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H.J. Heinz Company (NYSE:HNZ)
F1Q07 Earnings Conference Call
August 31, 2006 8:30 am ET

Executives

WIlliam R. Johnson Chairman, President and Chief Executive Officer
Art Winkleblack Executive Vice President, Chief Financial Officer
Jack Runkel Vice President Investor Relations

Analysts

Terry Bivens - Bear Stearns
Christopher Growe - AG Edwards
David Driscoll - Citigroup
Ann Gurkin - Davenport
Eric Serotta - Merrill Lynch
David Parmer - UBS
Alexia Howard - Bear Stearns
Edgar Roesch - Banc Of America
Christine McCracken - Cleveland Research

Presentation

Operator

Good morning my name is Judy and I will be your conference operator today. At this time I would like to welcome everyone to the H.J. Heinz Company Fiscal Year 2007 First Quarter Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remark, there will be a question-and-answer session. If you would like to ask a question during this time, simply press “star” then the number “one” on your telephone keypad. If you would like to withdraw your question, press “star” then the number “two” on your telephone keypad. Thank you. Mr. Runkle you may begin your conference.

Jack Runkle - VP - Investor Relations

Thanks Judy and good morning everyone. I am Jack Runkle VP of Investor Relations with the H. J. Heinz Company. I would like to welcome participants on the conference call and webcast. Copies of slides used in the presentation today are available on our website at heinz.com. Joining me this morning are William R. Johnson, Chairman, President and CEO, Art Winkleblack, EVP and CFO and Ed McMenamin, SVP Finance and Corporate controller. Before Bill starts with his prepared remarks, I referred you to the forward-looking statements currently displayed on our website.

To summarize, during our presentation we may make predictive statements about our business, they are intended to clarify results for your understanding. We ask you to refer to our May 3rd 2006 Form-10K which lists some of the factors that could cause actual results to differ materially from those in our predictions. Heinz undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by Securities Laws.

We may also use non-GAAP financial measures in our presentations as the company believes that such measures is allowed for consistent period-to-period comparison of the business. The most directly comparable GAAP financial measures and reconciliations of these non-GAAP measures are available on the company’s earnings release. I will now turn it over to Bill Johnson. Bill.

William Johnson - Chairman, President, and CEO

Thank you Jack. Good morning ladies and gentlemen. The purpose of today’s call is to briefly review you with our first quarter results and update you on our progress since our June 1st meeting. I will start with a few brief comments and then turn it over to Art to take you through the details of the quarter.

Overall, I am very pleased with our exceptional first quarter results. We made progress in virtually every area of the company starting with volume growth of 5.1% which is well ahead of our full year target. Importantly, every reporting segment contributed to this performance. Net sales rose 8.4% versus last year’s reported sales. They increased 11.1% versus Pro forma results again well ahead of our full year targets. Operating income increased 10.5% and importantly gross profit and operating margins improved versus last year despite oppressive increases in commodity cost which Art will detail.

Finally EPS grew 23.4%. Our 10 key brands posted particularly good results, with aggregate top line growth of 10.7% led by double-digit increases in six brands; ABC, Smart Ones, Classico, Plasmon, T.G.I Friday’s and Delimex. Importantly, all 10 brands showed growth versus last year and we continued to hold powerful share positions on these brands.

Encouragingly, we saw improvement in market shares virtually everywhere, except U.S. retail ketchup, which declined as we expected and as we advised it would in September, given our plan reduction and promotion spending and higher net pricing as a result. This was part of our initiative to upsize an increased profitability in the category.

Finally, the first quarter results also confirm our progress in simplifying and focusing the company. As our three core categories, ketchup condiments and sauces, meals and snacks, and infant feeding generated almost 96% of Heinz as total sales in the quarter. The management team remains engaged and energized and is executing well against our strategy of concentrating on core brands reducing cost and driving shareholder value.

As a reminder our mission as it has been for many years, is to become a premier global food company by engaging the hearts and minds of our employees and by delighting our customers and consumers with innovative and superior products and packaging. We’ve numerous examples in innovation in the first quarter including the launch of Fridge Fit ketchup, which during its first few months in the market has contributed to a 50% increase in large size ketchup sales in the U.S.

As outlined last September and discussed in more detail on June 1st, we have a three-part strategy for sustainable growth that built incrementally on our progress for the last four years. As a reminder, our strategy is to reduce cost to improve margins, grow the core portfolio, and generate and deploy cash to deliver superior shareholder return.

We continue successfully to reduce cost and improve productivity with particular emphasis on three areas, SG&A, trade spending, and the supply chain, all of which showed progress in the first quarter. Overall, as Art will detail, we realized approximately 170 basis points of productivity improvements in the first quarter.

We drew continued improvements in deals and allowances in the quarter as well and are clearly on our path to delivering our aggressive full year target. We made particular progress in the U.S. and the Asia Pacific. Behind our strategy of first analyzing the impact of D&A spend and then systematically working to reduce or maximize its efficiencies and returns.

The supply chain continues to benefit from intense scrutiny. We made great progress in our plan to further rationalize our manufacturing footprint. We divested or eliminated six facilities during the quarter including three in North America, one in Europe, one in Africa, and one in Asia, with a pending agreement on a seventh facility, which we expect to complete in the second quarter.

We are still aiming to exit 15 facilities by the end of the fiscal year with all costs absorbed in our fiscal 2007 P&L. Exiting these plans will further enhance productivity and drive significant cost savings.

One final comment on cost during the quarter; our results were even more impressive when you consider that we offset approximately $50 million of manufacturing and distribution related commodity cost headwinds in Q1. This is equivalent to approximately 240 basis points of margin delusion. We expect continued cost pressures we progressed through the fiscal year but believe we have the plans in place to address it.

Growing the core portfolio was integral to our strategy. In June we indicated that we would focus on growing what we own through further products and packaging innovation and increase investment in R&D and marketing, which is exactly what occurred in the first quarter.

We are on track to introduce over 100 new products this year with many of them being developed at the Global Innovation Center in Pittsburg. During the quarter, we increased marketing by over 20% with much of it directed behind new product activity and new advertising campaigns for U.S. ketchup, Classico, and U.K. ketchup.

I am definitely pleased with the growth of the Australian soup business for volume was up almost 20% in the quarter. That business continues to demonstrate the benefits of combining excellent innovation with efficient but highly targeted marketing.

Finally a comment on our emerging markets. Our first quarter results in the RICIP markets, Russia, India, China, Indonesia, and Poland were outstanding with sales growth of 31% and profit growth of 54%. These markets accounted for more than 8% of the company’s sales in the quarter.

These strong first quarter results have us on a clear path to achieve our full year double-digit sales and profit growth targets for the RICIP markets. And obviously these results have reinforced our enthusiasm for the potential of these high-growth businesses.

The third leg of our plan is to leverage our proven ability to drive cash flow to enhance shareholder value. Between fiscal years 2002 and fiscal year 2006, we improved our cash conversion cycle by 36 days. And we saw a further nine-day improvement in CCC in the first quarter. We believe the 47 days of CCC is an all time best for Heinz.

In terms of cash deployment, we repurchased approximately $1.9 million shares during the quarter and increased the dividend by almost 17%. We’ve now reduced total outstanding shares by 4% versus last year.

