The Kraft Heinz Company
Q4 2011 Earnings Call Transcript

Published: 2 Jun 2011

Margaret Nollen:

Good morning, everyone. Shall we get started? I'm Meg Nollen, Senior Vice President of Investor Relations and Global Program Management Officer for the H.J. Heinz Company. I'd like to welcome everyone to our 2011 Analyst and Investor Day. For those in the room, all of your conference materials are included in the folder in front of you. We have fun little gift in the front of the folder, a magnifying sheet. And I'm sure it's sustainability that's driving the tiny font these days, not my eyes. But you can always be sure to see the details with Heinz. So each speaker's presentation is separated by tabs. The agenda for the day is on the flip side of my page, also up on screen. Updated financials, statistical summaries are also in the back of your packet. We've got a 5-year financial and sales history for you. For those of you on the simultaneous listen-only call or webcast, the presentation and stat pages are also available on our website at heinz.com, in the Investor Relations section. Of course, you have to attend our meetings to get all these fun gifts. Please note our 10-K will be filed in a couple of weeks, so cash flow and balance sheet pages won't be updated until that time. We've got a great morning planned for you, starting with a strategic overview by Bill Johnson. Art Winkleblack will then provide a financial walk-through of our F '11 results, our FY '12 plans and the resulting FY '13 targets. Bob Ostryniec will take us through our global supply chain and productivity plan, while our Regional EVPs will focus on growth, innovation and productivity in their respective areas. Our schedule today is, as usual, very tight, so let me lay out the parameters, so you can be prepared to get the maximum benefit. We have presentations scheduled throughout the morning from 8
Bill Johnson:

Thank you, Meg. Good morning to all of you, and welcome to our 2011 Investor Conference and Analyst Meeting. Our purpose today is to update you on our performance and provide a detailed overview of our plans to drive strong, sustainable and profitable growth over the next 2 years and beyond. As most of you know, I'm a son of a head coach, or was, before he passed away. One of the things my dad used to say to me is when people think you're just going to keep going right, do something different. Today, what we're going to show you is a little different, designed to continue to create the kind of value that we've created. So I'm going to review the record performance the company had in fiscal 2011, our plan and financial outlook for both 2012 and 2013 and the long-term vision for Heinz, which is designed to build on the great success we've had over the last 5 years. Looking first at the fourth quarter, we finished a record year on a good note. We posted constant currency growth of almost 3% in sales, 9% in operating income and 12% in EPS. We achieved the double-digit EPS growth, while absorbing a $0.01 hit from the strike in Venezuela and $0.02 of costs related to closing the Quero acquisition earlier than we anticipated. As they were all year, Emerging Markets were again the primary growth engine in the quarter, delivering organic sales growth of almost 12%, despite a significant reduction in Venezuela. The company's top 15 brands also continue to do very well, with organic sales growth of almost 3% led by Complan, ABC and Smart Ones. Encouragingly, the U.S. Foodservice business returned to growth for the first time in 6 quarters, a hopeful sign that restaurant traffic may be at the end of its recessionary gridlock. Notably, the fourth quarter marked our 24th consecutive quarter of organic sales growth. Turning to the full year. Overall, the company posted excellent results. We delivered record sales, operating income, net income and operating free cash flow, while also engineering 2 critical acquisitions in Brazil and China to further accelerate our strong growth in Emerging Markets. On a constant-currency, continuing-operations basis, full year sales grew almost 3%. Gross margin increased by 80 basis points, despite higher commodity costs. Operating income rose almost 7%. And EPS grew around 9%, including the $0.02 hit related to closing the Quero deal in late April. We generated operating free cash flow more than $1.26 billion, by far the best in the company's history and drove substantial gains in returns on invested capital, which grew 100 basis points to 19.7%, excluding the 40 basis point reduction related to closing the Quero deal in April. I continue to be particularly encouraged by our results in Emerging Markets, which generated the vast majority of our sales growth for the year, while contributing more than 16% of the company's total revenue, despite the sizable devaluation in Venezuela last year. We exited the year at a run rate of 17%, excluding Quero. These results were led by double-digit organic growth in China, India, Indonesia and Russia. I believe Heinz is now better positioned in Emerging Markets than any other U.S.-based food company. Our long experience, growing infrastructure and improving business capabilities, combined with strong local brands and capable management, provide a sound base for continued strong growth. We have capable people on the ground, who sense or see things before our peer companies. More importantly, we prepare assiduously before entering a new market, thereby minimizing downside risk. Therefore, we have built a diverse, well-balanced geographic footprint with solid growth platforms in each of the BRIC countries, as well as Indonesia. Importantly, these countries are on pace to generate more than half of the global increase in GDP by 2020, more than half. And we are well positioned to capitalize on this trend. Like it or not, these are the growth markets for the 21st century. In Developed Markets, 2 of our largest businesses, North American Consumer Products and Heinz U.K., delivered a higher organic sales for the year despite their difficult economic environments, fueled by value-added innovation and focused plan support. Overall, our top 15 brands delivered organic sales growth for the year of almost 4%, led by ABC, Complan, Smart Ones and T.G.I. Friday's, as well as the iconic Heinz brand. Global Ketchup also delivered another strong year, with organic sales growth of almost 4%, led by Europe, and in particular, Russia. In summary, fiscal 2011 was a milestone year for the company, as we drove continued growth in a rapidly changing world, while overcoming sharply rising commodity prices and the lingering impact of the recession on consumer confidence in the developed world. Reflecting our strong financial performance, excellent cash flow and the commitment to shareholder value, I'm pleased to announce that the Heinz Board of Directors has approved an increase in the annualized dividend of $0.12 to $1.90. This increase of almost 7% is effective with the July payment, and clearly underscores our confidence in the future. With this increase, the Heinz dividend has grown almost 80% since fiscal 2004, a compound annual growth rate of around 7.5%. We expect to return more than $4 billion to shareholders through dividend payments over the period from fiscal 2004 through the end of fiscal 2012. Importantly, we also delivered total shareholder return of more than 54% over the past 5 years, almost 4x the return of the S&P 500. Before I discuss our 2-year outlook, I want to briefly share my perspective on the transformation of our company over the last 15 years and how we are positioning the company for even greater growth and performance going forward. I view our evolution in 3 distinct phases. The first wave of transformation, which began in 1996, featured aggressive cost cutting and our first real foray into Emerging Markets. During this phase, we initiated a badly needed overhaul of our supply chain and overhead structure. We dramatically reconfigured and streamlined our global manufacturing capabilities and footprint, while shedding underperforming assets and businesses. These moves were critical to establishing the foundation necessary for growth. The acquisition of Pudliszki in 1997 and ABC in Indonesia in 1999, were among our first successful ventures in Emerging Markets and proved to be the critical precursors to our more comprehensive Emerging Markets strategy. The second wave was characterized by a period of portfolio optimization and realignment, highlighted by our strategic decision in 2002 to spin off the U.S. baby food, canned soup, pet food and tuna businesses to Del Monte. This spinoff and other transactions to shed non-core assets like our European tuna and New Zealand poultry business, greatly simplified the company, while refocusing it on a global portfolio of 3 core categories
Arthur Winkleblack:

