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HJ Heinz Co (NYSE:HNZ)

F1Q08 (Qtr End 8/1/07) Earnings Call

August 24, 2007, 08:30 AM ET

Executives

Margaret R. Nollen - VP, IR

Arthur B. Winkleblack - CFO and EVP

Edward J. McMenamin - Sr. VP, Finance

Analysts

Alexia Howard - Sanford Bernstein & Co.

Eric Katzman - Deutsche Bank

David Driscoll - Citigroup Investment Research

Eric Serotta - Merrill Lynch

Terry Bivens - Bear Sterns

Ann Gurkin - Davenport & Company

Christopher Growe - A. G. Edwards & Sons, Inc.

Pablo Zuanic - J. P. Morgan

Edgar Roesch - Banc of America Securities

Presentation

Operator

Good morning. My name is Cynthia and I will be your conference operator today. At this time, I would like to welcome everyone to H. J. Heinz Company Fiscal Year 2007 First Quarter Earnings Release Conference Call. This call is being recorded at the request of H. J. Heinz Company. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions].

I would now like to turn the call over to Meg Nollen, Vice President, Investor Relations. Mr. Nollen, you may begin your conference.

Margaret R. Nollen - Vice President, Investor Relations

Thank you Cynthia and good morning everyone. I am Meg Nollen as you mentioned VP of Investor Relations for Heinz, and I want to welcome you this call.

Copies of the slides used in today's presentation are currently available on our website at heinz.com. Joining me on today’s call are Arth Winkleblack, EVP and CFO and Ed McMenamin, SVP of Finance and Corporate Controller.

Before I being with our prepared remarks, I would like to refer you the forward-looking statements that is currently displayed, which also available on this morning’s earning release and in our 10-K dated May 2, 2007 on file with the SEC. To summarize, during our presentation, we may make predictive statements about our business that are intended to clarify results for your understanding. We ask you to refer to our May 2, 2007 Form 10-K, 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 statements, whether as a result of new information, future events or otherwise, except as required by securities law.

We may also use non-GAAP financial measures in our presentation as the Company believes such measures allow for consistent period-to-period comparison of the business. The most directly comparable GAAP financial measures and reconciliation to these non-GAAP measures are available in the company's earnings release today.

I would now like to turn call over to Arth Winkleblack, Executive Vice President and Chief Financial Officer. Arth?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Thank you, Meg and good morning everyone. We appreciate you joining in us on a Friday morning and late August. We felt that today was better than any day of next week. This morning we are here to confirm the results that we preannouncement August 15 and update you on the progress we made on our superior value and growth plan.

Overall we had another great quarter and we are off to a very strong start for the fiscal year. The quarter was lead by a terrific performance in the Asia Pacific businesses and accelerating turnaround in Europe and continuing momentum in North American consumer products. These excellent results more than offset lower profitability in U. S. Food Service, which was down was in line with our expectations.

Company’s highlights for the quarter were 9% top line growth driven by strong organic sales increases. Operating income, up 15% even after double-digit increases in our marketing investments and EPS higher by 9% despite a significant increase in the year-over-year tax rate. Net-net we are after a strong start for the year.

Our results for this quarter represent the continuation of strong momentum that began a couple of years ago. In terms of organic sales growth, which is simply the combination of volume and net pricing, we generated positive growth every quarter over the last nine quarters after adjusting for the noise of the extra week in the fourth quarter of fiscal 2006. And we have generated five quarters in a row of organic growth exceeding the 4% target risk established for the Company this year. We believe this strengthening sales momentum reflects our more focused portfolio as well as increased investment in our people and product and in marketing and R&D.

As you can see we have increased our consumer marketing spending at a double-digit rate import over the last five quarters. We have a similar momentum from an operating income standpoint, again after normalizing for the 53-week, we now posted eight consecutive quarters of strong operating profit growth going back to fiscal 2006. And that despite significant commodity cost headwinds and substantial increases in consumer marketing. This is a fifth quarter in row where we haven’t had any special charges and as a result our results are much simpler to understand.

Now stepping back for just a minute to provide some context, as you recall fiscal ’06 was a year where we divested a number of businesses and focused on our three core categories in key geographies. At that time we developed strong momentum in the remaining three core businesses. We communicated this superior value and growth plans about 15 years ago to build on that momentum. This plan has three key pillars, grow the corporate portfolio, reduce cost to drive margins and generate cash to deliver superior value. You remember that we set very aggressive operating targets for fiscal ’07 in each of these three strategic pillars and we delivered on those targets, leading or exceeding virtually all of our operating and financial goals despite a very challenging cost environment and one less selling week in the prior year.

As we look to the second year of the business plan, we have again set aggressive operating targets. To fiscal 2008 our growth generally include double-digit increases in consumer marketing and R&D and calls for another year double-digit sales growth in the emerging markets. In terms of margins, we again expect to drive down trade spending and are targeting significant productivity gains on the supply chain and in our distribution and administrative areas. This include excellent five more plans as we continue to simply the company. And in terms of cash, we are looking to again drive strong results based on profit growth and continued reduction in the cash conversion cycle. We planned to share this cash for our shareholders to 500 million of shares repurchases and through our annual dividend, it’s up about 9% from prior year.

As you can see our first quarter operating results are right on track, in every case our Q1 results were ahead over the full year target. Emerging market sales grew 15%. We heavily invested behind the brands around the globe, trade spending came down significantly as we drilled net price and cash at high commodity inflation and we mange through some supply constrains related to our strong growth rate.

Our SG&A performance was excellent as we discus this later we were seeing administrative savings around the globe. We then improved our cash conversion cycle despite some additional inventories we prepared for additional capacity to come on line.

Operating free cash flow for the quarter was below last year that was in line with our internal plan. Remember due to tough seasonality the first quarter is always lower in terms of cash flow and we have 25% of our full year spending target for share repurchases in the first quarter.

Now we go to full year, we increased our targets for fiscal’08 at our May 31 Investor Conference versus the original targets and a superior value and growth plans. To the strength that we are seeing in the first quarter and our strong plans for the balance of the year, we believe that we are well-positioned to achieve the higher outlook that we announced from August 15. We now expect sales to be above 9.5 billion for the year and that will be at the upper end of our 254 to 260 EPS range. Just stay tuned to account the difficult commodity environment the industry facing from the fact that we have a number of new initiatives in which we are going to invest over the balance of the year.