Summarizing, I would characterize our operating results in the quarter as very encouraging, particularly in the light of the significant commodity inflation and additional marketing investments we made during the quarter.

We see no reason to adjust our full year outlook at this point and continue to believe that we are tracking well against the full year goals we outlined for you on June 1. As a reminder, these targets included sales growth of 3% to 4% versus 2006 Pro forma sales, and around 1% growth versus last year’s reported sales. And keep in mind that we are also comparing to a 53-week year last year.

Again we targeted a gross margin of approximately 38%, operating margin of approximately 16.5% and EPS of $2.35. Lastly, before I turn the meeting over to Art I want to say a few words about the proxy contest.

We do not expect final results from the Board to be certified by IBS Associates until the middle of September, as I stated on August 16th at our annual shareholder meeting. Until the results are certified there is no point speculating on the outcome. Whatever the outcome, management will work constructively to deliver our plan going forward.

On a related subject the governors committee and the Board of Directors are proceedings with plans that two new highly qualified directors to the board. We obviously can not comment on the names being considered and will not be in a position to make any announcement until well after the proxy results are certified.

Regardless, the management team remains engaged and enthused about our plan and our prospects and is focused on delivering our June 1st commitments. With that let me turn it over to Art to take you through the details of the first quarter.

Art Winkleblack - EVP, CFO

Thanks Bill and good morning everyone. I will take you through our financial results for Q1 and a brief update on our outlook for the full year. As Bill indicated we are up to a very strong start and believe that we are on track to deliver the targets we outlined for the fiscal year.

First let’s take a look at EPS results. For the quarter, we delivered reported EPS of $0.58 and importantly we entered no special charges. Thus organics and reported results for this quarter are the same. When comparing the last year however as you will recall, we had both discontinued operations and special charges to deal with. For full disclosure we’ve laid out last year’s numbers from three different perspectives. Anyway you look at it, we posted very strong results.

On a total company basis including a discontinued European sea food and New Zealand poultry operations, EPS is up 29%. For continuing operations only EPS is up 45% and for continuing operations excluding special items in prior year EPS is up 23% all very good.

I will use continuing operations excluding special items as the benchmark comparison for last year during the rest for this discussion. As a reminder, special charges in Q1 last year totaled about $32 million and consisted of reorganization charges for targeted workforce reductions and strategic review cost related to our portfolio realignment.

Now turning to our scorecard, you can see that we improved performance on virtually every metric during the quarter. Net sales exceeded last year by about 8.5% driven largely by strong volume increases. Smart Ones, Classico, Plasmon in Italy and ABC in Indonesia all generated strong growth in the quarter. And importantly volume was up in each of our operating segments.

Inline with our strategy trade spending as a percentage growth sales declined 40 basis points to 17.3%. This has been accomplished by reducing spending on less efficient promotions and by realignment of some less prices.

At the same time consumer marketing expense increased by 22% or 40 basis points of revenue as we invested behind our key brands. Gross margin improved 40 basis points to 37.5%. The increases due primarily to increase volume, higher pricing, productivity improvements and higher margin acquisitions partially offset by increased fuel and commodity costs.

Operating income exceeded last year by 10.5%. This increase was primarily driven by strong sales growth and improved gross margins that have been effectively leveraged through a solid SG&A management. Capital expenditures of $39 million were $8 million less than last year and 1.9% of sales.

Our first quarter cash conversion cycle reached 47 days of very strong improvement of 9 days versus last year. Approximately three days of this improvement reflect our better business mix which now excludes European sea food and Tegel poultry and six days relate to further efficiencies in working capital management in our core operations.

Operating free cash flow was $33 million for the quarter and includes the tax payment of approximately $45 million related to the sea food transaction last year, and cash payments were approximately 35 million for some of last year’s restructuring costs.

Net debt increased by only about 6% to $4.1 billion, a very good result in light of the one billion of acquisitions and more than $800 million in share repurchases we made last year.

Consistent with our plan annualized after tax or ROIC was 15.1%, a prior year comparative reflects the impact of HP foods acquisitions in the second quarter of last year. We believe we are on track to deliver our ROIC goal of 15.5% for the year. Now let’s take a look at the income statement.

The shape of the P&L was extremely strong for the quarter, boosting of following growth rates -- volume of 5%, sales of 8%, gross profit of 10%, operating income of almost 11%, net income of 19% and organic EPS of 23%. I will go deeper on sales, gross margin and SG&A in a minute, but there are few other items to know before we leave the P&L.

First net interest cost and other expenses below operating income are up $15million, this primarily reflects $8 million from higher interest rates with the average rate increasing from 5.4% last year to 6% this year, and higher maneuvered interest cost.

Second the company’s tax rate dropped to 20.3% from 28.3% last year. This decrease is primarily attributable to the revaluation of assets and a foreign subsidiary during the first quarter. This revaluation benefits both this year and next with about one half of the total benefit reflected in the first quarter. This tax planning initiative is part of our plan to deliver an effective tax rate of approximately 30% for the fiscal year.

And lastly you will note that fully diluted shares outstanding are down about 4% reflecting the use of our strong cash flow to buyback more than $800 million in company’s stock last year.

As this next slide depicts all components of our net sales change contributed favorably to the 8.4% increase in sales. The increase was led by strong volume mix of 5.1%, net acquisitions of 1.4%, foreign exchange gains of 1.1% and net price of 0.9%. We’re particularly pleased to generated net price growth of driving such strong volume.

The favorable volume results led by north American consumer products and U.S. food service along with our businesses in Australia, Italy and in the emerging markets of India, China, Indonesia and Poland. Net acquisitions reflect last year’s deals on HP foods and Nancy’s appetizers in Q2 and Kebabs in Q4, partially offset by a number of non-core divestitures.

Turning to net sales performance by division, every segment delivered increased sales this quarter. The leader among this segment was North American consumer products where sales were up double-digit at 13% with volume and acquisitions each contributing more than four points of growth. We are very pleased for the strong momentum that Dave Moran and his team are maintaining.

Sales in Asia Pacific segment grew 12%, volumes for the segment was up about 13.5% driven by strong growth in Australia, New Zealand, Indonesia and China reflecting new product introductions and affective marketing. Positive net pricing in the segment of 1.3% partially offset the negative impact of foreign exchange as the New Zealand dollars weaken year-over-year.

Europe sales grew about 7% driven by the HP acquisition and organic volume growth of 2.2%. The volume increase was mainly due to increased marketing activity on Italian baby food as well as broad based growth in Heinz ketchup and strong growth in Poland. These increases were partially offset by volume decline in the U.K. largely reflecting reduced promotional activity on soup. Divestitures reduced sales in Europe by about 5% partially offset by a three point gain in foreign exchange.

U.S. food service sales increased by about 4% primarily related to a volume increase of 5%. Gains were led by single serve condiments, Heinz ketchup and frozen soup. Well the divestiture of several low margin product lines of reduced overall sales growth, their elimination will improve focus on the more profitable portions of the food service business. In the rest of the world segment sales were flat. As volume growth of almost 6% and net pricing of approximately 7% was offset by the impact of the prior year divestitures and a weakening of the Indian rupee.