Thanks, Bill. Good morning, everyone. Now this morning, I'll take you through our Q4 annual results, which capped off a very strong year and an excellent 5-year run. After that, we'll review our plans for continued growth over the next 2 years. Let's focus first on our strong finish to fiscal '11. For the quarter, we delivered $2.9 billion of revenue and EPS of $0.69. On a constant-currency basis, sales increased about 3%, gross margin gained 100 basis points, operating income rose approximately 9% and EPS improved nearly 12%. These strong results were leveraged to even better reported results, as currency turned in our favor at the end of the fiscal year. Marketing was down in the quarter but in line with our expectations. And remember that we lapped a very high increase in marketing spending in Q4 of last year. Overall, we're pleased with our Q4 results, particularly in light of the costs we incurred for closing the Quero deal in Brazil and the strike-related impact in Venezuela. Now speaking of Quero, this chart outlines the impact of the acquisition on our Q4 results. We closed the deal on April 1 and incurred closing costs out of $11 million and a few weeks worth of foregone interest income on the cash we used to buy the business. We recognized no sales or operating costs during the quarter, as we were consolidating the business on a one-month lag basis. Now turning to Q4 sales drivers, the company delivered its 24th consecutive quarter of organic sales growth, up 1.6%. Net pricing was up almost 2%, which is our highest level of pricing in 1.5 years. Volume decreased slightly, as Venezuela negatively impacted total company volume growth by 80 basis points, largely reflecting the impact of our labor disruption in that country. Importantly, the work stoppage was resolved during the quarter. Looking more closely at net sales, all segments were up on a reported basis. Europe, Asia/Pacific and U.S. Foodservice generated organic sales growth for the quarter. Emerging Markets grew organic sales 11.5% and were up more than 14%, excluding Venezuela. And our top 15 brands grew about 3% organically. And with regard to operating income, every one of our segments reported strong growth on a constant-currency basis and double-digit growth on a reported basis. For reference, we've provided supplemental slides in your handouts and on our website, but now let's move to a summary of our performance for the full fiscal year. Overall, we've concluded a very strong fiscal '11, hitting all-time records for sales, profit and cash flow. To summarize on a constant-currency basis, sales grew by more than 2.5%, operating income was up almost 7%, EPS rose nearly 9%, operating free cash flow increased 17% and ROIC topped 19%, a strong year across the board. In terms of the P&L scorecard, we've laid out both constant currency and reported results, while currency helped modestly in the fourth quarter, it was a headwind for the full year. Gross margin was a key driver of our profitability, as we overcame commodity cost increases, which accelerated dramatically in the fiscal year. Marketing was down slightly, as increased investment in Emerging Markets were more than offset by a shift to spending in the U.S. to trade promotions. Note that our full year EPS was $3.08, if you exclude the $0.02 impact of Quero acquisition costs. Since we excluded any potential impact of Brazil in the outlook we provided in February, our full year results came in near the top of our projected range of $3.04 to $3.10. Turning to the P&L. I'll just focus on a couple of items here. SG&A was up 4.5% for the year, which largely reflects increased investments in Project Keystone, Quero acquisition costs and spending from proved capabilities in our Emerging Markets. The effective tax rate of 26.8% was down 100 basis points from prior year, contributing about $0.04 to the year-on-year EPS growth, but was fully offset by the increase in shares outstanding. In terms of sales drivers, volume and net pricing were both up for the year, while modest growth and acquisitions came from Foodstar and was offset by the unfavorable impact from foreign exchange. All segments delivered organic sales growth with the exception of the U.S. Foodservice, where the industry was impacted by lower restaurant traffic. Organic sales of our top 15 brands grew almost 4%, and Emerging Markets posted organic growth of about 14.5%. As a final note here, reported sales in the rest of the world were down by almost 12% due solely to Venezuela. Now let's go a bit deeper on our Asia/Pacific segment, which posted 8% constant currency sales growth for the year. To understand recent performance, it's useful to know the composition of the region. Overall, about 40% of the region is comprised of Emerging Market businesses, such as China, India and Indonesia. These businesses are performing extremely well at both the top and bottom line. The other 60% of the region is made up of Developed Markets, the largest of which is Australia. On a constant-currency basis, Emerging Markets in the region grew sales by 31% in FY '11, aided by 9 points of growth from Foodstar. On the other hand, the Developed Markets declined by 3% due to softness in Australia. As we discussed previously, the Australian retail environment has become very difficult due to a trade war between the 2 main retailers there. As a consequence, we are aggressively reshaping the Australian business. Turning from sales to gross profit. We drove significant improvement in gross margin this year, increasing by 70 basis points or 80 points on a constant-currency basis. Productivity improvements and procurement initiatives are the main drivers here, which along with higher pricing, more than offset increased commodity costs. During the year, external market prices for our basket of commodities rose by about 5%. Now Bob will take you through the detail on this, but the key was that we were able to limit our own internal inflation on commodities to about 1%. From a top and bottom line perspective, every segment posted constant currency profit growth this year. U.S. Foodservice led our growth with operating income, up almost 17%. Our large Developed Markets of NACP in Europe grew profit by 7% and 9% respectively. And Emerging Markets increased operating income on a constant-currency basis at 8% this year. Now let's move to our very strong balance sheet performance for the year. Overall, we drove down our cash conversion cycle by 5 days, increased operating free cash flow by $180 million, decreased our net debt to EBITDA to 1.9x and improved ROIC by 60 basis points. Importantly, we achieved these cash flow and ROIC results while increasing our capital investment on systems and Emerging Markets and while including Quero's opening balance sheet. The significant increase in cash flow was driven by higher profit and much lower pension funding. Overall, operating free cash flow represented 125% of net income for the year. Below the operating free cash flow line, acquisitions relate to the cash used to buy Quero and Foodstar. Dividend payments reflect the 7% increase we announced in May of last year, and net options exercise generated $85 million in cash, despite $70 million worth of share repurchase during the fourth quarter of fiscal 2011. For reference, we now have approximately 9 million stock options outstanding, which is down 70% from the 30 million options we had outstanding 10 years ago at the end of 2001. As a result, we have a much lower overhang on our share count, as we move forward. To conclude this section of the review, I'd like to put this year's results into the context of a 5-year performance summary. Overall, we're very pleased with the results. Organic sales grew at an average rate of 4% per year. EPS increased 8.2% on an average annual basis. Operating free cash flow averaged 113% of net income, and finally, ROIC increased by 450 basis points. And beyond the results, we believe we've positioned the business for continuing strong growth in the future. At this point, I'd like to transition to our plans for FY '12 and '13. We'll cover the constant currency-basis P&L outlook, onetime charges to accelerate productivity, the potential impact of foreign currency and summarize with a perspective on cash flow and the balance sheet. On a constant currency x items basis, our plan calls for sales growth of 7% to 8%, driven by Emerging Markets and our recent acquisitions. EPS up 6% to 8%, including an $0.08 increase in Keystone costs and higher net interest expenses and operating free cash flow of $1.15 billion. Organic growth is planned to be around 3% to 4%, driven by a double-digit increase in Emerging Markets and a low single-digit increase in Developed Markets. The plan contemplates 2 incremental days in FY '12 versus FY '11, in order to convert the company from fiscal weeks to calendar weeks. The upside from these 2 extra days is expected to be offset by the exit of Boston Market brand in the United States. Given the commodity environment, organic growth will come largely through pricing. We're not counting on increased volume due to the environment in Developed Markets. Last year's acquisitions of Quero and Foodstar expected to add roughly 4 points to our growth, rounding out to the overall constant currency growth target of 7% to 8%. In order to drive our top line, the plan calls for increased marketing behind our biggest brands, with increased marketing over the last 5 years by about 60%. And we expect to increase spending in FY '12 at a high single-digit rate. Spending in both Developed and Emerging Markets will increase, with the largest portion going to drive the double-digit growth in Emerging Markets. On the base business, we expect to improve gross margin this year by 50 to 90 basis points, driven by a strong combination of pricing and productivity. Effectively, we are pricing to cover inflation on a dollar basis and using productivity to drive gross margin to a higher level. You'll note however, that, that's not the full story. Last year's acquisitions will temporarily reduce gross margin by about 30 basis points, netting to our overall target increase of 20 to 60 basis points this year. And while on the short-term, these new businesses represent a headwind to gross margin, Mike and Chris will show you that they are a great opportunity as we look further down range. After a significant run-up in market inflation late in our fiscal '11, we anticipate the rate increase on our commodity basket will be around 7% in fiscal '12. We expect increases on all major commodity groups. But for the second year in a row, we are not expecting the pound-euro cross rate to be a significant factor to our cost inflation. With regard to Keystone, we now have covered almost 30% of the Heinz world on the SAP ERP system. We've designed the processes and systems to support the new supply chain hub in Europe, implemented the global template in northern Europe, covered almost 65% of our company with the indirect procurement module of SAP that has allowed us to capture significant cost reductions. With that as a base, we're now accelerating the rollout across Europe and into North America. During FY '12, we plan to implement the upgraded system in Canada and 4 other markets in Europe. In terms of cost and benefits for Keystone, we're basically doubling the Keystone P&L investment in our base plan for FY '12, up about $0.08 at EPS. Clearly, we're still in a net-expense position on the project, and we'll continue to be for the next 2 to 3 years. Looking forward, we expect gross expenses for the project and system to be roughly flat to the FY '12 level, while benefits will continue to ramp up. The break even point is likely to be in FY '15. Beyond Project Keystone, our FY '12 plan includes a number of other P&L investments aimed at further improving capabilities. We're adding talent to continue our strong momentum in Emerging Markets, increasing resources to drive global initiatives, and ensuring we have the right talent to integrate and run our recent acquisitions. While investing in the business, we're driving hard for productivity gains throughout the P&L and are maintaining tight control of non-value-added costs. We expect these initiatives to provide improved leverage on SG&A in FY '13 and beyond. Now to round up the discussion of the base P&L, let's take a quick look at the items below operating income. We expect an increase in net interest expense and a slightly higher tax rate effectively for the year. Partially mitigating these increased costs, we plan to buy back enough shares in FY '12 to offset the dilution from options and hold diluted shares flat. As Bill outlined, we plan to execute some onetime initiatives this year to accelerate our productivity gains. These initiatives include
Bob Ostryniec:

Thanks, Art. Good morning, everybody. As Bill has once said, one of the keys to driving sustainable growth will be our ability to leverage our global scale and drive productivity across our portfolio. We have significant Global Supply Chain initiatives underway, including Project Keystone and the productivity initiatives that I will discuss further. Heinz is taking a truly global approach to reducing costs and growing margin to become even more competitive. Frankly, this is a step change for our company. And it's an important one that we believe will produce tangible improvements in costs and margin and rapid return on investment. With that in mind, my remarks today will focus primarily on 4 topics
Scott O'Hara:

Thanks, Bob. It's great to be here today to share our growth story in North America. Despite a tough economic environment, we continue to deliver profitable growth, with solid underlying business performance, a robust innovation pipeline focused on our 5 strategic mega brands. We are implementing pricing as needed, given commodity inflation. And we have expanded our focus on capabilities and platforms across our entire North American business. Here's a quick snapshot of Heinz North America, which includes the U.S. and Canada. Overall, North America represents about $4.7 billion of sales, 8,500 employees and 24 factories. And as you can see, most of our sales were generated by 2 categories
David Moran:

