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H. J. Heinz Company (NYSE:HNZ)

2012 Analyst and Investor Day

May 24, 2012 1:00 pm ET

Executives

Margaret Roach Nollen - Senior Vice President of Investor Relations, Global Program Management Officer and Office of the Chairman

William R. Johnson - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee

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

Robert P. Ostryniec - Chief Supply Chain Officer and Senior Vice President

David C. Moran - Executive Vice President, Chief Executive Officer of Heinz Europe Operations and President of Heinz Europe Operations

Scott O'Hara

Christopher J. Warmoth - Executive Vice President of Asia Pacific business

Hein Schumacher

Dave Woodward

Fernando Pocaterra - Area Director of Latin America & Caribbean

Analysts

Jason English - Goldman Sachs Group Inc., Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Matthew C. Grainger - Morgan Stanley, Research Division

Thilo Wrede - Jefferies & Company, Inc., Research Division

Edward Aaron - RBC Capital Markets, LLC, Research Division

Bill Dempsey

Andrew Lazar - Barclays Capital, Research Division

Margaret Roach Nollen

Well, good afternoon, everyone. Let's get started. I'm Meg Nollen, Senior Vice President, Investor Relations and Global Program Management Officer for the H.J. Heinz Company. And I'd like to welcome everyone to our 2012 Analyst and Investor Day. We're excited to be here in New York City for this event. And as you can see, we've got a full agenda coming.

You'll see it in a minute. Thank you. Also, we've got updated 5-year financial and statistical summaries, which are included in the back of your presentation and on heinz.com in the Investor Relations section. Now please note, we will file our 10-K on June 15. So your cash flow balance sheet data will not be updated until that time.

We have a great afternoon planned for you with presentations scheduled, as you can see, until about 4. And we've devoted a full hour to answer your questions. We've got a 15-minute break. It should be right after 2:00, 2:15 time frame. And as a reminder, questions will only be taken from those of you who are attending our presentation today here in New York. So I'd like to ask those who are in attendance, though, let's please turn off our cellphones, BlackBerrys, not just muting. That helps avoid interference for those that are listening in on the webcast.

Now before we begin, let me refer you to the forward-looking statement that's about to be displayed. 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 April 27, 2011, Form 10-K, as well as our press release today, 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 laws. Now we may also use non-GAAP financial measures in our presentation as the company believes such measures allow for consistent period-to-period comparison of the business. The most directly comparable GAAP financial measures and reconciliations of these non-GAAP measures are available in the earnings release and at the back of the presentation and posted on the website.

And now, our analyst day begins. I'd like to turn it over to Bill Johnson, Chairman, President and CEO of the H.J. Heinz Company. Bill?

William R. Johnson

I know one of the questions is going to be about $120 million in incremental investments, well $119 million of them went to those folders and those pens. So the rest we'll spend in marketing the best we can, but Meg's trinkets and trash are really getting to me. So thanks, Meg, and good afternoon, everyone, and welcome to our 2012 Analyst Day. Before I share my perspective on Heinz and the key elements of our growth strategy, I want to briefly review our fiscal 2012 fourth quarter and our full year results.

As we reported this morning, Heinz delivered strong fourth quarter results. On a constant currency basis, we grew sales by 7%, operating income by 9% excluding the charges for the productivity initiatives and earnings per share by more than 20% excluding those charges. Additionally, we increased marketing investment by around 10% including a more than 20% increase in consumer products. Our trio of growth engines: Emerging Markets, Global Ketchup and Heinz's Top 15 brands delivered particularly good results. Emerging Markets once again led the way with sales growth of more than 17% organically, while Global Ketchup delivered organic growth of more than 8% and our Top 15 brands grew 5% organically.

It's now 28 consecutive quarters of organic sales growth reflecting the strength of our core brands and our accelerating growth in Emerging Markets. For the full year, we delivered solid results in a difficult environment while achieving our targets for sales, EPS and cash flow. Reported sales grew almost 9% to a record $11.6 billion fueled by Emerging Markets and Global Ketchup. Heinz posted record operating and net income excluding productivity charges, and operating free cash flow was more than $1 billion for the fourth consecutive year -- third consecutive year. Returning a high percentage of earnings to shareholders is a priority at the company. And today, I'm pleased to announce an increase in our annualized common stock dividend of more than 7% to $2.06 per share. The $0.14 increase reflects the company's strong performance in fiscal 2012, our consistently solid results over the past 7 years and our continued confidence in our proven long-term plan.

This increase marks the company's ninth consecutive year of dividend growth during which time, we will have returned more than $5 billion to shareholders in the form of dividends. So with fiscal 2012 behind us, I'll now focus the remainder of my remarks on 4 topics: The consumer and the economic environment, which continues to change; the key elements of our strategy to sustain top and bottom line momentum; the full year outlook for fiscal 2013; and our longer-term expectations.

Turning first to the consumer and the economic climate. I see another year of evolving consumer behavior amid a still-challenging environment, particularly in the developed markets. Although we are seeing anecdotal signs of improving consumer confidence, more than half of the global consumers surveyed believe we are still in recession. Consequently, consumers are aggressively reducing debt and increasing savings. A recent study from Kantar Retail provides insight on now these trends are manifesting themselves in the U.S. where consumers are consciously limiting their grocery purchases. Most strikingly, this behavior is being exhibited across the economic spectrum and across all classes. There's no doubt the consumers have become more disciplined, more frugal, more focused on price and value.

But interestingly enough, both Kantar and Nielsen confirmed that at least in the U.S., the volumes are not shifting to private label. Rather, volume is shifting at the perimeter of the store or being eliminated entirely. While this behavior has affected unit sales across the store, it has been particularly unfavorable and challenging for frozen food volumes. Retailers have adapted to, or in some cases, helped foster these shopping habits through changes in store layouts designed to emphasize the perimeter, a trend that has clearly impacting center of store. I'm directing our team to better understand and address the implications of this trend, which I suspect will continue.

Nielsen and Kantar also highlight emerging new demographic trends in developed markets like the growing divide between struggling and affluent households and a decline in the middle class in the U.S. These trends, combined with aging populations, smaller households and an increase in ethnic and immigrant households are affecting package sizes, price points and innovation. One outcome is an economic trifurcation, which is manifesting itself in the growth of alternate or non-measured channels, especially club, dollar and drugstores.

E-commerce, club, dollar and supercenters are expected to deliver higher relative growth than more traditional food outlets in the U.S. over the next few years. And consequently, our success is going to increasingly depend on our ability to win in these growing channels. Our U.S. team is responding in a disciplined and measured manner to these evolving demographics. For example, we are testing a limited array of smaller packages with more affordable price points for smaller households and struggling consumers. At the same time, we recognize the need to address the changing face of America. And consequently, our U.S. ketchup team has developed a new campaign aimed at Hispanic consumers to determine if we can efficiently and effectively penetrate this rapidly growing target where we are significantly underdeveloped.

Conversely, while the bottom tier is growing and the middle class is shrinking in developed markets, it is expanding in Emerging Markets. These markets are much more advanced than developed markets in tiering products to different audiences, and I've encouraged our team to share this critical learning and best practices with each other so that we can leverage this knowledge appropriately.

Emerging market development is imperative to long-term growth, and you can see why we are so intent on accelerating our presence in these markets. These fast-growing, highly populated markets are generating significantly stronger economic growth than developed markets and are the future of our business, as well as the future of economies around the world.

China, for example, has now overtaken the U.S. as the world's biggest grocery market. And 4 of the top 5 packaged goods spending markets will soon be in Emerging Markets. We have a strong position in each of these markets.

Now that I've shared my view of the consumer and economic environment, let's talk more about the key strategic elements that help make us a global leader in the packaged foods industry.

First, we are highly focused against only a few core categories with particular emphasis on an increasingly large and advantaged Ketchup and Sauces business. Second, we have a well-balanced geographic portfolio with accelerating growth in Emerging Markets and a solid foundation in the developed world. Third, we're building and increasingly leveraging unique global capabilities and infrastructures to support continued growth and improved productivity.

So looking first at our core business, we have radically transformed our portfolio over the last 10 years to become much more focused and competitive. In 2002, prior to the spinoff of our North American Seafood, Pet food and Soup businesses, we had 6 core categories. Today, we have 3. Ketchup and Sauces, which has grown from roughly 1/4 of our business in 2002 to nearly half the business in 2012. We also have global Infant/Nutrition and Meals and Snacks which operates almost exclusively in the developed world. It's no accident that Ketchup and Sauces now dominates the portfolio. It is our crown jewel, our founder's legacy and our fastest growing core business, with sales of more than $5 billion in the recently completed year. Led by the iconic Heinz brand, Ketchup and Sauces delivered organic growth of almost 7% last year. And importantly, 25% of our sales are now in Emerging Markets in this category where we are growing in soy and chili sauces, as well as ketchup. This category represents the future of Heinz and we possess numerous competitive advantages. We have very high margins and return on invested capital, we are seeing rapid growth in Emerging Markets, we have leading market shares around the world while still having upside development opportunities. There's substantial upside in under-penetrated developed markets, particularly in Europe and the Pacific. We have lower private label penetration. We have flexible and competitively advantaged manufacturing capabilities and we have the unique advantage of Heinz seed, which is our natural hybrid seed that delivers superior, great-tasting tomatoes exclusively for use in Heinz Ketchup and Sauces.

We are winning where we choose to compete, and we have only scratched the surface of this $110 billion global category. Given our strong brands, market leadership and global scale, we're well positioned in the world where the demand for Ketchup and Sauces is growing in both emerging and developed markets. It is clear, however, like most other businesses, that an even greater opportunity resides in Emerging Markets where sales will likely double to $80 billion by 2018.

We are #1 globally in ketchup and #2 in sauces. As [indiscernible] recognizes that no one remembers who finished second, so we have ambitions to become #1 overall. We are focused on what we see as the 4 largest opportunities in global sauces: Ketchup, soy, pasta, and chili sauces.

Importantly, we are already well positioned in virtually all of the top growth markets for Ketchup and Sauces led by China, Venezuela and Brazil. Emerging Markets account for 7 of the top 10 and it's no surprise that the biggest opportunity is China where our Ketchup and Sauces business, and including Foodstar, more than doubled in fiscal 2012.

Focusing more narrowly on ketchup, our flagship Heinz brand is far from mature after 136 years in the market. And in fiscal '12, we delivered excellent organic growth at more than 8% globally. This growth was driven by innovation, pricing, distribution gains and expansion into new geographies. These results are a good indicator of what we believe is achievable in this category overall. We are now #1 in 7 of the top 10 Global Ketchup markets and are aggressively building share in 2 of the other 3, specifically Brazil and Mexico. Meanwhile, led by growth in the U.K. and across the continent, Europe delivered strong organic ketchup growth of more than 7% last year, an impressive achievement given the uncertain economic environment we're operating in on the continent.

We continue to build on this momentum by taking our iconic brand to new geographies like Brazil, where the acquisition of Quero provides a very strong base and platform for future growth. Many Brazilian consumers use ketchup as a cooking ingredient or as a sauce on pasta not just as a condiment. Importantly, we will begin manufacturing Heinz Ketchup in Brazil later this year to help expand our availability in supermarkets and across the country.

The Brazilian plan is modeled after our very successful strategy in Russia, where Heinz is now #1 in the world's third largest ketchup market and where the brand grew more than 20% organically in fiscal 2012. Similarly, our acquisition of Foodstar in fiscal 2011 expanded our presence in China's rapidly growing $4 billion-plus soy sauce market, while providing also a strong growth platform for Ketchup and Sauces across that country. We are growing Foodstar's Master brand soy sauce to increase trial and penetration and expansion to contiguous provinces around our stronghold in Southeast China. At the same time, we are leveraging our increased capabilities to drive growth of Heinz Ketchup in both retail and Foodservice where we see enormous upside. Hein Schumacher, President of Heinz China, will discuss Foodstar and Master soy sauce later in this meeting.

Our strength in sauces extends to Indonesia where ABC soy and chili sauces are #1 and growing. Indonesia is the world's fourth most populous nation and it's an important market for soy and chili sauces. We've delivered growth there on a compounded basis of more than 22% over the last 2 years, powered by marketing and new product innovation.

Without question, packaging innovation is one of the keys to growth in Ketchup and Sauces. Consequently, we have a number of initiatives in progress, including the launch of our fully recyclable PlantBottle packaging in partnership with the Coca-Cola Company, which pioneered this technology and which we're now taking to Canada. Expansion of Heinz Dip & Squeeze, our innovative dual function Single-Serve Foodservice package, which has now sold more than 1 billion packets in the U.S. and is growing rapidly. Dip & Squeeze is fast becoming a global priority for the company. And finally, Doy Pack, our economical and flexible pouch which we're using for products ranging from Heinz ketchup and mayonnaise to ABC Soy Sauce and cheese sauce in Russia. Doy Pack has been introduced successfully in numerous Heinz Emerging Markets. And in my view, not yet shared by several of our developed market teams, it represents a significant growth opportunity for them as well.

A unique attribute of Ketchup and Sauces is the relevance to both grocery and Foodservice customers, which allows us to leverage assets across channels thereby producing superior returns. Additionally, Foodservice operates symbiotically with grocery to drive trial, penetration and awareness of Heinz Ketchup. The good news is that the global Foodservice market is projected to grow more than 40% from 2010 to 2015, and we are leveraging our strong relationships with quick serve restaurant partners to drive growth in Emerging Markets. I see this as a huge opportunity to build trial and brand equity outside the U.S.

Consistent with the increased focus on Ketchup and Sauces, we are repositioning our U.S. Foodservice business around its core strength, branded front of house Ketchup and Sauces. In the past 3 years, we have significantly streamlined the U.S. Foodservice portfolio, to exit non-core product lines and SKUs, while selling or closing 5 non-core factories. We're getting back to what we do best by focusing on front of house Ketchup and Sauces and Foodservice. With the recently announced sale of our Foodservice Frozen Desserts business, we have further transformed and extended the business back towards its evolution as a channel play for Ketchup and Sauces. Our success in innovating Ketchup and Sauces will yield excellent returns when restaurant traffic improves.

Beyond Ketchup and Sauces, we also continue to look for opportunities to extend our very profitable and growing Infant/Nutrition business. Infant/Nutrition delivered more than $1.2 billion in sales in fiscal '12, a 16% organic growth in Emerging Markets. This growth was led by Heinz branded baby food in multiple markets and Complan in India.

We view this category in 3 distinct segments: Baby food, which is our primary focus and the core of our Infant/Nutrition business, which generates about 65% of our sales in this category; Nutritional Beverages for children; and Infant Formula.

Infant/Nutrition is one of the world's fastest growing categories with nearly all of its growth in Emerging Markets. Infant/Nutrition in Emerging Markets, as I've said repeatedly, are the intersection of 2 high growth opportunities that I think we're well positioned to capitalize on. Overall, more than 40% of our Infant/Nutrition sales are now in Emerging Markets and I expect that to increase in years to come, reflecting their very high birth rates and our capabilities in baby food.

Our baby food business in Emerging Markets are leveraging best practices and innovation developed by our Global Center of Innovation and Center of Excellence in Italy where we have more than a century of Infant/Nutrition expertise. To support our dynamic growth, we are in the process of building a new 80,000 square-foot baby cereal factory in Guandong province that will begin production in fiscal 2014.

Heinz ranks third globally in prepared baby food and fifth if you include infant formula. Our goal is to be #1 in prepared baby food in the Emerging Markets, leveraging strong brands and our solid and growing shares in Emerging Markets, new penetration opportunities, our pipeline of innovation and our long history of nutritional expertise in markets ranging from Italy to China. We still see opportunity in developed markets as well, most particularly in Europe and the Pacific. Europe generated almost half of our global Infant/Nutrition sales in fiscal 2012. And to drive growth, we have launched a unique aseptic wet baby food line in Italy. This product, which is packaged in convenient, resealable plastic pouch requires less heat to process, and consequently, the end result is superior taste, nutrition, color and texture.

Early results are highly encouraging in the 2 categories we've introduced it to. While we see enormous opportunities for baby food, we are being very selective in formula. I'll preempt some of your questions and plan to only target markets like China and India where the birth rate is high and we have solid infrastructure and capabilities.

But the fastest-growing and most notable packaging innovation in infant food is pouch, a unique, more affordable, convenient and efficient alternative to glass. We have successfully launched pouched baby food in Canada, China, Mexico and other Latin American markets with outstanding early results.

Meals and Snacks is our third core category. It's primarily a developed market business focused in the U.S., U.K., Australia and New Zealand. This category consists of 2 distinct segments: a $2.5 billion frozen portfolio predominantly in the U.S. that had, to stay it kindly, mixed results over the last year; and a strong and growing $1.9 billion ambient portfolio anchored by the Heinz brands in outstanding businesses in the U.K. and New Zealand. The frozen segment includes 3 large U.S. brands, Ore-Ida, Smart Ones and T.G.I. Friday's. These brands are highly profitable but they are feeling the effects of poor consumer and category dynamics and obviously increase price elasticity in the category.

We remain committed to these brands and consequently are working to address the challenges and price value, while also upgrading our marketing and sales execution, which has been less than stellar. Getting Ore-Ida back on track is particularly important. We had a difficult fiscal 2012, and frankly, we're still wrestling with weak consumer metrics and shares. Our first priority is to address the value gap, which resulted from aggressive pricing actions last year, designed to offset increased costs. We are making progress, but in my view, still have a ways to go.

Starting in late Q4, we escalated working media investments behind the brand with new messaging that highlights the nutritional profile of our frozen potatoes. This will continue through fiscal 2013. And combined with new initiatives to improve the price value perception of the brand, I hope for some improvement by the second half of this fiscal year.

Frozen meals are the most cyclical of the major food categories we compete in. Strong and good times and weak and recessionary times as I think this chart does a pretty good job of showing. The category, however, has never seen such a protracted period of decline. Consequently, we are evolving our view of this business and have ramped up efforts to better focus on our key strengths while reducing costs. We have exited T.G.I.F. and Boston Market premium frozen meals in the U.S., divested our U.S. frozen desserts business in Foodservice, downsized our Long Fong business in China and exited 6 frozen factories across the globe in the last 12 months. Overall, we've reduced our frozen manufacturing footprint by 26% over the last year to improve productivity and reduce costs. We will continue to look for ways to improve returns from our frozen business.

On the other hand, our ambient Meals and Snacks categories hankered [ph] by the Heinz beans, soups and pasta meals businesses and it is performing very well, particularly in the U.K. Heinz U.K. generates roughly half of our global sales in the ambient segment and it continues to drive strong results with organic growth of about 8% last year in this category. The U.K. team has built a solid innovation pipeline in Meals and Snacks that we leverage last year with increased marketing investment and truly brilliant sales execution in the U.K., which the strong results confirm.

A great example is the successful launch of Heinz Squeeze & Stir Soups. This innovative product appropriately capitalized on a very strong Heinz brand equity, while extending our #1 share position in U.K. soup into an important adjacent category. Based on the enthusiastic consumer response, we are expanding this highly incremental offering to Australia and a few other markets.

Just a word on the Heinz brand. It generated sales around $4.5 billion last year behind robust growth of almost 8% organically. In fact, in the fourth quarter it was one of our top performing brands. The Heinz brand is trusted worldwide and has earned a reputation for quality, nutrition, innovation and value that we're leveraging across all 3 core categories and multiple new markets. It really is an iconic jewel for this company.

Our second key strategic element is designed to build on our core with a well-balanced, and we believe, increasingly advantaged global reach. Ten years ago, slightly more than half of our total sales were in the U.S. Today, 2/3 of our sales are outside the U.S. and growing. Notably, even our European business is better positioned because of the growing importance of our successful and fortress position in the U.K. and Eastern European operations, which have in turn reduced exposure to the more volatile economic conditions in certain parts of the Eurozone.

While I think our Emerging Markets story is by now pretty well known, it's important to note that we are increasingly well positioned with a record 21% of our sales last year in these markets, up from just 5% a decade ago. I expect our sales in Emerging Markets to approach 25% in the New Year, reflecting our strong organic growth.

Combined, fiscal 2013 Emerging Markets sales will likely exceed those of our U.S. Retail business for the first time in the history of the company. We were among the first U.S. companies to recognize the potential of Emerging Markets. We have expanded our global footprint over the last 15 years through organic initiatives and our, obviously, our buy and build strategy, which has brought us strong local brands and really good businesses. Organically, our growth rate is among the best in our peer group, surpassed really only by Mead. Our buy and build formula is based on identifying strong local businesses in the $50 million to $250 million range. We look for sound, commercial propositions and infrastructure, and unique attributes that we can grow into profitable $500 million to $1 billion businesses.

