it's going to be an ongoing rebalancing of our spending against these markets. But you'll see a lot of good stuff out of the North American team today, so really exciting plans, particularly in our key brands.

[Andrew Lazar:]

Andrew Lazar at Barclays Capital. You talked about, Bill and Art, the likelihood that pricing would be probably flattish maybe up slightly for the year in fiscal '11. Would you expect that to be the case in NACP as well? Just given what we've seen going on in the fourth quarter with respect to price, but also what you're seeing generally kind in the industry, maybe not surprisingly, but it seems like obviously, the promotional levels are up a bit trying to drive volumes, consumers are still strapped. So I want to get a sense of how that kind of plays out?

[William Johnson:]

I think our North American CP pricing is a downward bias. It's not significant, but we're going to see a downward bias as we make some decisions in terms of how we invest against those brands. We're going to get significant pricing in the Emerging Markets as a function of commodity cost and the ability to move price in those markets given where we stand relative to peers. And I think the rest of the world is just going to be -- we'll take opportunities where we have opportunities. But I think, individually, we'll look at brand by brand, Andrew. It's going to be very difficult than historically, because there are brands where we can take price. I mean, we don't have to get price back. There are other brands where it's going to be from a promotion-intensity standpoint or decisions strategically, that we think there's upside opportunity, and that the volume lift outweighs the cost to generate that volume when we make that decision. But in North America, I think, you'll see a downward bias, Europe will be flattish and the rest of the world should be up fairly significantly.

[Alexia Howard:]

Alexia Howard with Sanford Bernstein. Art, one for you on the gross margins, you've been pedaling hard against traveling commodity cost pressures over the last year. The gross margins have been coming up quite nicely recently. So could you talk a little bit more about the puts and takes within the gross margin line? It seems like 50 basis points for this year may be a little conservative. You've got productivity improvements coming through. Is it pricing concerns, or what are the things that you're worried about in there?

[Arthur Winkleblack:]

No, I think, Bob's got broad shoulders, so we're expecting good strong gross margin growth. But I think as we look at it, and we've got visibility on the commodity costs as we look forward. As I mentioned, some are going up and some are going down. They're starting to look like some inflationary pressure coming on some of the commodities more toward the back half. With the current economic gyrations, we're not so sure if that inflation will occur. Pricing is the question mark also. As Bill mentioned, in developed markets, I think, pricing will come hard. So we're looking at that closely. But we're very excited about the productivity plans. Bob, if you want to add anything from a productivity standpoint?

[Bob Ostryniec:]

I think our biggest leverage is, as you heard, is how do we take what we've developed in North America and Europe, and expand that into the Emerging Markets.

[William Johnson:]

I would be disappointed, Alexia, if we don't beat those numbers. And by the way, you should see Karen try to ride Art's bike.

[Margaret Nollen:]

I think the other thing, Art, you may have mentioned, that we've got some incremental investments this year as well.

[Arthur Winkleblack:]

Yes. Less so in the gross profit margin, but more so in the fixed, or in the SG&A or in subsidiary with Keystone. So we're building that into the algorithm as we go forward. Feel good about where we are on that, but it does cost some money as we go.

[Bryan Spillane:]

I guess this is for Art and for Karen, just on productivity, a couple of clarifications. First, in terms of reaching the billion of productivity, how much are you expecting to spend in order to get that? And then also, if I look at the schedule, where you kind of lay out the plan ahead, it looks like in terms of a year-on-year step up, the most incremental year is fiscal '12, is that an accurate way to read this slide?

[Karen Alber:]

Yes. The step up primarily in that year is with us ramping up our North America business. So as we do, the global template does allow us to start to do multiple regions simultaneously and we will be ramping up North America, while simultaneously completing for the Europe piece.

[Bryan Spillane:]

The benefits that we would see in the P&L would come through in fiscal '12 or fiscal '13?