Our gross sales -- our gross profit increased by 40 basis points to 37.5% despite some significant input cost increases. As you can see net pricing contributed 50 basis points to gross margin growth, driven mainly by increases in U.S. consumer products, Indonesia and Latin America.

Input inflation in cost of sales is estimated to be around $45 million for the quarter, reducing gross margin by 210 basis points. Heavy cost increases were incurred in sweeteners, packaging, vegetable products, energy and other commodities. Sweeteners alone increased approximately $10 million largely reflecting significant escalation of fructose cost in the U.S. Underlying many of these increases were average oil prices of $72 per barrel for the quarter versus our plan expectations around $65 a barrel.

Offsetting a portion of this increase was a 170 basis points of productivity and volume leverage led by our continued efforts on strategic sourcing, expansion of our Six Sigma process improvements and consolidation of production activities.

Finally, given the acquisition of some high margin businesses and the divestiture of relatively lower margin businesses; mix contributed positive three basis points to gross margin. As we look forward to the balance of the year, we expect full year commodity cost to be somewhat higher than originally planned, with a confront we have these potentially higher costs covered in out profit outlook.

Now let’s take a look at SG&A, excluding marketing expenses our SG&A cost were 18.6% of sales in the quarter at a down more than 20 basis points from 18.8% in Q1 last year. We made good progress in the quarter and reducing S&D despite of significant increase in fuel cost.

Within the G&A and R&D functions cost remained flat at 8.8% of sale. We drove strong productivity in this area led by the significant reduction of head count last year, offset by the cost associated with the proxy contest, increased R&D spending and higher incentive compensation accruals including cost related to the adoption on FAS123R.

During the profit each of our operating segments contributed positively to the company’s growth and operating income. North American consumer products succeeded last year by 14% driven by increased volume, higher pricing and the benefit of the acquisitions. These increases were partially offset by higher commodity cost and increased R&D and marketing activity related to product innovation and equity building on our key brands.

Europe’s results were up about 12% from last year primarily as the result of the HP acquisition, higher volume and G&A reductions. Asia Pacific segment’s operating income was up 27% resulting from strong volume higher pricing and G&A reductions.

The strong profit growth was led by Australia, China, and Indonesia. OI in U.S. food service increased by more than 6% largely due to the Kabobs acquisition, solid organic volume growth and cost savings projects which were partially offset by the impact of higher fuel and commodity cost.

Profit in our rest of world segment increased for the quarter, but was more than offset by cost incurred at world head quarters related to the proxy context and increased FAS123R and other incentive compensation accruals.

Quick operating working capital was down significantly versus last year. In addition cash conversion cycle declined to 47 days, a 9 day reduction from last year. DII was down 7 days and DSO was down 3 days, while DPO was flat. Again we estimated that two thirds of the improvement in the CCC reflects better efficiency in our core operations with the remainder related to improved business mix following our non-core divestitures last year. Net-debt increased modestly to $4.1 billion due to last year’s HP acquisition, that puts our latest 12 month’s net-debt EBITDA ratio at about 2.5 times.

Operating free cash flow was $33 million as I mentioned as expected we paid out $45 million in taxes during the quarter related to the last year’s gain on the sale of the European Sea food business and $35 million related to special item cost accrued in the forth quarter last year.

Moment in other working capital was $92 million unfavorable to last year. In addition to the payments related to last year’s special items this reflects the timing of payments of accrued interest with holding taxes and other items. Capital expenditures were slightly less than 2% of sales reflecting favorable timing. We still anticipate that full year CAPEX spending will be between 2.5% and 3% of sales.

Also you can see that we are doing a good job of monotizing unproductive assets, which brought in 24 million during the quarter and selling off a few remaining very small non-core businesses which generated $10 million in cash.

With regard to share repurchases we largely kept our powder dry in first quarter. Repurchases were limited to roughly $85 million which was inline with our cash proceeds from the exercise to stock options. We still anticipate buying back $1 billion in stock over the next two years.

Looking forward as you recall from June 1 our P&L expectations for this fiscal year in food sales were approximately $8.7 billion and operating margin around 16.5% and EPS of $2.35. Importantly, we anticipate incurring no charges for special items, so reported earnings will equal organic earnings.

Our other two primary financial goals are operating free cash flow of $800 million and an after tax ROIC of 15.5%. I am pleased to say that we believe that we are on track to deliver these goals. Thus far, sales are ahead of expectations and while fuel and commodity costs are somewhat higher than plan, foreign exchange rates provided a modest offset. Operating profit, EPS, cash flow, and ROIC are all inline with our plan.

Again, I will reiterate that we do not give quarterly guidance, but a couple of items should be noted as we look forward. Year-over-year operating income comparisons will be a bit variable as the course progress given the timing of FAS123R expenses this year. And last year’s HP acquisition and the divestiture of a number of businesses that did not qualify for discontinued operations.

Also, as I’ve mentioned before the income tax rate will continue to be bumpy from quarter-to-quarter. Net-to-net we are off to a great start for the year and we are very confident in our ability to deliver our commitments with our now highly focused portfolio, stronger team, and better systems. That’s said I would like to open up the questions.

Question-and-Answer Session

Operator

At this time I would like to remind everyone if you would like to ask a question please press “*star” then the number “one” on your telephone keypad. We will pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Terry Bivens with Bear Stearns.

Terry Bivens - Bear Stearns

Good morning everyone.

William Johnson

Good morning.

Terry Bivens - Bear Stearns

Just a question on food service; it would appear that if you take away Kebob food service, profits would have been what flattish to down a bit?

William Johnson

No, food service profits would have been up Terry. Kebabs are a very tiny little business. And the only reason we mentioned in this is because we acquired it last year. But if you notice our mix was good on food service. We had strong captured sales and strong portion control sales.

Terry Bivens - Bear Stearns

Well, the concern there would be Bill, as you know, the restaurant sector seems to be coming under some pressure. Are you feeling pretty good about food service as you go into the year and would you think if restaurant sales continue to kind of go the way they are going that that might pose any risk to your overall plan?

William Johnson

Well, I think there are a couple of things in that regard Terry. Fundamentally, our business, our sales are good in food service, and that’s, you know, shown by the strength in ketchup in the first quarter, which reflects the shift back to QSR may be away from fast casual. And you know that benefits us in terms of ketchup and in terms of single serve. Frankly, the issue that food service faces, if there is an issue at all, is the issue that Art raised which is commodity cost, particularly fructose and then oil in terms of transportation and the impact it could have on restaurant trade. Right now, we feel relatively sanguine about where food service is for the year. We have to work to cover the commodity cost, but the business itself is in pretty good shape. You know, the management changes we’ve over there have worked to our benefit, and I think Jeff Berger and Mike Hsu are working very well together to drive this business. So you know, I’m not overly concerned. Now oil, I’ve said this before, if oil goes to $85, $90 a barrel, then I will have concerns. The traffic in QSRs at least the QSRs we are doing business is not been that bad. It’s fast casual that we think is really suffering.

Terry Bivens - Bear Stearns

Okay, and then just one more thing. I know you have been able to get some pricing there. Do you feel that, you know, in the event commodities do go up a little further than budget that you would have opportunity to take some more pricing or do you feel you may be kind of, you know, at the end of the chain there?