Quero in Brazil and Foodstar in China have greatly exceeded our performance expectations, while delivering robust growth and are good examples of how this strategy is working. Our Emerging Markets portfolio is, by design, well balanced and diversified, and it's anchored by our growing businesses in the BRIC markets plus Indonesia and Venezuela. I expect our businesses in Eastern Europe, Venezuela, Indonesia, China and Brazil to each contribute around $400 million or better in sales this fiscal year, and we are actively looking for new opportunities in these and other high-growth markets and we are in the middle of a number of discussions regarding those opportunities.

Gross margins in our Emerging Markets are quickly approaching those of our developed markets and they are growing much faster on a relative basis. And in fact, last year, were flat year-on-year while the developed market showed some erosion. We are intent on further improving margins in Emerging Markets through pricing, automation and productivity. Mix will also contribute as the middle-class continues to grow and increasingly affluent consumers are able to afford larger sizes and premium more value-added versions of our existing products.

Strategically, the third key element of our plan is to leverage global capabilities and infrastructure to deliver cost synergies, while also driving the top line. Bob Ostryniec and Art will talk more about this in greater detail, but I'll touch on a few highlights.

First, we continue to expand the reach of Project Keystone, our never-ending initiative to harmonize and upgrade systems and processes on a global scale. We expect Keystone to help us optimize sales mix and trade spending, as well as improve our costs. We expect it to help us accelerate procurement savings, increase manufacturing efficiency and simplify back-office functions, while also enhancing the sharing and marketing of product ideas across our business units. I expect Keystone to play a major role in driving both top and bottom line growth when it's fully done.

We are still on track to achieve our 5-year global productivity goal of $1.3 billion by fiscal 2013. We made great progress in the past 12 months as we successfully began to regionalize our global supply chain and we exited 11 factories

The opportunity to consolidate back-office function once Keystone is completed has not been built into these goals and shouldn't materially enhance our expected returns. Our focus on cost-out opportunities extends to new product development as well, with our Innovation Centers and Centers of Excellence. Globally, we are aiming for innovation that adds value, convenience and quality while reducing cost for Heinz and its consumers. We're in the final stages of building our Innovation Center in Europe, which should accelerate new product development, particularly in Ketchup and Sauces when it opens this fiscal year. We plan to open a similar center in Asia within a few years.

Now that I've reviewed our strategy, I'd like to briefly discuss our outlook for fiscal 2013, which I see as a year of continued growth for the company as we benefit from significant investments in marketing and productivity, as well as Meg's folders and pens.

First, Heinz expects to deliver at least 4% organic sales growth in 2013 driven by Emerging Markets in Ketchup and Sauces. Second, we expect to deliver 5% to 8% growth in constant currency earnings per share from continuing operations. Third, we expect to deliver strong operating free cash flow better than $1 billion for the fourth consecutive year, despite increased capital behind the expansion of Keystone and much-needed capacity in Brazil and Asia.

Importantly, our outlook for fiscal 2013 incorporates about a 15% increase in marketing investment, which is 50% more than we've been spending on an annualized basis in terms of rate of growth. This is split almost evenly between developed and Emerging Markets. We will also see a further ramp up in spending behind Keystone and SCORE to accelerate its expansion, particularly across Europe, and new investments to enhance sales capabilities in Asia, Russia and Brazil. Art will provide details in a few minutes but overall, we expect around $120 million in new incremental investments in 2013 on a constant currency basis.

Our outlook is built on higher organic sales growth driven primarily, as I said, by emerging market investments and our Ketchup and Sauces growth. We expect significantly improved results from our U.S. Foodservice and Australian operations due to the decisive actions we took last year to strengthen and improve these businesses, both will be up this year. We also expect significant margin growth, as Art will detail in a minute, as a result of the productivity initiatives that we implemented last fiscal year to drive manufacturing efficiency and reduce costs. Overall, we believe that we spent your money wisely in fiscal '12 and we'll deliver on what we promised. I do expect a sizable FX headwind, which keeps changing by the day, at least through the first part of the year, which will likely impact reported sales and profits. Recent volatility in currency has made it difficult to quantify. You know, as well as I do what's happened to the euro and other currencies in the last couple of weeks, but Art will take you through our initial thoughts. And finally, to ensure that we properly leverage our incremental marketing investments, we have directed our business unit teams to improve the ratio between working and nonworking dollars. That is the mix of marketing spending that goes directly against consumers to drive growth. Due to the shift in working dollars -- 2 working dollars, the impact of our increased marketing will be even greater than the absolute increase in spending. So with fiscal '13 now underway, I also want to share some thoughts regarding our long-term vision for the company.

Over the next 3 to 5 years, I see Heinz extending its position as one of the best performing global food companies. We are aiming for annual organic sales growth of 4% to 5% on average, with select M&A leveraging that number higher. We're looking for constant currency EPS growth of 6% to 9% on average, gross margin improvement of between 100 to 200 basis points, much of which we should accomplish this year. And continued top-tier cash flows we deliver healthy dividend growth to our shareholders. Looking at our global portfolio, I expect Emerging Markets sales to double to around $5 billion with sales in China, Indonesia, Brazil and Eastern Europe each approaching $1 billion. Importantly, I expect profit growth from Emerging Markets well in excess of their top line growth as they contribute disproportionately to our EPS performance.

Conversely, I expect steady but slow growth in developed markets, with Europe outperforming the U.S. as it pertains to Heinz. Our European business benefits from the strong position in the U.K., a Ketchup and Sauces focus, a growing contribution from the East and very little presence in frozen. I also see Ketchup and Sauces' momentum globally as the category approaches 60% of company sales, if not more. And finally, I anticipate significant benefits from our Keystone investments and the consolidation of back office functions driving further productivity. In summary, I believe we delivered winning results in fiscal 2012 as we adapted to the changing landscape. Including fiscal 2012, we have delivered impressive growth in sales, EPS, operating free cash flow and after-tax return on invested capital over the last 6 years through solid execution of our now well-proven plan. In fiscal 2013, we will build on this momentum and new investments to drive continued growth, while also establishing a solid base for sustained outperformance going forward. As I've told you many times, I look at the business in 3- to 5-year periods. I don't look at it in 3- to 5-week periods. And so we will continue to invest to continue to drive the kind of growth that I think we're capable of generating. We've been a leader in the packaged foods industry for 143 years and we continue to live by our founder's credo and vision, The World is our Field, particularly when it comes to Ketchup and Sauces. Now I'll turn it over to Art. And Art can take you through the details of our performance last year and where we're headed.

Arthur B. Winkleblack

Great. Thanks, Bill, and good afternoon, everybody. Today, I'll take you through our Q4 results, a summary of the full year fiscal '12 and our outlook for FY '13. Since we posted our standard financial disclosure pages on the website along with the press release this morning, I'll just hit the highlights for last fiscal year so we can focus primarily on the future.

Let's start with a quick overview of the fourth quarter. Overall, we had a strong finish to the year. On a constant currency x items basis, Q4 sales were up about 7%, operating income increased almost 9% and EPS rose 20%. Overall, strong sales growth, effective SG&A management and a lower tax rate offset the continued pressure on industry gross margins and significant incremental investments in marketing and Project Keystone. Tax contributed about $0.06 of EPS growth for the quarter, while currency translation actually reduced EPS by about $0.02. Organic sales increased 4.5% with every segment contributing positive growth. Emerging Markets, Global Ketchup and the Top 15 brands, again, drove our growth. In the quarter, we also benefited from 2 extra shipping days. Rest of World clearly posted the highest segment growth at almost 40%, driven by strong results in Latin America and the Middle East. Europe was up more than 5% in a difficult economy led by the U.K. and by Russia. Asia-Pac was up despite lower sales in Australia. And even though Australian revenue declined, they are making sequential progress. U.S. Foodservice returned to solid growth, with both positive volume and price in the quarter. North American Consumer Products delivered a slight increase as net price gains were partially offset by volume declines in Ore-Ida and ready meals in Canada.

In terms of profitability, we posted almost 9% constant currency OI growth for the quarter. We achieved dramatic growth in U.S. Foodservice as positive volume, net pricing more in line with commodity costs and a streamlined cost structure combined to deliver 38% profit growth. Rest of World was close behind, generating 34% profit growth based on strength in Latin America, including the Quero acquisition in Brazil a year ago. Only North American Consumer Products was down on a constant currency basis as continuing gross margin pressure and higher marketing spending were only partially offset by lower SG&A costs.

Now let's take a look at the full fiscal year '12. For the full year on an x items basis, sales were up about 9%, operating income grew almost 2% and EPS was up 9.5%. You can see that foreign exchange translation provided a modest benefit for the year between 1% and 2% across the P&L. At EPS, ForEx helped by about $0.06. A key story for the year was the gross margin pressure that we and the rest of the industry experienced. With significant commodity pressure and a weak consumer in developed markets, our gross margin dropped by 140 basis points or about $165 million on a rate basis. Importantly, we absorbed this impact while significantly increasing our investment in the business. Those investments were on Keystone, about $35 million, marketing of another $40 million, and new capabilities in Emerging Markets of roughly $10 million.

We offset the gross margin decline in these significant investments through very strong management of SG&A and our tax rate. For the year, our tax rate was 21.7% versus 26.8% last year. And for perspective, we expect to hold roughly that same tax rate for fiscal '13 as well.

As you know, we executed a number of nonrecurring productivity initiatives in FY '12. Bob Ostryniec will give you more perspective on the operational aspect of these initiatives, but from a financial standpoint, we incurred $224 million in charges or $0.50 per share on these projects. Almost 2/3 of the spending impacted COGS, while the rest went through SG&A. We are pleased with the results here as we are on or ahead of plan in terms of both costs and benefits of the program.

We posted 3.5% organic sales growth for the full year, which was right in the middle of the range we provided for fiscal '12. Again, this organic growth was driven by Emerging Markets, Global Ketchup and our Top 15 brands, up 16%, 8% and 5%, respectively. Each segment delivered organic sales growth for the year led by the rest of the world. Europe posted strong growth in light of the economy there, driven by excellent results in the U.K. and in Russia. Our U.S. businesses posted modest growth in a tough consumer environment where price elasticity was quite dramatic. Our operating income was up modestly for the year as strong sales growth and effective SG&A management were largely offset by gross margin pressure and our significant incremental investments in the business. Rest of World led the way again, benefiting from Base business growth and from the Quero acquisition. Europe posted very solid growth in the challenging market. The U.S. saw moderate percentage declines in profitability due to gross margin pressure, and the drop in Asia-Pacific reflects lower profitability in Australia, which was only partially offset by growth in the balance of that region. Overall, Emerging Markets were the driver of profit growth for the company in fiscal 2012. Even with significant P&L investments in Emerging Markets, their profit grew faster than sales. We had another strong year in terms of balance sheet management as well. For the year, we increased CapEx to 3.6% of sales, primarily around the planned investments in Project Keystone and Emerging Market capacity. We held CCC flat despite inventory increases in the first half of the year, partly reflecting our numerous plant closures. We delivered an x items operating free cash flow of more than $1.2 billion, which was about 5% above our target for the year. And remember that this result excludes the $122 million of cash spent on our nonrecurring productivity initiatives. We slightly improved our net debt-to-EBITDA ratio to 1.8x and held our after-tax ROIC basically flat at 19.2% despite the impact of the emerging market acquisitions we made in late fiscal '11. Excluding the impact of those acquisitions, base business ROIC was up over 20%.

Okay, so let's put the year in perspective. From FY '06 through fiscal '12, we've averaged 4% organic sales growth, posted an EPS CAGR of about 8.5%, delivered operating free cash flow at 113% of net income and improved our after-tax ROIC by 440 basis points to 19.2%. We're pleased with these results and ready to continue driving strong performance into the future. With that, let's turn to 2013.

As Bill outlined, we have 5 goals for the new fiscal year. These include: A step up in our organic sales growth rate to 4% plus, including the impact of about 1 point of portfolio pruning; investing approximately $120 million more in business building P&L investments; constant currency EPS growth of 5% to 8% even with these incremental investments; operating free cash flow of $1.1 billion; and, as announced this morning, an increase in dividends to shareholders of 7.3%, net-net a challenging set of goals balancing near-term returns to shareholders and business building initiatives for the long haul.

Now drilling further into our sales outlook, as mentioned, our 4% plus organic sales growth target includes the impact of some limited pruning of the portfolio to further improve our focus. We expect this growth to be partially offset by a few small divestitures, which will improve our business mix, and by foreign exchange. At recent average exchange rates, currency could negatively impact sales by around 2%. Clearly, we continue to work on our pipeline of potential bolt-on M&A deals, but we're not going to count on those until they happen. We expect our sales growth dynamics to be similar to fiscal '12. The lion share of organic growth is to come from Emerging Markets with the growth rate of around 15%. While we expect growth in developed markets, it is anticipated to be quite modest at around 1%. And again, organic growth will be tilted more toward net pricing than volume growth, given the expectation of continued commodity inflation.

We expect to improve our gross margin in fiscal '13, and this is driven by 3 key factors: The first is net pricing. We continue to price in Emerging Markets, but it is certainly tougher to get in developed markets. Having said this, we expect positive net pricing there as well, often driven by a more efficient trade spending rather than additional list pricing. Second, Bob and the supply chain are driving hard to improve productivity and take non-value-added costs out of our products. And third, we have the benefit of last year's nonrecurring productivity initiatives and other actions, which combined to reduce our total number of factories by 11. All of this is arrayed to help offset yet another year in which we anticipate higher commodity cost. This year, as you can see, we've left ourselves a fairly wide range on the gross margin to account for various potential economic scenarios. In terms of commodity costs, it appears that the volatility of the past few years is here to stay. Overall, we now expect market inflation on our basket of commodities to be approximately 4% driven by tomatoes, beans and meat, as well as metal and paper packaging.

By region, we expect the highest commodity inflation to occur in Latin America and in Europe, where the effective government regulation and reduced subsidies will have a real impact. Overall, our plans call for net pricing and strong productivity to more than offset inflation for the year. As we look at the economy and our opportunity set, we believe it is the right thing to do to continue amping up our investment in the business. To that point, between marketing and capability building, we anticipate investing an incremental $120 million in the business. As you recall, we've increased marketing spending in the business by about $200 million over the last 6 years. That's an average growth rate of about 10% per year. For fiscal '13, our target is to increase marketing spending at an even higher rate of 15% to improve our organic sales growth trajectory.

We expect the spending increase to be balanced between developed and Emerging Markets, and we'll be focused on getting the most bang for the buck by maximizing the portion of spending on working media. We'll also be investing in greater capabilities. We're adding about $20 million in P&L investments on Project Keystone and Project SCORE, the latter of which is our supply chain hub initiative in Europe, which Bob will expand upon shortly. The goal here is to accelerate completion of both of these projects in Europe and be fully operational there by the end of fiscal '14. We're also stepping up our investment in Emerging Markets sales capabilities or what we call boots on the ground in order to further strengthen our ability to capture the exploding sales opportunities in these markets. And finally, we expect to have a modest amount of carryover on our prior year productivity initiatives, which we'll just run through the organic P&L.

With regard to Project Keystone, remember that it is our company-wide initiative to standardize and harmonize processes, data and systems around the globe. We're pleased with our progress and are in full deployment mode. We're primarily focused on Europe now as the process and system capabilities are a key foundation for our strategy there. And we believe this region represents our biggest opportunity for productivity and cost reduction. Later in the fiscal year, we'll initiate and do a launch a Keystone in Asia with full functionality planned for the major markets there. Additionally, we'll begin rollout soon in North America starting with Canada. Based on our current road map, the last major business units to implement Keystone will be the Pacific operations and the U.S. By FY '16, we expect Keystone to be essentially complete and that will be capturing significant benefits from the greater visibility and harmonized capabilities.

Now some of you have asked what we expect to get out of Keystone. And in fact, Bill asks me that question almost daily. Overall, we fully expect Keystone to help us improve our gross margin, EPS and ROIC. These are the ultimate metrics by which to track us going forward. The benefits don't come from just one area. Rather, the consistency of processes, systems and data will help will top line growth, efficiency and effectiveness across the entire value chain from buying, making, moving, selling, managing, and as a secondary benefit, even helping to lower our tax bill in some cases. This is well tried ground and we have deeply experienced leadership and resources on the project. We believe the program is on track and we are working to take full advantage of our expanding capabilities.

And to help offset the impact of the investment spending, we have the savings from last year's nonrecurring productivity initiatives. Overall, we incurred $224 million in charges last year. The result is savings of $0.06 of EPS in FY '12 and an expected $0.21 in FY '13 and a year-on-year increment of about $0.15. Overall, the payback period on the aggregate investment is expected to be about 2.5 years.

And to round out the discussions of the P&L, let's take a quick look at items below operating income and then at foreign exchange. We expect an increase in net interest expense reflecting the full year impact of the new fixed-rate bonds we've put in place in FY '12 and lower interest income on overseas cash. We anticipate that our full year tax rate will be about flat with fiscal '12 and that fully diluted shares outstanding will be basically flat as well. Now so far, we've been talking about expectations in constant currency. Now let's take a look at the potential impact of currency changes on business results in FY '13. Similar to commodities, volatility seems to be continuing in foreign exchange markets. Here we've laid out our average currency rates for fiscal '12, the average rates for the last 15 trading days and last Friday's spot rates. You can see that most currencies are weakening versus the U.S. dollar. Using the averages of the last 15 days, our P&L results would be reduced by roughly 2% and this reduction would be greater if we applied today's spot rates. We'll be watching the situation in Europe and the global currency rates very closely and minimizing risk where appropriate and where possible.

Now let's take a quick look at the balance sheet. Overall, we expect strong progress on working capital and a year of investment in terms of capital spending. Our goal is to reduce CCC by 4 to 6 days in fiscal '13. We've got a great head start on this through the aggressive inventory reductions we achieved in the back half of fiscal '12. And we intend to keep pressure on inventory levels as we go forward while continuing our focused management of receivables and payables. With regard to CapEx, we expect a modest step up this year related to Project Keystone and to capacity projects in Emerging Markets. Some of our key projects in Emerging Markets include a new baby food plant in China, completion of our Foodstar plant there, expansion of one of our factories in India and installation of a pouch vegetable line in Brazil. Additionally, we're completing our Innovation Center in Europe this year so we've got a lot going on.

In order to put our capital spending in perspective, here we've shown Heinz CapEx as a percent of sales over the last 7 years and our plan for this year. Our spending has stepped up over the last couple of years in line with our rapid expansion in Emerging Markets and the requirements of Keystone. But even with this, total spending is still at or below the industry average. We've been very disciplined in our use of capital historically, and we fully expect that to continue. Our after-tax returns on invested capital and cash flow continue to be very healthy. We maintained ROIC about flat in FY '12, even with the impact of 2 relatively sizable Emerging Market acquisitions late in fiscal '11. With ongoing strength in the business and improving leverage of the acquisitions, we expect ROIC to hit 20% this year.

And from a cash perspective, we expect to deliver operating free cash flow of $1.1 billion. As discussed, capital will be higher this year but our cash outlays for nonrecurring productivity initiatives will be lower. Importantly, we continue to benchmark our cash flow versus peer companies, and our OFCF target is well above the averages in the industry, both from a percent of sales and percent of income standpoint.

In terms of uses of cash, our priorities remain largely unchanged. First, our target is to protect and grow our dividend as evidenced by the increase we announced today. Second, we continue to look for bolt-on acquisitions, primarily Ketchup and Sauces and baby food, as well as in Emerging Markets. Third, we'll continue to drive for lower net debt levels, particularly if we don't find bolt-on deals that will add shareholder value. And finally, we expect to keep fully diluted shares outstanding basically flat. And as usual, we intend to operate in a manner consistent with maintaining our investment grade credit rating and outlook.