I would like to go a bit deeper on the progress we are making on each of our strategic pillars starting with growing the core portfolio. Over the fast few years we worked hard to streamline the portfolio down the three core categories, which now represent 96% of total sales.

Our portfolio mix is more than 40% Ketchup and sauces, 40% meals and snacks and more than 10% in infant nutrition leaving only about 4% remaining outside of our core. We are very pleased that all three core categories are demonstrating strong growth and tracking at or above our overall target even after excluding the impact of foreign exchange. Within these core categories the organization has strongly focused on our top 15 brands. Each brand holds strong market position, represented approximately 70% of total sales in the quarter and grew above the Company average at 11%. Pudliszki in Poland, Smart Ones in the U. S. and Heinz around the globe led our growth.

The other key to success… the other key to our success is our very strong international business. Remember that with the exception of Wrigley’s, Heinz is the most global U. S. based food company, with 60% of our total sales generated outside of the U. S. Overall, international sales growth was a very strong 14% with organic sales growing at 7%. These results were led by the emerging markets of India, China, and Poland.

Essential to our growth is in the Company’s ability to hit the suite spot with a great taste, convenience, and health converge. This is an important lens through which we gaze our innovation initiatives. Within our innovation framework, our growing success of new product development is primary attributable to the priority we have placed on better understanding our consumers. We fully expect our management team to be experts on the consumers in their respective markets. Based on our improved consumer insight, we are introducing over 200 new product ideas around the globe this year.

Health and wellness is a clear strategic opportunity for Heinz, particularly given our global expertise in tomato base products, nutrient rich beans and infant nutrition. Heinz was a legacy as the pure food company is particularly well positioned to capitalize on the trend toward healthier reading. Through product such as our organic Classico pasta sauces, our expanding range of reduced calorie meal, soups and dessert under the Weight Watchers and the Smart Ones brands, our nutritious hi-fiber beans and our fortified infant nutrition products. We provide consumers with many healthy options that suit their taste and lifestyles.

Making existing products even more helpful is a key part of the strategy. For example, we have expanded our specialty ketchup range with no salt, organic and reduced sugar varieties. In Ore-Ida line will be free of trans fats by the end of this year and we are pushing our new health and wellness initiatives and specially infant nutrition where we have recently introduced the Plasmon Select natural brand in Italy and Omega 3 fortified infant foods in China.

We are applying the science of innovation in each of our core categories and our clear understanding of consumer behavior led to the development of top down ketchup bottle which we have now introduced successfully across the Heinz world not only on ketchup, but on many of our other great sauces as well, including most recently, HP.

Some other recent innovations in this category include the launch of Heinz Fridge Fit ketchup last fiscal year which is still driving year-over-year growth on our flagship brand in U. S. And we have recently introduced this in a club pack. The rollout of 100% all natural Pudliszki ketchup for kids in Poland which started shipping in July, the introduction of two great new Classico flavors earlier this calendar year, convenient and affordable new ABC soy sauce receivable pouches in Indonesia, and new adult ketchup flavors in U. K. where we have rolled out PK with a twist. The key to our innovation is that we are not straying from our core rather we are adding value to our products that consumers are willing to pay for it and it’s proving to be a successful formula.

Tuning to meals and snacks. We are very excited about our new great taste and convenient products in this category. Big Eats launched last fiscal year in Australia has driven terrific. As a result, we are now rolling it into the U. K. and range is selling so well we are already expanding capacity to keep up the demand. We have added microwavable soups in the U. K., Australia, New Zealand. And U. K. is launching a number of new varieties improving our Farmers market premium line which started shipping in July.

We have also added excitement to the beans category in U. K. with Heinz baked beans which HP sauce. And then in the second quarter, we are introducing Snap Pots, convenient microwavable plastic pots for our very popular Heinz beans into pasta foods.

As you know many consumers now prefer healthy, convenient, light meals and snacks sporadically throughout the day rather than the traditional breakfast, lunch and dinner. We have responded with a successful launch as Smart Ones, Anytime Selection quesadillas and calzones in the U. S. and the expansion of our Watties Toasties handheld pastry sandwiches in New Zealand.

Around the world in the nutrition categories growing at very robust rates, as busy moms turn to safe, healthy, and convenient prepared foods for their babies. In Italy, we have restaged our Toddler milk with new re-closable packaging renewed our wet line and supported with our new TV advertising campaign and launched three new flavors of our biscuits.

In China, where they are expected to be more than 20 million babies born this year, we are launching nationally our premium cereal line fortified for developmental benefits and a similarly position products in jars and mutlipacks.

In the U. K., we are re-launching mom zone recipe with 14 new product recipes, which in meat line utilizes winning customer recipes and features winning mom and baby on packaging and advertise. And in Canada, we have expanded our line adding fruit and vegetable combinations along with mini cereal bars and fruit bars for toddlers.

Turning to our emerging markets, Heinz is well ahead of our most American food companies with strong and profitable brands like Heinz and Long Fong in China, ABC in Indonesia, Complan and Glucon-D in India, Pudliszki in Poland and Heinz in Russia and Latin America. In China, Long Fong grew more than 20% this quarter as we continue to expand distribution points and support our brands with strong advertisings. In India, Complan further strengthen its momentum with more than 20% growth in the first quarter including a new popular strawberry flavor. And Glucon-D grew more than 45% in the quarter aided by the launch of the lemon lime flavor and the new advertising campaign. The progress in these markets represents a unique competitive advantage for Heinz and a key to future growth.

The importance of our emerging markets portfolio continues to increase. The Heinz emerging markets include the rick-up countries and Latin America. With 15% year-on-year growth in these markets during Q1. Emerging markets now represent 11% of total Company sales, up from 8% just a couple of years ago. With sales growth outpacing the Company average, emerging markets represents 17% of our total top line growth in the first quarter. Strategically, we feel very good about our emerging market's platform and our continuing to invest to drive additional profitable growth point forward. Underlying our growth around the world, as the continuing increase in our consumer market and investment. As I mentioned earlier, our consumer marketing spending dramatically ramped up in fiscal '07 and is continuing into fiscal '08.

Focusing per minute on the first quarter, you can see that we have increased first quarter marketing at a compound annual rate of 24% over the last two years, up $31 million increase over Q1 of FY ’06. At the same time, we have increased operating income at a nearly 13% compound annual growth rate over last two years and successfully lapped a very strong Q1 profit last year.