William Johnson

No, you know, I think right now, we’re counting on about 100 basis points of pricing for the rest of the year. You saw we got 90 basis points in the first quarter. And that will come to us in the form of both D&A reduction where we’re making great progress and in terms of less pricing. Depending on how my commodities go for the rest of the year, we are going to continue to evaluate further opportunities to price around all of our businesses, and we’ll take those opportunities as they arrive in the context of understanding their impact on the business.

Terry Bivens - Bear Stearns

Okay. Thank you very much.

Operator

The next question comes from Christine McCracken with Cleveland Research.

Christine McCracken - Cleveland Research

Good morning.

William Johnson

Good morning.

Art Winkleblack

Hi Christine.

Christine McCracken - Cleveland Research

I just wanted to go into a little bit more detail on the commodity cost outlook only because I wasn’t aware of the big movement of fructose in the last quarter or so. Can you talk about how you might, you know, price that or source that; if it’s changed at all over the years; and just relative I guess to your other commodities, how much disability do you have around some of these inputs? Is it kind of a quarter by quarter kind of outlook or is it a six months outlook that gives you some confidence in your ability to forecast prices?

William Johnson

No, we -- you know, we have a full year outlook and then it changes quarter to quarter based upon certain variables. Clearly oil is having an impact in terms of cost packaging, but it’s also an impact in terms of fructose, because corn is being shifted to the production of ethanol which is increased by the cost on fructose. Fructose hit us first, as Art said, about $10 million in the quarter. Having said that, ketchup because of the mixed shift in the quarter and some of the other actions we took, price on ketchup in the U.S. was up well beyond the rate of inflation. So that pretty much offset that thus far.

Now, fructose, you know, is a key ingredient, and we continue to look for alternatives although sugar costs are going up around the globe also. But we are well prepared for fructose, and I think it’s going to be a long-term issue that’s going to require some different thinking, and we’re looking at it hard. Remember, we shifted to fructose and ketchup in 1973. So we’ve been at it for 33 years, and we understand fairly well the implications of fructose.

The other commodity that hit us hard in the first quarter was potatoes, both in the U.S. and in Europe. Europe has not had a good crop, and so we’re dealing with potatoes. And those two things along with, you know, the other commodities, beans and other raw vegetables are areas we’re well versed on and well aware of. And where are set up domestically if it is required.

Recognizing, that as you price you make certain tradeoffs in terms of volume and or market share. We just need to understand what that may be. But we have very good visibility end of this, particularly you know in the U.S. as we, you know completed our systems investment several years ago. And now with SAP in the U.K. we probably have better visibility into this than we’ve had; certainly in the 24 years I’ve been here.

Art Winkleblack

So, you know, Christine we’re working both the pricing side of the equation as you see our volume and our sales are running ahead of plan as well. And we’re redoubling the efforts on the productivity side. So between those three levels we feel very good about our ability to offset the cross pressure that we’re seeing.

Christine McCracken - Cleveland Research

Do you have any ability to contract these prices for -- you know annually rather than keep yourself open for this kind of move? I would have assumed that your fructose cost should have been locked in you know some time ago.

Art Winkleblack

Yeah, but the fructose move is not new Christine. Fructose started about 6 or 7 months ago. And we do contract for virtually all of these things and including tomatoes and potatoes and so forth. Those contract prices change on a spot basis occasionally and you know there is either a 6-month lag or a 6-month pick-up on many of our contracts, certainly on packaging in (inaudible). But we do contract for a lot of this.

But I think all of you are overlooking as you tend to do the good side of this which is we got here with $50 million of commodity cost between manufacturing and distribution in the first quarter and still grew our margins 30 and 40 basis points. So we clearly were prepared for it and we clearly covered it and you know we contract when there are opportunities. We sourced alternatively when there are opportunities. And it’s you know -- it’s something we just deal with on an ongoing basis, but we were fully prepared for it. Otherwise, we wouldn’t have made the projections from this.

Jack Runkle

Christine if you recall the cost of commodities really went up throughout all of last year. So if you think about the overlaps in our -- on a quarter-by-quarter basis we expect a most difficult overlaps from our commodity cost endpoints to be the first and second quarters. And with a little less dramatic cost rise in the back half of the year. So if you want to think about it that’s good way to -- or a good prospect to the key.

Christine McCracken - Cleveland Research

That’s helpful. Thanks. Just one other question on Europe, because there was a change in management; the result seems to be stabilizing getting a little better there? I am wondering what kinds of things I guess are you working on right now, now that the themes kind of been in place for some time?

William Johnson

Well I think, across Europe, you got to look the Europe is really four segments. You know the eastern part of Europe with Poland and Russia developing markets and we’re really focusing on growth there. And our businesses certainly in Poland are doing well. And in Russia we continue to put management in place and continue to try to improve the brand strength of those businesses over there. And with the McDonald’s connection now on ketchup, which we started shipping at the end of the first quarter, beginning in the second quarter in Russia we feel good about Eastern Europe going forward.

In Italy, our Italian volume and our Italian business generally in the first quarter performed as we expected; volume was up approximately double-digit. And I think the management team has taken hold there. They have been in place now for almost a year. There is a lot of innovation going on over there. And I think, you know, the opportunity and that the thing we are working on in Italy is to get the pricing environment stabilized from a competitive standpoint, so that we can all make a lot more money.

I think in the continent our businesses are doing extremely well, particularly in Northern Europe despite of very aggressive pricing environment; business performed extremely well in the first quarter, both from the sales and profit standpoint. And then in the U.K., you know the U.K. was the one business we had in the corporation where volume generally was soft relative to the rest of the company.

The management team has been in place now for about a quarter and their focus is on a couple of things. One, getting the learning curve up to speed in terms of the utilization of SAP to improve the business. Secondly, really focused on driving innovation, which has been very much missing in the U.K. and across all of Europe over the last several years. And in continuing to improve that the capabilities of the management team we’ve greatly strengthened that team with addition of Suzanne Douglas, David Woodward, (inaudible), John Heinz and so forth and you now I am feeling better about the U.K. over the long term, but you’re going to see sequential improvement and sequential benefits on the U.K. going through this year.

And as I’ve said that to many of you; I think you’ll see the real pick-up starting in fiscal ’08 as we get the innovations in place and really get the marketing a chance to really work, having said that, our ketchup business in the U.K. continues to perform extremely well. But you will see a fair amount of activities this year borrowed from other companies. So, do I feel better about Europe? Yes, I think Europe generally is a tougher environment as I’ve been saying. And we continue to make great progress there. We have taken a number of costs out because of the elimination in the head quarters. And you know I feel we are making progress there.

Europe is still the area we have to keep a very close eye on. We are making progress and our management team upgrades are obviously taking hold and I think our leadership has improved significantly. So, I am feeling better about Europe, but I am certainly not sanguine about the environment in which we operate.

Art Winkleblack

You know the other thing that we are working on is you know is the further rollout of phase II with roll out of SAP. So we’ve got a lot of systems work ongoing there, that we’re excited about that over time we will generate a strong visibility in cost reductions for us.

Christine McCracken - Cleveland Research

Okay, thanks.

Operator

The next question comes from Chris Growe, with AG Edward.

Chris Growe - A.G. Edward

Hi, good morning.

William Johnson

Hi Chris.