Now just a quick reminder on the dividend. After a 6.7% increase in FY '12, we're again increasing the dividend this year, up 7.3% to an annual rate of $2.06 per share, a pretty healthy dividend. As we look to the first quarter of the new fiscal year, we expect to start off with solid organic sales growth of 4% or more. This will be led by another quarter, another strong quarter in Emerging Markets. From a profit perspective, we'll be investing in incremental marketing and more boots on the ground in Emerging Markets. We will also be continuing the rollout of Keystone, implementing in both Canada and in Germany this quarter. And finally, we expect a favorable tax rate, including the impact of a statutory rate change in the U.K. to be partially offset by negative foreign exchange rates. Net-net, we expect very modest year-on-year EPS growth in the first quarter.

So to summarize, we're very excited about the business and our plans for FY '13. We're continuing a strong multiyear run, are stepping up our organic sales growth target to 4% plus despite a tough economic environment and the impact of some portfolio pruning. We're making an incremental $120 million P&L investment and long-term fuel for growth, are targeting a very healthy 5% to 8% increase in EPS, expect another year of the strong cash flow generation and are sharing that cash with our owners through a strong increase in the dividend. So with that, I'll turn it over to Bob to talk about our supply chain initiatives. Bob?

Robert P. Ostryniec

Thank you, Art. Good afternoon. At this event last year, I outlined our strategy to strengthen and leverage the global scale of Heinz. I also discussed the actions that our company planned to take in FY '12 to drive productivity and efficiency across our supply chain. Today I will review the significant progress that we made in the last year focusing on 4 key accomplishments: Heinz streamlined our manufacturing footprint, we generated more than $200 million of cost out, we reduced inventories below prior year levels and we integrated our acquisitions of Quero in Brazil and Foodstar in China. As I will discuss in more detail, our global supply chain initiatives helped Heinz deliver a good performance in a challenging economic environment.

Let's look first at our success in streamlining our manufacturing footprint to drive productivity and efficiency and reduce excess capacity. Including the recent sale of our frozen Foodservice dessert businesses, we have exited 11 out of our 81 factories in the last year, including 5 in North America, 3 in Europe and 3 in Asia-Pacific. With this reduction, Heinz has now reduced our global manufacturing capacity by about 25% since 2007 to improve efficiency without sacrificing quality. Importantly, we reduced our frozen factories by 26% in the last year alone, as Heinz implemented a growth strategy to focus on core brands and streamline the frozen portfolio.

With these closures, we reduced headcount by 3,300 employees, fixed cost by $62 million and total cost by $95 million. As a result, we expect a positive incremental EPS impact of $0.15 in FY '13.

Our second major accomplishment was driving more than $200 million of productivity in FY '12. As you can see, our total cost of goods sold is approximately $7.5 billion. This figure excludes the indirect procurement totaling $1.5 billion. We attacked cost and drove productivity in all areas of the P&L. Reflecting the positive impact of our initiatives in the last 12 months, we expect increased productivity in FY '13. Our focus on driving productivity in FY '12 combined with pricing, more than offset inflation of around $420 million. Our third major achievement was reducing inventory by 11% from the prior year. We reduced inventory to under $1.4 billion after taking into account commodity inflation of 7% for the year. Our success in reducing inventory was a key contributor to the company's strong operating free cash flow of $1.2 billion for the year. Our fourth accomplishment was the smooth and rapid integration of Quero in Brazil and Foodstar in China. Acquisitions in FY '11 that accelerated growth in Emerging Markets. Thanks to the outstanding efforts of our teams in China and Brazil, both of these businesses got off to a running start after joining Heinz and their performance has exceeded the company's expectations.

At Foodstar, the startup of the new Shanghai factory is underway and going extremely well. The facility will help us maximize production capacity across China to support future growth in our Sauces business. In Brazil, the integration of Quero has been swift and we are driving productivity while leveraging automation to reduce labor costs. Quero's factory in Nerópolis is the largest in our global portfolio and its automated production lines are fast, efficient and very cost effective. We expect to double the productivity in Latin America this year, reflecting our implementation of the Heinz global performance system, increased automation and the impact of global productivity initiatives. Importantly, we have created a more centralized and efficient global supply chain. At the end of FY '11, Heinz had 13 independent supply chains around the globe. We had a decentralized structure that was, quite frankly, making it tough to achieve the economies of scale. We recognized that we needed to make a change and that is exactly what we did in FY '12. Today, we have 7 supply chains and we are evolving into 4 regional hubs that will help us leverage our global scale to drive top line growth and margins.

Take for the example of the formation of our European supply chain hub in Europe. This hub is located in the Netherlands and is led by Christophe Muller. First, it has already increased efficiency by bringing together 130 supply chain professionals who were previously scattered across Europe. Having centralized supply chain functions under one roof also enables us to make decisions quickly with huge financial impacts, such as managing inventory. In FY '12, Europe drove an impressive 13% reduction in inventory levels over the previous year without compromising service.

Another example is steps we have taken to create a regional supply chain hub for Latin America. Coinciding with the acquisition of Quero, we have, over the last year, built a strong Latin America supply chain organization. First, we brought in 2 outstanding supply chain leaders who have delivered excellent results in other markets. They were implementing our global productivity initiatives in the region and are sharing best practices and knowledges from our developed markets. Through this hub, we are also sharing and leveraging innovative packaging solutions to lower cost and reduce our dependency on costly commodities such as tin plate and glass. One example is the flexible pouch or Doy Pack, which we launched across the Emerging Markets to grow growth in ketchup and baby food.

As you have heard, Heinz recently introduced pouch ketchup to U.S. consumers. A second example is tetra packaging, which is used in many of our Quero products in Brazil such as beans and vegetables. We are in the process of developing tetra packaging for Europe. We see pouch and tetra as 2 key packaging innovations that will help Heinz reduce the impact of escalating commodity cost in the future. Finally, the supply chain hub in Latin America will enable Heinz to optimize manufacturing and distribution and expand growth like our plan to produce Heinz Ketchup in Brazil for the first time for consumers in the region. In short, this hub is starting to optimize our regional manufacturing and distribution footprint in Latin America.

Looking at FY '13, here are the must do's. First, as I just mentioned, we will continue to implement regional supply chain hubs with a focus on completing the European hub and building the Latin American hub. Second, we will leverage our global procurement organization to drive savings. And finally, we will drive emerging markets productivity as we deliver against our 5-year $1.3 billion productivity target. All of these initiatives will help us further reduce inventory, one of the keys to driving cash flow.

As I said last year, Heinz has a diversified input basket. However, we have key commodity categories across all businesses that we can leverage to reduce our procurement spend. Here's how we're going to leverage global procurement in FY '13. We have hired a new Chief Procurement Officer, John Dickson, who brings 20 years of procurement expertise. And I'm confident that John will take this organization to the next level. By optimizing the performance of our global category leaders who are responsible for high spend categories such as resins, tomatoes and proteins, and continuing to expand the global rollout of Project Keystone to drive common metrics and compliance to capture savings. Under John's leadership, our category leaders will leverage spend globally with Mega Tenders, drive global indirect procurement and co-packing initiatives and consolidate vendors for volume pricing. Finally, we will continue to build on our partnership with Coca-Cola and continue to look at opportunities with other suppliers to leverage global scale across the supply chain.

We believe there are numerous opportunities, large and small, to leverage global procurement. And here is just one example. We have saved $11 million on $70 million in spending by moving from 17 regional carriers to just 1 global forwarder. This has also created an opportunity to reduce lead times, which in turn drives inventory reductions.

The third must-do is to drive productivity in emerging markets as we deliver against our $1.3 billion 5-year productivity target. We expect increased productivity in Emerging Markets will help drive gross margin improvements of 100 to 200 basis points over 3 years. We also expect emerging markets to contribute 30% of our annual productivity by FY '15. In conclusion, Heinz is accelerating our evolution as a global supply chain that is truly capable of leveraging our global scale and our capabilities. We delivered significant savings in FY '12 and we are bullish about FY '13 as we continue to implement our regional supply chain hubs to support growth and increase efficiency, leverage global procurement and continue to further reduce inventory. Together, these actions will help the company deliver on its cash target of $1.1 billion. Finally, Heinz expects increased productivity in FY '13 as we remain on track to deliver our 5-year target. As we look into the future, we believe FY '13 is an important step on the path to driving productivity and supply chain excellence. We see even stronger results from our initiatives in the years to come.

Thank you. I now will turn the podium over to Meg for a few announcements before we take our break.

David C. Moran

Welcome back. I think we'd all agree the last 12 months in Europe has been very eventful to say the least. Regardless of the external environment, Heinz Europe has made progress improving our financial performance and importantly, executing our strategy, the European agenda. Our great brands are responding to the powerful combination of the new strategy and the team's full commitment to the plan. We believe our performance will continue to improve over the next 3 years and we will help lead the company into its bright future.

To be clear, the majority of financial benefits from the European agenda have yet to flow-through our P&L. As background, Europe is a vital contributor for the company. Our European business is about 30% of sales, a much larger percentage than all other U.S.-based food companies. Now as you can see, about 60% of our business is done in 2 important markets. The U.K. as many of you know, is a fortress business for Heinz, virtually unmatched in consumers' eyes anywhere in the world. Our East is our fastest growing business and we have plans to more than double it over the next 5 years. We are also increasingly focused on our Sauces business, a business where we are clearly winning and we have a multiyear pipeline of new ideas. While we are excited about our future, we are also pleased with our FY '12 results. In fiscal year '12, we grew our volume, a first for 5 years, we reduced our deals and allowances back to levels not seen since '07. We grew our sales by over 6%, our gross profit dollars hit in an all-time European record, we increased marketing by 9% to a record, we also grew our operating income to an all-time record.

Pulling it all together, the European agenda is about improving our financial performance. And over the last 3 years, we've added more than $160 million in sales, dropping $64 million of profit to the corporation.

Importantly, I think that we're winning the right way, winning with full price consumption while leading our categories. The strategy calls for lower deal and allowances spending, strong marketing increases, tight fixed cost management, greater efficiency in working capital and using ROIC as a key measurement tool for the balance of the team, aligning us fully with our shareholders.

Let's talk our strategy a bit deeper.

As you know, the European agenda is our strategic platform to overhaul our structure, our business philosophy and our culture. Our strategy more fully values ideas, innovation, full price sales, full price consumption and leveraging our European scale. We are entering the third year of transformation and with the crisis in Europe continuing to accelerate, we're not slowing down, we’re accelerating the change process.

The team's strong execution is driving our improved performance. First about driving sustainable profitable growth in the brands we already own. The second component is leveraging our scale thereby gaining efficiency and effectiveness in the marketplace. We're doing centrally one-time what used to be done 15x scattered across Europe. Our competitive advantage in Europe lies that we have top-tier brands that are relevant to consumers. This fabulous foundation from which to build and these leading brands are about 70% of our sales in virtually all of our planned future growth and investment. The good news about these brands that are responding to the new model, a model that is integrated, leveraged and more idea-centric. We believe that a local go-to-market model is our competitive advantage in Europe. Western Europe's slow growth environment requires us to be more leveraged and more efficient in our spending.

As you can see, we've been busy improving how we run the business, essentially running Europe more centrally than in the past. Scale matters hugely in Europe and we are moving rapidly to a more sophisticated, integrated model as our confidence, and importantly, our skills increase. But make no mistake. This business is a complex set of customers, categories and consumers. Europe is far from homogeneous. There are very real differences between each country and each country's consumers. The largest customer in Europe only has a 6 share and the top 5 only 16% share. So Europe is complex. But the size of the prize makes it an attractive market for Heinz.

Europe produces 31% of the world's GDP and does 40% of the packaged foods consumption. It is the world's largest marketplace. This is a highly nuanced business and we're taking great care to achieve the proper mix between effectiveness and efficiency. We believe that our planned combination of in-country decision-making and pan-European scale is that right mix. Sales, marketing and P&L choices are best done closest to the consumer and the customer. By running many of the functions centrally, we free up energy for growth. And with our new scale, we gained leverage in the marketplace. We are actively professionalizing and Europeanizing the functions, which we best believe can be led from the center, supply chain, R&D, finance and HR. Our largest function is supply chain, it represent 60% of the P&L and about 85% of Europe's employees. We are making terrific progress here. And in many ways, supply chain is leading Europe down this new path. Our progress is showing up in the numbers. To simplify, we've cut the number of distribution centers and distribution networks. Our days in inventory have dropped by 20% and we ended FY '12 with the lowest amount of finished goods ever. This translated to record cash flow and record ROIC.

Our strategy is about building functional excellence, it's about scale, it's about improved capabilities and depth of our thinking. To leverage scale and support our pan-European strategy, we are accelerating the implementation of Keystone. And the team is excited about this capability and our progress is good. This is heavy lifting for a unit as complex as Heinz Europe, but Keystone is the enabler for so much of our future path.

R&D innovation and product performance are vital to our full price consumption strategy. At the very core is our desire to engage and delight our consumers at the critical intersections of the shelf, the package and the taste of the product. In December, we opened our new world-class state-of-the-art Innovation Center in Nijmegen, Holland. This 90,000 square-foot center will house 200 scientists, engineers and professionals. We expect about 40% of the employees to be new to Heinz as our skill expectations have increased. I saw first-hand what happened to the U.S. business when we opened the R&D center in Pittsburgh in 2002, the creativity of the teams exploded. We attracted world-class talent, built capabilities in engineering, processes in science. In Europe, our goal is to translate the new R&D center into a much more capable innovation machine, resulting in substantial greater organic growth.

Let me turn to the building of our big 4 brands and the emerging markets focus. Our portfolio mirrors Heinz' core categories and we are applying common strategies to these great brands. For example, we now have pan-European category teams for faster idea transfer. We're improving our innovation, we are increasing marketing to drive full price consumption and it's all being funded with a reduced amount of deals and allowances. Over the last 3 years, our marketing dollars to support the big 4 brands have increased by 8% a year and our ratio of working to nonworking is at an all-time record. Heinz Ketchup is always the company's top investment choice and that's absolutely true in Europe. We're winning hugely here and we see enormous upside and have the richest innovation pipeline in a decade. Great credit to the U.K. and Continental teams for running this business as a pan-European category thereby gaining enormous scale through the supply chain and idea transfer. Innovation is playing a key role in driving our growth. Ketchup with balsamic vinegar was our first ketchup product specifically oriented to adult taste. We backed that up with ketchup with Indian spices. First Harvest captures the first tomatoes of the season and we pack within 48 hours of harvest. We also have focused on small and larger size formats to meet consumers' changing definitions of value. In the U.K., we have an incredible strong ketchup position, almost an 80 share. And that special connection with consumers in the U.K. was highlighted in March of this year when Heinz was named Britain's favorite brand by The Grocer, the leading industry magazine. It's also confirmed by the fact that the average U.K. consumer buys a Heinz product 18x a year. Packaging, taste and product innovation has resulted in share growth in 8 of our 11 European ketchup markets. As a result, we've achieved strong double-digit retail sales growth in 5 markets, record shares across 6, 2 of which, Russia and Germany, are in the top 5 largest ketchup markets in the world. Interestingly, because of our innovation and increased marketing, retailer brands are not growing across Europe in the ketchup category and of course, that's in stark contrast with virtually all other categories in Europe.

Let's now turn to Infant Nutrition category in Europe and across the globe. As you know, we lead 2 categories globally, ketchup and Infant Nutrition. Infant Nutrition is led by, Stefano Clini, President of our Italian business. We have a team of professionals in marketing, supply chain, R&D and finance who are 100% dedicated to this global business and we're excited about this category for 3 reasons: Very strong category growth, deep Heinz expertise and wonderful emerging markets opportunities. Baby food competes in our fastest growing worldwide category. Globally, the category is up 10% a year and we have a terrific footprint from which to compete. We're #1 in Italy, Canada, Australia and New Zealand and we're using infant formula to -- infant feeding to expand into new emerging markets such as China, Russia and Latin America. In Italy and the U.K., we recently launched aseptic wet baby food, the production of this product reduces cook time from 30 minutes to 30 seconds. The results in a significant superior product with better taste, nutrition, color and texture, we have first mover advantage in Italy and early market results are very promising.

Infant Nutrition and [ph] Emerging Markets is a terrific opportunity for Heinz, both organically and through bolt-on acquisitions. Emerging Markets grew by 18% a year over the last 5 years and we see that actually accelerating into the future. We're aggressively pursuing growth where growth is happening and I think this chart says it all. Hein will give you an update on the China strategy in a very few minutes.

Let me switch to our terrific Beans business. This business is anchored in the U.K. where we have a whopping 60 plus share. About 70% of U.K. households right now have a can of beans in it. And also the average British household buys about $33 of Heinz beans every year and I can assure you, that's a lot of beans. We've continued with our tradition of effective marketing and it has to be Heinz Jack the Beanzstalk ad, our 1 of your 5 a day health and wellness messages has been effective in raising awareness that beans are good for you every day. Heinz beans is selling more off-the-shelf at full price than ever, responding to a 17% increase in media this year for an all-time record spend on the brand. Let's take a look at one of the spots.

[Presentation]

David C. Moran

Our focus on packaging innovation continues to drive growth. In fact, sales in Fridge Pack doubled this year and we're now urgently adding new plastic lines to keep up with demand. In Soups, we have an extremely strong portfolio of classics, including Cream of Tomato, Big Soup and Farmers' Market, as well as Weight Watchers. Our ambient soup business in the U.K. enjoys an incredible position with 2/3 of the business. This is another business we are investing in. Marketing was up 82% year-on-year, again for another record and we're excited about our new product pipeline. We see opportunity to improve the core and new flavors by providing greater convenience.

New Squeeze & Stir is our great tasting entry into Instant Soup markets. Our launch has been 80% incremental to our business. We just already achieved a high single-digit market share for the last 6 months and we see that more than doubling in the next year. Let's take a quick look at that commercial.

[Presentation]

David C. Moran

Let's now move to the east to our fast growing and very exciting Eastern Europe. I'm pleased to say that our focus here is really paying off. Allow me to share why we're so excited about the CIS markets and Russia, specifically. Eastern Europe is about 7% of the world's population but represents 12% of the packaged foods consumption. In Russia alone, packaged foods consumption was up 90% over the last 5 years. Now Russia is a country that's booming in all measures. Unemployment in Moscow and Saint Pete is virtually 0, the middle-class is growing rapidly, wages are growing ahead of inflation and over the last 5 years, exports have doubled -- excuse me they were up 5x over the last 10 years. Our strategy is clear here, to grow the Russian business substantially by building a world-class team and the infrastructure to support that. Today, we produce about 90% of our Russian shipments in 2 local factories. This gives us great logistical advantages of no tariffs and faster speed to market. Today, the Heinz equity is 70% of the Heinz business in Russia. In FY '12, we grew the Heinz brand alone in Russia alone, volume by 18%, sales by 23% and OI by over 100%. We did this by focusing on innovation and full price consumption. We are rolling out Keystone in Russia and over the next year, it will greatly help our analytical rigor in that important country. Importantly, Heinz Ketchup is growing strongly in Russia where we're the #1 brand in the third largest ketchup market in the world. Heinz Baby Cereal and Biscuits are growing rapidly and Baby Cereal has achieved the leading share position. In summary, we are rewiring Heinz Europe. And we have so many tangible reasons to believe in our near-term future. We have a new state-of-the-art R&D center opening in December to drive our innovation harder. We have a pan-European team to transfer ideas instantly, we have Keystone, enabling deeper analytics on the business. We have a consolidated, leveraged and very well run supply chain, innovation on our most important our brand, which is Heinz Ketchup is rich at a level we have not seen in a generation. We have a fortress business in the U.K. and you've seen the results and importantly, our plans for Eastern Europe. But the team is not naive about the European crisis and the difficult environment that we operate in. Europe's issues are very real, they are deep and they're going to take an extended period of time to work through. One of the most difficult elements for us to navigate is the extraordinary inflation that Europe is facing even with most of Europe already in or headed into a recession. Last year, we had high single-digit inflation and FY '13 we will be above that in Heinz Europe. To the team's credit, we're adapting quickly, choosing to execute this proven plan. We believe deeply that our brands are a solution for struggling consumers. We sell food, food that is nutritious and filling, food that is mostly priced between $2 and $3. The team believes success is determined by our thinking, creativity, courage to adapt and ultimately, our ability to execute this proven plan. Knowing the team as I do and believing deeply in our strategy, coupled with our specific plans to drive growth and efficiency, I am bullish on our markets near-term results. Over the next 3 years, I expect Heinz Europe's contribution to Heinz to actually accelerate.

With that I'll turn it over to Scott to hear more about North America.