I will tell you briefly the second strategic imitative of reducing cost to drive margins. Toward the operating margin structure for the first quarter this year compared to last year’s first quarter. Ed will take you through the details in a couple of minutes, but we are very pleased that our operating margin improved 80 basis points in the quarter despite very significant commodity cost inflation and 50 basis points increase in consumer marketing. The improvement was driven by reduction of G&A cost across the Company. Even though, the cost of sales was up slightly as a percent of sales, we continue to generate strong productivity in supply chain now totaling approximately 210 million over the last five quarters.

Clearly, we are witnessing some of the worst commodity inflation in many, many years for prospect that the Company offset approximately 180 million of inflation last fiscal year through the rising cost ingredients in packaging and inflation will be even higher in fiscal ’08. We now expect commodity inflation to be approximately 5.5% across the Company this year, mainly driven by dairy, sweetener, oil packaging and tomatoes. We are seeing positive net pricing and productivity offset these cost headwinds. Productivity initiatives include our supply chain task force and new internal procurement academy, newer ways to reduction teams and improved systems. Going forward, however, given this unprecedented commodity environment like others in our industry, we will continue to take price increases around the world the way we expect to.

Finally, let’s turn to our third strategic pillar, generating cash to deliver superior value. As you know, we put a great deal of focus on cash flow and have been one of the leaders in our industry in this regard. Over the last five years, Heinz’s operating free cash growth as a percentage of sales has averaged 10.5% versus the peer group average of 7.7%. For reference the peer group is the S&P packaged food group excluding pricing and bean foods. So, we have developed a strong track record of effectively generating cash growth for our shareholders and basically recapitalize the Company out of its working capital. We have had our cash converging cycle almost in half, dropping for more than 90 days in 2002 to less than 50 in 2007. We now have about $1 billion less working capital than in fiscal ’02.

At this point, we feel good about our CCC which is significantly better than the average of our peer group and there is further opportunity that we are pursuing an inventory over time. We know that our owners want to share our cash flow with them. The last three fiscal years, we have returned more than $3 billion to shareholders to annual dividends and share repurchases and this year we are continuing that effort. Through the first quarter, we have exited with 25% of our full year target for share repurchases reducing fully diluted shares outstanding by nearly 3%. Importantly, we have returned a significant amount of cash to shareholders through our annual dividend. Using our stock price at the end of the first quarter, our dividend yield was a very healthy 3.5%, almost 100 basis points ahead of our peer group average. In the past 15 months, we have increased the dividend by 27%.

Okay. With that, I would like to turn it over to Ed to provide further specifics on the financial performance for the quarter. Ed?

Edward J. McMenamin - Senior Vice President, Finance

Thanks, Art and good morning everyone. As I go through the results for Q1, I think you will appreciate a strong performance this quarter, as well as the improved clarity with our special items in either period. First, let me start by taking a look at our P&L scorecard. We can see that building on a very strong quarter last year, we have significantly improved our performance on virtually every metric during the quarter. Net sales exceeded last year by over 9%, led by the growth in our top 15 brands, which were 11% inline with our focus on reducing trade spending as a percentage of gross sales, we have cut spending by 160 basis points to 15.8% this quarter.

This has been accomplished by reducing spending on less efficient promotions and by realignment of some coolest, some list prices. In response to commodity costs and capacity constraints in some areas, we pulled back on promotions this quarter. So, although, we will continue to make progress on reducing trade spending going forward, we are targeting around a 30 basis points annual improvement. We continued our investment in consumer marketing, which increased by 25% or 50 basis points as a percentage of revenue. Operating income exceeded last year by almost 15%, primarily driven by strong sales growth and tight SG&A management. EPS at $0.63 was up almost 9% as operating income growth and fewer shares outstanding more than compensated for a higher tax rate.

Now let’s take a deeper look at the income statement. As you saw on the scorecard, the P&L was extremely strong this quarter. Touching on several of the lines that weren’t on the scorecard, you can see that gross profit increased 9%. SG&A was virtually flat despite the strong top line growth and net income was up 6%.

I will go deeper on each of the major lines that comprise operating income in the next few slides, but I would like to cover the activity below operating income here. Net interest and other expenses were up $11 million, primarily resulting from a higher interest cost due to our share repurchase activity since last July. We know that diluted shares outstanding are down almost 3%, distorting the progress against our goal of $1 billion in cumulative share repurchases for fiscal years 2007 and 2008. The Company’s effective tax rate increased to 26.6% from 20.3% last year.

And I will take a minute to provide some background on taxes. As you may recall, last year benefited from the revaluation of assets in one of our foreign subsidiaries, resulting in a particularly lower effective rate for the quarter and contributing to a 29.6% rate for the full year. In the first quarter of this year, the U. K. reduced its statutory tax rate from 30% to 28%. Reduction takes effective in April 2008. However, the impact of this future rate reduction on net deferred tax liabilities is recognized in full in Q1. This is the primary reason why we were able to deliver a 26.6% effective tax rate for the quarter relative to our annual guidance of 31% to 32%.

Although, U.K. rate reduction will benefit us long-term, the adjustments in deferred taxes this quarter is far more pronounced than the long-term impact on our effective tax rate. We remain confident in our 31% to 32% estimate for the year and would expect the rates for the balance of the year to be slightly above that range.

Now let’s take a deeper look at sales. The first quarter delivered outstanding organic sales growth of 5.3%. I might add this is on top of 6% organic growth in Q1 of last year. The increase was led by strong volume of 2.5%, price of 2.8% or foreign exchange added 6%, and net divestitures reduced sales by 0.7%. In order to aid your understanding of the sale drivers, we have added a table in the press release showing these changes by segment. We are pleased that we have generated a balance of strong volume and strong pricing. The consumer volume was led by a particularly strong performance by Heinz ketchup, beans and soup in Europe and supported by continued solid results in North American consumer products, Australia, New Zealand and the RICIP markets.

Notably, the RICIP markets produced 11% volume growth in the quarter. These increases were partially offset by volume declines in the U. S. food service segment. Global pricing was realized across all the segments and each of the major business units. U.S. food service in Europe in particular achieved pricing above the corporate average. The continued commodity trends will result in our increased focus on higher net price realization through that higher risk prices and more effective deal spending.