Welcome back, everyone. I'm very excited to talk a little bit about the European business and a pretty exciting transformation that we have going on in Europe. But we are confident that this substantial redesign will improve our structure, our work processes and importantly, dramatically increase our results as we go forward. The good news is we're making these changes from a position of strength. As you heard from Bill and Art earlier, the results in Europe last year were really strong. We grew sales, we cut our deals and allowances, we grew our gross profit margin by 180 basis points, we increased our marketing by 6%, we grew our operating income by $50 million or 9% year-on-year, and importantly, we increased our ROIC by 120 basis points, all in the very difficult European environment. I'm also pleased to report that our brands are healthy, and the team is fully aligned in the new plan that you're going to hear today. The plan you'll see today should produce substantially improved results over the next 3 years. Volume from NPV will increase from our historic 1% to 5%. Deals will continue to decline, our gross profit margin will expand by hundreds of basis points, operating income will increase in a very high single digits and ROIC will grow by over 500 basis points over this period of time. The change elements you're going to hear about are quite expansive, but I believe they're worth the effort given the financial return. Before I go deeper on the agenda, I do want to comment on the trading environment in Europe because it is very challenging. We expect to see an uneven recovery around the globe and even in Europe, but our silver lining is in Eastern Europe, where both Russia and Poland have been moved back to the 4-plus percent growth levels, while the rest of Europe is not seeing the recovery like the U.S. is. There are 3 major external issues that are impacting our business. First is the economic health of our consumers, second is the continued currency volatility, and arguably the most important in fiscal year '12 is the recent all-time record materials inflation we're facing. What we're seeing across Europe can best be detailed in our largest unit, the United Kingdom. The austerity that the European governments are implementing is having a dramatic effect on our consumers. Consumers are dealing with record inflation, 4 years of negative earnings and also the elimination of public service jobs, which represent a whopping 30% of the U.K. GDP. One of the largest issues we're dealing with is all-time record inflation. Due to the market basket of categories and prime materials we operate in Europe, we have to offset double-digit inflation in fiscal year '12. This is significantly higher than the balance of the company. Primarily due to metals, European sugar and several other large spends with strong double-digit increases, like dairy, meat and cocoa. As we gain momentum through the year, we expect our pricing plans, our productivity and innovation will more than fully cover this record level of cost, and we expect our gross profit margin to continue its 2-year track record of growth. I would like to be very clear. We're incredibly bullish on our European business. We have been in many of these markets for over 100 years. We have a very talented and local team, and we know the issues that we face are real and we have a very much of a get-after-it attitude. Some of the issues we're facing are external, some are internal. But we're addressing them head-on. We're dealing with these unique issues with great speed. We have a new plan, we're building new capabilities, we're aligning Europe behind a new philosophy, all of this is to accelerate our improving results. There are 5 key tenets of our strategy, which we've branded the European Agenda. First is we want to win with ideas and innovation and you're going to hear today, we're announcing a big step forward in our ability to compete and win in this area. Second, we want to better leverage our European scale. While we still believe in our in-country execution model, we now know we can leverage our assets more effectively and efficiently. Our plans here are quite aggressive. We have reorganized and better aligned our Eastern European markets for faster growth. This is a very exciting part of our European portfolio, and we can better leverage these markets when they're united. We need to improve our cross-sharing of European assets. We're tearing down the silos that exist between countries, between functions, and the teams are embracing this model quickly and I personally am very pleased with our progress. Finally, we're improving how we run our business and specifically run our brands. We have new pan-European philosophies and tools that we're using to expand our thinking and raise our intellectual output against the business. To add specific texture to what you just heard, we're building a new world-class innovation center, uniting all the R&D resources in Europe. We're completely centralizing and professionalizing our leadership and strategy within the supply chain. We're co-locating and centralizing our entire supply chain function, manufacturing, procurement and logistics, all led by one strong leader. We're also enhancing our Eastern European leadership structure to better capitalize on our fastest growing area. We're driving united culture, one of ideas, cooperation, innovations and better partnering skills with our customers and suppliers. Ideas and innovations are the very backbone of our strategy. Accordingly, we need to build capabilities to do this work. We're pleased to announce we're building a state-of-the-art innovation center in Holland. This center will house up to 2,200 professionals. Experts include science, engineering, packaging and food safety. We'll be investing in a new pilot plant which will be capable of replicating production of virtually every factory in Europe. We're adding a new consumer closeness sensory center, building an instrumentation lab and advanced food-safety capabilities. We're also using this opportunity to bring in new talent, which will bring us new and advance skills, adding to our already talented R&D organization. As you remember, we built an innovation center in the U.S. 8 years ago. You've seen the results from that investment. We're looking for a similar step change in our innovation output in Europe going forward. We strategically located this center next to our Elst factory, which produces essentially all European sauces. Nijmegen, Holland is known as the Silicon Valley of food science. This is all part of the agenda to better partner with others who have knowledge we need. I cannot tell you how excited the team is about the new center, the capabilities it will bring and how it's going to improve our results. We're grateful to the company for the investment, and we promise a terrific return to our shareholders. The new center will be the single largest investment in R&D in Heinz's history. It will add enormously to our capabilities and talent. The center will support all of Europe and many of our emerging markets all around the globe. As an example of the progress we're already making let's take a look at our most important brand, Heinz Ketchup. Ketchup represents over 20% of the gross profit dollars in Europe. It has grown 6% in each of the last 2 years. It's truly a pan-European brand, and gives us enormous economies of scale in dealing with our customers. So clearly, ketchup is the power brand in Europe. We're number one in 10 markets, we enjoyed share growth across virtually all of Europe. In fact, Germany just refers to the course that's on the slide here. We now have a 33% share. So a super congratulations to Jens [ph] and his German team. We have a powerful pipeline of innovation and detailed plans to grow our share by 15 points over the next several years. Our ketchup plan is a good example of the European agenda in action, better leveraging our scale, our ideas with an emphasis on innovation and creativity. The U.K. and the continent team together developed a multiyear ketchup innovation and marketing plan. We own the barbecue season in a number of countries through innovative new products, flankers, and an iPad app to organize everyone's grilling experience. We're now running ketchup as a pan-European brand for innovation, packaging and marketing. All innovations are launched within multiple countries today, with several good examples here on this slide. A specific call-out is the multi-country media campaign to enhance the Heinz equity and prove Heinz is the only tomato ketchup. Let's take a quick look at that commercial. [Video Presentation] This commercial is now running in 8 European countries. All of Heinz is moving to the new world of digital media, and the whole company is seeing a really strong payback. We're providing consumers with recipes which utilize ketchup and ways to share their Heinz Ketchup moment. As I said earlier, ketchup innovation pipeline has never been stronger in Europe. First Harvest emphasizes the naturalness of Heinz. This new SKU captures the first tomatoes of the season, and we pack within 48 hours from the vine. Let me share another example of the agenda. As you heard me say, the Heinz business in the U.K. is truly of an epic brand status, unlike any I've seen anywhere around. Penetration is 95%, 60% of households have 4 or more SKUs in every pantry and our shares have never been stronger, with a whopping 70% across the brands listed. Even with this success, we're enhancing our model. We're using the agenda to drive more full-price sales, reducing our discounting and improving our innovation emphasis. Most of our products in the U.K. are undergoing enhancements in taste, packaging and line extensions. We're also reshaping our P&L, spending much more in marketing. As you can see, 55% over the last 2 years, to drive the business in a much more sustainable, lasting way. This great business can perform even better in the future following this strategy. Our Infant Feeding business in Italy is a gem in the company. We command a 55 share and like Heinz in the U.K., enjoy a multigenerational relationship of trust with our consumers. Let's take a quick look at the commercial that's driving that business. [Video Presentation] Our Italian team has a well-developed strategy to grow this vital business for us. Their approach focuses on up-aging the category and gaining a bigger share of stomach from homemade. This strategy led us to the innovation coming out later this year. We are the first to offer in the Italian market a full line of innovative aseptic products. This is a big game changer for us, and a category grower for us and our customers. Our aseptic will be the best taste in the category. We believe the biggest source of new volume will be from homemade so this volume is all upside for Heinz and our customers. The product is cooked less, tastes better and is more nutritious. It is also sustainable as we move to plastic away from glass. Let's turn to our local jewel in Holland, the Honig brand, an almost unparalleled 97% penetration for this multi-category brand. The brand is number one in 3 main food categories
Michael Milone:

Thanks, Dave. The Emerging Market opportunity is big it actually takes 2 of us to present, but I'll kick it off. You can see from the map that these markets span a wide geographic territory. In FY '11, they accounted for $1.7 billion in sales for Heinz, and it's not unreasonable to expect they could grow to $5 billion by FY '16. The reasons for our optimism are simple. First, the emerging markets are more demographically advantaged. Starting with the basics, they have a greater population and more births. We enjoy a rapidly growing middle-class, estimated to grow 70% over the next 5 years. This amounts to an additional 460 million new middle-class consumers or nearly 2 times the adult spending population in the United States today, age 14 plus. These fundamentals translate to a higher GDP growth and economic development and more opportunities to sell our products to more people in more markets. The macroeconomic forecasts are startling. Everyone's heard reports that China will soon be the largest economy in the world. But taking a look at 2050, it's expected that 6 out of the top 10, really 6 out of the 8 top economies will be those that are considered emerging today. Heinz is well-positioned for this future. Emerging Markets are also attractive from several operating considerations. For one thing they have a highly fragmented trade environment. This chart shows the concentration of the top 5 retailers in a number of developed markets in the red and Emerging Markets in green. This will of course change overtime, but with less trade concentration, there's more of a mutual balance of power between suppliers and retailers in Emerging Markets. Not only is the trade environment more fragmented, so is the competitive environment. You can see from this slide that there's no single competitor in Heinz' emerging markets that competes with Heinz across both our key product categories and across markets. We have shown that we can be successful and grow rapidly. When we first started emphasizing growth of our Emerging Markets, their importance to our portfolio was only around 10%. For the latest fiscal year, we reached 16%, and in FY '12, we expect Emerging Markets to exceed 20% of Heinz' total net sales. The question of yes, you can grow them, but are they profitable frequently arises. We believe the environment is also favorable for profit improvement. Currently, pricing per ton and gross profit are slightly lower in our Emerging Markets than our Developed Markets. The difference is more pronounced that if we take out the impact of mix and look at our largest emerging market categories
Christopher Warmoth:

As Mike has just said, India and China are indeed critical for Infant Nutrition. And the positive news is that in both countries, we have real momentum and see major potential going forward. In India, Complan is a great growth story, up 3.5x over 5 years, with sales in FY '12 expected to approach $200 million. Complan has high applicability or relevance through its excellent advertising campaign which started in FY '05. We've now made over 20 spots in this campaign. We've also had a constant stream of new products, the biggest being the saffron and almond version, Complan Kesar Badam. More recently, we've introduced Complan Nutri-Gro and Complan Memory. Both are now in the middle of national expansion and adding significant extra volume. Memory goes on a clinically proven fact that kids with insufficient nutrition have poorer cognitive responses. Nutri-Gro is a down-age Complan targeted at kids 2 to 4 versus the base of 4 to 14. The advertising builds on a common Indian concern that young kids don't look their age with a nutritionist explaining that sickness and fussy eating can impede growth. [Video Presentation] Complan, along with our second brand in India, Glucon-D, has also grown through deep and ever-improving availability. The left axis here shows the number of stores carrying the brands, with Glucon-D with over 1 million and Complan now nearly 600,000. The percentage above the bars shows year-on-year distribution increases. And that's significant on both base products and especially new ones. Moving to our Chinese Infant business, FY '11 was a very good year. We're making consistent progress on infant formula. A critical measure is how much our distributors sell to retailers, and it's growing very steadily. Distribution is in line with our target, and we're learning over time. For example, we were surprised to find out that in-store tasting works very well. We're having very good success with all our digital activities, with our websites voted the third best in China. The Heinz brands, including formula, grew by 41% in FY '11 and excluding formula, we still grew by 27%, a record. And significantly above the previous 3-year average. The additional marketing, medical detailing and sampling resources put against formula have really helped baby food. We've continued to be very active on innovation across our range of dry cereals and noodles, wet jars and pouches, supplements and snacks. This slide shows only items introduced since January 2010. And as you can see, they're very extensive. Growth is also being driven by some big gains in distribution, and especially on products introduced in the past 2 or so years, such as noodles, Fruit Crush, Teething Rusks and Milk Mate supplements. We also make sure our products are broadly affordable through the use of tiering. Plain cereals and noodles cost just $0.14 per serve, with flavored cereal at $0.18 compared to over $0.40 for our premium range and the cost in Italy. On jars, our pricing is relatively higher at $0.31, but still well below Italy at over $0.50. Our success in India and China both derive from our operating model, which is working very well and has evolved based on long experience. It has 2 key elements. First is branding, having a strong brand on which to build. Second is organizing the right local/global balance. And lastly is executing in the market. On branding, the Heinz brand, of course, has been built organically. The other brands here all came via acquisition, and we're very comfortable with both approaches. We do sell the Heinz brand everywhere and as you heard from Dave, it's big in Russia and also in Latin America and China. Five brands from emerging markets are now in the company's top 15. Apart from the Heinz brand, the other 4 were all acquired, starting with Complan in 1994. Prior to acquisition, most had a long history, but were small. On organizing, at the heart is empowered local teams. Emerging Markets change fast. Speed and flexibility is key. Food is full of local differences and the trade is constantly changing. We've evolved most decision-making down to our local teams, which requires strong and capable local management and that's exactly what we have. At the leadership level, all our BU leaders originate from emerging markets. We have a good mix of locals in their local market and transferees from other emerging markets. And also a very good balance of youth and experience. On top, we're increasingly leveraging our global scale with global resources to support and help improve the local teams. We're raising technical skill levels, bringing new technology faster to the markets and reapplying proven business processes and systems. We've also recently made several management moves to broaden experience, and at the same time, to leverage developed market expertise in both line management, those on the left, and also functional expertise, on the right. Finally, executing. This revolves around the 3 A's of availability, affordability and applicability. Availability is all about distribution; affordability about the right price; applicability, about relevance. They sound simple. But doing them all well all the time is a major challenge. On availability, no one size fits all. The trade environment and local practices vary hugely. And this is why we go to market in very different ways. In some businesses, over 80% of our sales go through distributors. On others, it's relatively evenly balanced between direct and distributors and in Java and Indonesia and Brazil, it's all direct. These distributive differences are captured on the top graph here. But one trend, which is common everywhere is the growth of the modern trade. Now currently, the percent of our business, which goes through the model trade vary hugely from 100% down to just 10%. We usually have big sales forces, and with such big teams, technology can be a tremendous aid. We've installed IT systems at our distributors, giving us access to realtime data on their inventory, sales to retailers, sales by area and so on. We're also making increasing use of hand-held terminals for better data quality, immediate visibility on orders and to track sales performance. Since we installed this in Indonesia, all metrics have improved. The number of calls the salesman makes per day, the number of calls which result in a sale and in-store out of stocks. The second A is affordability. In Indonesia, ABC was recently voted one of the top 5 brands across all categories. We make our products affordable to everyone by offering on sauces a broad range of sachets. We sell approaching 5 billion sachets per year with most priced at just USD $0.03. Our beverages are also very affordable. Squash Delight Syrup makes 21 glasses for just $0.06 each, and on the far right, Mr. Juicy Ready To Drink for kids costs just $0.11. One interesting statistic. Our Indonesian sales at about USD 350 million in FY '11 are obviously much smaller than our U.S. sales. But if you adjust for wage levels, an average consumer in Indonesia spends about twice as much on our products compared to what an American spends here. So as wages grow in Indonesia, our sales will grow accordingly. Indonesia also offers good examples of the third A
Michael Milone:

As you're likely aware, we've completed the acquisition of Quero in April after reaching an agreement to buy the company just a month earlier. Quero is a leading brand of tomato products, ketchup, condiments, vegetables and seasonings in Brazil, with annual sales of approximately $325 million in 2010. We are extremely excited about this acquisition, as it's our first meaningful position in Brazil. As you can see, Brazil is an incredibly important market, an opportunity for Heinz in Latin America based both on population and GDP. Beyond Latin America it's the fifth largest market by population and ninth largest by GDP globally. Quero was founded 26 years ago in São Paulo and has been growing at a rate of 13% between 2005 and 2009. Sales were basically flat in 2010 due to capacity constraints. This is well on the way to being rectified and is just one reason for our confidence in the growth opportunities in Brazil. Sales product mix is an area that are very well known and familiar at Heinz. Tomato products and condiments represent 55% of the business and vegetable products, the remainder. We feel that Quero and Heinz are a terrific match. You'll see that whether it's branding, capabilities and organizing or executing the 3 As, this is a great fit, truly buy-and-build in action. Touching briefly on each of these points. There's are leading local brand holding the number one or number 2 position in each of its key product categories. Note the small and growing position that Heinz has established in Brazil with ketchup. In fact, our FY '11 exported tonnage of the Heinz brand in Brazil was up 71% and net sales more than doubled. This was achieved although focusing only on the modern trade, with a very premium-priced product. Quero brings great local manufacturing, infrastructure and one major centrally located plant, a new state-of-the-art distribution center and a recently installed basic SAP system. This site near Neropolis in the state of Goias, has more employees than any other site in the world of Heinz. While Quero brings local capabilities, Heinz brings global best practices and opportunities to deliver productivity improvements be it through agriculture, procurement, manufacturing or product innovation, plus the capital to support investments. In terms of management philosophies, the companies are, again, highly complementary. And this is a key point of difference and advantage for Heinz in developing new business relationships. I'm often asked how can Heinz be expected to succeed in its acquisition strategy in Emerging Markets when much larger companies can easily come in and outbid us? However, when dealing with entrepreneurs, you're dealing with an emotional attachment. In the case of Quero, it was developed over 26 years, with the brand and loyal employees who have become part of the family. We value those brands, we value those employees and their expertise, we value the local expert insights and experience they bring, all of which have been important factors in successfully developing deals with entrepreneurs in the Emerging Markets. This next slide shows how it's been specifically executed from an organization standpoint with Quero. Our management team represents a good mix of Heinz and individuals from Quero plus new hires. In the case of Heinz employees, we've sourced them from 4 different Heinz BUs
Christopher Warmoth:

Thanks Mike. The addition of Foodstar has nicely rounded out our portfolio in China. We now have substantial entries in all 3 of the company's core categories. Foodstar has 2 brands; in soy sauce, Master or Weishida in Chinese and fermented bean curd, Guanghe. Soy is a huge market. And in FY '12, this business should be approaching a $150 million. Master soy sauce competes in a premium segment called Weijixian. But it's still affordable with a small bottle costing under USD 1 and significant sales coming from the 1.6 liter value pack. Guanghe bean curd will last many weeks and costs just $0.72. We completed this acquisition in November, and it's off to a very fast start. In the 12 months prior to the acquisition, sales were growing 12% per year. In our 6 months, this has accelerated to 22% with all key segments growing strongly. This accelerated growth reflects the benefits of various activities we've undertaken
Bill Johnson:

Just a few comments. I think, in general takeaways, solid fiscal ’11, increasing the dividend, great strength in emerging markets, enormous talent including some people you haven’t seen today that many of you were exposed to last year and very optimistic about the future, both in our developed markets and our emerging markets. I mean, we feel this company is hitting on every cylinder. In restructuring or the initiatives that we're calling productivity initiatives. You noticed, by the way, there is no name. There will be no name. These are just individual productivity initiatives, will set us up for what we see as a really good run over the next 3 to 5 years. So, I think, you've been exposed to a very capable team, probably in my view, certainly the best in the industry. And certainly, the deepest and most experienced and more importantly, the most stable. We've had very few changes in our senior team over the last 5 or 6 years. So I think with that, we'll open it up to Q&A. We've kept you right on time. As you can imagine, Meg is a big reason for that. I think she broke 7 sticks this week, beating us all over the head. And you all see the nice side of Meg. You don’t see the other side of Meg.
Margaret Nollen:

All right. [Indiscernible]
Jonathan Feeney:

Jon Feeney at Janney. Mike, in your emerging market presentation, you gave the -- off the gross margin for the emerging markets versus the Heinz average. I just was kind of wondering if you could give us some sense of what the operating margin looks like, some of the SG&A differences between the 2 businesses? And related to that, tying it back into with Art's comments, I mean, it looks like capital expenditure by the end of fiscal '12 in your guidance will have about tripled going into emerging markets. Kind of what sort of return profile are we looking at in an aggregate basis and going forward? So, operating margins and returns in those emerging markets versus the rest of the business?
Michael Milone:

Well, it's tough to generalize because some of our markets are as high as profitability in any other market. Indonesia and India, for example, are extremely profitable. We've been there for a while, but in general, once you get below the gross profit margin line, we're obviously spending more on marketing. We are spending a little bit more on sales and distribution. I think, on the whole, G&A is on about par, maybe a little bit higher. We expect to be able to get some efficiencies there over time. I think, if you look at the history, there is no question that the operating margins are lower, but they've been increasing at the same kind of pace. I think that shows in some of our aggregate numbers from the regions. So, good prospects for continued improvements. In terms of the return, we have a new asset base. So the assets aren't as fully depreciated in some of the other markets, but they're high.
Arthur Winkleblack:

Generally, our returns are higher in emerging markets, because we got growth. I mean I'm -- always, when I go out with investors one of the questions we always get is are these markets profitable? Well, you don't grow the way we've grown at the bottom line without these markets being profitable. And they are very profitable, but in some cases, we've opted to invest more aggressively than in others. But certainly in the case of the 2 markets Mike mentioned that I had preferred he not mention, those are very profitable markets. If we look at a couple of others, we've been very clear on Russia, for example, over the last few years that we're investing to make sure we win in ketchup. And we are winning in ketchup. We now have a very strong number one position in ketchup and condiments and in ketchup itself. We're number one in dry baby food and we're number one or are going to soon be number one in beans. And so I think as we look at these markets, we will continue to invest differentially because we're getting different growth out of them. We're getting much better growth, disproportionate, but we are making money in all these markets. We are cash flow positive in all these markets. The margins over time will equilibrate with our developed markets. If you look at our portfolio and you break it into parts, you look at it in 3 parts. We have 3 segments of gross margin. You obviously have the United States, the U.K., Italy and a few other markets that have top tier margins. Then we have our emerging markets. Then we have some of our other developed markets below those emerging markets. So I’m always amused by the question, are emerging markets pulling your margins down? If anything, it's the markets where we struggle more with the consolidated customer base. So I think over time, the emerging markets in terms of driving profit and in terms of driving growth will far surpass anything we have ever seen in the developed world.
Arthur Winkleblack:

Keep in mind, these capital projects all stand on their own. So they each have a discounted cash flow model behind them. And so if they don’t return well better than the weighted average cost of capital of the company, we don’t do the project.
Bill Johnson:

Yes, one more comment on capital, I don’t want to leave anybody with a misimpression we're only investing in emerging markets. You've got huge investment, one of the largest capital investments we have ever made in the aseptic launch in Italy and the U.K. It’s huge investment. In fact, I’m going over there in 2 weeks to look at the investment in Latina. We've got the opening of the factory in South Carolina in Florence to support frozen, which is the most expensive factory the company has ever built, opens in a couple of weeks. We've just filled the employment and the factory is shaping up pretty well. The keystone investments being made predominantly in developed markets are significant investments of capital and then, obviously, Dip & Squeeze, where as Scott mentioned, we are out of capacity. We're at 2 machines now, soon to add a third machine because if we don’t we will not literally be able to keep up with demand. So we spread our bets as carefully as we can against opportunities that will give us the greatest return, and I think the team has done a pretty good job. Now put yourself in my position with all these guys in my office asking for marketing and capital, it makes for some pretty interesting discussions. We've got some dents in the wall from where my shoes missed them and hit the wall. We've got a few other areas of opportunities that all these guys would like to invest in, but I think generally we do a pretty good job of diversifying our investments across the portfolio.
Margaret Nollen:

Terry?
Terry Bivens:

My question is for Chris and Bill. It kind of leverages off your comment about some of the developed markets with the lower margins. Clearly, a lot of enthusiasm for the stock is based on some of the growth that we expect to see out of Asia, but at the same time, we have this anchor in Australia. Can you bring us up-to-date on what's the latest with the Coles-Woolworth price war? And I think more importantly, how do you guys -- if this thing keeps going on, how do you plan to change the business model there to adapt to that?
Christopher Warmoth:

Terry, I think we assume the climate will continue. It is a very tough climate for the reason you said. And we are now reshaping our whole business to succeed in that environment where innovation is going to be critical, bringing new insights to the retailers. I think we've learned a lot from our U.S. colleagues in terms of techniques and tools, whereby you actually bring the retailers' shopper insights, category insights, which may give discipline, but also ensure they come up with the right answers. And we announced this morning the restructuring projects, we said some would be in the Pacific. That would include Australia. So we're sharpening our cost base. We operate that region as Australia, New Zealand and Japan together. There is a lot of mutual supply interdependency. So we can actually become quite a lot more efficient by taking that one step further. So we're well down the path on all of that. I think, we're assuming the situation will continue, and Metcash is the number 3 retailer, and they're pretty small. We don’t see Coles and Woolworths going anywhere, so we’re adapting to that environment. We have a very strong brand in Heinz. We have a very strong brand in Golden Circle. We have an organization with a long history. We've put in quite a lot of talents from other markets. I think, as these things come through, Australia can be a good market for us.
Bill Johnson:

Yes, I think, the 2 other things to keep in mind, one is factored into our outlook. And we don’t look for a turnaround in Australia, and it's factored into our outlook. I think, the second thing to note is we put the individual in charge successfully in charge of New Zealand in charge of Australia. He is used to dealing with a consolidated customer market of 2 customers, including Woolies, which is one of those customers, but there is no doubt that in terms of retail environment, the Australian market is the worst market, and ultimately the people that will pay the price over there are the consumers because products will ultimately be devalued to address the price points that customers are asking us to address. So the consumer is going to ultimately be the big loser in Australia. But we have factored in mediocre results from our Australian portfolio. And you got to remember, we're talking about 7% of our sales. And basically, over time, probably 6% or 5% of our sales. So we’re not talking about a big piece. The portfolio is very profitable in terms of the bottom line. It's just not an opportunity anymore because of the fight that's broken out between Coles and Woolworths. And it's really a shame because, again, I think ultimately, the people who will pay the price is the Australian consumer, who will be served in a poor way, I think, with poor product selection long term.
Margaret Nollen:

Chris?
Christopher Growe:

Question for you regarding Europe. I guess, it's also for Dave. I was curious, 2 aspects to Europe, one being, there is a planned reduction in D&A spending, which I think you've tried before. I know, it's a tough market for that to occur. So I was curious how you see that playing out over the next several years. And then also to understand the operating profit growth there, which is a very robust growth rate over the next several years. I assume part of that's cost-saving driven, but also you are expecting some strong top-line growth as well. So I'm just trying to understand those 2 pieces of the Europe outlook over the next several years.
David Moran:

Okay. You've heard me say this before that I believe retailers put manufacturers in 2 buckets. The bucket of I'm going to negotiate dollars and cents and pennies and extract money from you, or we're going to use you to help grow our category. And we are trying to move some of our businesses away from the former to the latter, which is done via innovation and new ideas. The innovation pipeline for Europe is growing. It's not perfect yet, I think when we get the innovation center up and running, it will be a fabulous addition. But the teams are already responding beautifully to the mantra. And we're making great progress there. We've been pretty open with our retailers. We've had these types of conversations of you view us in this bucket, we want to move to this bucket, and here is what the benefits are. And we're being pretty successful. Last year, especially Q2, Q3 and Q4 in terms of D&A, was down very substantially across Europe. We had a bad first quarter, so that moderated the year, but we took out roughly 100 basis points, give or take a bit, on a full year basis last year. This year, we're looking for about the same, maybe a little bit less. And that will grow as we replace deals with ideas, concepts, and new innovations. So we sell more product off the shelf at full price. The operating income is really a function of that. We're blessed with glorious brands. We have a couple of businesses that have epic status, 80% share, 70% share, wonderful gross margins. The consumer loves our brands, they’re very responsive, and we’re pumping more and more marketing money into the European environment trying to sell more product off the shelf at full price, I mean, that really is the backbone of raising the operating income on an ongoing basis. And I do think the team is really terrific at managing the middle of that P&L. SG&A has kind of been directionally flat for a long period of time. I think, with some of the supply chain changes in distribution, that will even improve as we go forward.
Bill Johnson:

Well, I think, the other thing you are getting is a huge pick-up in sales mix. You've seen the growth in ketchup across Europe, one of our most profitable businesses. The Italian Baby Food business has done well over the last couple of years, driven by innovation. So we're getting a real mix shift in Europe that I think will benefit us long term. And I think -- I want to echo one of Dave’s points. I will stack our European management team up against anybody’s. They are all locals. They understand the consumer. They understand the customer. And Dave Woodward, in particular, in the U.K. and Roel van Neerbos and his team and Stefano Clini, who runs Italy, who’s actually sitting in the back of the room, absorbing all of this. For what purpose, I’m not sure. But he asked if he could come, and he was in the country, and I said sure. But I think generally, we just have a terrific team, who's done a very good job of managing in a difficult situation. And one last thing, no one has a greater passion for efficient deal spending than Dave. He proved it in the United States, he’s proving it there. With commitment and focus, you can manage this process. It does take great brands. And where we don’t have strong brands in Europe, we've lost some distribution. So it is a function of having great brands, but with passionate leadership, who are committed to making this happen. And I think the European team has done a damn good job of rising from the ashes and driving pretty darn good performance.
Margaret Nollen:

Definitely. Okay. David?
Unknown Analyst -:

Well, I have 2 small questions. In the stores where you've already removed Boston Market, and I think there have been some, what have you seen in terms of the shelving and where you sense the consumers are making substitute purchases? Obviously the implication is that, that 2 points may not end up being 2 points because you get your stuff in front of the consumer. The inflation last year -- a separate question on inflation, you said it was 5%, but really to Heinz, it was 1% because of some -- this year, it's 7%, but really, to Heinz, what is it this year?
Scott O'Hara:

You want me to start with Boston Market?
Margaret Nollen:

Sure.
Scott O'Hara:

So the Boston Market distribution -- as we made the decision to exit the relationship has -- you've seen it start to lose distribution over really the last 9 months. And it sort of stabilized where it is today. And then we'll exit that relationship completely on June 30. So until we launch T.G.I. single-serve entrees, the other full-calorie meals were taking that space. And the retailers were making that choice with those other suppliers. Clearly, with T.G.I. Friday’s going into that space, there's an opportunity for us to look at the entire area, and we're doing that. So over the past 9 months, not a lot of it came to Heinz because we weren't really competing there other than in our multi-serve, which is typically merchandised in another area. As we bring out our new single-serve product then that may be an opportunity.
Bill Johnson:

Yes, I want to clarify that. We are not taking the product off the shelf. We are exiting the license. The retailer is taking the product off the shelf. We are not going in, withdrawing the product from the market. That is the retail decision as we exit the license, somebody else has assumed the license, and we wish them good luck with it. But we are not, we are not forcibly removing the product from the shelf.
Arthur Winkleblack:

In terms of the commodity costs, to your point, Bob and his team did a great job in fiscal '11 taking that 5% of market inflation. And really for us the net impact was around 1%. As we look forward in the next year, we're looking at market inflation of around 7%. We hope to beat that a bit. And we'll see how that goes. But I wouldn't expect such a big gap as we look forward as we got in fiscal ‘11. But we'll keep you posted as that unfolds.
Margaret Nollen:

Okay. Rob?
Robert Moskow:

Rob Moskow, Credit Suisse. Two very different questions. The first, really for Bill. This is the most progress I think I have heard about moving away from the country model and into more of a centralized type of management style. You have an overlay of management now in Eastern Europe and also in China. And I wanted to know, do you feel like the organization is responding well to that shift? And how will you keep track about the cultural change there? And then secondly, just kind of tactically, Walmart is probably moving faster and faster towards organic products, environmental sustainability. And I think we brought a lot of their suppliers with them and the relationship you have with Coke sounds like it's right down the heart of that. When you launched this product in first quarter, how are you using that to expand your merchandising with Walmart, and are they embracing it like you probably hoped they would?
Bill Johnson:

Let me talk about the transition of the company or the evolution of the company to more of an integrated model. If you caught the 2 comments I made in my opening statement, it was basically about globalization and scale. We are now a global company with a global supply chain. We have global procurement. We are moving talented people, the appointment of Dan Milich in Eastern Europe and Hein Schumacher in China into position, leveraging experiences to do 2 things
Scott O'Hara:

Rob, on the PlantBottle, a couple of things. Number one, obviously, we're working closely with our partner, Coke, on that, and they're building out capacity to produce more of the resin that we need to make the PlantBottle. And they're expanding that within their own product portfolio, as well as us within ours. So we're going to start with one SKU in retail and one SKU in Foodservice. On the Walmart-specific question, it's important to them. Sustainability is important to Walmart. It’s also important to many other of our larger customer. So they're all excited about it. It will be one SKU in the range to start. It will grow over time as the raw material has availability. We had a choice to do more SKUs in retail and exclude Foodservice. But we really felt like, strategically, it was important to get into the Foodservice environment. If you think about it, you'd have this great Heinz ketchup bottle on all of these restaurant tables, creating all of these impressions, communicating the PlantBottle story. And so it's going to create a lot of awareness. Coke is excited about that exposure that we can provide. And so that's the plan, ultimately though, it will grow over time. And the trade has been great. They really love it. It ties into the things they're doing. And quite frankly, the things that we're doing and Coke is doing. But beyond that we've got the mineral tray for Smart Ones, where we have breakthrough technology. We've got lots of opportunities in sustainability. We set out specific goals about 3 or 4 years ago. We're among the first to set them out. We're surpassing all of them. We've got a lot of activity going on sustainability, and in the whole area of organic in terms of the way it relates to greenhouse gas emissions and water and so forth. I mean, one of the things we do is we try to measure water. We try to measure utility usage, we measure waste. We measure all this stuff at the plant level around the Company. And we have made enormous progress. In fact, I would stack us up against anybody. Mike Milone leads this initiative for us globally. It has been an extraordinary success, something the Board is very excited about. This morning, for example, on our Micronutrient Campaign, Lucy Liu was on -- who represents us was on -- I guess she was on the Fox News this morning. And she's been on Good Morning America. And just last night, she did something very unique, which I won't -- we'll show you later -- I don't think we'll show you today, but we'll show you later with -- I guess it was Crosby and Nash on the Fallon show. The Fallon show has been very good to us. You saw the Bagel Bite spot, Meat Loaf, apparently, loves Bagel Bites. So we'll send him a supply just to keep him excited about the business, so...
Michael Milone:

If I could, one other comment on sustainability. A lot of the stuff that we're doing may not be obvious. For example, that package in front of you, it's not just the package, it's also what's in it. We have a very extensive seed program that develops our own proprietary seeds that are highly water efficient, high-yielding, and it makes a very large impact that our customers are well aware of.
Margaret Nollen:

All right. Andrew?
Andrew Lazar:

Bill, 2 questions, one with respect to the earnings growth rate, the long term growth rate going to 7% to 10%, what’s the underlying rate of organic top line growth embedded in that? In other words, is the increase in long term earnings growth driven by now a higher level of expected organic sales growth? And then the second one would be, the industry, as well as Heinz, has moved away over the last 5, 10 years from a lot of the big bang kind of restructuring charges to more of the metering it through and absorbing in the P&L. You've gone away from that with this more recent productivity measure. But my sense is there's a lot behind that. And I’d love your perspective on it. Is it just the new normal or a new reality around where we're at? And we need to kind of ramp up and accelerate cost saves? I'm sure there's perspective that would be helpful to get behind that thinking.
Bill Johnson:

Well, let me take the second one first. We tend to lead things. We tend to get beaten up a bit for leading them, and then eventually everybody else follows. And if you go back to emerging markets, emerging markets, the question from everybody, why in the world would you go into Indonesia, why China or why India? 20%-plus of our sales next year. And I want to make that clear, it is 20% plus of our sales in this year. And I'll get to the organic sales underlying the earnings. So my own view is that all you have to do is look around the sales around the globe, particularly in developed markets to understand what's supporting that sales growth. Demand looks for capacity, capacity looks for demand. We, as a company -- I won’t speak for the industry, we, as a company, think we can do more productivity. We can do better. We can supply the needs of our customers without the capacity we have, and rather than extend this over 3 or 4 years like we have been doing over the past couple of years, we've been taking a factory or 2 out every year. Felt the opportunity was now to make a quantum leap in productivity by freeing up the capacity that we don't need and moving it into other areas. The second thing that you are seeing, the world is shifting. And I sort of sit back and I reflect on this. I have been in this job a long time, and I have made more than my fair share of mistakes. But the one thing that I think we have seen very well is this shift that's occurring from the developed world to the developing world. Now we can all fight it. We can all resist it. We can all say you can't ignore the developed world, which obviously, we're not. But the reality is, our resources are still very concentric with the developed world. We've got to begin shifting those resources. And part of what we're not able to talk to you about today is the ultimate production of some of these products that will be moved into places that I think give us more efficient long-term benefits. One of the things Chris mentioned quickly in his comments was Qingdao. Qingdao in China, where we have put along with Indonesia, capacity in to produce McDonald's products for 13 or 14 markets. That's the model going forward, particularly on a regional basis. And we just felt there was a time for a quantum leap move. The second thing is, obviously, the step change we are making in Europe with the centralization of the supply chain into our markets in Zeist, Netherlands, which we're doing for a couple of reasons. The primary reason, it's much more efficient. And we have a big overhead structure in Zeist that can accommodate this, along with the opening of our R&D facility. Now let me come back to the underlying sales algorithm using Art's term, one he's absolutely beaten into me over the years, and I now love the word algorithm. In fact, I said to my children a couple of weeks ago, my daughter told us she was getting married, and we'd have our second grandchild. And I said to my daughter again last night, "What is your algorithm for grandchildren?" and between the looks I got from my wife and the looks I got from my daughter, algorithm was probably not an appropriate use of the term in that regard. I think right now you should assume 4%-plus constant-currency growth underwritten by 3 to 4 points of very solid organic growth and an opportunistic M&A. Let me tell you how we get there. If we're going to emerging markets of 15% better or better than that, and I will tell you that if we do only 15% this year, I'll be disappointed in the emerging markets. And that’s 20%-plus of our business, you're getting 3 points of organic growth out of the emerging markets. If, in fact, Dave does 2 to 3 points of volume, as he said, and 2 to 4 points of net sales, and Scott does the 1% to 2%, we are well over the 3% to 4% organic growth. Now we can debate all day long about will Scott do 1% to 2%, will Dave do 2% to 3%, but the reality is given the increased importance of emerging markets, given the innovation pipeline that the company has, we feel pretty good about 3% to 4%, plus a point of M&A. In regards to M&A, I've said this at CAGNY, I think we've born this out with Foodstar and Quero, we are still looking at opportunities as long as my arm. I mean, we are literally in the process of trying to put them in order of priority in terms of the opportunities that are being brought to us, non-auctioned processes, just because of entrepreneurs seeing the way we operate these businesses on a local market basis. And we are literally ferreting through a number. We've got a couple of small ones that I would expect to be done over the next 6 months or so, relatively small, but important in terms of market development and opportunities that they will create for us long term. So 4%-plus constant-currency growth, underwritten 3 to 4 points of organic growth, 1 point ad-hoc, opportunistic on M&A, and 7 to 8 this year, obviously, because of the M&A.
Margaret Nollen:

For the M&A.
Arthur Winkleblack:

Andrew one final thought on the why now in terms of the productivity initiatives, the other thing we wanted to not do was as we roll out Keystone, I’d rather not spend the money to put Keystone into plants that we don't want long-term. And so to the extent we can simplify and streamline the footprint now, that will help us in terms of the Keystone process going forward.
Margaret Nollen:

Bryan?
Bryan Spillane:

All right. Just a follow up on Andrew's question. In terms of the long-term growth algorithm, especially since it's going up on EPS as well, are you expecting that the contribution to operating profit, to earnings from developing markets to accelerate over that time period, is that part of the logic between to raising the long-term earnings?
Bill Johnson:

Absolutely, I mean, this year, operating profit from the emerging markets outpaced that from the developed markets. So, over time, as our investments start paying off and as the capital gets in, allows us to automate and improve efficiencies in those market, drive returns, and as our marketing continues to drive growth, we are absolutely expecting profit growth out of the emerging markets to outpace those of the developed markets. But we're also getting a lot of the productivity benefits from Keystone and some of the initiatives that we'll outline more fully over the coming months in the developed markets. But absolutely, we're looking for disproportionate -- and I said it in my comments, disproportionate sales and profit growth from the emerging markets.
Bryan Spillane:

How much did it contribute to the growth this year?
Bill Johnson:

Operating income, cutting through everything in emerging markets grew between 8% and 10%. And we've said 8% as a base, but it grew between 8% and 10%. Well, the company's operating income was up about 7% on a constant-currency basis, give or take, so you can see the benefits we're getting out of emerging markets relative to the developed markets. And part of that, as you saw, what Scott is doing, you saw what Dave is doing, but you also saw that the impact we're getting on Australia and New Zealand where we've been down a bit, so I think generally, the outlook is guided greatly by our success in emerging markets. I have to tell all of you and again, I know you get tired of hearing from me, and I've been preaching some of this on for 14 years. Don't underestimate these emerging markets. And I still think it's being underestimated by a lot of the market. And if you look at one of the things we have done choicefully that, I think, differentiates us from everybody else, we are almost equally spread among the 5 BRIC markets and Indonesia. We have not made one huge bet in any of these individual markets purposefully. And while everyone may be chasing Russia or China or India, we're chasing them all because the opportunities in these markets are significant. And like anything else in life, we're going to be right in many of them. We'll be wrong occasionally in one of them. And so we want to diversify and spread our bets. But I will tell you that over time, we've got the 30% algorithm over the next 5 years. We'll be every bit of that. And emerging markets are the growth, I mean, I tell my children to tell their children that I got news for Americans. While the United States will be the best economy in the world for as long as I'm around, the reality is, as Mike showed you, over the next 30 or 40 years, 5 or 6 of the top 8 economies in the world are going to be in these markets. We're there with management, infrastructure, brands, productivity, and capabilities, and it always sort of -- I get -- I talk to my wife about this all the time, who asks the same thing, "why are we going to all these markets?" And she didn't go with me to Vietnam and Indonesia because she said, "Gee, that’s too far." But that's where the future is. It's a sad state of affairs as an American, but it is a great state of affairs as a head of a multinational company. And when I go to these markets, I don't talk as an American. I talk about the head of the H.J. Heinz Company, and I remind all these people, "Look what H.J. did. He went bankrupt in the United States, went to the U.K. and restarted his company. And that was 140 years ago, it’s pretty amazing." And so I don’t go talk about what the U.S. government requires, I talk about how we run the H.J. Heinz Company. And that really plays. I tell our North American team, I just told them this in a meeting that Meg sat through and Scott knows. They asked me what the big difference was between being part of the American company, and being part of the emerging markets. If you look at our employee ratings, our pride levels in the emerging markets being part of the Heinz Company, 99% off the charts, in terms of wanting to learn and grow with this Company, off the charts. In terms of seeing a future for themselves and their families, in terms of creating a difference, off the charts. It is so much fun to go to these markets and watch the faces in the audience as I speak to them and watch them individually how they react to the legacy of H.J. And outside the U.S., the legacy of H.J. is everything, and we sell it hard. In the U.S., we are a cynical country. But it is -- you just can't underestimate the impact, you really can't.
Margaret Nollen:

Okay, Alexia?
Alexia Howard:

Two quick questions. First of all, on the U.S. supply chain. It seems as though a lot of the growth in the market now is coming through smaller-box retailers, and that the retail environment is changing over here. Is that impacting the way that you're thinking about the supply chain over here and how is that affecting you?
Scott O'Hara:

Yes, Alexia, the first -- I have mentioned in my presentation, we're underdeveloped in that channel. So the first thing we need to do is sell something, right? And then we'll work through the supply chain implications. But in all fairness, we really don't have a big business there today. We think it's a massive opportunity. There is no question that those -- that that channel and a number of those retailers are doing exceptionally well. We have some presence in them today, but it's typically with our core range that would be in any other retailer, and what we've found is we benchmarked ourselves against other companies that we believe are doing better in those channels is they've tailored their offering to that channel. And there are some supply chain implications of that for sure. And we'll balance that additional complexity with the opportunity. But the first thing we need to do is actually create some critical mass in that channel, which we're very focused on for fiscal ’12.
Alexia Howard:

Then just real quickly, you've mentioned an appetite for acquisitions. How do you think about the criteria of what you're looking for? And about the pace in managing the risks associated with that, just in terms of how many you can digest in what period of time?
Bill Johnson:

Well, it depends on where they are geographically, and what -- how they fit with our business and whether we have management capability on the ground. But certainly the priority is the emerging markets. But I also want to be clear, we're not opposed to making a developed market acquisition, we just haven’t seen any. And we certainly haven’t seen any that would give returns to our shareholders that would be acceptable to them. So I think that the prices and the costs in the developed markets, because of the size of the businesses are one. And I think, most of the industry has not yet recognized that their portfolios may not be consistent with their aspirations. I'll let you draw your own conclusions on who I’m referring to. I think the other thing, Alexia, is we try to spread these as best we can. We did Foodstar in November. We did Quero in April, and a lot of the negotiating team is the same team, and so we try to spread the big ones. Now in a smaller one, we let the local teams pretty much handle that. But we’re looking for things that create value over time. Now, I mean, I’m really excited about Foodstar, 6 months into it, we’re doing well, but it’s still early. Quero I’m really enthused about. But we’re 2 months into it, and it’s still early, and as Mike can tell you, I wear a path to his door every day, asking how we’re doing, and he said you just asked me that at 5 o’clock last night, and I had lunch with the partner -- the seller, the CEO, and his wife 2 weeks ago. And he’s very enthused about being part of the Heinz company, he still owns a big piece of it. But we will spread these out in terms of the capabilities we have. Now putting Dan Milich in Europe, we've added a resource in Asia, we've added resources in the U.S. in terms of the way we look at it. So we're adding resources because the opportunities right now frankly are stretching our capabilities, but we're not going to do anything that breaks us. So we'll continue to parse these as carefully as we can, as selectively as we can, and I've got to tell you that the line I'm looking at, as I said as long as my arm, are all in emerging markets. I don't think there's a single exception.
Michael Milone:

If I can add on risk, we have a lot of debates about it internally, there's a difference between informed and calculated risks and risks. There's a strong argument that could be made inaction or not taking some risks will be more risky than taking a perceived risk as well.
Bill Johnson:

Interestingly Mike runs our risk management program in the company, too. So coming from him, I'm glad -- I wish -- did we tape that?
Margaret Nollen:

Vincent, go ahead.
Vincent Andrews:

Bill, this is the first packaged food presentation I've seen with the -- I guess, back in the CIVETS in it. And so I just want to ask on EM, how you are thinking about balancing, going further into the markets that you are already in, in EMs versus maybe trying to establish some positions in these other markets where according to this chart you are not very well established and maybe there's a difference in valuations in these new markets or not, but how are you broadly thinking about that?
Bill Johnson:

Well, going back to Alexia's question, we look for opportunities and we try to balance them. We have a very good business in South Africa with a partnership with Pioneer Foods. We have a very good business in Egypt, which is again, I've said to certainly a number of you that we think is a huge opportunity for supplying tomato paste long term. It's the only place in the world you grow the tomato crop 2 times in a year. And we've got a very good business there. We've got our Egyptian partner last year, it's growing and we feel very good about it. It's still relatively small, and no, we weren't terribly affected by the problems in Egypt. And as we look, I've been in Vietnam. Vietnam is a real opportunity, but it also worries me. And the dong has done nothing but depreciate. The government is still quite working through how it manifests itself in terms of working with business, but we're looking at opportunities there. We're looking at opportunities in Turkey and I just came back from Turkey as I said, and we continue to explore opportunities. What we tend to do and we've done in Vietnam and in Turkey, we’ve opened small offices there, and we've put -- what do we have, 4 or 5 people on the ground in Vietnam. We’re going to have 4 or 5 people in the ground in Turkey. They start building out distribution, they start building out the introduction of the Heinz brand, and if we see something that can create additional infrastructure or give us an accelerated pace of growth, then we move into those markets in a bigger way. It’s what we did in Brazil. You saw in Mike’s comment about how much we’ve grown the Heinz brand there off a very small base. So we tend, as I said in my opening comments, to be very assiduous in learning and understanding these markets before jumping in. Now, I’d love to get bigger in Indonesia. I’d love to see us bigger in China. I’d love to see us get bigger in Brazil. I’d love to see us get bigger in Russia, but we balance all this stuff with the opportunities how they mesh with terms of creating value for the shareholders and how we can manage them, but we're aggressively looking at all the existing markets we're in, plus as we open offices and put teams in these new markets, we'll penetrate those, try to understand the retail and food service trade and to make decisions based on that. And a lot of it depends on what we can leverage. I mean Quero in Brazil is a prime example and what we've been looking in Brazil for a long time and this partnership sort of evolved out of an understanding between Fernando Pocaterra and the individual who sold us the company, and that’s the way we tend to do these things. So, as I said we have a line of opportunities. The Office of the Chairman debates these opportunities. We’re looking for more additional businesses. I’d like to get bigger in Poland. I’d like to see us get a little bit bigger in Latin America. I’d love to figure out a way eventually to get into Colombia. Colombia is a rapidly growing market in Latin America, but we talk about this stuff, but trust me we’re going to be extremely prudent, as Mike said, in terms of the way we go about this, but the priority is to look for opportunities that create value.
Margaret Nollen:

David?
Unknown Analyst -:

I want to follow up on some of the margin questions. So, when you said that you expected equilibration in the margins over the course of time, were you referring to the gross margins or the operating margins? And as a related question, total company segment margins are about 17.5%, the Asia Pac margins are about 9.5%. There is an enormous differential here between these. In this higher algorithm that you've given, this 8% -- 7% to 10% EPS growth, what is the expectation particularly of that Asia-Pac operating margin over the course of time within the next 5 years, give or take?
Bill Johnson:

It will grow. And you've got to remember, in Asia-Pac, we've launched formula in China. We are spending a great deal of money to try to get formulas ceded. So, we made a conscious decision that we would forego operating profit, gross margins are still very good, in order to invest back in the growth opportunity, and it's all factored into the numbers you've seen this year into our outlook going forward. But again, back to Mike's point, we have a couple of markets that are every bit the 17% and the debate we have is very different than the debate and the questions you ask me, the debate we have is led usually by Art interestingly enough, is are we pulling too much money out of these markets, are we not capitalizing on the growth, and by the way, if the Board has any pushback with us that's the question they ask. Gee, it's great you want to be 15%, 16% operating margins in these markets, but are we making moves too soon? Are we not investing aggressively enough because they recognize that's where the growth is coming long term also? So, I think over time the margins will equilibrate. Now what time period that's going to be; 5, 10 years? Time will tell, but I think you've got those in Russia. I have been very clear. I said it earlier, we've made a conscious decision. We are going to be number one in ketchup, period. We missed Japan in the '70s and '80s. We are not going to miss Russia. If that means we take a smaller operating margin out of Russia to drive disproportionate growth and establish an impenetrable share position, we'll do it. But all that’s factored in. When you run a portfolio of businesses, not every business will play the same. I used to watch football practices my whole life and it's really interesting when you look at sports teams, all you have to do is look at the Miami Heat, if you watch NBA basketball, I mean, you leverage the great players and everybody else supports those great players, Dallas Mavericks, Dirk Nowitzki, Nowitzki is doing -- I mean, he’s playing unbelievably well. Two games ago he had terrible game and they got beat. And you surround yourself with a portfolio and you manage against that portfolio as we have done I think pretty darn well, and I think in that context, David, we'll continue to manage it the way we think we can get the most value long-term. The other thing I'll remind all of you and I tell this to investors when I’m out with them all the time, I don’t run this business quarter-to-quarter. Now I know you want me to, but I don’t, and I’ve been here almost 14 years now in this job, and I don’t run it quarter-to-quarter, and had I run it quarter-to-quarter, we wouldn't have been in Indonesia, we wouldn't have been in India, we wouldn't have been in China, we certainly wouldn't have gone into Brazil, because I can tell you right now, Brazil and Foodstar are going to effect the first quarter. We’re just ramping these businesses up, they’re going to dilute the first quarter; they have to, as we'd ramp up marketing and try to get our management team in place. So I run this business over 5 year periods, which is why I gave you the history over the last 15 years, and looking forward over 5 years. And if you look at the last 5 years, we grew EPS at better than 8%, we grew the top line organically at 4%. We grew ROIC despite all these investments close to 500 basis points, and we improved gross margins, and we drove cash flow, even at the levels this year. I apologized to the Board a couple of weeks ago, I said, our cash flow is going to be about $1.2 billion, but frankly it always comes on higher than I say, so expect a bigger number, and it does, I mean, we just drive enormous cash. These guys and their teams are doing incredible job. So we'll continue to balance all this against the best way we think long-term to create value for our shareholders, and frankly our employees.
Unknown Analyst -:

Can I just sneak one more in?
Bill Johnson:

Obviously.
Unknown Analyst -:

It's a related question to the margin question and you started to answer it, but marketing spending for the company as a percent of net sales, even with an FY '12 growth of high single digits to the budget will still put it around approximately 4% of net sales, the industry leaders within U.S. packaged foods are double that number, your growth opportunities are undeniable in the emerging markets, so sometimes when I step back and think about it, the percentage seems kind of backwards to me, it almost feels as if you guys should be spending much more than the peer group because you have these opportunities in the emerging markets.
Bill Johnson:

Now which one of your guys talked to him? That's -- we have this debate all the time, and again it's a balance. I mean, I could spend a lot on marketing. To quote Herman Cain's comment a couple weeks ago about how the politicians in D.C. are working out. I think his question was, how is that working out for you? How is the marketing spend working out for some others? We balance it against the opportunities we see in the businesses. I mean, we could quadruple spending in some of these businesses, but because we're 97% penetrated, we're not going to see a huge lift that gets us a return, and that's why we are very enthused about things like Dip & Squeeze. I don't know how many of you caught Scott's comment on the research we've done, 60% incremental, 60%. We're going to sell 10 of those things for $1.99, that's $0.20 a piece for one of those little Dip & Squeeze pouches, and I'll bet you, we sell a bunch of it at retail, and we won't have to spend a whole heck of a lot of marketing beyond what we're doing on Facebook and on YouTube, and so there are ways to go about this. I mean, most of you have heard my comments about marketing spend over my entire career, and I'm a marketing guy, and I think, I could easily double the spending on this business, I won't give you a return on it, and so we're trying to parse it out as carefully as we can. Dave showed you we're up significantly in the U.K. because we've got plans now that are giving us a return. We are up significantly in the emerging markets, because it seems to be every dollar we spend, we get 2 back. I mean, it really is, gives us a great return in a short period of time, so I don’t look at the percentage. I look at the growth, and I will remind you there is one other company in the industry that spends lower than we do that’s done pretty darn well over the last 4 or 5 years in terms of shareholder returns and in creating value, and so I don’t -- I just don’t look at that number. I am more concerned about are we supporting these businesses. Now there is not a single guy up here that wouldn't tell you, he'd like more marketing. But you also have to recognize in the developed markets, you've got a trade off. We're investing close to 30% of sales in many of these markets between D&A, marketing, and some other things we do from innovation. We've substantially ramped up R&D with the opening of the innovation center in Nijmegen in Europe. That is a huge ramp up in R&D. I don’t know how many of you caught my comments. We're looking at an R&D center in Asia. Over the next 4 years, I assure you we will open an R&D center at some point in Asia for a lot of reasons. One, enormous talent, two, enormous growth, and three, the need to be on the ground there and develop for the future, so it’s a combination of a lot of factors, and frankly, I think looking at strictly a percentage of marketing, as a percentage of sales is probably not deep enough in terms of understanding what we're doing. But it’s a valid point. I mean, we have this debate all the time. Should we spend more, we're trying to increase it as best we can in the context of the balance between creating value and driving long term growth.
Margaret Nollen:

We've only got time for couple more. Eric? Pass it back, David. Thanks.
Bill Johnson:

I can’t see that far.
Unknown Analyst -:

It's still me.
Margaret Nollen:

I couldn't neither at first. I need my magnifier.
Unknown Analyst -:

Okay. I guess 2 questions. One is, I was kind of surprised that given the inflation and your desire to take pricing that in the U.S. and Europe, your both segments are looking for gross margin expansion. During the last wave of inflation most of the companies showed gross margin declines and at best was flat. So I am wondering how does that gross margin expansion jive with retailers' views of pricing? Like why wouldn't they be like, 'why are you taking pricing if you are actually going to be showing gross margin expansion?'
Bill Johnson:

For us on gross margins, we have grown gross margins, and there is a big difference now between 2008 and today. 2008 was the last period of huge inflation and last the time the industry took pricing, and I will tell you the trade was far more receptive in 2008 than they are now, generally. You’ve got other things working for you now. You’ve got at least ostensibly growing employment, although the report today I don’t know if you've seen it came out in the U.S., it was not good. You’ve got a better economy, growing financial markets, you’ve got from a consumer standpoint consumers at least willing to sample or to buy proven products, and we’ve seen that. We have not seen the elasticity issues yet that others have, but it’s still early. My view is that when you have 60%, 70% market share, you should have the capability of taking price, and we have underpriced relative to commodity costs over the last few years and I think it’s an opportunity. There is no doubt we get pushed back. Dave is getting enormous pushback now. Scott is getting pushback. We have to do what’s right long term for our business and I'll give you an example. One of the things that you saw is our top 15 brands growing at about 4 points of organic growth, but the Company didn't grow at 4 points of organic growth; that’s because we’ve taken price in a few areas and lost distribution, Sonnen Bassermann in Germany is one. We’re trying to pick it back up. We have tuna in Australia where we took price. Coles delisted us. We're trying to get it back. So we’ve got some of these issues, we're balancing, but fundamentally in our strong brands, we’ve been fairly successful in the ability to get price through and if we don’t try to grow margins, how are we going to support -- back to David’s question -- the marketing spend that we need to drive the growth in these businesses?
Arthur Winkleblack:

Yes, Eric, let me add on that, that we're trying to price to cover the commodity inflation. So we’re not really pricing ahead of commodity inflation. What we’re using is, through Bob’s group, the very, very strong productivity to then try to drive the gross margins up. So if you can basically cover the commodity inflation with pricing and then you can make your aggressive productivity on top of that, that’s how ultimately you end up growing gross margins.
Unknown Analyst -:

Then a follow-up maybe on the productivity. You’ve raised your target, but what I wasn't clear about is the Project Keystone and the expansion of SAP linked to that productivity ramp-up? And if it isn't, I’m just kind of wondering about the returns on Project Keystone. It looks like you are spending an extra $0.08 this coming year and then it’s going to be a run-rate I guess on $0.16 in fiscal 2013. So what kind of -- most of the companies that have rolled out SAP in the industry have benefited significantly from them. What does that mean and is that part of the 7 to 10 change on the bottom-line?
Arthur Winkleblack:

Sure. I mean over time Keystone will be a key enabler to all that we do frankly. I mean it’s just how a great business is run. Now to your point there is some additional spending that we’ve got to do here as we get the system rolled out more fully and it will be a while until we get to breakeven, but over the long-term, Keystone is a critical enabler and a key foundational piece to increasing both productivity and ultimately then the EPS growth target to the 7 to 10.
Bill Johnson:

Yes, and I think the thing you have to keep in mind is from a procurement standpoint, certainly in indirect, we've got it rolled out across two-thirds of the company already, and we're getting big benefits out of that, and the other big benefit in productivity is going to be from the value engineering. We will get returns from Keystone later on. As Art said, we cross the line in about fiscal '15 give or take. Fiscal '15 sounds like a pretty good year for me to sort of cross the lines with Keystone. I think the other thing you got to keep in mind regardless of the kinds of returns we get on SAP, we don't have a choice. We don't have a global ERP system. We're operating with individual ERP systems. Now some of you can say, 'well gee, you are behind the industry,' and I'd say, 'yeah.' The other side of that is we're behind the industry and look how well we've performed without doing what the rest of the industry is already banking into their outlook. So, I feel pretty good about where we're going. As Art can tell you, Art and I are the longest running tandem CEO-CFO in this industry by a long ways. Art and I agree on 99.9% of everything. The one thing as Art can tell you, he has scars on his back from is Keystone. And I am a CEO, I hate systems projects. I hate systems. I can barely turn my iPad on, and in fact we've got the Board on iPads now. Just we've got everybody on iPads, now I will tell you this has been a real experience. If any of you are on Boards that want to shift to iPads argue vigorously to stay with paper, and so we are, but we're not going to see returns on those for another 3 or so years and then we will get incremental returns that hopefully will allow Bob and us to keep maintain that productivity outlook going forward, so we're not getting much benefit over the next three years, Eric.
Margaret Nollen:

Guys, I apologize. We are out of time. So with that, I think we'll thank everyone for listening in today and cut off the webcast. I do want to thank the entire IR team who has worked very hard to make this event possible today, so for those of you who don’t know Mary Ann Bell, Jessica Hollern, Jeff Strine, and Kelly, so thank you so much and have a great day.

The Kraft Heinz Company Q4 2011 Earnings Call Transcript

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The Kraft Heinz Company
Q4 2011 Earnings Call Transcript