Scott O'Hara

Thanks, Dave. It's great to be here today to share an update on the North American business and our plans to drive stronger growth especially in our U.S. frozen business. Frankly, I'm not happy with our performance over the past year especially on the top line. However, we are taking action to get the business back on track and drive sales, operating income and volume going forward.

Let's start with a quick overview of our North American business, which includes the U.S. and Canada. Overall, North America generates about $4.7 billion in sales, primarily within 2 categories, Ketchup and Sauces and Frozen Meals and Snacks. And North American Consumer Products generate about 70% of the sales for the region.

Let me start with our U.S. Foodservice business, which delivered improved results in the back half of the year, reflecting our focus on streamlining the portfolio and simplifying the business. Our U.S. Foodservice business continues to operate in a difficult environment marked by weak but improving restaurant traffic, high but moderating commodity inflation and continuing pressure on Back of House brands. The environment, while challenging, is improving slightly. And the good news is that restaurant foot traffic trends are improving albeit slightly. Our national chain customers are seeing their foot traffic flatten over the past few months, additionally, independent operator trends are still down but improving gradually, fueled by lower gas prices.

As this chart shows, our improved pricing covered commodities in the back half of the year after commodity inflation spiked the first 6 months. We expect pricing in fiscal 2013 to continue to cover commodity inflation in our Foodservice business.

Our quarterly profits have been improving over the last 2 quarters and I expect this trend to continue into fiscal '13. This improvement reflects pricing that is offsetting commodity inflation, our efforts to streamline the business and our relentless focus on selling the right product mix led by our iconic front of the house brands.

With that as backdrop, let me talk to you about our Foodservice strategy, which has 3 elements: Number one, we are getting back to what we do best, branded Ketchup and Sauces. Number two, we are pursuing growth opportunities to drive volume in other channels to accelerate growth. And number three, we continue to drive greater productivity by simplifying the Frozen Soup business and exiting our noncore frozen desserts business.

One key to our Foodservice strategy is to drive innovation behind Ketchup and Sauces. A great example is Dip & Squeeze, our dual function, single serve package. We have sold more than 1 billion packets to date and it now represents about 25% of our U.S. branded single serve sales. We continue to drive volume and are getting manufacturing efficiency, and we expect to convert more customers in fiscal '13. Like our recent win with McDonald's Tri-Ad Mac group in the Pittsburgh area. To drive tabletop sales, we're launching a new classic 14 ounce squeeze bottle for our Foodservice customers. This new offering will help facilitate entry into non-restaurant channels and its price point will provide relief for small independent operators. In addition, the bottle is a cost-effective alternative for Heinz, allowing us to deliver greater value to the operator. Speaking of tabletops, they are powerful platforms to drive trial and awareness. We generate an incredible 17 billion impressions or the equivalent of more than 150 Super Bowl audiences through our tabletop Ketchup business. In addition, we've used the Talking Labels to leverage restaurant partnerships, highlight our PlantBottle initiative with the Coca-Cola Company and to support the Wounded Warrior program, all of which have enhanced our visibility with the consumer.

And as you can see, there is plenty of room for growth in the non-restaurant channels. Heinz is underrepresented in this white space and we have restructured our selling organization to capture this growth opportunity. Importantly, we have taken decisive action to simplify the Frozen Soup business and improve its profitability. Over the past year, we have closed 2 factories in the United States, Kent and King of Prussia, and we've eliminated a number of slow-growing SKUs. These actions have refocused our Soup portfolio on faster growing and more profitable core offerings and reduced cost by about $10 million.

Earlier this month, we divested our Frozen Desserts business, including the Dianne’s and Alden Merrell brands. This transaction enabled us to exit 2 factories, reduce headcount by about 500 and eliminate a low-margin business that had declining sales. This will impact sales by about $73 million in fiscal '13. Importantly, it allows us to now focus our resources on branded ketchup, condiments and sauces.

Our strategy to simplify the business and focus on a more profitable mix is driving the turnaround of our Foodservice business. We delivered solid organic sales growth in Q4 with a more focused Soup business, improving margins, resulting in improved ROIC. And as a result, I believe the business is now well-positioned for future growth, especially as restaurant traffic improves.

Now that I've covered our Foodservice business, I'd like to switch gears and talk about our consumer products business, which generates the majority of our sales. As Bill highlighted earlier, the U.S. environment remains challenging, marked by still low consumer confidence, a growing economic divide amongst consumers and changing consumer behavior. Consumers continue to focus relentlessly on price and value and they are shopping emerging or alternate channels. In a down economy, frozen categories tend to suffer more and this has clearly been the case in this cycle. To win in this environment, we have adapted our strategy. Consumer sentiment remains well below the historical average and is just starting to return to 2011 levels.

Consumers continue to feel inflationary pressures and as consumers manage tighter household budgets, the center of the store, where most of our brands play, have been impacted more significantly than the rest of the store. That differentiation is especially critical as we continue to see a shift to 3 distinct socioeconomic consumer groups, the affluent, middle class and struggling consumers. And as you can see from our penetration index, we are well developed with affluent consumers and middle-class consumers.

And we have a real growth opportunity with lower income households who account for about 1/3 of total spending.

In the last decade, U.S. consumers have increasingly moved away from supermarkets to alternate channels like drug, dollar and convenience stores in their pursuit of convenience and lower-priced offerings. This is a fast growing area where Heinz is severely underrepresented and we are taking action to change that.

Our U.S. consumer products business is made up of 2 distinct categories, frozen and ambient. And as this chart shows, the trends in these 2 categories are in stark contrast. The frozen category has been disproportionately impacted by the recession and changing consumer behavior. And conversely, the ambient business has held its own in a very challenging environment.

Let me spend a few minutes discussing the new strategy that we developed in order to invigorate growth in this challenging environment. There are 5 key elements to our strategy: First, we are driving innovation and we're going to continue to do that. Second, we are fixing the Ore-Ida issue and then we're going to market the fix. Third, we're going to aggressively attack the emerging alternate channel opportunity. Fourth, we’re going to significantly increase our commercial investments in the business. And finally, we’re going to continue to drive productivity to help fuel our growth.

Turning to innovation, we are focused on 4 goals: Providing value for consumers through lower more affordable price points and convenient packaging and offerings; we intend to capitalize on the growing trend of health and wellness as U.S. consumers continue to age; we are targeting the increasingly diverse consumer in the United States; and finally, we are leveraging the powerful Heinz equity, which the company has successfully done around the globe and especially in the U.K.

To meet the needs of all consumers, we are tailoring our products to meet the needs of consumer groups across the socioeconomic spectrum. We want to capture our fair share of each consumer segment so it's critical for us to get the right products at the right price in the right channels.

Ketchup is a great example of this strategy. On the low end, in March, we introduced pouch ketchup in the U.S. with a suggested price of $0.99, making it an affordable option for smaller households and struggling consumers. The pouch is an example of innovation that we have successfully transplanted from Emerging Markets where this cost-effective packaging is being used for everything from Heinz ketchup to mayonnaise, to soy sauce, and even cheese sauce. And the customer response has been good with over 30 customers accepting it on a permanent basis, including Walmart and Kroger. At the same time, we have extended the product line with adult varieties like Balsamic Ketchup where we sold more than 16,000 bottles via Facebook in the first 48 hours after we announced the launch. And we plan to launch a jalapeno ketchup in the same manner later this year.

To capture untapped growth, starting in the alternate channels, we have launched smaller sizes of our leading brands to deliver value at affordable price points. Many of these products are priced around $1 and will help support our strategy to increase penetration of Heinz products in the alternate channels. Capitalizing on the health and wellness trend, we have launched 12 great new items to drive continued growth in Smart Ones, which has been outperforming the soft nutritional category.

We have successfully positioned this brand as a 24/7 day part solution to enhance its #2 share position. As emerging consumer groups become increasingly important in the U.S., we have a significant opportunity with Ketchup and Sauces to grow our business. The U.S. Hispanic population consumes more ketchup per capita than our base consumer, yet awareness of the Heinz brand amongst this group is very low. We have an opportunity to increase our business in the Southwest market by 17% if we grow our share to the national average. Along with our agency, LatinWorks, we have launched a comprehensive, targeted Hispanic 360-degree marketing program to start to capture this opportunity including this commercial. Take a look.

[Presentation]

Scott O'Hara

Reflecting our focus on quality, great taste, innovation and value, Heinz ranks #1 among all 225 companies across 47 industries in the American Customer Satisfaction Index.

We are leveraging the strong equity of the Heinz brand to expand in the adjacent white space. We've launched 4 SKUs of Heinz Beans under the Heinz Home Style brand and are expanding the launch nationally in July. This is an opportune time to bring back our nutritious classic.

We are also launching new varieties of Heinz Home Style Sloppy Joe Sauce to leverage the great Heinz equity.

Now I want to discuss our #1 issue, fixing the Ore-Ida business and getting it back on track.

We started this work in fiscal '12 by addressing the value gap on Ore-Ida. And we've made significant progress over the last 3 or 4 months but I won't be satisfied until we return this business to growth. I see this happening in the latter half of the year. Make no mistake, fixing this #1 brand is very important, which is why we are increasing marketing and advertising significantly. We've just returned to television with the new commercial that focuses on the nutritional profile of our Ore-Ida French Fries.

Another key to driving renewed growth is innovation. One example is our Ore-Ida Grillers. To capture new occasions during the summer grilling season. In addition, we have launched new varieties of Sweet Potato Fries and you can expect more new innovation from us in the coming year.

Importantly, we are taking action to address the value gap. In dollar and drug channels, we are expanding our one-pound offerings priced at less than $2. We plan to add a Tater Tots SKU, 1 pound SKU in September. In addition, our Easy Fries, priced under $1 have performed very well in this environment with more than 12% volume growth over the last 12 weeks and it has been good for both the category and Ore-Ida.

These actions are making Ore-Ida more accessible to value-conscious consumers. Our Ore-Ida share performance has clearly been disappointing. We took a 9% price increase and some share erosion was expected but the impact on our volume turned out to be much greater than our elasticity models predicted. We have taken action to address the value gap with private label and our share trends since January have been improving. That said, we are still off our 52-week high and we have a lot more room for improvement, which we are planning for in fiscal '13.

To build on the improving volume trends, we will substantially increase our marketing support on Ore-Ida in fiscal '13 with a combination of TV, print and digital. Let's take a look at our new TV ad.

[Presentation]

Scott O'Hara

As I mentioned, we are continuing to innovate focusing on new occasions to drive the category. Our Sweet Potato Fries have been a huge success as we have quickly become the share leader in that segment. In April, we launched 2 SKUs of Ore-Ida Grillers just-in-time to be on shelves for the summer grilling season. We will support the Grillers launch with a national marketing campaign during the summer. I think you can see that we are absolutely committed to returning the Ore-Ida business to growth.

Across our brands, we are attacking the alternative channel opportunity. We've taken a number of actions to target what we believe is an untapped growth opportunity for Heinz. First, I've appointed a new sales leader for our U.S. business, John Hans. Second, we've added dedicated all channel marketing and sales people for the first time. And finally, we are leveraging our smaller-sized products, which are helping us make progress but I believe we've only scratched the surface on this important opportunity.

To build a stronger foundation for growth, we are planning a double-digit increase in working media in fiscal '13. At the same time, we're improving the value proposition on key brands like Ore-Ida and we believe these actions will help get our business back on track. To refocus our business on core brands, we have simplified and streamlined on our greatest growth opportunities. We've divested our Boston Market license and exited the T.G.I. Friday's premium frozen entree business in response to weak category trends. These actions will be good for our business in the long-term but will result in an NSV impact of about $73 million in fiscal '13. In the past year, we've made great progress streamlining the organization. We've taken out 5 factories, primarily across our Foodservice Frozen Soup and Desserts businesses. We've reduced our salaried workforce by almost 8% and our hourly workforce by 15%. And through those reductions, we've been able to decrease our fixed cost by about 6%. In addition, we reduced our ending inventory by 10% and we've eliminated a little over 300 SKUs or 6% of our total SKUs.

Another cost out initiative is new packaging in ketchup that will leverage our iconic bottle, improve sustainability and importantly, eliminate non value-added costs. It's too early to reveal today but we will share details of this important initiative with you soon.

To provide fuel for growth, we plan to deliver greater productivity savings in fiscal '13, targeting total productivity of about 5%, up from roughly 3% in fiscal '12. In this consumer environment, we've accelerated our value engineering initiatives as a means of mitigating inflation and providing fuel to fund our marketing initiatives. We expect to double our value engineering savings in fiscal '13. In addition, we will also realize benefits from last year's productivity initiatives.

Now that I've reviewed our FY '12 results and shared our growth strategy, let me briefly discuss our outlook for fiscal '13. We are building on the actions that we've taken in fiscal '12 to strengthen our business. On a reported basis, we expect sales to be about flat. However, if you excluded the impact of the Foodservice Dessert sale, the Boston Market divestiture and the T.G.I. Friday's Meals exits, we expect sales to be up 2% to 3%. We expect operating income in North American Consumer Products will be up mid-single digits behind our increased investments and high single digits in U.S. Foodservice as they continue to make very good progress.

In conclusion, although we continue to operate in a very difficult U.S. environment, we have successfully turned around our U.S. Foodservice business. We are driving our retail Ambient business and Foodservice businesses for profit and growth. We are addressing the issues in Frozen, especially on Ore-Ida, where we are fixing the problem and marketing the fix.

We are taking a targeted approach to new customer demographics. And finally, we are driving greater productivity to fuel our future growth. Thank you for the opportunity to share an update on my North American business. I'll now hand it over to Chris Warmoth to lead the Emerging Markets discussion.

Christopher J. Warmoth

Thanks, Scott. To discuss Heinz' Emerging Markets, we've convened a panel. I'm Chris Warmoth, Executive Vice President for Asia-Pacific. We have Dave Woodward, Executive Vice President, Rest of the World and as soon as Dave starts to speak, you'll discover that he, like me, comes from a country that just loves Heinz tomato ketchup and has not yet discovered Sloppy Joe. We also have Hein Schumacher, he's the President of China. Hein is Dutch and I have to tell you that his first name has led many of our Chinese employees to believe he owns the company. And then finally, we have Fernando Pocaterra, Area Director for Latin America and the Caribbean. Ever useful, Fernando has been with the company for more than 30 years. Now this slide shows how our Emerging Markets break down by segment. So the Asian Emerging Markets are just under half and the Rest of the World is now not far behind with the remainder in Europe.

Now, of course, we report our results by region and we have Emerging Markets in 3 of them. It's just over 10% of Europe, it's about 40% of Asia-Pacific and it's 100% of Rest of the World. But what we wanted to do today was use the opportunity to give you a consolidated scorecard for our Emerging Markets and share the common strategies we're using to run and grow this business.

Now Dave Moran has covered the European Emerging Markets. So we're going to kick off with overviews on the other regions. And I will start and initially focus on the developed part of Asia-Pacific. We haven't yet covered it and it is an important business for Heinz.

Within Asia-Pacific, in FY '12, Australia, New Zealand was less than half of the sales and that's a very significant change in the last few years and it reflects the high-growth we've had in Asia. If you then add Japan, we would be up to 60%, that's in red. By NSV, Australia's by some way, the largest country. Then we have New Zealand, Indonesia and China are all in the $350 million to $400 million range and Japan and India, in the $200 million to $300 million range.

If we look at Asia-Pacific NSV between FY '10 and FY '12, it grew at a CAGR of 13% from $2 billion to $2.6 billion. OI over the same period grew from $195 million to $206 million. But as you can see, FY '12 was less than FY '11 and that was all Australia. In fact, if we exclude Australia, operating income grew faster than net sales.

I'm going to discuss Australia more in a moment, but just suffice it to say, the business is stabilizing.

Now Japan had a really excellent year in FY '12. The top line grew nearly double digits and the bottom line much higher than that. We had another very strong year on Ore-Ida. And we have successful innovation on the Heinz brand. We had a premium line of pasta sauces in a very distinctive black pack. And we've leveraged our core product in Japan, Heinz Demi-glace Sauce into Ready-to-Use Cooking Sauces and also, Frozen Hamburger.

New Zealand also had a very solid year with both top and bottom line growth. And this was our ninth consecutive year of growth of OI, OI margin and NSV. And in fact over that period, OI margins have more than quadrupled.

And then lastly, Australia. We were well short of target and we were well below previous year. But in the past 8 months, we've seen a stabilization of this business and that comes down to 3 elements: First, we've improved our relationship with the retailers and they have told us that they have noticed our increased ability to bring them real value. Our customer service has gone from poor to strong and that's due to a total overhaul of our planning process.

We've also established a category development department, borrowing expertise from the U.K. and the U.S. and that's enabling us to bring the retailers better shopper and consumer insights. And then we've had improved innovation. We just launched the U.K. idea of Squeeze & Stir. On Weight Watchers, we borrowed the U.S. 24/7 concept to enter into snacking. And we've just launched the first probiotic juice in Australia, Golden Circle Healthy Life. Now it's early on all of these innovations but the initial responses are really very encouraging.

Australia has also reduced cost on every front. We have 5 factories, we closed 1 and have downsized 3. We had a record year by far on the supply chain productivity. And we've transformed our down the street beverage sales force from a large, expensive and inefficient one to something much more effective, nimbler and lower-cost. We've also substantially downsized our head office.

We've also reorganized in Australia. We have a new senior management team. We've moved to one fully integrated supply chain with New Zealand, giving us better scale and allowing us to move faster. And we've also created a new structure with 4 business units, one for Food, Beverage, Infant and Nutrition and Out of Home and that is giving us more transparency and much more accountability.

Now we are not where we want to be in Australia but we've made significant progress and we enter FY '13 with a much stronger foundation.

We expect strong double-digit profit growth in FY '13 and we have the plans in place to deliver. Now that concludes the discussion on the developed markets of Asia Pacific and the rest of this panel will be about Emerging Markets and I will kick off with the Asian ones.

They again grew double-digit in FY '12 and this business is now well over $1 billion in sales. Our big 3, Indonesia, China and India, have all had significant growth in the past 2 years, plus 13%, plus 19%, plus 16%. These are all great businesses with a lot of upside potential.

Indonesia had another double-digit year, it's fifth in a row, and as you saw earlier, a very strong performance on sauces. India grew again and that was mainly due to Complan. It’s our biggest brand and it had another strong double-digit year. And it was driven by 2 innovations. The first, Complan Memory. This is targeted to kids and it has added ingredients to help brain development. No, I drink it, it has a great taste but I was a little disappointed when the Indian team told me rather triumphantly that it doesn't work against brains which are no longer developing. Our second innovation was Complan Nutri-Gro, this is targeted to younger kids aged 2 to 6. Both these innovations have been very incremental and have helped us build share. Now I just covered Indonesia and India. Hein, maybe you could talk China first.

Hein Schumacher

Sure, Chris. The Heinz China portfolio in a way, resembles the corporate core categories, Ketchup and Sauces, Infant and Nutrition and Meals and Snacks. Meals and Snacks in our case, is our frozen meals under the Long Fong brand and I'll talk briefly about each of those categories. To start with, sauces and condiments or Ketchup and Sauces as we used to call them. We already had a small western sauces business in China but with the addition of Foodstar, it is now a real business, approaching about $250 million sales value. Importantly, we now have a very full portfolio of sauces and condiments with local as well as western propositions. We had another good year, another double-digit year, I should say, on Infants. The business has nearly doubled in a number of years since 2007. But more importantly, Heinz as a brand name, is almost synonymous with baby food in China.

We are very firmly rooted in that country and I would say, with a high birth rate, that is a very favorable position to be in. And the key differentiator for us versus any of the other players is that we are the only one offering the total assortment of baby food products ranging from cereals to teething rusks, fruit solutions and as you very well know, we also entered infant milk formula around 18 months ago. Now infant milk formula is of course, a huge category. But it's also very competitive, all the major players are essentially there. I would tell you, we learned as we went along, I'm quite pleased with the progress.

We've seen very good growth where we actually focus in. And that means focus on both geographically, which you almost have to do in China and I'll talk about that a number of times today. But also channel-wise and where we focus channel-wise was on baby stores. And baby stores is a format in China that is about 1/3 of the total Infant and Nutrition market. In a baby store, a mother or as Dave and Chris would say, a mum, they can actually buy the whole assortment of baby food products but also, strollers and baby clothing. So that allows us to display our total assortment, which again, is our key differentiator. Actually in baby stores, babies can even get a massage just to relax a little bit. I can recommend it to everyone, of course, if you have a baby. But it is truly a very popular format and much faster growing shopping in grocery in China.