Turning to net sales by segment, every segment delivered organic sales growth. Please note, that we achieved our segment reporting to reclassify our business from India, from the Rest of World to the Asia-Pacific segment reflecting organizational changes. We have adjusted last year for consistency and we also be providing last years quarterly sales and profits for India in the 10-Q to be filed later today. Our larger segment is Europe where sales grew by almost 12%. Organic growth offered 6% with volume contributing 2.4% and pricing 3.4%. The volume increase was mainly due to outstanding performance in the Heinz brand across Europe as well as the Pudliszki brand in Poland. The price increase was largely due to Heinz ketchup, salad, cream, beans and soup in the U. K. Foreign exchange added 8%, while a number of small divestitures reduced sales in Europe by about 2%.

North American consumer product sales were up a very strong 8%, led by a 3.3% volume improvement primarily in Heinz ketchup and Smart Ones. Additionally consumer products realized almost 2% in prices this quarter helping to offset the commodity costs. Asia-Pacific had a great quarter, with sales up 18%. Volume for the segment was up about 6%, driven by strong growth in Australia, New Zealand, India and China. Positive net pricing in the segment of 1.2% was led by India and Indonesia. Topping of these increases was our 11% increase from foreign exchange. U.S. food service organic sales grew up half a point, a favorable net pricing of 3.2% was partially offset by a 2.7% volume decline.

Overall, sales for the segment were down almost 1% through the divestiture of low margin product lines which reduced sales by 1.3%. The volume declines were primarily due to non-branded single sauces condiments and tomato products, while Heinz ketchup delivered volume growth during the quarter. And in the rest of world segment, sales were up 9%, as a 6% increase in volume and a 9% increase in price could partially offset by a 7% decline from divestitures.

As indicated earlier, gross profit was up 9%, but our gross profit margin increased slightly to 37.3% as we experienced significant input cost increases. As you can see, broad base pricing contributed 170 basis points to gross margin. Commodity and other inflation reduced gross margin by 350 basis points this quarter. Virtually, all of our key ingredients were up with substantial increases in dairy and oils, up over 20%, while sweeteners were up over 10%, offsetting a portion of these headwinds was 120 basis points of productivity improvements. Art discussed a number of these initiatives earlier in his speech.

As I refer to the balance of the year, we expect commodity costs to be higher than originally planned, and we are confident that we have covered those in our profit outlook through continued pricing and productivity as well as strong volume.

Now let’s take a look at SG&A. Excluding marketing expenses, our SG&A cost was 17.1% of sales. That’s down 150 basis points from Q1 of last year. Excluding the impact of last years commodity costs, SG&A has slowed down 4 percentage points with Selling and Distribution benefiting from our network optimization project in the U. S. and traditional G&A down with reduced headcount.

Turning to operating income, North American consumer products grew by over 6%, due primarily to strong organic sales growth, partially offset by escalating commodity costs. It’s worth noting that this profit growth is on top of nearly 15% operating income growth for CP in last year’s first quarter. Europe’s results were up 16% from last year, primarily due to strong organic sales growth, reduced G&A and the favorable impact of foreign exchange, while overcoming increased commodity costs and increased marketing investments. Adjusting for foreign exchange and divestitures Europe’s profits are still up about 10%. The U. K. and Italy in particular delivered strong operating performance, while our businesses in Continental Europe primarily the Netherlands and Germany have experienced strong commodity cost headwinds and are expected to further increase prices this year to offset these market-wide cost increases.

The Asia-Pacific segments operating income is up a very impressive 50%, resulting from solid performance from all business units and outstanding improvement in Australia and India. Although, FX aided these segments results, operating income would have nearly 35% on a constant currency basis. In line with our expectations, operating income in U. S. Foodservice decreased by around 20%, largely due to increased commodity and supply chain costs along with the volume declines in PPI, I discussed earlier. We expect the full year results to be slightly down for Foodservice as we further integrated with the consumer products business, but we do expect that the year-on-year comparisons will improve in the balance of the year. We also grew the non-operating segment also delivered improved results for this quarter. Now let’s move to the balance sheet score card.

Capital expenditures of $58 million, the 2.6% of sales, up 70 basis points from the prior year. This increase is in line with the expectations and reflects capacity related spending in support of future growth and ongoing investment in better systems. Our full year projections for capital spending remain just over 3% of sales. Our first quarter cash conversion cycle, reached an all time level 34 days, a further improvement of three days from last year. Operating free cash flow is below last year and I’ll take you through an overview of cash flow a bit later. Net debt increased to $4.5 billion, this increase is in line with our plans as we completed over $625 million in share repurchases since this time last year, lower than the total increase in net debt.

Consistent with our plan, RICIP was 15.9%, which is up 80 basis points primarily due to improved profitability. The change in accounting for pensions has helped RICIP slide up 40 basis points to-date, and we will estimate approximately 100 basis points for the full year. As a result, we’ve increased our RICIP target to 17% from our original 16%. As our quick operating working capital is up as a result of our strong growth, we continue to reduce our cash conversion cycle. The three day reduction in CTC was driven by data outstanding down two days, comparable to favorable five days offset by a three day increase in inventory. As I mentioned earlier, operating free cash flow was below last year, POWC was unfavorable to last year by $32 million, which is less than the incremental investment in inventory.

These and other items were $12 million unfavorable to last year as a result of the $30 million increase in tax payments. I touched on capital expenditures earlier, but I will point out that last year received $24 million for plant disposals while there were no proceeds this year.. The $24 million spending for acquisitions net of divestitures reflects the current quarter acquisition of Cottee's and Rose's in Australia, partially offset by the proceeds from a small divestiture in Portugal. And finally, EBIT Heinz reflects the 8.6% increase we announced in June. Overall, we are extremely pleased with our performance again this quarter. Our increased investment in consumer marketing and R&D are continuing to drive strong top line growth. In addition, our focus on tight cost control and productivity improvements are enabling us to more than compensate for the commodity headwinds that are industry is facing.

With that, I’ll turn it back to Arthur to update you on our full year outlook.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Thanks Ed. Now let’s wrap up with the outlook for the year and a few final comments before we open it for questions. As I mentioned, we have raised our sights for the full year and now anticipate sales to grow at least 6% to 7% versus our original 4% target. Operating income growth at the upper end of the 7% to 9% growth range we provided in May. EPS growth projected at the upper end of our 254, 260 range, representing growth of 8% to 9%. As part of this we still expect the tax rate to be between 31% and 32%. And finally, we forecast operating free cash flow to be around $825 million, with higher capital spending for capacity related projects and systems investments along with higher inventory in advance of additional capacity coming online. Importantly we feel very good about our prospects for the year, despite commodity cost inflation is significantly higher than originally planned. We also have a number of terrific new product ideas and capability building projects that we are planning to invest in to sustain our momentum for the long-term.