[Arthur Winkleblack:]

You're starting to see, for instance, an indirect procurement. We're already streaming one savings, and Bob had talked about that, so you've seen some of that coming through. Right now, in relatively earlier stages, you're seeing more costs coming through the benefit. Over time, you'll see that cost starting to plateau, it will increase over time a little bit. I think we've got that built in the algorithm, but that will start plateauing in a habitual, I'll pace it.

[William Johnson:]

Yes, we got a slightly different brand. I mean, I look at the way we performed over the last four or five years with SAP and 25% of the company with 90 global supply chain, and these are all incremental opportunities that should add to what we've gotten. And the reality is, one of the reasons you're not seeing some of that factored in is we just don't know how much the increments' going to be. The U.S. has pretty good ERP systems. On a relative basis, we'll get a lot of opportunity as we're able to consolidate certain functions and so forth. But to me, I sort of look at it differently. If you look at Bob's progression and you look at Karen's progression, marry that with our performance over the last four or five years and then recognize the step up that we ought to see, and the ability to not only get improved performance in those markets but the ability to share that improve performance. I mean, one of the big criticisms leveled against this company historically, that's an appropriate criticism I mentioned in my comments and Steve Clark will mention it later, is either an inability or unwillingness to share across regions. Now we've improved dramatically between the U.S. and Europe, but we haven't touched the Pacific or the rest of the world. And there is clear upside in those markets. Bob, as he said, has spent a fair amount of time in Australia, and the Pacific and in China over the last couple of weeks because we see huge upside. So I think what you would see, you will see ongoing benefits from the continued rollout of implementation across the markets we're in now, you'll see disproportionate benefits as Bob brings some of the HGPS opportunities to the markets that haven't been involved and then you'll see the incremental benefits in '13 and '14 as we get the North American team fully up and running. And you got to remember, Canada has been on a version of SAP for a better part of a decade. So I think that the response to that is we're not sure exactly how much we're going to get beyond that. I mean, my team has heard me talk about the $1 billion. I set the goal and frankly, as I've said to the Board, I'd be disappointed if we don't do better than that as we really get these systems in place, and the transparency of our operations becomes very clear and our ability, more importantly, to transfer that knowledge across our BUs. Our business units is really where the leverages.

[Arthur Winkleblack:]

I don't know if you think about it, if you benchmark us against our peers, we stack up very, very well in most measures. Gross margin is still lagging some, so we think we've got some opportunity there to drive that forward, and what Bob and Karen are doing are driving toward that.

[Ann Gurkin:]

If we're sitting here in five years and you put up your scorecard looking back to prior five years, what would you like to see on that scorecard?

[William Johnson:]

I'd like to see what you saw today. I'd like to see consistent, continued improvement, both from a margin standpoint and a top line standpoint. I think you will see a dramatically different company five years from now; you will see a dramatically more important Emerging Markets business; you'll see some portfolio shifts, probably in the developing and the developed world as we begin to recognize the difficulty in some of those markets and I'm not going to tell you exactly what those are going to be, but I have a pretty good sense. So you'll see a business five years out that I would hope, short of currency, in a constant-currency basis, would have shown similar metrics to what we've done, continued improvement in returns, continued improvement in margins. In fact, I think, more rapid improvement in margins. Continued improvement in the top line vis-à-vis the shipped to Emerging Markets as a more significant piece of the portfolio and the opportunity, in my view, to leverage that into markets where we can't now in terms of limitations on the balance sheet that we shouldn't have five years from now as we continue to pay down debt, and as we continue to look for better opportunities in the emerging world and we make bigger bets. But the one thing I can tell you almost assuredly and I will share this with you is five years from now, Emerging Markets will represent every bit of 25% to 30% of this company. Every bit of that. I'm short of some kind of transformative situation someplace else, which is you heard me say at CAGNY, I certainly don't anticipate.

[Margaret Nollen:]

Okay. So we've got a 15-minute break. For those of you on the webcast, we'll start promptly at 9