I see, again, I see a strong off take in those formats where we truly focus also geographically. Now our third category is frozen dim sum under the Long Fong brand. And frankly, we have struggled with that brand for a while. Recently, the category, the frozen category, has also been hit by a number of competitor recalls. We were not involved in none of them but having said that, the consumer did lose some confidence in the category and obviously, the total value in the category went down. I would say, we acted fast and we have taken some very tough measures in the last 6 months or so. We've brought the business back to 3 core subcategories that you see here on the slide. But we have also focused here again geographically, in 3 core geographies in China where we have a relatively high share and therefore, a right to win. I would say, with this business, we have now a much leaner, simpler and nimbler approach. I would say, we have a fairly bright outlook for the near future.

Let me add a couple of words on the consumer sentiment in China. And I touched upon this topic already. Food safety is the #1 concern for Chinese consumers. And I think as an industry, as a food industry, we have a job to do, to recover the confidence of the consumer in China. And I think as Heinz, we've done a great job in the last, well, actually since we entered the country. But to me, it simply means that we continue -- that we have to continue to drive quality assurance relentlessly through our operations.

That said, the Chinese consumer is still bullish about their own financial future, about 60% of them expect an increase in disposable income in the near future, which is, on a relative basis, quite high versus countries both in Asia, as well as in the West. We do see, at this moment, some signs of macroeconomic slowdown as you are aware of. But I would say, that especially hits the high end luxury goods. I think for fast-moving everyday consumer goods, there are some broad megatrends that will continue to push demand forward, which are ongoing urbanization in China and then of course, the related growth of the middle-class.

So on balance, I'm positive, I'm very positive about our Heinz China business. Obviously, with acquisition of Foodstar, I'll talk about that a little bit -- I'll talk about that more later and I'm bullish about the prospects for China in general. Dave?

Dave Woodward

Well, Hein, I really feel your optimism about China, it's terrific. I'm also very excited about Rest of the World. So let me spend a few moments talking about it. Sales in FY '12 exceeded $1 billion with operating income ahead of $100 million. A terrific milestone for Mike Milone and his team and I'd like to take the opportunity really to congratulate Mike, both on this achievement but also his very well-earned retirement. Mike has been a terrific coach, teacher and mentor to many of us, including myself. Now within the Rest of the World, Latin America, of course, is very much the biggest part and Fernando will spend time talking about that in a moment. But I'm also very bullish about Africa and the Middle East and our prospects there underpinned for me by 2 killer facts. The first is that GDP today is about $1.6 trillion, roughly equal to that of Brazil or Russia. And by 2020, it will be about $2.6 trillion. Secondly, today, the annual consumer spending is about $900 billion. By 2020, it will be about $1.4 trillion. Now our efforts here are very much focused on 3 segments, South Africa and Egypt where we have significant manufacturing capability and then thirdly, Arabia and Africa, which includes the all-important Nigeria, a terrific prospect for the future where we're really starting to make great progress and there's much more news to come there. These businesses all grew top line double-digit growth or thereabouts in FY '12 and that includes Egypt, which really is a tremendous achievement given the volatility in that region and the momentous year that, that particular country has had, very well reported in the media of course. In South Africa, where we are in sauces and frozen snacks, the sauces, both Heinz and local brand, Wellington's, had particularly impressive years and are currently the growth engines of our business down there in South Africa. In Arabia, our main product is the Heinz Ketchup and Mayonnaise. And I'm very pleased to say you can see the very strong sales growth but similarly, we have very strong share positions and all heading in a northwards direction.

Now in terms of consumer sentiment in this part of the world, it really does offer incredible potential with the population size and GDP growth rates equal now to that of India. Diverse cultures and income levels, which offer scope for our full brand and portfolio offerings. Consumers tend to be optimistic, balanced with some concerns about job security. That may sound a little negative. The reality is, it isn't at all. It just means that with every $0.01 spent, they really need absolute reassurance they're going to get high-quality, great tasting, nutritious products every time. And, of course, we play extremely well in that particular field. They also tend to have very traditional beliefs, they're very brand loyal, they're heavily influenced by TV, radio and increasingly, mobile telephony, which really plays to our innovation streams and our increased digital capabilities, something Hein will talk about a little later on.

Now I do see many of the same trends in Latin America, and I know talking to Chris and Hein, it's very similar in Asia, too. Fernando, will you tell us a bit more about Latin America?

Fernando Pocaterra

Sure Dave. We also have a great business in Latin America. Latin America continues to be an area of opportunities. Our business is about $800 million within these 3 core categories: Ketchup and Sauces, Infant/Nutrition and Meals and Snacks. As you can see, Heinz is across all 3 categories. In the case of Infant/Nutrition, it's mainly Heinz. And in Meals and Snacks, we also have some local brands.

Our business in Latin America is doing very well. In fiscal year '12, it grew 23% driven by great performance in all markets. All markets, as you can see, grew double digits, and by category, all show very strong growth. The Quero position in Brazil, which we will discuss later in more detail, has catapulted our growth in Latin America. It doubled our sales, it is off to a great start well above our expectations and has good growth potential and opportunities. We're also very happy with our progress in Mexico where we have seen good growth in both ketchup and baby food. Reaching record high market shares of 18.4% on ketchup and 6.8% on wet baby food. However, that's not enough. But I can tell you that today, we got some good news. The latest market share data in Walmart wet baby food shows that we reached an average of 20% in our baby food brand. These results are mainly driven by the introduction of pouch, which has exceeded all our expectations. Across the region, both categories, ketchup and baby food, are responding very well to the new pouch format. Consumers love it for its convenience and lower cost, which make us more affordable to consumers. Back to you, Dave.

Dave Woodward

Okay, thanks Fernando. And that's it now for the regional overviews. Let me very quickly review the 5 agenda points we're now going to cover for the rest of the panel session. First off, Chris will provide an overview of our Emerging Markets performance at aggregate level. We're then going to take a deeper look at some underlying broad dynamics in the Emerging Markets that we believe will continue to drive sustained growth for quite some time to come. We're then going to outline our 5 key strategies in Emerging Markets. These are already working extremely well for us and they make us feel very confident indeed that we're very well placed for the future. Of these, were going to go much deeper on our organizational strategy, and we're also going to talk in much more detail about our buy and build approach to acquisitions. You're going to see 2 incredible testimonials from Fernando in terms of Quero and Hein in terms of Foodstar, and you'll be able to see and understand exactly how we went about acquiring those businesses, importantly, how we went about integrating them. Even more importantly, how we went about leveraging them to ensure that our performance really did and does exceed our expectations.

We're then going to focus on how we execute in the market using Chris's famous 3 As of availability, affordability and applicability. And then finally, I'm going to wrap up with a financial perspective and a brief summary. Chris, would you be kind enough to kick off with the first point.

Christopher J. Warmoth

Yes, sure. I think as we know, Emerging Markets are a critical top line growth driver for Heinz. That was true in the past decade, that was particularly true in FY '12 and it's going to be very true going forward. If we take the period FY '07 to FY '12, you can see our sales grew from $1.1 billion to $2.4 billion, they more than doubled. If we then take the 7 years from FY '05, we grew at a CAGR of 18% and the sales more than tripled. And as Bill's slide showed just earlier, this growth compares very favorably to our peers.

Let's look at the Emerging Markets as a percentage of total Heinz. In FY '05, we were single digit; FY '07, 12%; FY '12, 21%. And last year, we said our target was to be 30% by FY '16, taking to account both organic and acquisition growth. Looking at our recent history, we think we can get to the 30% even without acquisitions. So we're now looking to get there faster and get even bigger over time.

Importantly, our Emerging Market growth has been profitable. Take the period again FY '07 to FY '12, sales CAGR has been at 18% and gross profit has been at 19%. So we've seen a slight improvement in our gross profit margin, and that's even though the 2 recent acquisitions do have a gross profit slightly below our average and that's very normal for an acquisition. And what we find is that over time, we will improve that gross profit margin. In FY '12, net sales in Emerging Markets grew by 16.5% and our gross profit was up nearly 19%. So another very strong year. Our investments in Emerging Markets have been increasing for both marketing and for CapEx. On marketing, you see a very consistent year-on-year increase since FY '07. It's grown at a CAGR of 20%. And that's as we've put stronger support behind our brands. CapEx sees more fluctuations, but it's grown at a CAGR of 23%. That's a significant increase in particular in FY '12, which is going to continue into FY '13, mainly behind new factories and the expansion of existing factories to meet our fast-growing demand.

Let's look at OI growth. Again, FY '07 to FY '12, it's grown at a CAGR of 15%. Now that's somewhat below the gross profit at 19%, but that reflects the higher marketing spend and it’s still pretty healthy growth. If we look at FY '12 and exclude the acquisitions there in the red on the slide, our OI again grew at double digits. I think very importantly, our OI margins are also double digits. On operating free cash flow despite the CapEx, if we take the past 5 years, it's been over 100% of net income. So overall, a very sound financial performance from our Emerging Markets.

Let's now move to the second agenda point, this is to discuss some underlying broad dynamics, which will continue to drive our sustained growth. Now Dave, you've had a long and storied career, I'd say, in developed markets, including leading the turnaround of the very successful U.K. business. I think you've also been running Africa and the Middle East for the past year and you've had a foot in both camps going from the mysteries of Westminster to the glories of the sphinx. I'm sure this has given you some fresh perspective, perhaps you could share some story.

Dave Woodward

Thanks, Chris. Yes. Well, first of all, I've been struck by the very stark difference in the current standard of living in many Emerging Markets compared to what we're used to in the West. But I'm equally amazed by the growth in these markets and just how quickly the wealth gap now appears to be closing. Of course, it does vary tremendously by market. But overall, wherever I go in Emerging Markets, people seem to be getting richer and they certainly seem to be consuming more. The statistics behind me really do confirm this picture. Now if we move forward and look at measures like consumer confidence and disposable income growth, the contrast between developed and Emerging Markets really is quite striking, and this slide shows all the detail. But the big picture is very, very clear, Emerging Market, consumer they're growing in number, they're indeed much more confident about their futures and they are seeing a growth in disposable income. And that, in turn, of course, means that the number of consumers who can afford branded products just continues to grow. This is often referred to as the rise of the middle-class. And analysts have suggest that the middle class in Emerging Markets has grown by some 70% from 2010 through to 2015. Now these are not soccer mums or soccer moms, should I say, with SUVs in Emerging Markets, their disposable income is still much less than what we're accustomed to in the West. The emerging middle class, or better described, the emerging consuming class, is experiencing the trickle down wealth effect, which is now expanding into more rural areas and they're buying more packaged foods. These are just some the reasons why emerging market growth will far outstrip that of the developed world as we move forward in the future. The great news is these trends show absolutely no sign of abating. GDP is growing fast, birthrates are healthy, and in most Emerging Markets, the population is growing strongly, too. So really healthy mixture and one that seems likely to propel growth for businesses like ours for much time to come. Now Hein, you've also lived and worked extensively in Western markets until they asked you to leave. Could you tell us a bit more about what you're doing now?

Hein Schumacher

Yes, asked me to leave. Well actually, in a way, that was probably a good thing. I now live in Shanghai, which is an extremely exciting place to be. And together with Guangzhou, those 2 cities are the basis for Heinz in China. In Guangzhou, we have our infant and nutrition business, as well as the Foodstar business. And in Shanghai, we have our frozen foods business and some corporate functions. Now importantly, because we are based in both of these economic clusters, we can obviously pull talent out of a both of them and that's very important for us.

Now as we know, China is the country of mind blowing macro numbers. But just to make them a little bit more relevant for Heinz, you can here see just the sizes and in average growth number of the sauces and condiments categories. Now obviously, soy stands out. It's a $3 billion retail category and if you would then add Foodservice, it adds up to a total of around $4 billion. But also some smaller and lesser known categories such as fermented bean curd, a category that came with the acquisition of Foodstar, is actually sizable. Or even sesame oil, a category that we organically entered this year is a rather sizable category.

Another dynamic on the Emerging Markets is competition. Now, I also laugh if I speak to colleagues within Heinz or even outside of Heinz when they talk about the competition saying, "My market is really very competitive," as if others are not really competitive. Well, let me tell you, these Emerging Markets are incredibly competitive. China is incredibly competitive. But there is one fundamental difference with the developed markets and that is that the competition is much more fragmented. Let's just take a look at soy sauce and Infant. Two categories in which we play.

There are literally hundreds of competitors there, many of them are very local, many of them are regional. And because of the macro growth over the last couple of years, there has been ample growth for many of them just to grow with the street. But I should also say that right now, we are seeing a trend of starting consolidation. And I think as a company, we're quite well placed to take advantage of that, both organically because we're focused and we have resources and also, through mergers and acquisitions, a topic that we will talk about a little later.

As Bill has already mentioned, Foodservice is another exciting growth opportunity and we now look to grow focused together with our international QSR partners and drive front of house and branded Ketchup and Sauces product. That is how our heart lands. We just set up a Heinz China Foodservice operation comprising the whole portfolio of sauces and condiments, and our objective is clear, which is to become the leading player in Ketchup and Sauces in Foodservice.

Finally, a topic that is very close to my heart, which is digitalization and e-commerce. China, and I think this is a well-known statistic to most of you, is well on track to become the largest online market in absolute dollar terms. But let's take a little bit deeper look here and look at connectivity. About 1/3 of the Chinese population is already connected to the Internet and then, another 1/3 of that group is actually already buying online. And I see 2 dimensions for growth. First one is simply to convert that group of 1/3 to an even higher ratio. And secondly, of course, to increase the average shopping basket size. Now I'm extremely passionate about this trend and I'm very proud to say, you can see that actually on the picture there, that the Heinz cereals is already the #1 selling item on Taobao, which is the dominant Chinese e-commerce platform.

Christopher J. Warmoth

It is a topic Hein is very passionate about. He dragged me to Guangzhou to hear about it for 2 days, so I think we better move on to the third agenda item before he gets going, which is perhaps the most important agenda right in the ball, that's our Emerging Market strategies. I think you're getting the feel we're all very optimistic about Heinz' future in Emerging Markets. And that's the reason we have laid out these 5 strategies. This is what's giving us the optimism that underlines that view of the future. The first of our key pillars is that we have a well balanced portfolio and trifle [ph] one in terms of countries.

Second, we bring a really strong focus in our 2 core categories of Ketchup and Sauces and Infant/Nutrition. We're investing our funds and our efforts behind brands which are already strong. Put another way, we spend behind strength. And then we have a distinctive, well-tuned and flexible way of operating. It's really effective. And finally, we have a buy and build approach to acquisitions, which is very strategic. And the discussion is going to include a detailed update on Quero and Foodstar. Dave, perhaps you could pick up the first 2.

Dave Woodward

Sure, let me start with the first point. So the strategic need, really, to make sure that our portfolio is well balanced. We've made significant progress here. Today, we have strong underground presence across all of the BRIC markets plus Indonesia and then several more. If you go back just a few years ago, we were very small in Brazil, Russia and China. And these are now all well on their way to being $300 million to $400 million businesses and then beyond. We're also selectively -- and that's important, selectively well-balanced. No single big bet on anyone, unlike many of our competitors. We're also striving to spread the balance further, partly by building in countries where we already have a very good presence like Mexico in Fernando's area or indeed South Africa. But then also, as we mentioned earlier, there are several of us, in fact all of us, actively involved working on potential entries to new markets, including, importantly, the identification and preparation of key business managers appropriate and relevant to those territories.

Our second strategic pillar is the primary focus we have on tomato ketchup and sauces and Infant/Nutrition as our core categories. Now this is somewhat different to the U.K., whereas Dave said earlier on, our biggest products are beans and soups. Now I very much enjoy my Heinz baked beans wherever and whenever I can get them. They are becoming ubiquitous. It's a crusade of mine across the company, I've now even got them in full distribution in most parts of South Africa. But our successes are clearly most notable in Ketchup and Sauces and Infant/Nutrition. Now as you can see from this slide, 73% of our emerging business is in these 2 categories versus 55% for the total corporation. Ultimately, I think we all recognize that scale -- focus brings scale and efficiencies. And what makes Heinz different is how we execute locally, coupled with a real agility and flexibility to be able to exploit certain significant and scalable market-specific opportunities. Both core categories have driven great growth, but frankly, there's a heck of a lot more still to come. And I'd also highlight the fact that this focused category mix really does help us from a margin perspective, and we'll come back to that theme throughout the presentation.

Hein, perhaps you'd be kind enough to cover the third pillar.

Hein Schumacher

Sure, Dave. The third pillar is in ensuring that we have good brands. Actually in Emerging Markets, we have a very healthy mix of the Heinz brand and also some local leading brands. The iconic Heinz brand is often the largest one, for example in Russia, in Latin America and in some Asian countries. But I think a very interesting fact on local -- on our local leading brands. As you can see, 5 of them already made it to the Top 15 global brands: ABC in Indonesia, Quero in Brazil, Complan in India, Pudliszki in Poland and Master in China. Now beyond this list, we have actually a group of smaller brands, which are contenders to make it in the Top 15 list not too far from now.

Now some find this list of Heinz brand plus local brands are rather unusual or I’ve even read eclectic. But we believe that food is a very local affair, local taste preferences, local habits. And as a company, it is much easier to take an existing well-known local brand and make that even bigger and better than trying to greenfield an unknown overseas brand.

What we do, do sometimes is overlay the local brand with our Heinz brand. For example in Russia, we had a brand called Moya Semya and then we put the Heinz brand on top in a more premium segment. And I think we're well on the way to do that in Brazil as well obviously in still in early stages after the Quero acquisition.

Dave Woodward

You're right, Hein. Let me now pick up on the fourth pillar. How we organize and operate is critically important. We really have a strategy that's designed to drive good judgments and very, very powerful execution. We push the vast majority of our resource all the way to the consumer and the customers while ensuring that our local leaders really fully understand our corporate requirements and also leverage our considerable global expertise and scale. Now operating in Emerging Markets can be very challenging for the inexperienced. I certainly found that. Hein, I think you've found it even more challenging than I did. But we both had a great teacher with Chris, and I think we've benefited from all his advice, guidance and experience and we've taken all of the advice, the one exception is neither of us are wearing short trousers in the Emerging Markets yet. Now whilst there's some need for regional global oversight, we do believe in essentially local organizations, both for the local expertise that they bring, but also importantly, the speed of decision-making it gives. It really is a unique point of difference, I think, for Heinz. Now being so local is in fact a huge challenge in an environment where talent is really scarce, top talent, A players. But at some of [ph] the company, we've learned to do and I think learned to do extremely well. As an example in Latin America, we have a core group of senior managements very capably led by Fernando, who've been with the company for an average over 20 years each, which is just incredible. So they know how to manage fluctuation currencies. They know how to manage new regulations and so on and so forth. And they also, of course, know the type of people that we want to recruit and the type of working environment that we need to have. We have similar people in all of our other Emerging Markets. Now our chosen operating model also brings very strong operating discipline, and this is where we think many local competitors struggle. Our local teams absolutely understand that the sustainable business requires very good gross margins and strong cash flows. As Bill often said, it's far too easy to drift into profitless prosperity. Top line growth can seem beguiling, even seductive, but if it comes with low gross margins, very high trade returns and write-offs, it's simply not attractive. So we focus on cash, predominantly through working capital management, not allowing receivables and inventory to get out of control. We don't build capacity too far ahead and thereby avoiding the consequences of markets that can and do change very dramatically and very quickly. So we need to be bold and aggressive and I think we are, but we do it with great discipline.

Hein Schumacher

Yes, you're right, Dave. And as you already showed, and actually, as Dave Moran mentioned, our local autonomy in our go to market is very valuable to us. However, we are also connected to leverage the power of the corporation. Our Emerging Markets are supported by a number of organizations in the Heinz world. For example, in Emerging Markets, capability team, the global tomato ketchup team and the global Infant/Nutrition center of excellence out of Italy. And they help us to prevent to reinvent the wheel in these individual markets, and of course, they help us to accelerate new developments across different markets. Let me just give you some very specific examples in China of last year. With the acquisition of Foodstar, we completely reconstructed our purchasing organization, but we did it with techniques and principles that we had from elsewhere in the Heinz organization. You can also see here on the slide the number of supply chain initiatives and Rob Ostryniec already talked about them. All of these initiatives were owned locally and triggered by local management but heavily supported by either the global supply chain or by experts in other countries.