And just to summarize, we are after a great start for the year with our key operating and financial methods tracking well. We are confident in our full year outlook for both the top line and the bottom line. We are going to continue to aggressively launch and support consumer relevant innovation and will press hard on net pricing and productivity to offset the very difficult commodity environment. And lastly, we are committed to investing in the business in order to sustain long-term momentum.

With that, let’s open it up to your questions.

Question and Answer

Operator

[Operator Instructions]. We will pause for just a moment to compile the Q&A roaster. Your first question comes from the Alexia Howard with Sanford Bernstein.

Alexia Howard - Sanford Bernstein & Co.

Hello guys.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Hello, Alexia.

Alexia Howard - Sanford Bernstein & Co.

Good morning. Couple of quick questions. I noticed that… I mean Europe seems to be coming pretty more strongly at the moment and I was wondering whether you could speak to the prices as far as and also what’s happening with the U. K. pricing environment? It seems to me that’s reading a lot about the U. K. retail is getting a little bit tougher on pricing again and also wonder on the sales demand whether you are seeing weather having an impact on the soups and sauces of this business out there?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes, good questions, Alexia. Overall Europe, we had some great top line growth in every major market, we had almost 6% organic growth. That was about 2.5% volume, pricing is about 3.5%, and that driven by the consumer marketing up about 40%, about half of the company increase, we’ve got strong new products as I mentioned. They were able to offset some tough commodity inflation. So, continued pricing is key to your point. G&A savings were very strong in Europe, so that’s certainly helped their results and really right now, the key is keeping up with demand from a supply standpoint. But in terms of the U. K. pricing, it is a difficult environment having said that, if you bring the innovation that consumers are willing to pay forward, we are finding that we are able to pass along appropriate price increases and its necessary given the commodity environment, I think you mentioned weather also, the weather did impact the sales in U. K. with soup benefiting from that, but on the flip side of it, our sauces business, you know was hurt by the weather as it came out. So net, net we are just very pleased with Europe and we believe that’s… that turnaround is setting and moving on.

Alexia Howard - Sanford Bernstein & Co.

All right. Thank you very much.

Operator

Your next question comes from Eric Katzman with Deutsche Bank.

Eric Katzman - Deutsche Bank

Hi, good morning everybody.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Hi, Eric.

Edward J. McMenamin - Senior Vice President, Finance

Good morning.

Eric Katzman - Deutsche Bank

I guess my question goes to first in North American segment, I think at the last Analyst meeting in New York, I kind of questioned Bill about the… I think it was like 9% to 10% kind of EBIT growth projection for North American consumer this year. You started out lower than that. What gives you confidence in this cost environment that you can still make what I thought was a fairly aggressive target to begin with?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes, Eric. We feel like we are on track in consumer products, the numbers came in right in line with our plan. We’ve got great volume momentum and a number of products, products like Smart Ones, Boston market continue to fire of the shows, Heinz, the Heinz brand had an exceptionally good quarter to strong top line results, clearly commodities are top headwinds then and more than what we had planned. Having said that, we are working hard on price increases and we are getting those through and they are sticking, I mean if you might recall Q1 of last year was one of the strongest that CP had, so this was probably our toughest overlap. So, that’s not to say it’s a lay down. But we feel very confident and we like the momentum or seeing in consumer products.

Eric Katzman - Deutsche Bank

Okay. It’s a fair point. And then I guess second you indicated that there is going to be five plant closures this year maybe you already did one in the quarter. Is there a like upfront cost that you absorbed in the quarter within the numbers? And how much would that be for the full year, or was it in the past restructuring?

Edward J. McMenamin - Senior Vice President, Finance

No. There is…

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

No, there is… Eric to that point there, there’s no material with one-time cost in there with fully covered any associated cost within the algorithm. So, we don’t expect anything significant going forward.

Eric Katzman - Deutsche Bank

Okay. And then my last question quickly, corporate expense, I guess why was it down so much and would you expect the number to be for the full year?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes, we… I think as I mentioned we had some proxy contest costs last in the first quarter that we obviously didn’t have this quarter, so that certainly helped. But even beyond that we have been trekking a very hard line on G&A expenses and you see that globally those G&A expenses were very favorable in the quarter. I wouldn’t expect them to continue to be as favorable as what we seen this quarter but we feel good about where we’re going for the full year.

Eric Katzman - Deutsche Bank

Okay. Very thanks.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes.

Margaret R. Nollen - Vice President, Investor Relations

And Eric I just want to throw away in… I was looking back, Dave's comment was 7% and 9% expected OI growth for the year not 9% to 10%.

Operator

Your next question comes from David Driscoll with Citi Investment Research.

David Driscoll - Citigroup Investment Research

Hi good morning.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Hi David.

David Driscoll - Citigroup Investment Research

Congratulations on the nice start to the year. My question would be in Europe, how much of the sales growth was driven by the reduced trade promotion in Europe? I think you said the overall number for the Company but I apologize I didn’t hear the European ones specifically.

Arthur B. Winkleblack - Chief Financial Officer, Executive Vice President

Yes we don’t typically talk too directly about each of the segments but the bulk of the reductions came out of Europe. So, that as you remember last year was more oriented toward reductions in the U. S. This year its much more about reducing trade spending in Europe and we are off to a head of a good start.

David Driscoll - Citigroup Investment Research

But would you expect that is where the bulk of these benefits will continue to come from, the trade reductions from Europe?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes for this fiscal year the bulk of those savings are coming out of Europe. So… but here again we wouldn’t anticipate that we will see that strong a reduction over the balance of the year. But as I mentioned we’re tracking well through our plan.

David Driscoll - Citigroup Investment Research

And then if I could pick this a little bit more because you have made a lot of comments on trade reduction and what the possibilities were in Europe. Can you just talk to us a little bit about the geographies and I am really trying to drive to the difference between the United Kingdom and your baby food base business and Italy. Was it… was the trade reduction… is it really due to one of those geographies and if so, which one?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

No, I think we saw very good reductions in the U. K. and Italy as I recall. So, good progress there. That’s probably the toughest market for us from that and I regard as continental Europe particularly Northern Europe. So, I think if you think about the savings primarily U. K. and primarily in Italy.