Chris Growe - A.G. Edward

Hi, I just have a couple of questions for you, the first one, it kind of continue on the theme of Europe; I was curious by the comment on or the point that the pricing for that division was down a little bit in the quarter. So, I was surprised by if you were truly cutting back on your deals and allowances. Was that at work and therefore why was the pricing up in the year, I guess is the basic question?

William Johnson

Well I think the primary reason is Italy. You know we continued to have a very tough pricing environment in Italy, we made a decision, which I announced at the February or March call and then reinforced in June that we were not going to let market share be taken away from us. And we promoted very aggressively in the first quarter on Italy and that you know Italy given the pricing history in that business and given its impact in terms of overall for Europe, had a big impact in the first quarter. And so it was predominantly related to Italy.

We are -- we are still wrestling with the -- our whole situation in Northern Europe and while we have made great progress there. You won’t see most of that impact until the second half of this year, but you know I am not worried about the pricing environment long term in Europe again assuming Italy stabilizes from a competitive set.

Chris Growe - A.G. Edward

Is the deals and allowances declined that you’re hoping to implement mostly U.K. or kind of the continent versus say Italy?

William Johnson

No it’s across -- it’s across the whole business in Europe. And then I will remind you, you know we were at 17.7 last year, we are at 17.3 in the first quarter. Our goal for the year is 17.2 in terms of percentage of the company. So we made great progress. We just made more progress, continue progress in the U.S. and Asia Pacific than we did in Europe in the first quarter, but you will see pretty good progress across the business in Europe this year.

Jack Runkle

Primarily Chris in the second half, I would anticipate most of the improvement to be weighted that way.

Chris Growe - A.G. Edward

Okay -- and then my another question I have was on the tax rate and the question for you Art -- I guess we still expect a 30% tax rate for the year and there are still some savings coming through from the foreign tax credits what if they are. It would imply those for an ongoing rate closer to the mid 30s is that -- a suggestion going forward that it could be that your tax rate could get that high.

Art Winkleblack

The expectation ongoing rate, you know as we’ve said for ’08 is about 32%. So if you said 32% - 33% over the balance of the year that’s kind of the way math works. You know we continue to work on tax planning initiatives to see if we can beat that. And you know as and when those things come true we’ll certainly chat with you about it. But that’s our expectation at this point is the 30% tax rate for the -- full year.

Chris Growe - A.G. Edward

Okay. And my last question is relative to the cost savings. I think there was somewhere around $ 35 million if I heard that correctly in cost sales this quarter, you expect to about 225 million total for the year and there was also comments apparently of related -- at least the Board believes that your SG&A could be also a target for more aggressive cost cutting than perhaps what you would suggest to me and or like Nelson Peltz suggested. Is that going to help -- because we see this 225 that number grows through the year? Is SG&A still -- is it being targeted today from more aggressive cost cutting?

Art Winkleblack

No SG&A is about what we said it would be Chris. We are tracking right on what we said on June 1st. We continue to believe very strongly that the SG&A amount just don’t exist to the level that you know that Mr. Peltz suggested. And you know -- as you look at it we are at 18.6 right now. If you look at the variability of that of the U.S. versus Europe and the U.S. versus Asia Pacific for example there are significant differences.

But you got to remember the U.S. is one business, Europe is four businesses and you’re going to have some inefficiency in the SG&A, but we’re still number two or number three in terms of our peer group, in terms of SG&A spending. We made 20 basis points of cuts in S&P. We would have been down on the G&A and SG&A side. We’re not for the things we talked about, which are FAS123R costs, which I think is interesting, we covered FAS123R without a significant increase in SG&A and we took the cost for the proxy contest.

So, now we are sticking to our cost plans that we announced on June 1st, feel very good about delivering those. And I think, you know, if we have to do a little more, it would be more focused on the supply chain, really it’s an offset to commodity cost, but, you know we’ve been very clear it has not changed. I don’t know who are you referring to in terms of the board, but we have been very clear on SG&A that we would stick to the plan we articulated on June 1.

Chris Growe - A.G. Edward

Okay and just one more if I could ask is and that is it -- usually you have taken restructuring charges to close the facilities. Is there -- can you give me a rough amount of how much that would have been in the quarter for the facility closures?

Art Winkleblack

It’s not significant.

Chris Growe - A.G. Edward

Okay.

William Johnson

We’ve – you know the things that we closed, you know, many of those charges were taken appropriately accrued for last year and so minimal charges this quarter for that.

Chris Growe - A.G. Edward

Okay, that’s great. Thank you.

Operator

You next question comes from David Driscoll with Citigroup.

David Driscoll - Citigroup

Good morning everyone.

Art Winkleblack

Good morning David.

David Driscoll - Citigroup

Art in your prepared comments, you mentioned and I wrote it down here that organic EPS was up 23%. Embedded in that organic EPS though is this tax issue? Can you explain what it is, because I guess from my seat over here it seems to me that, that would not be something that we would typically call organic. I would call that as, you know, it’s not an item that would really be reoccurring year after year after year. If that’s not correct, can you kind of explain why it would be?

Art Winkleblack

Now, well, Chris I guess – David sorry yeah, it’s even…

David Driscoll - Citigroup

We’re all the same.

Art Winkleblack

Even if you exclude the change in tax rate quarter-over-quarter we’d still had double-digits EPS growth, I think we would have been at 52 cents which would have exceeded you know our expectations that were set, you know couple of months ago. So, you know, it’s strong anyway you look at it whether without the tax benefit, but we are very pleased with the tax planning efforts that we’ve been successful at so far and hope to continue to be. I might ask Ed McMenamin to just come in a little further on the mechanics of this particular tax planning initiative.

Ed McMenamin

Well, I think the key issue here is that there were always new tax planning initiatives, you know they’re never the same. We’re constantly looking for them and trying to rejuvenate those ones out there. So I would say that although specifically they may not be organic, it’s a constantly renewal process we’re out looking for ways to reduce our tax rate.

William Johnson

Yeah, I think David two other things. One (inaudible) with the 30% of sales rate we’ve talked about for the year that takes us to the $2.35. We’ve been very clear on that since June the 1st. I think secondly, you can’t ignore 10% gross profit growth; 10.5% operating income growth; 8.1% sales growth; 5.1% volume growth; and significant improvement in margins. And you also have to remember we took a $15 million hidden interest cost related to rate and related to some minority interest issues. So I think, you know, in that context it all works together. How you define it on a quarterly basis, it’s up to you guys, but its part of the process we use to get to the $2.35 for the year at around the 30% rate.

David Driscoll - Citigroup

Am I correct -- I think in your comments you said the revaluation of assets and I would like to know actually where the assets were and what the revaluation was? But that revaluation, half of the benefits in fiscal ’07 and half of it in fiscal ’08, that implies that the total benefit is $70 million over the two-year period. Is that correct?

Art Winkleblack

Actually, that’s a little bit high. The benefit in the first quarter is about $25 million and over the whole time period closer to 50.

David Driscoll - Citigroup

What was -- go ahead about the assets. Just explain where was it and how much were these revaluations?

Art Winkleblack

It’s a step-up in tangible assets in foreign locations. The total step-up was about $243 million, which provides about a $50 million benefit over the next couple of years. It’s in a foreign location. I would rather not get into the specific comment.