Arthur B. Winkleblack

And I think another important global enabler, Hein, is Project Keystone. And we're pretty pleased that in the Emerging Markets we've been giving a higher priority. The endpoint is still 2 to 3 years away, but some Emerging Markets are already on SAP. And in FY '13, we're going to prepare the implementation of the Keystone instance for Asia and for Russia. And I think, Dave, the rest of the world is going to work on a light version of Keystone, which we're calling SAP in a Box. We're expecting 3 key benefits from Keystone. The first is we see it as critical to support our growth. It will give us new insights and it'll also give us the backbone, which is going to be required for sustained growth in terms of systems, for cash management, for planning and so on. Secondly, it will give us realtime and accurate visibility on all aspects of the business especially costs. Lastly, it will enable us to integrate more and new acquisitions. So I think we've gone pretty deep on how we organize and now we operate. Let's now move to the last pillar, which is our buy and build acquisition strategy.

Now buy and build in essence is identify a target, evaluate it, acquire, invest and build. And put that way, it can sound very easy. But it’s far from easy. And it's an area in which we think we've developed a real core competency. The first step is building a relationship with the seller. And here we can use examples of what we've done with other acquisitions to overcome their fears on what we might do with their brands or their employees. Due diligence itself is often a real challenge, many of these are family-owned businesses and they don't operate at all like multinationals. So we need to be sensitive to the sellers, but at the same time, we really have to understand the business, the issues and the opportunities. And then for integrating, we have to draw heavily on our experience. Of course, as a U.S. public company, we have many obligations. And I think we've learned to find a way to meet these obligations without swamping the new company. Now Complan, Pudliszki, ABC, they all followed this path. But I would say perhaps Foodstar and Quero are off to even stronger starts. Maybe Hein and Fernando I'll stick my neck out and say perhaps you will agree with that.

Fernando Pocaterra

Yes, you're right Chris. Quero started very strong. Also building our relationship with the former owner was key to Quero's acquisition since we were not the first multinational to approach them. However, we invested the time to explain to him our philosophy on how we manage and grow business around the world. He liked the fact that we believe on growing and supporting local brands, that we wanted him and his team to stay in the business. We were able to point out our experience in other part of the world like in Indonesia where our partner is still on the business and we continue growing the local brand, ABC.

Working together, we were able to demonstrate the add in value that Heinz brought to Quero great accomplishments. At the end, we were convinced that one plus one was going to be much more than 2. What about Foodstar, Hein?

Hein Schumacher

Yes, Fernando. Some similarities with Quero. The first discussions with Foodstar took actually already place in 2006. But at the time, both parties concluded that it wasn't the right timing for both of them. And then in 2010, we restarted. We did very thorough due diligence. But actually, we have perceived that as a very positive experience and we are obviously grateful to the seller for accommodating us to do that. In fact, it's helped us to get to know each other very well. And in the time in between the signing of the deal and the closure of the deal, we already worked together here and there. Obviously, we were restricted in decision-making as a buyer. But we did cooperate in some key decision making on personnel decisions, for example, and organizational design. And as such, we were off to a very good start. Now, let me take, for example, the organization here. Foodstar already had a strong and stable organization. But together, we decided that in certain key positions, it was key to place some Heinz management. So for example, the Managing Director of the company, he is from Heinz Russia and we bought him over to China and he's actually doing an outstanding job there. Fernando?

Fernando Pocaterra

It's really similar to what happened in Quero. The owner has stayed with the business and we have not changed almost anything on the original organization. We strengthened the organization with our Managing Director that we brought from Heinz Venezuela. We also brought a CFO who understands the requirements of a public company and some marketing leadership. Additionally, we brought some technical expertise and best practices from around the Heinz world. However, more importantly [ph], the results since we closed the business a year ago have been very good. The total Brazilian business has grown 13% in fiscal year '12, reflecting a very good integration and several OI [ph] factors that I will discuss specifically now.

First, as you can see on this slide, all our categories grew in fiscal year '12 driven by strong selling and distribution capabilities. Importantly, our best quarter was Q4 and especially month 12 showing very high growth. We enter fiscal year '13 with real momentum on the business. And let me tell you, our fiscal year '13 month, first month of the year, results have been very, very strong. Sales grew more than 70% versus year ago. Thus we ended the year very strong and we started a new year even stronger. This strong momentum is driven first by significantly increasing our marketing investment. Historically, Quero spent little or nothing on advertising. This includes advertising Quero on television for the first time. Let me show you now an excellent Quero commercial, which we consider is one of the drivers of the excellent growth of Quero in Brazil.

[Presentation]

Fernando Pocaterra

Are you hungry now? You should try it. They are very good products. Second, we put together the best of Quero and Heinz in terms of selling. Quero has an excellent distribution network in the traditional trade, one of the best in Brazil giving us a competitive advantage. We took advantage of that infrastructure to grow the Heinz brand, growing their distribution from 500 clients to 5,000 clients. And on top of that, we have been able to improve Quero and Heinz distribution and support in the modern trade, resulting in a big increase in sales. Thirdly, we have been able to use the Quero infrastructure to start building the Heinz brand. We have just produced locally our first Heinz product, Heinz Extracto tomato paste product used in cooking, which is thicker, tasty and has a better color than our competition. We're also working on other locally made Heinz products to increase our portfolio in Brazil. Finally, the organization work on the supply chain has been also very good. We were all impressed with the quality of the factory. Working with the existing team, we've put together plans to significantly increase our needed capacity to support our growth. Here the Heinz global expertise has been very helpful. On top, we have started in February 2012, our new business biomass boiler. This produces steam using wood chips and sugarcane waste. It is much better for the environment and brings significant savings. We're estimated $3.5 million this year.

Our tomato agriculture team has also brought a lot of value, helping the local farmers improve productivity. By introducing a cost-effective way of automating harvesting and through better irrigation processes. We are also leveraging Heinz tomato seeds technology as 45% of Quero is tomato-based. I think Hein you should leverage some of this in China to accelerate Heinz growth.

Hein Schumacher

Yes, I will certainly look at that, Fernando. But actually -- the good reader can actually see that our growth of 27% already outpaced yours by twice. And just to make sure, Bill has actually asked me just before the session that Chris and I do a little coaching session to both of you tomorrow on how to grow the business even faster. But we'll talk about that later. Now, look, there are many similarities to the Quero business but we've also had some differences in Foodstar. And in my view, there are 4 key reasons for success: Number one, is to drive distribution even harder, number 2 is to ensure a reliable supply to the business, number 3 is improving top of mind awareness and driving brand equity, and number 4 is introducing new items and entry into new channels.

Now let me talk very briefly about each of them. First of all, about expanding distribution. Our [indiscernible] plant in China is at Guangdong province and Fujian province in the Southeast of the country. But to gain share even in these existing geographies, we added more boots on the ground, or as the Chinese say, more poetically we created a sea of faces. And that also meant that we shifted resources from back-office to front line selling. We also significantly improved in in-store execution. In addition, we expanded our distribution to adjacent provinces. For example, Zhejiang province just north of Fujian. But choosing these new areas is actually a very thoughtful process. We go through that very database. We determine our resources, we determine our attack plan and we determine exactly how we do it. For us, the goal is to bring soy sauce, which is truly an everyday item for consumers in China, as close to the consumer as possible, even in very rural areas. And for perspective, we've now doubled our store coverage since we acquired the business.

The second success factor, as I mentioned, is ensuring reliable supply. Somehow, that was bit of an issue prior to the acquisition. We moved very fast so we completed and expanded the Shanghai factory, vital for the supply of soy extracts, but we also improved and expanded the output of the existing factories. The result was excellent customer service and our sales force didn't have to hold back on growing the business. Then the third reason for the success, I think, is driving top of mind awareness and thereby boosting brand equity with consumers in China. Like Fernando explained to me when actually back on air with the Master brand and we did extensive street advertising. Now that allowed us to do the fourth key success factor, which was entry into new channels. As Heinz, we were able to not only do business in the traditional trade as Foodstar was used to do, but expand that also to key accounts and modern trade. And finally, it allowed us to introduce a number of new items under these now very well-known brand names, Master and Guanghe, and we introduced into, for example, chili sauce and sesame oil.

Christopher J. Warmoth

Yes thanks, Hein and Fernando. I think you can see, we're very encouraged with the success of Quero and Foodstar, both well ahead of our expectations. And we're using that to allow ourselves to invest even further. Our appetite has increased and we're now actively working several acquisitions in each of Asia, Latin America and Eastern Europe. Now we're very comfortable with small to mid-sized family businesses. Perhaps for bigger companies, these are too small, and for less experienced companies, they may be too complex or too difficult. The key for us is the potential for fast growth. If they’re less than $100 million, we're looking for a milestone to get there as soon as possible or the bolt-on fit just needs to be excellent. We're focused on Ketchup and Sauces and infant and nutrition. And also, we're looking at countries where we already have a business as was the case with Foodstar in China or where we don't as in Quero. And our priorities are, yes, Asia, Asia, Asia. And then, Eastern Europe and Latin America. But if we do find attractive candidates in other regions, we're also interested there, too. Now that's the end of the 5 pillars of our strategic plan. Let me just summarize very briefly what we've covered so far. You saw that Heinz Emerging Markets performance over a 5-year period has been very strong. We then discussed some underlying dynamics, which we believe will support sustained growth and we reviewed our 5 critical strategies, that was the balance portfolio of countries, the focus on sources and infant and nutrition, investing behind strong brands and being locally oriented while we were leveraging global scale.

We also have a well-tuned approach to acquisitions. And with that, let me now move on to the next agenda point, which is how we appeal to local consumers and customers on a day in and day out basis. And this is where our 3As model come in, that's the As of availability, affordability and applicability.

Availability is all about good distribution and excellent in-store presence. And it applies to all key channels: Modern trade, traditional trade, pharmacies, baby stores, international QSRs, or local food service.

Affordability, it's about offering great value. It’s not the same as being cheap. We usually sell at a premium to the average. But it is about being within the reach of the consuming classes.

Applicability is for products, for packages, for innovations, for promotions, for advertising, for digital, and it's about being relevant to consumers, consumers whose needs do and their taste do constantly change. Dave, would you be available to talk about availability?

David C. Moran

Always available, Chris. As I indicated earlier, the trade environment in Emerging Markets is much more complex than that of the developed world. The traditional trade is almost always much bigger, and in many cases, the dominant channel. The modern trade consists of international players, but also some key local accounts. And we cover channels such as baby stores in China or as Hein's already alluded to, or pharmacies in India and they're all incredibly important to our overall business. Our Foodservice offering ranges all the way from very small street vendors up to 5-star hotels. And in the case of Dubai, of course, 7-star hotels. So the complexity and variety is very common, and yet each country has a rather distinctive set of practices, meaning that there is no one ideal go-to-market model. For example, we use distributors in some countries but in some they're huge and others very, very small. In some they're exclusive, in others they carry a huge range of brands. In some, the distributors sell, deliver and collect. In others, they mainly deliver and collect. The role of the wholesale varies tremendously as well. In some markets, a lot of retailer distribution comes from wholesalers. In others, direct selling is becoming far, far more important. Now the Heinz approach here is to have a very clear go-to-market model in each business but never to try and force the model from one market to another. On the other hand, ideas and approaches can be reapplied and we really do seek out the very best practice that we want to share across the Heinz globe, whether it's Emerging Markets or indeed the developed world, and it’s something we're increasingly doing. For example, we're now utilizing systems and technology much more. In many countries, our salesmen and saleswomen and often the distributor teams, carry handheld terminals. And this gives us much, much better information on what is selling and where, and helps us to really target the core growth opportunities. We're also increasingly providing our distributors with high-quality software, and that gives 2 real benefits. It gives them an accounting and stock management system. But as importantly, it gives us realtime data. Another angle on availability is Foodservice. We touched upon it earlier. I see 2 huge -- I see huge opportunities there for 2 main reasons. And the first one is we have a very complete portfolio of sauces and condiments. That leads to an opportunity for the customer to do one-stop shopping with us for all their sauces and condiments needs. And then secondly, we can leverage our brands and our presence with international QSR to continue to build our business. Our objective, and I mentioned this again, I mentioned this earlier, our objective is to be a leading player in ketchup, sauces and condiments in Foodservice.

Fernando Pocaterra

I agree with all having said about availability. Building distribution is an important competitive advantage in Latin America since the market is very fragmented, and that was one of the strengths Quero brought to the picture. But now let me move to the second A, affordability. Very important also in our markets. One thing that has worked very well in Latin America for us on sauces is brand tiering. As you can see, we used Tiquire Flores and Heinz in Venezuela. We used Banquete and Heinz in Costa Rica and we used Abal and Heinz in Mexico. We will use these strategies to drive Quero and Heinz brand in Brazil to maximize our profit and sales. Quero is the brand of the people, good pricing and very good quality. However, our marketing intelligence tell us that it is an opportunity for a premium brand. We won’t have Heinz in all the categories, but on those where the Heinz brand fits such as ketchup or Extracto tomato paste, we will have both.

Christopher J. Warmoth

Yes, I think tiering, Fernando, is a very good way to address affordability. In Indonesia, we achieved the same end result but within a brand. And one way to do this is sachets. So we have sachets on soy, on shrimp paste, on oyster, on our full line of chili sauces and also on tomato. Our biggest volume is in soy and chili. They cost less than $0.03 a sachet and we do sell literally billions of them. Now of course, sachets give us the lowest unit price. On soy, we offer a full range of packages. And it's all part of making sure that the cash outlay, no size requirement becomes a barrier to purchase. So in Indonesia, you can spend $0.22, that's IDR 2,000 and get 110 ml pouch or $1.48 for 600 ml pet. And of course, this sort of skewed proliferation might not be possible in developed markets, but it is critical in a population as economically diverse as Indonesia and where the trade is very fragmented, too.

David C. Moran

You're right, Chris. Let's talk about the third A, which is applicability. I think a great example of applicability is our baby noodle product in China. It's actually a wonderful proposition that combines key nutrients that are very healthy and relevant for the baby with very tasty noodles in small chunks. That makes the feeding of the baby obviously very easy. Actually I have a son of 2, he loves this stuff. So we stocked up significantly at home. Now fortunately, we're not alone, as you can see, because the business has almost doubled every year since our introduction of the product. Together with IMF and cereals, that is really the backbone of our infant and nutrition business in China. We also see a strong consumer pull to pouches as Fernando had already explained. This packaging format appeals on several fronts to consumers.

And finally, we introduced a number of new items under the Master brand, as I've mentioned, and I'd like to call out here the [ph] sources on the far right of the slide. These are large sized soy packaging formats that make it much easier to use in both Foodservice or for heavy users at home. It brings, again, easier use but it also lets us much more ease in distributing the products and savings in logistics versus our original glass packaging.

Christopher J. Warmoth

Yes, Fernando, you talked earlier about the premiumization opportunity in Brazil with the Heinz brand and Bill also mentioned that this morning. In Asia, we're also seeing the similar opportunity but here often via line extensions. As consumers get wealthier, they will pay for added benefits. And just a couple of examples here, hot soy, what the research showed us in Indonesia is that many consumers were adding chili to their sweet soy sauce. So we came out with a product in which we added it for her, giving a better taste and more convenience. We were able to charge a premium and it's done really well in the market. And then the second sambal terasi. Sambal is chilly, terasi is shrimp. And what the research shows here is 80% of households were consuming sambal terasi, but it was all homemade. So we've developed a product. We put it in this great looking jar and sachet, and it's our fastest growing MPD ever, truly applicable. And as a sociological study in Indonesian table etiquette, I would now like to show you the ad we've used for this, which has really driven the business.

[Presentation]

Fernando Pocaterra

You probably feel very hot after watching this commercial. But let me change the subject to packaging. Several packaging initiatives are being mentioned, something Quero has done very well. In most markets, vegetables come in cans or jars. Quero market them also in tetra packs. Quero markets a broad range on products also in pouches for pasta sauce, mayo and tomato paste. The new forms of packaging, pouches and tetra, are overtaking the cans of jars. All these newer packaging formats have also attracted other Heinz affiliates around the world, including developed markets. Do you think, Dave, these are opportunities for the developed markets?

David C. Moran

I do, Fernando. And so that's our very point. We discussed earlier pouch and spouts, ketchup in Mexico, your business and many other markets as well. And interesting, as we've heard from Scott, we're now testing this in the U.S. I know the U.K. are also actively looking at using Emerging Markets packaging. Hopefully that's part of the legacy that I've left in that business. It really is a fantastic opportunity to provide value to the consumer and to really diversify our packaging. That in turn, of course, makes us much more less vulnerable to very specific commodity spikes. Now please, allow me, if you will, to draw the session so close to anticipate with relish the coaching than Hein is going to provide for me later and to summarize.

In FY '12, our total sales for Emerging Markets were approximately $2.5 billion. We look forward, we believe, that all the strategies and plans that we've discussed today should drive organic growth in the mid-teens. And this will drive us the majority of the way to our goal of $5 billion in sales by 2016. $5 billion of course, would mean this would be about 1/3 of the corporation's total business. We are expecting acquisitions to be the increment needed to close the gap between our $5 billion NSV goal and our organic growth plan. And as Chris and Bill have both mentioned, our acquisition strategy will be very tightly focused and disciplined looking primarily for the right targets in our core areas of Ketchup and Sauces and Infant/Nutrition.

Ensuring we get profitable growth, real profitable growth in Emerging Markets is critically important to us as well. And whilst growth margins for total Emerging Markets do remain below the company average, I think it's crucial to note the gap has closed significantly by 30% down to just a few hundred basis points. Further innovation, mix management, brand building and economies of scale will help us to grow -- to raise the gross margin level across all of our emerging businesses, as well, of course, as the whole company.

So if we look slightly closer now to FY '13, we expect continued powerful top line growth from Emerging Markets. In fact, we demand it. We fully expect the top line growth will accompany a significant rise in absolute gross profit dollars for the region, marketing investments and capital expenditure will increase to continue driving those brand building activities that we've seen today and to achieve the economies of scale necessary to really move the needle on the bottom line for the company. So in summary, what we have is a very well balanced geographic portfolio, primary focus against sauces and Infant/Nutrition. We have a multitude of strong brands comprising both global icons and some very, very powerful local jewels. Our strong local orientation led by top local talent really lends itself to further leverage of our well-tuned approach to local acquisitions, all underpinned by our affordability, applicability and availability framework. That wraps up the panel discussion. Thank you, ladies and gentlemen. We'd now like to hand over to Bill.

William R. Johnson

Well, thank you all for coming today. We appreciate your patience. I did warn this group that there was not a great deal of sense of humor so if they didn't get any laughs not to worry about it. They got a few, so that's progress. I would like to wrap up just with a couple of comments. One, I want to say goodbye to Mike Milone who's worked for me since the day I walked in the door at Heinz better than 30 years ago. I think he's been an extraordinary contributor to this company. And this will be Mike's last official meeting with the market. And the company will miss Mike, and I will miss Mike personally. And I also like to welcome Dave Woodward to senior management. Dave had an extraordinary run in the U.K., has produced truly outstanding results and we look forward to the contributions he will make.

And the last thing, it's interesting, we were going to put in here that Art and I just celebrated our 10th anniversary together. I said to my wife the other day, I said, "We've been married 39 years, but Art and I have been married 10 years." And she said, "Which have you enjoyed more?" With that, we'll take your questions, so. . . The answer to my wife was, "Well, honey, there's no one who could replace you." The answer to Art was, "Art, I don't want to make you jealous so..."

Margaret Roach Nollen

Do you guys want to come on up. Art? Great, who's got the mic?

Question-and-Answer Session

Margaret Roach Nollen

Okay, John. We'll start with Jason.

Jason English - Goldman Sachs Group Inc., Research Division

Great. Lots of conversation today in Infant/Nutrition, lots of new initiatives there. When we look at the results, the last couple of quarters, the business has actually declined. What are the factors that have caused that decline?

William R. Johnson

You talking about infant/Nutrition?

Jason English - Goldman Sachs Group Inc., Research Division

Yes.

William R. Johnson

Emerging markets has grown significantly. The decline has been predominantly related to the performance in the U.K. and the Italian baby food market and that's why we launched Aseptic. But globally, the business is performing as we expected it to, shifting in Emerging Markets. If you go back 5 years ago, the Emerging Markets were about 25% of Infant/Nutrition and now 40%. I think going forward, they'll be somewhere between 60% and 70%. So I mean, I think overall, our Infant/Nutrition is performing just about as well as we thought it would. So I think from an Infant/Nutrition standpoint, we're happy to be in the business, want to get a lot bigger in it, want to focus on Emerging Markets and we truly believe we can be #1 in food in the emerging world.