David Driscoll - Citigroup Investment Research

On the new product front, that’s’ also a big portion for the story for Europe, can you talk to me a little bit about the impact of new products on a quarterly pattern? Is there anything… is it even throughout the year. Was the first quarter, perhaps the most important one from the new product standpoint noted in your release? Then you talked a lot about the new soup offerings in the United Kingdom, can you give us a little bit of guidance here on… sometimes it hard to really understand. You a launching like a 100 new products I think in Europe over all. But its hard to understand precisely the… how the quarterly pattern might layout from a dollar perspective. Is one quarter much more important than another?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

No, not really I think as I recall across the Company, its pretty well level set across the business. Some you want to make sure that you want to get off early in the year if you got sorting the paper or something like that. But we have got very strong programs laid out for the second, third and fourth quarter. So, pretty much even I would think, David. And by the way congratulations to you.

David Driscoll - Citigroup Investment Research

Thank you very much I appreciate that. I have a few more fast questions for you if I might?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Okay.

David Driscoll - Citigroup Investment Research

First question is the marketing dollars, were they concentrated in any one particular geography? And then the second question is in your sales guidance what’s the embedded implication for foreign exchange within the sales guidance?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes, the marketing spending was up from across most of all of our segments that is we mentioned… primarily in Europe, I think about 50% increase was from Europe from a marketing standpoint. But all the other markets up as well. And you last question was?

David Driscoll - Citigroup Investment Research

Foreign exchange, what's the… given the sales guidance that the total number. Just give us a ballpark here. What’s your expectation for the benefit from that FX?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes, well we would expect FX to be around where it is now for the balance of the year. I think that’s roughly what we have forecast. I mean as I recall, let’s add it couple of points, 200 points or so to the sales forecast. Good news is that we are up on the organic business as well but and then getting a boost out of foreign exchange. Having said that, the boost form foreign exchange is dwarfed by the higher than planned commodity cost. So, it’s some external factors some dwarf and some minor.

David Driscoll - Citigroup Investment Research

Really appreciate the information guys. Great quarter. Thank you.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Thanks.

Margaret R. Nollen - Vice President, Investor Relations

For those of you that don’t know David just got back from his honeymoon so thanks for joining us David.

David Driscoll - Citigroup Investment Research

Just for you guys.

Operator

Your next question comes from Eric Serotta with Merrill Lynch.

Eric Serotta - Merrill Lynch

Good morning.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Hey Eric good morning.

Eric Serotta - Merrill Lynch

Couple of quick questions here. First you mentioned some supply constraints or capacity constraints earlier. Could you give us some idea about what categories those were in? And whether there is any change to your capital spending plan as the results exposed to high class problem to have. But could you give us some detail on that?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes, I mean given competitive reasons I probably won’t get specific. But as you are seeing, we are generating much stronger volume momentum through the business across all of our segments. So, with that momentum comes a different problem and the problem is keeping up with demand. So, again a high class problem. And so, what we are working to do is to make sure that we are ready to meet that demand in an umber of markets. In particular, in the U. S. and in Europe we have got some areas where we want to quickly get some capacity and plates. Our capital spending will be… I think we have mentioned all along… will be higher than it has been over the past few years. Having said that, I think the 3% to 3.5% guidance on capital spending is probably still about ripe. Spending against both capacity related capital and for continuing systems investment.

Eric Serotta - Merrill Lynch

Okay. And in another area, could you go into a little more detail about the competitive environment in the Italian infant feeding market? And I hate to kind of be the dead horse on this one it seems to come up on every call. But given the continued consolidation and the global infant feeding business, are you guys looking at that category any differently these days than you have been in the past?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes, good question. In terms of the competition and infant feeding, Numico with Mellon is obviously, a tough competitor in Italy. And we are appropriately battling back and forth on that. I think we have seen up until very recently some very, very aggressive promotional tactics on those parts. For a number of weeks, we have chosen not to match some of those very deep competitive price points. Choosing rather to compete on a consumer basis in terms of innovation and in terms of marketing. Having said that, if that kind of deep discounting continues, we will need to do. So, it’s a competitive environment, but hey everybody has got heavy competitors.

And in terms of nutrition in general, I mean just stepping back we are the number three player in baby food worldwide when it comes to food even after the recently announced deals. Infant nutrition is open of the fastest growing categories on the food industry on a global basis. We have got leading share positions and a bunch of markets around the world. So, we remain very excited and very committed to the baby food business. And frankly, we welcome the competition.

Eric Serotta - Merrill Lynch

Great. Well, good luck. Thank you.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Thanks.

Operator

Your next question comes from Terry Bivens with Bear Sterns.

Terry Bivens - Bear Sterns

Hi good everyone.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Hi good morning.

Terry Bivens - Bear Sterns

Two quick questions. Art, The gross margin I guess slipped a little bit. I was looking at the pricing, the volume is there, what would you say… how would you allocate kind of the head wind you saw in the gross margin sorted?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

As you said the gross margin was slightly lower than prior year. And I think as we look for the full year, I wouldn’t expect a lot of growth in gross profit margin. Given the commodity head wind, I can just do the math on commodity headwind versus pricing. As we price up the cover, that will change our gross margin expectation. But if you think about the commodity in our headwinds as Ed mentioned, dairy and oils up over 20%. Sweeteners were double digit, tomatoes, packaging, beans all very significant increases. So, commodity cost increase in first quarter are probably around $50 million. So, it’s a very sizeable impact for the quarter.

Terry Bivens - Bear Stearns

Okay. So that’s really the delta there, right?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes.

Terry Bivens - Bear Stearns

Overhead?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes, Yes. I mean to be quite honest, I think we have all over the past number of weeks as this year has gone on. We’ve seen much higher tomato inflation than originally anticipated. Good news is we have it fully factored and covered.