Jack Runkle

We typically don’t comment on the specific jurisdictions.

David Driscoll - Citigroup

I am just trying to understand what this thing is and understand how to treat it, you know, Bill as you said, we’ll make that decision, but making that decision I need to know what the thing is. So on the marking side, Bill, you mentioned in your prepared comments that marketing spending was up during the quarter, when I -- there is a little bit of a funny line though in your Safe Harbor Provision on your actual financial release. You actually said something here that would cause your earnings not to meet your goals and “the ability to maintain sales growth while reducing spending on advertising, marketing and promotional programs.”

To sense the Safe Harbor provision actually indicating that you are going to reduce these things, yet in the quarter you stated the fact that marketing spending was up. What’s the right answer is? Marketing spending going to go up or is marketing spending going to go down?

William Johnson

Here the only goal that’s ever referred to the Safe Harbor Provision. That’s a bunch of legal stuff that we put in there and everybody, go look at our peers, all of us figure out every possible angle that could affect the annualized number and put it in the Safe Harbor just to give ourselves that legal out. One has nothing to do with the other, marketing was up 22%. We’ve said all along David, marketing spending will be up for the year. It will be up for the year.

David Driscoll - Citigroup

No worries I -- it’s just an odd -- (inaudible) me given all the other things, I believe…

Jack Runkle

…Well I am a (overlapping) by actually reach this thing.

Art Winkleblack

Our luck. I will spend some time with our legal rep -- we’ll take a look at it.

David Driscoll - Citigroup

One final question if I may on Smart Ones. I believe that’s been the strongest performing business you have in the U.S. Can you just talk a little bit more about how you’ve been generating that growth and in particular you mentioned that trade promotion spending I believe is been coming down in North America. Is it also coming down on Smart Ones or was that actually benefiting from the increased trade promotion. Just what’s going on in the Smart Ones?

Art Winkleblack

Better product, better package, more items, better distribution, better advertising, better everything. I mean it’s literally that simple. And you know the guy that put that plan together Mike Shew (phonetic) we moved over to food service that’s the beginning of our fiscal year. Smart Ones is just responding to great innovation, great marketing, superior products, better packaging and continued launch of new items and new distribution. I mean it’s just, it’s a great success and Boston Market was up equally. In fact I think Boston Market might have actually been up more for the quarter than Smart Ones.

David Driscoll - Citigroup

Was trade spending down on that product line?

Art Winkleblack

I don’t have the numbers right in front of me, but I can tell you the U.S. trade spend overall was down. So you know I suspect it was flat, if not down a bit. We are not -- you know if the implication is are you buying volume, the answer to that is an absolute no. It’s just better marketing.

William Johnson

You know David I don’t think promotion spending has been a big factor for Smart Ones.

David Driscoll - Citigroup

The growth is so large that obviously, you know you guys must understand the nature of the question. So it is - I appreciate you telling us exactly what you think is driving the business. Thank you.

William Johnson

Well but it’s been growing that way, David. You know the Smart Ones turnaround is not new. Ever since the low carbs thing stopped and we started launching new items and innovating Smart Ones was up 20% in the fourth quarter last year. In fact for the full year was up well in the double-digits across the full year. So, you know I think in that context we are just continuing the momentum we have on Smart Ones and on Boston Market.

It’s important to look at the context of whole category, plus you got to remember T.G.I Friday’s was way up and Delimex was up. Our frozen business in the U.S. is doing extremely well, driven by very solid marketing, innovation, new items, new distribution and then the kinds of things you wanted to do to sustain growth. Now what our peer companies are going to do in response to that will be interesting to see. So I assume you will ask them the same question you just ask us.

David Driscoll - Citigroup

But we have to do.

Jack Runkle

During the quarter net pricing on the (inaudible) business in the U.S. was up.

Art Winkleblack

So discounting is not a factor.

David Driscoll - Citigroup

Great. Thanks a lot everybody.

Art Winkleblack

Yes. Thank you.

Operator

Your next question comes from Ann Gurkin with Davenport?

Ann Gurkin - Davenport

Good morning.

Art Winkleblack

Good morning.

Ann Gurkin - Davenport

I just have a couple of questions. One can we just review trade spending outlooks for the year. It is expected to be down 90 basis points.

Art Winkleblack

I think that’s what I said in my presentation Ann that we would go from 18.1 to 17.2. We were 17.3 in the first quarter, feel very good about delivering that number I know a lot of you were skeptical about it. We are tracking well for that number. I feel very good about getting into the 17.1, 17.2, 17.3 range for the year.

Ann Gurkin - Davenport

Great, and then I don’t know if you could comment, but can you talk a little bit about the competitive environment on ketchup and frozen foods just in general. Are you seeing any changes from Conagra’s actions in these categories?

Art Winkleblack

Well I think you got to look at our volume results in the first quarter and I think you should ask them that question about us. You know I think we haven’t seen anything of substance she had, I think back to David’s question the thing I would be concerned about from them and others would be a huge wretch it up and deal spending and a huge increase in promotion spending.

But no nothing unusual, you know that what we’ve seen out of the ordinary and again given the success of our frozen business in Q1 and all of last year and continued momentum from innovation and new distribution and marketing. You know we’re going to continue to do what we’re going to continue to do. We’re going to be like Bobby Knight, we’re going to play our game and not worry about what everyone else is doing.

Ann Gurkin - Davenport

Right. Great thanks.

Operator

The next question comes from Eric Serotta with Merrill Lynch.

Eric Serotta - Merrill Lynch

Good morning.

William Johnson

Good morning Eric.

Art Winkleblack

Good morning.

Eric Serotta - Merrill Lynch

Could you go into the pricing dynamic in U.S. food Service a little bit? My understanding was you’ve taken several price increases over the past several years. Over the past year or two, your pricing was down somewhat in the quarter. It was up somewhat in the previous quarter. Could you just provide some color as to why the pricing was down?

William Johnson

Yeah. You know I think we’re responding selectively to competitive pressure and not you know doing what we think we will. We’re using the levels that we feel appropriate to optimize profitability. So you know in certain cases you’ll see that the net pricing off a little of other cases you’ll see it up and I think it varies also by product category. So I don’t know anything else.

Art Winkleblack

Well I think you know you’re seeing some mixed impact in terms of ketchup sizes and so forth. You know we are not overly concerned right now with the pricing environment on food service. Again I think, you know that will be dictated to us by what happens to food traffic.

Eric Serotta - Merrill Lynch

Okay. And moving up to overall sale for the company, as you pointed out the first quarter was well above your target for the year, you didn’t raise your full year sales growth target. And just giving the math of it implies that pretty dramatic slowdown for the balance of the year. Could you discuss some of those factors that would drive that?

William Johnson

Well as the biggest factor is 53 weeks versus 52 weeks. Remember last year was a 53-week year. So in the fourth quarter we’re going to come up against very difficult comps in terms of volume and sales. I think the second is; you know this is still the first quarter and we’ve been asked a lot about why we haven’t taken the numbers up. And I think it’s just simply too early. You know we’re four months into the year, what we’re projecting on top of a 53-week year last year is consistent what we’ve always projected, which is 1% and 2% volume, 1% price and 1% from acquisitions to get to 3-4%. And we just don’t see any reason at this time to change that.