Jason English - Goldman Sachs Group Inc., Research Division

One more and then I'll pass it on. Tax rate, 22%. Half your operating profit coming from North America. Why should we believe that's sustainable?

William R. Johnson

What, half the profit coming from North America or the 22% tax rate?

Jason English - Goldman Sachs Group Inc., Research Division

Good catch. Fair enough. Tax rate, please.

William R. Johnson

Tax rate? You want to...

Arthur B. Winkleblack

Yes, I think as we talked earlier, the reality is we've got a very strong international portfolio and that allows us to do a lot of very value added appropriate tax planning. So I think we've done a nice job of that. We've got a great tax team that continues to work away at that. So we feel very good about the fact that we were able to deliver the tax rate we did in FY '12, we're holding that constant in FY '13. And as we look forward, we're continuing to employ strategies to keep that down as far as we possibly can. We talked about setting up supply chain hubs, primary benefit of supply chain hubs, obviously, comes from the manufacturing side and supply chain side. But there's also, if you do it right, some tangential tax benefits as well. So there are structural changes. And as you see, there's a lot of the countries around the world other than United States are continuing to drop their tax rate like the U.K. is again to be more competitive. So we think all that plays together to give us a good opportunity to drive that tax rate for a long period of time.

Margaret Roach Nollen

David?

Unknown Analyst

Just a couple of questions on North American Consumer Products. So the declines in profitability have accelerated. So I think it was down 4.5% constant currency basis in the fourth quarter, down to approximately 3% for the full year. I believe that Ore-Ida Potato has kind of comprised the bulk of this decline. So the single largest business that you have in NECP is in significant trouble. I think it's now been more than 4 quarters where this business has been in decline. And so it's declines upon declines. I would say that the first question I have is some other folks in the presentations talked about the right to win. Does private label have the right to win in frozen potatoes is the first question? And this is -- is this fundamentally -- or we're looking at it wrong, we need to be wary of private label and the rise of it in frozen potato. The second question, related is that the 1 pound bag, as I believe, Bill you pointed out back at CAGNY was a key component to the resurgence of this brand. I don't believe you've paid slotting fees to really get this in, in a sudden and in dramatic fashion, that cost would be maybe I would estimate somewhere between $5 million and $10 million per slotting. You perhaps have lost $60 million, $70 million in sales. Why not do that and why not treat this perhaps with greater importance and emphasis?

Arthur B. Winkleblack

Do you want me to take that Bill?

William R. Johnson

I'll take.

Arthur B. Winkleblack

No, I'd be happy to. I'd be happy to. David, a couple of things. I think you're right. First of all, Ore-Ida is absolutely critically important to our North American business and our U.S. Retail business in particular. It's been a challenging issue for us to deal with. We took price, as I mentioned, and pretty significant price based on the commodity headwinds of 9%. When we took price, a number of retailers -- many retailers actually took an opportunity to margin up in the category. So they took price ahead of what we assume they would based on our price increase. And at that point, the category was performing pretty well. Matter of fact, through all of calendar '11, the category continued to perform well. So category was performing well because of the price value gap with private label. Private label was performing well and we were being hurt without a doubt. We were obviously engaging customers in that dialogue to try to get pricing right for the overall category. But with the category growing, that was -- they weren't willing to engage. Now we've seen that the category has actually started to slip. And not only has the category slipped, but the category started to lose households. And they were losing households because consumers like, want and enjoy Ore-Ida products. So we, together with the retailers, had to get this price gap to private label in a range that we've historically had where both businesses, quite frankly, can perform well and the overall category performs well. So it took time because until the category softened, we couldn't get retailers to engage in that discussion. As that happened, we've gotten them to engage, we've gotten the price value pretty well addressed now in most of the retailers. And as a result, we have, since January, started to see our business bounce back a little. Now as I said in my presentation, far below where we want it to be. We absolutely don't consider where we're at success. Success is getting everything we lost and more. And we think between the pricing actions and then getting back on air, we can do that. I mean, I think any brand, whether it's a private label brand or another branded company has a potential right to win. It's up to us to make sure that we're supporting the business in the way that it allows us to win. The second part of the question was on 1 pound. 1 pound is important, but getting the core 2-pound business fixed is the thing we needed to do first. And that's where we've been focusing the majority of our efforts.

As we've gotten that addressed, I do think 1 pound will play a more important role in the portfolio but I think it will play a more important role in the off channels than in the grocery channels.

Margaret Roach Nollen

Okay. Up front, Ken.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Bill, can you -- for the industry, not just for Heinz, can you elaborate on why do you think consumers are shifting to the perimeter? Because although the data are supporting your thesis, it does seem counterintuitive for consumers to maybe trade to higher price point items like to meat and maybe fresh vegetables in difficult times, then I have a follow up.

William R. Johnson

No. I don't think that's right. I think what's happening is as consumers are looking for demonstrable value from companies like ours. And I'm going to comment specifically to the perimeter opportunity and the issue and I think our company generally has been slow to adapt. I mean, I think the consumer is saying to us we need a new way to go to market all us are rooted in the past. I think it's one of the reasons you're seeing our emerging market businesses outperform our developed market businesses by such a great degree, they're open-minded, they're not rooted in the past and they're really flexible in terms of how they adapt to the consumer. In terms of the perimeter, this is something I've expected. I mentioned this at CAGNY before we started seeing the data from Nielsen camps are [ph]. What's happening on the perimeter is really very simple if you think about it. If you go back and reflect on the slide I showed, which is that the stores' retailers are reorienting their categories in their stores to force people to shop the perimeter. They're also adding alcohol and so forth. What's happening is consumers are walking in with the budget. By the time they get out of the perimeter, they're budget is gone. And so what's happening as they get to the center of the store, they're being highly selective, picking a few categories. Fortunately we're in some that they are picking and unfortunately, we're in some they're not picking. And by the time they get to the freezer case, they're pretty much bypassing it totally. So what we're seeing is perimeter basket up, absolute volume down. I was talking to a retailer, a big chain, 2 weeks ago and he called me on another issue and we got talking and I said how are your sales? He said, my dollar sales are up, my unit sales are down. My dollar sales are up because of that very issue that my consumers are shifting into perimeter but I've got to somehow reorient them to the center store. So for us as an industry, we've got to get out of being rooted to the past, we've got to figure out a way to do something that's going to bring consumers back to the center of the store. And I think generally, pouch packaging, opportunities to change price value points and things like that are what we're going to have to do, as well as real innovation. But there is no doubt that the perimeter is changing the dynamic. The other interesting thing that's happening, if you go into the dollar stores, people are buying in bulk and they tend to be buying in bulk in very select categories. But generally, if you look across the U.S. market, with the exception of alcohol and produce, every single segment in grocery was down in 52 weeks in terms of units, dollars were up in some, produce, alcohol. The top-selling category in the United States right now is alcohol. Now maybe that's because they're like me and they face questions like this and they want to go have a big drink afterwards or maybe it’s just a way to relieve tedium and the pressure of their everyday lives or maybe it’s their concern about the administration or maybe they're just concerned about having a job tomorrow. I don't know. But if you look at it, we've never seen trends as protracted as these. If you go back to frozen, I showed a chart today that showed really, 3 years of frozen. If you go back to 2008, frozen has essentially been down since 2008, the entree category has lost almost 1/4 of its total units. And it's predominantly the consumers shifting to that perimeter and preparing food a lot differently than they prepared. If you look at the one business we have that historically has been the center of the store business that is doing extremely well is the Renne's Salad Dressing business in Canada, which we sell in the refrigerator case, the chilled segment on the perimeter growing in double digits. And consumers are walking through there and picking those products up and we've got to figure out a way to play there as an industry or we're all going to be in trouble long-term.

Kenneth Goldman - JP Morgan Chase & Co, Research Division

That's helpful. And then following up. What's your best guess for -- as we go into the back half of this year and cost inflation decelerates, again, not for Heinz but for whole industry, what the promotional environment will be like? Will we see rationality or as you've mentioned in the past, maybe it's not a good bet but...

William R. Johnson

Did I mention alcohol sales are up? Look, I was asked the same question or a similar question at CAGNY. You would think given the inflation environment, given the pressure on gross margins and given just the angst that most of the companies have, that there would be a discipline and a sense of perspective that might be different this time. I'm not counting on it. I've just been around too long and I've seen too many changes in the industry. But theoretically, what I think you're going to see, it goes back to the comment I made a few minutes ago, which is that the consumers are looking for demonstrable value. They are looking for different things than we as an industry have been giving them. Pricing is not working. If you look at promotion activity, it is not producing the kinds of results. I mean look at private label. Private label trends are down also in most of the categories we operate in because of the perimeter phenomena. We got to give the consumers something else. So we got to go back to doing things that bring them back to the store through innovation, create some kind of messaging around our product uniqueness or product attributes that create a different perspective in their mind and get them excited again. And I know many of you look at the Emerging Markets and you think we talk about the Emerging Markets as a way to sort of deflect attention from the U.S. I will tell all of you and I've said this before, right now, I don't know how many of you picked up in my comments. Our Emerging Market business this year was bigger than our U.S. Retail business, it’s the first time ever. It is a matter of time before our Emerging Market business is more profitable based on its growth, not the decline in the U.S. business, before some cynic asks the question. I can't imagine anybody in here asking a question like that but you never know. And so I think we have to continue. And if you look at the Yum! model, Yum! has done that very thing. And they’re really the only company in CPG or the Foodservice space that’s done it. McDonald's is doing it and I think that's where you're going to see us continue to shift. It does not deny the need and the culpability with how poorly we have performed on Ore-Ida. We got to get Ore-Ida fixed, it's an important brand. Interestingly enough, it's growing in Japan. So top -- our growth rate in Japanese Ore-Ida last year is the single highest growth rate of any product in the company outside of the 2 new acquisitions. But there's opportunity, we just got to play there.

Margaret Roach Nollen

Okay, Alexia.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Two questions. The first one, on the $120 million investment in capability building this year...

William R. Johnson

There's only one going to business, the rest is going to Meg's trinkets...

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

But philosophically, as you think about capability investments going forward, if you have a year where you feel as though you could still hit your long-term EPS growth target, with that extra spending, would you continue to reinvest back over time, we're seeing others substantially raise advertising spending as a percent of sales.

William R. Johnson

Well, I think, we will continue to reinvest when we think there's an opportunity for growth. I mean, I think what we're trying to do, when I look at the business as I said in my opening comments in 3 to 5-year phases. And I've been in the job a long time, I look at businesses generationally. We're trying to create a generational growth prospect that's a different than everybody else in the industry. Well, I recognize there's a bit of angst and concern about the investments and the growth rate this year versus what we talked about last year, the reality is, we have an opportunity to invest and differentially improve our performance. We will take that opportunity and we're going to do it. So of the $120 million, $70 million of that's going into marketing. Now, the question that ought to be asked to us at the end of the year is did that $70 million produce profitable growth? And if it didn't, we won't spend it. If we find places that have produced outsized profitable growth, we will reorient it. If the U.S. doesn't get anything for the spending we're giving them, we'll shift it to the U.K., which I think has done a good job. If the U.K. doesn't get it, we'll shift it to where it ought to go. But I think the perspective is over time, that we have an opportunity to differentially distinguish our company for generation versus everybody else, and we're going to invest to take care of that opportunity. And while I know that creates angst and uncertainty and a little worry in some you, the reality is, these opportunities don't come along very often. We are the best positioned U.S. company in the emerging world, we're going to capitalize on it. Our U.K. business is a fortress unlike any others we have or most other companies have, we're going to invest in it. The Heinz brand, something we don't talk about very often, $4.5 billion, 8% organic growth last year. I mean, there aren't many $4.5 billion brands in CPG that grew 8% organically last year. We did, partly because of our success in the U.K., partly because of our success in undeveloped world and partly because of our great success in Russia and the other markets where we're taking that brand. We're going to leverage that. We're going to jump all over that. Boots on the ground in these markets, I think the question that's asked of us often by investors, are these acquisitions getting more expensive? The answer is yes. But we've got infrastructure in these markets that we can leverage with better resource allocation and better resources on the ground, and we're going to do that and we're going to take advantage of it. In terms of score and the Keystone investments in Europe, what we are learning out of our investments in the Netherlands that we don't talk about, in fact we're taking our board through it in a couple of weeks, there's incredible insights into our business that we didn't know. Historically, most companies like ours would allocate cost on a tonnage basis. And so if you got 100 tons going through a factory and 50 tons is ketchup and 50 tons is tomato paste, you allocate across on a tonnage basis. SAP won't let you do that. SAP and the Keystone process will force the allocation based on energy usage, hourly time, shutdown and so forth. So you find out that you have SKUs that are more profitable than you thought, you leverage those, you find out you get SKUs that aren't making as much money, you get out of those. So we're going to push this through Europe because the biggest opportunity in the company is Europe. So yes, we're going to make investments this year and I think my perspective on those is I don't want to apologize for those investments, we're going to continue to drive and try to build another 7 years, like the 7 we've just enjoyed, which arguably are among the best in the industry. It's not a straight line but the job we want to do is create a generational fortress to invest, to make this a better company than anybody else in the industry.

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

And can I just do a quick follow-up on the frozen business, I apologize for sticking with the subject but we've seen a number of splits announced across the industry. Obviously, the frozen business has been struggling for some time. Might it not be more valuable as part of another larger frozen portfolio? And if it were to be separated off, that presumably would allow you to focus a lot more in Emerging Markets. The Emerging Market exposure would be a lot better or are there synergies and linkages that just mean it can't be done.

William R. Johnson

No. I think there is reality and I think the reality is it provides a lot of critical mass in our U.S. business, throws off a lot of cash which allows us to support our dividend. It really fundamentally helps our U.S. company continue to be of a size that's important to continue to exist. Now I want to be clear on this because I think if anything, our track record would suggest if we get tired of the business, we do things differently than maybe others do and we don't wait. And for me, the interest is now in all the structural changes, some of which we did 10, 11 years ago. So I think our perspective would be if there are opportunities to greatly enhance value by doing other things, we'll look at them.

Margaret Roach Nollen

Bryan?

Bryan D. Spillane - BofA Merrill Lynch, Research Division

Just a question about the 3 to 5-year growth objectives. I just did some back of the envelope math, and over 5 years, sort of implies about $0.5 billion of extra operating profit. And if you assume a 2% to 3% growth rate in North America U.S. Foodservice and Europe, that's about $200 million roughly of profit. So it means $300 million comes from everywhere else in the world, which basically means it doubles. The profit contribution in Emerging Markets and what are the other businesses, will double. Is that basically the way that you're looking at that growth model?

William R. Johnson

This is the U.S., this is the company. Actually, this is probably your brain, this is probably my brain. Certainly in terms the way many of you think. So I think in that context, the answer is yes. It is the right way to look at it. I mean, I think, Chris showed you a chart that says our top line will grow about 15%, our operating profit will grow faster than that. And given the strength of the U.K. company, remember people don't recognize U.K. companies are already 2/3 the size of the U.S. company. We'll continue to get disproportionate growth there. So that's the way the business is going to shift. 10 years from now, 15 years from now, you'll look back in this business, the U.S. will still be an important component but really, fundamentally, will be a relatively small piece. 20% of our sales, U.S. CP. Think about that. I mean, when we started this Emerging Market journey years ago, how many of you in this room thought our Emerging Markets would be bigger than our CP business? I can answer the question, 0. And so yes, that's exactly what we're looking for, Bryan.

Bryan D. Spillane - BofA Merrill Lynch, Research Division

And is that model different. So if you lowered and if you look out these next 5 years versus what you were looking at a few years ago, you lowered your growth expectations for your North American business and raised your profit, we're talking about profit, profit growth expectation now everywhere else?

William R. Johnson

Absolutely. That's correct. See, you got one of these.

Arthur B. Winkleblack

The other thing to think about is the leverage that Keystone will bring. And it goes across the value chain as we mentioned. It will take us a while to get fully deployed. But over that sort of next 2 to 3-year time frame, you'll start to really begin to leverage the benefits out of that and many of them are quantifiable on the cost side but the intangibles are really the growth opportunity there that we've yet to fully exploit. So I think we’re optimistic on that to a great degree.

William R. Johnson

It's a question I ask him every day. When do I start getting return on Keystone?

Arthur B. Winkleblack

At least.

Margaret Roach Nollen

Eric?

Eric R. Katzman - Deutsche Bank AG, Research Division

I guess first question is, I think a year ago, you talked about the SAP and Project Keystone spending being maybe $0.15 or $0.16 a share in fiscal '12 and then a similar amount in fiscal '13 and then it was going to roll off not completely, but go down in '14. And yet my impression is from the slides that it’s now extending out into fiscal '16. So this project is going on for years. Is that accurate?

Arthur B. Winkleblack

We're pretty much on the same track that we've always been, Eric. I think as we look at it, what we're trying to do is be fairly methodical with it and make sure we don't take on too much risk. But the net of it is, we have reshuffled the sequencing a bit to focus on Europe, in particular. We mentioned we're accelerating Europe and I think as we look at it, that's the biggest opportunity for us because as Dave mentioned, the complexity across the European business. So we've pulled in Europe, we're also pulling in some of the Emerging Market piece so that we can get more leverage as we grow that rapidly. That means that, really, the Pacific businesses and the U.S. will probably be the last to go. We think there is the least amount of benefit there. But I think end of '15 into mid '16, pretty much...

William R. Johnson

Yes, I think there's a difference and nuance here. If we go back, we've historically said about 90% of our business would be done by 2015, that is still absolutely true. We're talking about '16 now being totally done. So that picks up the nips and naps that we haven't thought about doing. But if you go back and look at the comments we've made in the past, we've said about 90% would be done by 2015. We're still on track for that. Now the one thing that has changed is we've delayed the rollout across the U.S. We are getting Canada seated and we are expanding in Europe instead. So we reoriented the process, probably cost us maybe 1 quarter at max because the opportunity in Europe is much greater. And frankly right now, we have other priorities in the U.S. and I don't think rolling out Keystone is going to fix those.

Margaret Roach Nollen

Yes and the spending, Eric, has always been consistent. We knew we were going to ramp up and then start rolling out across the businesses and I can take you back through that from prior presentations. I think what you're thinking of is the benefits. And therefore, the offset to it. So it will net out and create positive benefits in the back end of the project. But as we implement, we will begin to get benefits from each of those later in.

William R. Johnson

Well, we're getting benefits now in Europe. We couldn’t do Project Score without it and the centralization of the supply chain would not be possible had we not put it in to the Netherlands and the Benelux markets and had we not been starting up in Germany and the other markets. So I think the reality is we're starting to get benefits. But the most amazing benefit to me was brought forth when Dave enrolled Venderbosch [ph] to France and a couple of weeks ago. The French are now trying to do this on the back of an envelope because of the learning we’re getting out of the Elst factory and the other factories in the Netherlands in terms of the application of SAP and the allocation processes aligned and determine where you're really profitable and we're you're not. I mean, the good news or bad news depending on your perspective, I take a long time perspective, is everybody else in the industry has already done this, we're still doing it. So we're -- the best for us is yet to come in terms of how we get and how we grade out of this. Now I have to tell you, I hate systems projects. I hate them all. And I go to the board and every meeting I have with the board, I say Mark's going to talk about Keystone, which if I haven't told you lately, I really don't like. And the board laughs and says we know we don't like them either. But this is a real opportunity for us and I think the investment we'll make has been pretty consistent in the range we've been talking about in the past. We saw numbers the other day from somebody we supply in the industry and I immediately took that article to Art, and I said if I ever see numbers like this, we are going out the window and we're in the 34th floor, so it would be painful.

Margaret Roach Nollen

We get the point.

Eric R. Katzman - Deutsche Bank AG, Research Division

Next question I guess, a bit of a follow-up on Bryan's question about the long-term growth rate. I mean, I don't remember a company in CPG that took its growth rate, long-term growth rate up and then went back on it in 1 year. And if anything, you're telling us that the Emerging Markets side of the business is profitably growing on both gross profit and EBIT to a certain extent in line with sales and if anything, that's getting better. SAP by your own comp, by what you just said, isn't really changing in terms of its spend. And so, Europe is doing all right given what it's got. So I'm left to conclude North America is a mess and why isn't -- why should we believe that that's going to turn in this environment or what's happening I mean, I just I'm not -- it's not exactly clear to me that with Alexia's question with frozen, I mean is that going to get any better anytime soon or are we just stuck?