Terry Bivens - Bear Stearns

Okay. And one on Foodservice. I’d like to get just a little bit better idea of where the portion pack weakness is. We were checking with our restaurant guys, the Quick Service seemed to be doing pretty good. If you can give us a little bit more color on where that weak spot seems to be?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes. I think just stepping back from Foodservice. Our organic sales in the business were up about half points. Overall, we look pretty good at the top line. We had strong branded results and ketchup was up almost 9% as I recall. To your point, the softer results were really in PPI and some of our smaller subs. I mean that relates to more of the product label business and we pack for the mid scale family restaurants and the casual dining segments, and those segments of Foodservice are having a little tougher time than some of the other areas. QSRT your point is quite positive, but as we look at the profitability in Foodservice it’s really very heavy commodity costs that disproportionably hit us in Foodservice. They basically have the same dollar impact to commodity costs as did the consumer products business and as you recall consumer product is a lot bigger. So, Foodservice impacted by diary, oil and film, and we probably had our toughest cost overlap in the first quarter from a supply chain standpoint. So net, net Foodservice is about as we expected.

Terry Bivens - Bear Stearns

Over time do you think you could get out of some of those co-packing contracts or do you kind of need those to help recover overhead?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Well, I think we continue to look at the profitability of our skews and of our customers and we’ll make whatever decisions are required. You might recall over the past six months or so we have got out of few of those unprofitable customers. So, we are continuing to take a hard look at it. The other thing as I step back from, I am excited about the long-term outlook for Foodservice. We clearly have some work to do in that business as we integrate not only within Foodservice, some of the subs that were acquired over a number of years we still got some integration work to do there. And as we integrate under David Moran’s leadership between Foodservice and CP. But there’s some teething pains as we do that, but I think that will be an important project as we get more cost competitive in that arena.

Terry Bivens - Bear Stearns

Okay. Great, and Thanks a lot.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes.

Operator

Your next question comes from Ann Gurkin with Davenport.

Ann Gurkin - Davenport & Company

Good Morning.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Good Morning, Ann.

Ann Gurkin - Davenport & Company

We saw a nice pick up and growth for the top 15 brands. Can you come on the biggest driver? Is it increased support for this brand innovation?

Arthur B. Winkleblack - Chief Financial Officer, Executive Vice President

You know Ann, I think it’s all of the above. The answer is that we had some great innovation going on as I profiled. We’ve got some very strong, just, good strong sales executions, so good momentum in the business as we adopt greater talent. We have increased the marketing support across a number of our brands and keep continuing to do that. Ann, it’s all based again as I mentioned on better consumer insight. I think we’ve done much better job of really understanding the consumer, doing our homework, doing the analytics and then launching the right product and the right initiative and the right marketing, frankly behind those insights.

Ann Gurkin - Davenport & Company

And well marketing expense is going to be a double digit behind the brands in ’08?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes, as we mentioned for the full year it will be up, double digit.

Ann Gurkin - Davenport & Company

Okay. And then in terms of commodity cost I did not see meat listed. Is that because it’s not as much of a pressure as the others or we have you, a not realizing higher cost on that front. Can you comment on that?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes as I recall it’s up, but it just doesn’t make the radar screen in terms of one of those top six or seven items that are up. We’ve got so many different commodities that are up significantly but it is more impact but not huge.

Ann Gurkin - Davenport & Company

And will sweetener cost be up in the same magnitude they were up in ’07 versus ’06.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

So far, as I recall sweeteners were up. We’re looking at about 10% increase in sweeteners.

Edward J. McMenamin - Senior Vice President, Finance

Yes. I think that will hold for the full year.

Ann Gurkin - Davenport & Company

And you have taken an average of 2.8% in terms of price increases or are you going to need to increase prices in 2008.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

What was that?

Ann Gurkin - Davenport & Company

When you combine your commodity costs?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

We have taken price increases and we plan to take additional price increases in certain markets, its just absolutely critical to cover this kind of commodity inflation. So, its just part of the business equation.

Ann Gurkin - Davenport & Company

What’s the timing on some of those price increases

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

It will be throughout the year, there’s no specific timeframe that varies very much by market depending upon the customer and depending upon the country.

Ann Gurkin - Davenport & Company

Okay. That’s great. Thank you.

Operator

Your next question comes from Chris Growe with A. G. Edwards.

Christopher Growe - A. G. Edwards & Sons, Inc.

Good morning.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Hi Chris. Good morning.

Christopher Growe - A. G. Edwards & Sons, Inc.

Hi. Just had a couple of questions for you to follow up here. First one. It looks like in the first quarter trade spending generated essentially all of your pricing. I think you said it was down 160 basis points and prices were 138 plus point benefit in the quarter. Is that… I’m starting to get… Is that correct.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

It’s a portion of it Chris, you can’t completely directly correlate it, because in some cases we’re adjusting list prices, so you’ve got a lot of moving parts there. But it was clearly a significant portion of the pricing that we got.

Christopher Growe - A. G. Edwards & Sons, Inc.

It was well beyond what you expect for the year. is it…, as adjusting your full year offset, but is there… is there something like in the back half of the year that could have altered that reduction in trade spending.

Arthur B. Winkleblack - Chief Financial Officer, Executive Vice President

I think we will sort of reserve the right or the opportunity to go deep if certain competitors choose to go at us from a heavy discount standpoint. So we’re not going to count out any particular competitive approach that we have.

Christopher Growe - A. G. Edwards & Sons, Inc.

Understood. And the last question that I have, just on your operation cash flow. We have it at the… was below the year ago in the first quarter, and you have it at the lower end of your range, everything else is at the upper end of the range. Its been encouraging, but is there again is that a drag for working capital through the year maybe or what would be the kind of the main items dragging operating cash flow down.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes. I think clearly cash taxes were up, but we’re looking to make sure that we spend the right amount of capital to support the stronger growth at the top line and I think inventory will run a bit high if we expect that to feather down over the year. But the reality is, where there’s much growth as we have, where there’s much new product activity as we have. I am waiting for the capacity to come on line in certain cases we’re going to compensate by a little bit more inventory. So that… it will be a main focus for us through the year. But, we expect again to be so that the end, lower end of our range there around the 825 mark. But we got a good strong track record there and we got some work to do. But we’re up for it.

Christopher Growe - A. G. Edwards & Sons, Inc.

Okay. Great. Thank you.

Operator

Your next question comes from Pablo Zuanic with JP Morgan.

Pablo Zuanic - J. P. Morgan

Good morning, everyone.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Hello, Pablo.

Margaret Nollen - Vice President, Investor Relations

Good morning.