I certainly believe that the momentum we have in the first quarter will continue through some of these businesses. And again we need to see Europe across the year to really determine where we are and we need to understand food traffic that’s actually Terry Bivens question on food service across the year.

But it is just too early, but right now our businesses are performing very well. And that’s generally across the board, but again you have an extra week last year that has an impact on the year. So we just feel that’s too early. But I don’t know that I would read anything into that other than, you know we’ll come back to it at the end of the second quarter and let you know where we are.

Eric Serotta - Merrill Lynch

And the impact of the extra week, I know it’s very significant for the fourth quarter probably around 7%, that’s only about 2% for the year or so on sale. So there is still a big gap between your first quarter performance and your full year targets?

Art Winkleblack

But the other thing you got to remember we have divestitures coming out of last year’s business. So you know if you look at what we said would be up one, you know about 1% versus the reported numbers last year and about 3% to 4% versus the Pro forma numbers last year and we continue to make some divestures, small business divestures this year. We just don’t -- we’re not breaking them up separately. But again, you know, I think everyone’s looking to read into that. So…

Jack Runkle

Yeah, I think the other thing to remember Eric is the timing of the HP acquisition last year. We acquired that in the second quarter. So --

Eric Serotta - Merrill Lynch

Okay.

Art Winkleblack

So we over lapsed not having that in the first quarter, but that ends in the second quarter. But remember our 5.1% volume growth that we had in the first quarter does not include HP. So, you know we feel very good about our momentum, but as Bill says, I think it’s just a bit early to start taking numbers and change them up for full year.

Eric Serotta - Merrill Lynch

Well that’s very helpful. I asked for just overlooking the additional quarter of HP this year. Thanks a lot.

Art Winkleblack

Yeah. Thank you.

Operator

The next question comes from David Parmer with UBS.

David Parmer - UBS

Good morning.

Art Winkleblack

Good morning Dave.

David Parmer - UBS

Good morning. Are the canal conditions in California going to cause a significant increase in tomato cost? I know that lot of the tomatoes pastes -- tomatoes are harvested out there, and I think the crop is due in the fall. Any comment on that? Is that going to be an issue for the next year?

Art Winkleblack

Well, on the first place, the crop is coming in as we speak. It is not necessarily due in the fall. We will process later into the year than we historically do. But because we out source tomato paste, we have an option to procure extra paste as part of a contract price which we set up at the beginning of the year. So we are covered for the year, feel good about where we are on tomatoes. Paste cost will go up.

Inventories coming into this year were low. The crop was projected to be about 11 million tons. Looks like it’s going to be somewhere around 10 million, maybe softer than that, and -- but that’s our processing is going fine and so we’re just going to process late. I think the only risk to the crop is if we have to process into October and you get frost or rain in late September, which is more of an issue than the drought is an issue. But right now, tomato costs are going to be higher than last year, but they are built into our numbers.

David Parmer - UBS

You know just a clarification on some of the comments that have been made on food service. And I just want to get a sense of the magnitude. You know it seems like from what you are saying some accounts are improving like a Wendy’s for instance. And the magnitude of that improvement maybe overwhelming the, you know, what you see, something like a 2-3 percentage point deceleration in the industry growth.

Is that kind of the -- is that the characterization? Is that how -- is that the sort of magnitude you are thinking about or trying to describe to us there, or is there something more specific about your own execution where you’re maybe getting some account wins, maybe doing somethings with packaging or else, you know that you can maybe describe that you are doing there in food service to help off at the industry growth?

William Johnson

Well, on the first place, we are not seeing a pick-up in Wendy’s. Our Wendy’s business is still relatively soft. But we are seeing more foot trap. We are seeing better results in QSR versus fast casual. And given our ketchup business and our single serving portion control business particularly at PPI, which had a very good first quarter, we are more dependent on that business on quick serve.

Now over the years, we have been working to improve our capabilities and penetration with Truesoups and things like Panera bread and so forth, which continues to perform relatively well for us. But right now, the business is just performing fairly well. I mean our buying is good. Sales outlook is good; but again, you know, a lot of that’s going to be determined by oil prices, consumer confidence numbers, the other day, are things we are taking a look at.

But, you know, the mix of our business if you listen to Art’s comments, our business grew in three areas in the first quarter, forcing control, ketchup, and in soup. And we think soup continues to be an opportunity as we expand distribution and so forth. Our appetizers business is doing very well.

We are seeing a bifurcation in the industry where we are seeing a decent QSR performance, and decent up performance in terms of premium, and where sauce so far has been predominantly in the middle for over the years, we have been less well developed in say some of our peers or some of our QSR business. So it’s just a function of a shift and mix.

And right now, you know, I think we are feeling relatively good about food service. Again, as I said earlier, our biggest concern on food service are commodity costs and whether oil spikes back up into the $75, $80, $85 range at which point, you know, I think confidence will take a pounding, and I think eating out will be here. But right now, we don’t forecast that.

David Parmer - UBS

One last question, you know, many investors have noted that the quarter’s improvement seems to be coinciding with this proxy battle, and they are concerned about the sustainability. In other words, they are wondering if the company has done anything to make the results look good and perhaps at the expense of future quarters. That’s probably that the outset in the room.

And when we look at some measures like, you know, that perhaps would give us a sign of earnings’ quality, the marketing spend, accounts receivables, it doesn’t seem to be, you know, an issue there, but perhaps you can kind of offer a comment in general about why we are seeing this improvement now and if there’s any reasons why there might be a giveback in future quarters in any respect?

Art Winkleblack

Four years of hard work, four years of sweat, four years of taking beatings in the market, four years of questions and four years of divestitures and streamlining this business, simplifying the portfolio, getting it focused on the three-core categories which now represent 96%, continued improve management capabilities. Continued systems upgrades, I mean it’s just, you know, it’s a reflection of a lot of the activity. Now, I am not saying that we are going to have the first quarter every quarter, because every quarter is different. And in the second quarter you know we faced heavier FAS123R cost and some other issues.

But I think in the context of the business the overall business is performing well and I think again all of the -- Europe probably the last four years has performed well and we (inaudible) fair amount of that with the performance in Europe and with the divestitures. So the first quarter reflects a lot of hard work over the last four years and the sustainability of that is going to be go back to the plan we announced on June 1st and our ability to deliver against the metrics which we feel very confident in. Some will surpass, some will probably fall shorter, but overall we’ll be right on those numbers. So, you know I think in that context the first quarter just reflects the hell of a lot of hard work over a long period of time.

William Johnson

You know David, I might add that every quarter and every month we spend a lot of time making absolutely sure that everything that’s done in the business is appropriate and as accounted for, you know fully and appropriately. So you know we feel very good about the numbers, you know for the quarter we feel very good about all the numbers every quarter and we work hard to ensure that.

David Parmer - UBS

Thank you very much.

Operator

Your next question comes from Alexia Howard with Bear Stearns.

Alexia Howard - Bear Stearns

Hello guys.

Art Winkleblack

Good morning Alexia.

Alexia Howard - Bear Stearns

Few really quick things -- we talked a little about the divestitures, I guess in the June first presentation you were saying that from fiscal ’06 down to the Pro forma planning to get rid about $250 million to $260 million in sales. How much more of that is that to come through the remainder of the year? It seems as there were some of that have been done in the first quarter.