Pablo Zuanic - J. P. Morgan

A couple of questions, Arthur. First just can you walk us through what’s going on in the frozen dinner category. We’ve heard from ConAgra, they are launching also new product. Hence, clearly, I understand because you got more promotional from a price standpoint. Just describe the environment in that category. I mean are you seeing a more price competition than normal or less, are you seeing a bigger ramp up on innovation or… just more color there both on frozen dinners and frozen potatoes.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes. We’re extremely pleased with what’s going on in the frozen products. Smart Ones continues to have tremendous growth and there’s no hidden secret there. It is just about better quality and executing better. It’s good effective marketing and operating and executing on the basics. So, we’ve got some new products, we’ve got better quality, better tasting food. They are right down the sweet spot in terms of the healthy and convenient things that we talked about. So, Smart Ones is running well. Boston Market is running extremely well and we had a solid quarter on Ore-Ida. The big news on Ore-Ida there is that we’ll be out of trans fat by year end. Again just like every other category not easy, but, if we’re doing the right thing, we’re executing our game, we’re doing quite well.

Pablo Zuanic - J. P. Morgan

And just in terms of the space in the frozen aisle. When I look it seems that all the sales are coming from obviously more turnover. But are you garnering more space on the frozen aisle. I don’t see that going on or is it happening.

Edward J. McMenamin - Senior Vice President, Finance

I’m probably not the best to ask on that. I don’t recall any major gains in terms of footage, but I think what we’re doing is, is getting better turnover out of the space we have primarily by better products that meet consumer needs. So, it’s probably more of a story of optimizing the space we have rather than adding spaces as best I know it.

Pablo Zuanic - J. P. Morgan

Okay. And just a follow-up. Operating margins in Asia-Pacific, I mean, the jump there is quite good compared to that was in previous quarters. Is that type of jump sustainable, I mean, this type of 14% margins we saw this quarter?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

On Asia Pacific? Yes. It was a heck of a quarter, no doubt about it. We saw just great results in India, Australia and a number of other markets. I wouldn’t count on that kind of growth going forward, but we feel very good about that segment and things that Chris Warmoth is doing. It is good blocking and track on back to the basics and we expect strong performance going forward.

Pablo Zuanic - J. P. Morgan

Okay. And one last one. Just on the core infant food, remind us how big is Italy as a percentage of your total global sales of infant feeding? How big is Italy as a percentage? And then when we talk about China, how big is China for you guys right now? And put China in perspective, I mean, are we talking about the Infant feeding in general or is it just cereal, is it a very niche category? What about Dierberg [ph]? What about other competitors in China? Just walk us through the opportunity in China market share wise and category wise?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes, in terms of Italy, we don’t tend to breakout country’s specific data very much, but it is clearly our largest baby food business. I would say, probably less than half of the total roughly, but that would give you the sense… the magnitude. In China, so far we are leading player in the cereal business. That’s the strength of our business there in that category. We obviously are looking to play on a broader basis and given the magnitude that market, we think there is just some huge opportunities there. And we’ve got, unlike many of our competitors we’ve got a very strong distribution platform that goes past baby food into frozen foods and so we feel like we’ve got the platform, we’ve got the infrastructure and the critical mass in order to significantly grow that business and with Chris Warmoth and the team over there leading that I feel good about the prospects.

Pablo Zuanic - J. P. Morgan

Right. Thank you.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

And the other thing to keep in mind is that our biggest competitor in many of these markets is still homemade, and so it’s less of a share grab and more of how do you grow the category and how do you convince mom that she should be saving some effort and going with prepared foods.

Margaret R. Nollen - Vice President, Investor Relations

All right. We are running out of time, one more please.

Operator

Your final question comes from Ed Roesch with Banc of America Securities.

Edgar Roesch - Banc of America Securities

Hi, good Morning.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Hi, Ed.

Edgar Roesch - Banc of America Securities

A lot of my questions they covered here. Just wanted to ask you, Arth, about the productivity initiatives you have, I mean you are closing these plants plant and you are well on track for your fiscal ’08 targets. But it seems like you are going to have some pretty good carryover from some of these initiatives into fiscal ’09, having savings on that carryover in the next fiscal year. So, if you could comment on that and then also maybe on how you are thinking beyond fiscal ’08? How on an ongoing basis each year? You want to have productivity play into your long-term targets.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes. Well, obviously we are… Edward having to run fast on the productivity side, given the commodity inflation and usually you would like to see productivity off setting commodity inflation. Unfortunately in this environment that’s just frankly not possible. I think that’s true of not only us, but our competitors as well. So pricing and productivity need to go hand in hand. I feel good about the various initiatives that are underway. We have got this supply chain task force under the leadership of Scott O’Hara working. And we are doing a lot of diagnostics there to understand our biggest opportunities and where to focus our time and attention. and I think the outcome of that will pay significant dividends in ’09 and beyond. Having said that we don’t expect the commodity headwinds to stop any time soon. So we have got to keep doing that in order to foot the numbers and the algorithm going forward.

Edgar Roesch - Banc of America Securities

And some of the actions that you are taking on plant closing and you should see some spillover in the next year where those savings will be incremental, I would suspect that?

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Yes. I mean we are seeing savings from those in some cases are not large plants. So, it’s not real large, but the other key benefit and its hard to quantify is just the simplicity that it adds by reducing the supply chain footprint. We have less things that people need to keep track of, less distractions and we can focus on big plants in the big distribution lines, just try to optimize those. So, fish, where the fish are.

Edgar Roesch - Banc of America Securities

Makes sense. Thanks very much.

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Thanks Ed.

Margaret R. Nollen - Vice President, Investor Relations

Okay. Just before we close, I do want to give you a head ups and an opportunity to mark your calendars. Arth will be presenting at the upcoming Lehman Brother Back-To-School Conference in Boston on Thursday September 5. We got a 2:15 slot that’s Eastern. Of course and then Bill will be presenting at B/A conference in San Francisco on Wednesday September 19 at 8:30 AM and that’s Pacific West Coast Time. So, hopefully, we will see you there or you can dial in. We will be available for questions today in Investor Relations otherwise have a great day and a great weekend.

Operator

Thank you for participating in today’s H. J. Heinz Company conference call. This call will be available for reply beginning on 11:30 AM Eastern Standard Time today through August 31, 2007 at 11:59 PM Eastern Standard Time. The conference ID number for the reply is 7166147. Again the conference ID number 7166147. The number to dial for the reply is 800-642-1687 or 706-6459-291 internationally. This concludes today’s conference call. You may now disconnect.

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