Art Winkleblack

Yeah, it’s small. There is a little bit to come, but it’s not material Alexia.

Alexia Howard - Bear Stearns

Great! Then second one -- coming back to media spending quickly, am I right on thinking that again going back to the June first presentation I think for the full year you are planning marketing spend going up by about 18.7%. I thought it will be a little higher than that so that the marketing piece of that has been up by 22% in the first quarter. Does that mean more -- it should be up side still into double-digits, but somewhat less than it was in the first quarter for the remainder of the year?

William Johnson

We are projecting marketing spending to be up about $50 million for the year as we said on June 1st. We continue to sit on that number, was up about 12.5 million to 13 million in the first quarter. So we are tracking right against that on a quarterly basis. If you assume all quarters are equal, which they are obviously not. We continue to believe marketing spending will be up in the 17%-18% range around $50 million, yes.

Alexia Howard - Bear Stearns

Okay, great. And then finally on the deals and allowances it sounds as though you are planning to have net pricing going up by about I think with the 100 basis points for the full year. It seems that your plan deals and allowance reduction is a similar amount. Does that mean that you are going to allow the deals and allowance reductions into straight through the net selling price, you are not planning to do anything with gross selling price just in the deal for the trade if you like?

Art Winkleblack

It depends on the business Alexia. In the U.K. we will do it differently than we did in the U.S. where we are doing it differently than we are doing in Asia Pacific. So it’s just going to depend on the business. You know as many of our peers are now discovering pricing has been an enormous weapon for us over the last few years as we have gotten our price points right; improved our products greatly innovated against those products and the combination of all that creates value, or what David Moran is always talking about is the consumer products model for value creation.

And it will just vary by market, but right now again, you know, we do think we’ll end up somewhere between 90 and 100 basis points of price for the year, again depending on a commodity outlook that number could change. We’ll get 90 basis points out of deals and allowances. Some of that will go to price; most of that would go to price, but some may go some other places. So it’s just going to depend on how the business is structured and how we go about doing it.

Alexia Howard - Bear Stearns

Okay great, thank you very much.

Operator

The next question comes from (inaudible).

Question

Good morning. I just have some of the qualitative questions. If you have a normalized tax rate in this quarter, you would have made about $0.49 and by reckoning you made $0.51 from operations as far back as 2004. I just wonder how you can really say that this is an outstanding quarter when you look at the results for normalized tax basis.

Art Winkleblack

Well I mean, it looks as I mentioned at the start. Though you look at it anyway, anyway you want. I think these numbers are very strong. If you take a look at volume growth of over 5%, sales growth of over 8% and operating income growth of 10.5%. You know what I take that any day of the week.

Question

You know that’s because you keep restating the base downward, you know reporting gains of lower basis. In that way, have you made any progress for four years?

Art Winkleblack

I think that’s unfair. Bill I think the reality is that you know we have divested a number of non-core business as we have gotten smaller to get better has been part of the strategy. We’ve talked about that for -- frankly for four years now. That divestiture process is now complete, and we’re looking to grow going forward and growing what we own. We think we’re off to a good start in the first quarter and now we’re looking to, you know, continue the momentum as we go forward.

Question

Okay, it’s just my comment. Thanks.

Operator

Once again, if you would like to ask a question, please press “star” “one” on your telephone keypad. Your next question comes from Edgar Roesch with Banc Of America Securities.

Edgar Roesch - Banc Of America

Hi. Good morning.

Art Winkleblack

Good morning Ed.

Edgar Roesch - Banc Of America

At the annual meeting you mentioned about $12 million to $13 million, spent some proxy barrels. I was wondering if most of that fell in the fiscal first quarter.

Art Winkleblack

Yeah, yeah, did about $11 million in Q1.

Edgar Roesch - Banc Of America

Okay. (inaudible) and still had 7.5% yearly growth. Second one, Smart Ones is expanding into some different, you know, meal occasions, snacks, things like that. I’m wondering if retailers are recognizing, you know, those expansions and giving some more space to that category in general.

Art Winkleblack

Well, I think Ed it’s perceptive. We’ve clearly picked up a lot of business and targets as they to expand it in the freezers. Our business in Wal-Mart is doing extremely well. You know, we’ve launched into a bigger way into desserts. We’re now going into lunches. We’re looking at several ethnic varieties. We’ve launched some Mexican and some Hispanic and some Mexican and some Asian businesses. And we just continue to build up that portfolio. And you know I think the other thing that’s really helped us in Smart Ones is as we’ve always felt we were undeveloped at retail and under penetrated, and we’ve had a major concerted effort to improve that distribution and availability over the last couple of years.

And the Smart Ones momentum is the factor over the last five quarters. You know, I think it’s interesting on some of the comments today. You know consumer products have said now had nine consecutive quarters of volume and sales growth which is pretty impressive in the U.S. market. And anyway you will look at it, it’s our business in the U.S. continues to perform very, very well. So you know I think it reflects a lot of things, enormous innovation and better products. And yes, I do think that retailers have recognized that and I think they recognized that Smart Ones, particularly as it pertains to health and wellness is a very viable proposition that they need on their shelf. And I think it’s done well.

Edgar Roesch - Banc Of America

Thank you and then one last question. You have the strategy of trading up a promoted ketchup squeeze of larger sizes and I think you are getting better pricing out of that. Do you feel comfortable with the participation by retailers and you know and bind into your promotion, getting the place when you want in the stores…

Art Winkleblack

Yeah. It actually has I think surprised us on the upside. We have one retailer who has been difficult -- obviously I am not going to name that retailer, that we have worked through and I think it now addressed. But fundamentally everyone jumped on this as a real opportunity to upgrade their profitability of the category and to improve their overall returns. And we are very enthused about our large size sales which increased about 50% in the first quarter, and believe this strategy is working well, which you didn’t see in the first quarter was only $0.99, 24 ounce ketchup. And you know clearly that has been a bit of a culture shock, but most of the retailers will buy that now. And we feel very encouraged about where we are.

Edgar Roesch - Banc Of America

Very good. Thanks for your help.

William Johnson

Thank you Ed.

Operator

Ladies and gentlemen we have reached the end of the allotted time for questions and answers. I will now turn the call back over to Mr. Johnson for any closing remarks.

William Johnson

Thank you for your participation in today’s webcast. As you heard this morning we are completely focused on driving value and growth. The new fiscal year is off to a great start under any measure and under any metric aligned with our June 1st plans. And we are producing the results we anticipated. Finally, thank you for your continued interest in Heinz and the strategy and our plans to become the world’s premier food company. Thanks very much.

Operator

Thank you for participating in today’s H. J. Heinz Company Fiscal year 2007 First Quarter Earnings Release Conference Call. This call will be available for replay, beginning at 11 a.m. Eastern Time today through 11:59 p.m. Eastern Standard Time, Thursday September 7th 2006. The conference ID number for the replay is 3335239; again the conference ID number for the replay is 3335239. The number to dial for the replay is 1800-6421687 or 706-6459291. This concludes the conference call you may now disconnect.

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Source: H.J. Heinz F1Q07 (Qtr End 8/2/06) Earnings Call Transcript (HNZ)