William R. Johnson

Well, I think, to say North America is a mess is a bit of a misstatement. I think the reality is Foodservice has turned. We've got Foodservice under pretty good control. We've reoriented the business. We had a hell of a fourth quarter, we'll have a very strong year this year on Foodservice, I feel good, providing the restaurant industry continues to trundle along the way it is, which doesn't require substantial growth. In frozen, our share performance on Smart Ones has clearly been in the vanguard of the industry. We've had a lot of new product activity there. The 24/7 strategy has worked really well. Delimex had 35%, 40% growth last year. So fundamentally, the issue comes back to the brand we've been talking about, Ore-Ida. And I'm not happy with Ore-Ida. I don't know that I'd say Ore-Ida is a mess but it is clearly not meeting the kinds of expectation in terms of our execution or frankly, our thinking. And that's a conversation we are having frequently. And so, I think the reality is though, in the last year, things have changed. I'm a keen observer of the earth. I read the newspaper and what's happened in the last year is things have happened. In our industry itself, if you look at the frozen categories across our industry with the possible exception for a short term basis the private label growth in potatoes and frozen is not a great category right now in the U.S. That doesn't mean it won't be again but I'm just telling you it isn't right now. And in the last year, I mean, if you can ask me one word, what's different? The world changed. It changed. And the world we operate in is continuing to evolve. And I think for us, I'm grateful we have a balanced portfolio. I mean, think about other companies in our industry that's suffering this kind of problem with one of our big businesses, they'd all be in terrible shape. We're telling you we're going to grow organically and in constant currency at 5% to 8%. Now you may not like that, but that's a hell a lot better than contracting 5% to 8% and you look forward on where we're going in terms of what we've done over the last 7 years, and we think we can duplicate similar patterns in the next 5, 7 years. I feel pretty good about it. Do I like coming in here and taking the number down a bit versus what it did last year? No. But I also made a decision. And the decision, we get paid for judgment and we get paid to build long-term value. We could have been there had we kept our investment levels commensurate where they were in the past. We see an opportunity. An opportunity as I said earlier, to differentially change this company in terms of making it far better than everybody else. But I looked at the results the last couple of days from some of our peer companies. And I ran into another CEO in the elevator today and I came back and told my team, I'd rather be me than him. So I think from that perspective, yes, I'm not unhappy where we are. I'd quote the movie Hoosiers when Gene Hackman is presented with this context of the fans saying they are unhappy and so forth because the team hasn't started winning. And he said I'm really happy. I'll also remind you that team won the state championship. I think we're on our way. Do we have a problem? Yes. Good news is we know exactly what it is, we hope we know what has to be done, we think we can execute it, and if it gets fixed then you'll be looking for something else to talk about and you'll have tough time finding it. So yes, I'm concerned about it.

Margaret Roach Nollen

Chris.

Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division

Bill, I had a question for you about -- I get the questions, a lot about the Emerging Market margins. You've given us information today, Chris did. And I guess, my question is over the next 3 to 5 years and a bit of a follow on to an earlier response you had, but is there an expectation that those margins will continue to contract? And my basic question would be that if you got this great opportunity to continue to reinvest to generate better growth, shouldn’t we worry more about the dollar growth than the margin from that emerging market business?

William R. Johnson

Well, let's talk about margins. There's gross margins and there's operating margins. Gross margins in that business will continue to widen, they'll continue to improve. Operating margins, they're differentially adjusted by what we decide to invest back in that business either through boots on the ground, SG&A cost or through marketing. And I think we've got that pretty well-balanced. I think over time, those margins will equilibrate to the rest of the world. Now remember the rest of the world itself is not -- it's an amalgam of things. Foodservice has relatively low gross margins, relatively low operating margins whereas the branded business in terms of the company is a little bit higher. But right now, gross margins, forget operating margins for a minute, gross margins are closer than they've ever been and that includes the implementation of Quero and Foodstar, which historically have brought, as Chris said, would bring in lower margins. So I feel pretty good. I think the way you ought to look at the emerging market businesses over the next few years is their dollar contribution in terms of sales on a constant currency basis and their profit contribution on a dollar basis. And we'll take you through the margin expansion that we expect to see in those businesses. But I got to tell you, the gap between them and the developed world has narrowed appreciably and part of the issue is, goes back to the comment I made earlier, consumers in the developed world are looking for value. Prices are being compressed, not necessarily by reduced prices as a promotion expense but by the mix of products being sold and consumers are buying. We're not seeing that in Emerging Markets. We're seeing the exact opposite phenomena as that continues to grow. So I continue to feel pretty darn good about where we are. I mean, I think of a company our size. Surely, a U.S. company our size with 25% of its business in the growing markets around the world and while I hear people concerned about China's GDP slowing down, yes it's only growing at 8.5% instead of 10%. Last time I checked, the U.S. is growing between 2% and 3%, that's after they doctor the numbers. So my own perspective is that I think the reality is, we're where we need to be. And I hear concerns about the margins in some of these businesses. I got to tell you, the margins in Brazil have surprised the hell out of us. They're much better than we anticipated when we bought the business. The Foodstar debate we're having now is they had such a good margin, the only argument I'm having with Hein is Hein keeps saying well, you can't expect me to throw those margins up every year and I said, you're right, I can't. I expect them to improve every year. And when you put a finance guy in charge of a business, they sort of revert back and try to become marketing people and then they want to reduce margins so they spend more money. But I think from that standpoint, we'll continue to invest. Now of the increment in $70 million of marketing this year, you should assume about 60%, give or take, in the emerging world and about 40% to 45% depending how these come out, in the developed world. And right now, the developed world spends about 2/3 of our total marketing dollars and the developing world spends about 1/3. Over the next 5 years, those numbers will equilibrate more likely, particularly if we continue to get the kind of outsized growth we're getting in the developed world.

Margaret Roach Nollen

Okay. Matt?

Matthew C. Grainger - Morgan Stanley, Research Division

Just 2 follow ups on Emerging Markets. One, I just wanted to get a sense of how you think about the outlook or the immediacy of Emerging Markets' M&A during the next 12 months, given the increased focus on innovation, marketing spend, particularly in developed markets, does that present any constraints on your ability to integrate Emerging Markets acquisitions in the short term? And then, just your assessment of the M&A pipeline that’s out there right now.

William R. Johnson

Let me hit the second one first. The M&A pipeline is full. Again, I've been saying for a couple of years and I still say it, I mean, our biggest issue is resource allocation and getting these done, not from the negotiation standpoint, the identification standpoint but from the due diligence standpoint. And it's always complicated because you get the FCPA issues you have to address. So the due diligence process, we put these companies through is rigorous and I think I've told the story before that the owner of the Brazilian company called me in the middle of this process and said you people are evil. I mean, what is all this stuff we have to do and I said we're a U.S. listed company and we have to comport with U.S. laws and that's what this is. He almost changed his mind as did the guys in China. But that's the big issue. The opportunities are significant. We have a robust pipeline of Emerging Market opportunities virtually in any market we already are in or any market we want to be in. How many of those get done will be dependent on whether we think we can create value and whether or not we have the resources to get them done. On the other side, on the marketing side, I think you're asking almost 2 different questions. We continue to believe that we can invest in these businesses differentially because we're getting differential returns. And so I think that is a separate issue. As long as we continue to see that, we'll continue to invest in them, when we don't, we won't. But from our perspective, I mean, I'd love to add all these businesses in Indonesia, Brazil, China, India, Russia. I mean, nothing would make me happier than to build onto those infrastructures that we've created and to leverage them with additional marketing and/or additional resources.

Matthew C. Grainger - Morgan Stanley, Research Division

Okay. Just to follow up on Chris' question in your discussion of operating leverage. On Russia, in particular, I know you talked for a few years about investing to win there. We've obviously seen pretty robust sales growth, some gross margin expansion. How close are we relative to sort of the total Emerging Markets group to seeing an inflection in operating margins in that market...

William R. Johnson

I think you're real close. I mean, I think in the fourth quarter of this year, and certainly for the most part of the year, we saw an inflection point relative to where we've been. I think going forward, you'll definitely see an inflection point because frankly, they're going to have to contribute and carry their weight relative to their size. If you look at the sales side, they'll be 25% of our business this year. If you looked at their operating contribution side of that, it's obviously a little bit less. But it's not a little bit less turned into a lot less like it used to be. I mean, we've narrowed that gap. But eventually, we're going to expect them if they’re 30% of the sales are going to be every bit of 30% of the profit contribution or more and we are getting very close to that point.

Margaret Roach Nollen

Rob?

Unknown Analyst

Bill, I wanted to know about a year ago, I think you were pretty vocal about the desire to reallocate resources away from North America and into Emerging Markets and International. This year, we had some pretty big fires in Ore-Ida and in Foodservice and I'd like to know, as you do your kind of review, do you think that you might have pulled too much out of North America just in terms of either marketing money or even in management talent?

William R. Johnson

Well, I'll try to muster enough bluster so I don't fluster as I refrain from disdain that might cause pain. But I think in the context of the argument, I think maybe the talent question’s the legitimate one. I don't think from a dollar standpoint, we've pulled the resources out. In fact CP marketing was up this year. It was up pretty significantly. The only place that marketing would've been down in North America this year is the Canadian operations. So CP marketing was up this year, was up last year, and it will be up significantly coming into '13. That's not the issue. I think the issue is, how it was spent and how well it was utilized. And I don't think it was spent well and I don't think it was executed well and that's not new news, that's not the first time Scott has heard me say that. So I think that's the bigger issue. In terms of the talent, that is a concern and while we haven't taken a lot of talent out of there, we've moved some around the world. The reality is I'm not sure we've kept up with the rest of the company in terms of infusing new talent into the U.S. company and that's something we're working on aggressively. In terms of Foodservice, I think our Foodservice leadership team has done a very good job of creating a compelling vision and a compelling business proposition in a lousy industry. And you saw the fourth quarter output, they had a heck of a fourth quarter. They'll have a very good year this year on a relative basis, again assuming the restaurant industry doesn't collapse. So I think on Foodservice, we're in pretty good position going forward in the U.S.

Unknown Analyst

And actually I have a follow-up for Scott on Foodservice. I was surprised to see that Dip & Squeeze is now 25% of your ketchup volume in Foodservice. Are we seeing any kind of a margin uptick because of that shift and is it hidden by other stuff, are we going to see more coming forward?

Scott O'Hara

Well, we are continuing to build that business out, as I showed you and we're continuing to get better at the manufacturing of it. So there are some efficiencies that are coming through that. Now in fairness, we're also investing in it to continue to drive it out, Rob. So we feel really good about that. I mean, we're really pleased that we were able to knock down our partner in Pittsburgh with McDonald's there. That was a big win for us, we're excited about that. So we got their Tri-Ad Mac group that I mentioned in my announcement. So that just came online. We are excited about that and we're going to continue to build out on Dip & Squeeze. If I could maybe just add one other build on Bill's comments on the CP thing, we made a big bet. I made a big bet and my team on T.G.I. Friday meals and that bet involved a lot of marketing support as well. And so to Bill's point, our total marketing was actually up, we didn't pull back. Where we invested it didn't work. And it was a painful decision to get out. But the reality is the level of investment we are going to need to continue to make to make T.G.I. Friday entrees work, we didn't feel like it was the best use of the company's money. And so, we're reallocating that back to brands like Ore-Ida and quite frankly, Heinz Ketchup. So that's one thing. On the resource question, I don't think that we've taken any away. We have shared a number of our resources with other affiliates around the globe and actually a number of those are coming back to the business this year. So I mentioned John Hans coming back in to head up our selling organization. We have a guy by the name of Mark Frasier that was helping Chris down in Asia and sort of trade management he's coming back into our business. We had a guy by the name of Max Wetzel who is a marketer that was helping Chris in Asia, he's going to come back and actually work on our Ore-Ida business. So a very experienced guy and then we have a couple of people in the supply chain that were again, working in Asia that are going to come back and help us in our North American supply organization. So I think from a resource standpoint, we're in a good place. I think the T.G.I. Friday's meals bet didn't work out, we're going to learn from that and focus on areas we think we have a better chance to win in '13.

Margaret Roach Nollen

Thilo?

Thilo Wrede - Jefferies & Company, Inc., Research Division

Bill, is Heinz quick enough to notice problems and address problems as Heinz is quick enough to address opportunities?

William R. Johnson

Yes I think, are we quick enough to notice problems? Oh we're really good at noticing problems. Are we quick enough to take advantage of opportunities? Yes. Are we quick enough sometimes to fix problems? I think Ore-Ida certainly is an example of where we weren't very quick and weren't very adept and I think we haven't done a very good job. But I think generally, we got after the Australian business, we've got that turned around, Chris is looking for double-digit profit growth. If I told you the number, it would shock you. I mean, we're really looking for a substantial improvement in profitability there this year. Foodservice, we got after very quickly. I think Brendan and his team did a fantastic job of downsizing the business, getting it repositioned and that's a business that I think will do good things for us this year. But I mean clearly, it comes back to Ore-Ida and the problem when you have a problem is like a football team. When you have a bad player or you have a weakness, it's glaring. When it causes you to not play as well as you possibly can, and that's the issue with Ore-Ida and I think that's true. But I think, if anything, because of our business unit structure, we're far more nimble and flexible at identifying and dealing with problems than many of our peers are. Sometimes we're not very successful at it and I think it probably goes back to Rob's question because I happen to disagree with Scott. I think the talent base in our U.S. company frankly is not where it needs to be. And we're going have to fix it. And I think that's part of the issue. But I certainly think in China, we've gotten after issues very quickly, we've got after issues in India very quickly, we got after issues in New Zealand quickly, I mean, I think we're actually pretty good at it. When we brought Dave in, he got very quick after the U.K. I mean the U.K., nobody talks about anymore, is a hell of a business for us and is growing quite well. But I think it's a fair question and I think all of that is sort of overcome by one glaring example of where it doesn't appear to be that we've been very facile in dealing with the problem that's Ore-Ida. I think in that context, it's a fair statement. I think generally though, it's not accurate.

Thilo Wrede - Jefferies & Company, Inc., Research Division

But based on your answers to all the questions, the problem always comes back to Ore-Ida...

William R. Johnson

Seems to.

Thilo Wrede - Jefferies & Company, Inc., Research Division

Seems to. The organic top line growth this year was better than last year and it’s supposed to accelerate further next year. You said the world changed but except for Ore-Ida, everything seems to be doing fine.

William R. Johnson

I think that's probably fair.

Thilo Wrede - Jefferies & Company, Inc., Research Division

So why the slowdown in the [indiscernible].

William R. Johnson

Because Ore-Ida is a big business. It's very profitable.

Thilo Wrede - Jefferies & Company, Inc., Research Division

And it's going to take 5 years to fix that?

William R. Johnson

I hope not. But on the other hand, I think we're at 6% to 9%. Last year, we said 7% to 10%. At 6% to 9%, it still puts us in a pretty good position relative to our peer group. And I think our perspective was we need to continue to invest to take advantage of these opportunities. I think if you go back over the last 10 years and you looked at prognostications of companies and analysts, I don't think any of us bat very well. And so I think there's an opportunity. Clearly, if we can get the Ore-Ida business fixed, clearly, there'll more upside than downside against that. But we do have to get it fixed. But I think in that context, I am not at all concerned about whether or not that's a good rate or not a good rate. The organic growth rate of going to 4%, we said 4% plus this year, but we've got plenty of stuff we're pulling out of their excluding the divestiture. So we're actually going to get close to 5% organic growth this year. And if that organic growth, if we can sustain that organic growth without the levels of investment we're assuming this year, you get a better growth rate at the bottom line. If you don't, you won't. But again, I think over time, we look at the business in phases and I'm not at all unhappy with where we are, not in the least.

Margaret Roach Nollen

Ed?

Edward Aaron - RBC Capital Markets, LLC, Research Division

Just looking at the 2013 plan, the margin expansion is really coming all from developed markets, right? But you're only expecting I think 1% sales growth and you plan to invest pretty significantly this year. As an outsider, that looks kind of aggressive in terms of the margin expectation. How aggressive is that in your mind? And then, Scott, on the productivity side, you're talking about a 5% number, which is a pretty big number for this industry and the last company that really went there, I think was Kellogg and it caused them some problems. So how do you assess the risk around that?

Arthur B. Winkleblack

I think from a gross margin standpoint, remember that we've got the one-time productivity initiatives we did in FY '12 coming through and help us in FY '13. So that's a big boost, if you will. The other thing is, some of this portfolio pruning we're talking about were obviously targeting those low-margin, slow growth kind of businesses. So that, I think, as we progress forward, will help the margin dynamics as well along with a lot of the things that Bob talked about from a supply chain standpoint. So we've got a number of things stacked up to move in our favor. Having said that, it'll be a lot of hard work but we feel good about the plan.

Scott O'Hara

Ed, I would agree. So I think 3 main drivers for us, Art just touched on 2 of them. So we did do a lot of productivity initiatives in '12 that will give us benefits in '13. There is no doubt that things that we've done to prune the frozen pieces of the business that I talked about are going to improve our margins. And then the third thing I talked about in my presentation was we are doubling down on this value engineering or what they call CVC. Those have taken really non-value-added cost out of our products that we can save that the consumer really doesn't value. And so, the pipeline of that work is already done. Were in implementation mode and I feel good that, that will come through...

William R. Johnson

Yes. I think I had a couple more comments on the margin. I mean, I will tell you that the operating companies think that they will do better than that. We took them back because Art and I looked at it and I wasn't sure who burst out laughing first, me or him. And we decided we would back them down. So I think we'll get the margin growth. The question is whether we get 50 basis points, 100 basis points. But the productivity initiative has worked very well. I think the second thing is the pruning, to borrow another company's phrase is that we're all talking about here, we have taken -- if you take the Foodservice desserts out of the business, Foodservice desserts were making about a 20% gross margin. We've got other businesses like that, T.G.I. Friday's Meals launch wasn't making very good gross margins. And so as we take those out, we'll get some mixed impact from doing those kinds of things. And then I think the other thing is that nobody's mentioned, we've got a lot of carryover pricing coming into the year relative to commodity costs that aren't going to be quite as high. Now, again, Europe and the rest of the world will see higher commodity spikes. The U.S. and most of Asia should see lower commodity spikes. We've got a few exceptions like sugar in Indonesia and a few other things. But generally, I think we’re in pretty good shape right now. And again, stuff happens. But if the dollar continues to strengthen while it has a deleterious impact on our translation effect, in some cases, our transaction effect, it does help commodity cost. And if China slows down on a relative basis from the resource standpoint, then commodity cost should be okay. And a lot of it’s going to depend on where the grain crops come in the U.S., sugar is a big issue or opportunity, either way and packaging is the real opportunity for us. If we go more flexible, we reduce cost and that's one of the reasons I'm pushing the U.S. and Western Europe to use more flexible packaging, get us out of resin-based products, which have gotten very expensive and certainly out of cans, which although somewhat better than they have been, are just completely out of kilter.

Edward Aaron - RBC Capital Markets, LLC, Research Division

One just quick follow-up on the cost side. Dave, I think you mentioned in your prepared remarks that you're expecting inflation in Europe to accelerate from the high single-digit rate that you saw in fiscal '12. It seems like a lot when you consider that I think the cross rates kind of coming your way this year. Is that -- did I read that right?

Dave Woodward

Well that factors -- my statement factors out the currency issue. A lot of things in life are self-imposed and a lot of things in Europe are self-imposed. The eggs are ruling because of the chicken coops...

William R. Johnson

Got to protect those hens. That's very important.

Dave Woodward

They increase the size. By law, that tripled the cost of eggs over the last 90 days, people are trying to source from around, so that's an issue. Sugar prices, it's a closed market so you're not able to play on the world market. So it's the highest price of sugar in the world, that's going up substantially. The tariffs from Portugal, tomato paste is rolling off. So you put all of these things together, tin plate, edible oils, you add it up and it's a very high single digit and it is the opposite of the direction of the balance of the company. But it's really going to be tough on the European consumer, who's real wages are going down with edible -- with food cost going up 6% to 7%.

Margaret Roach Nollen

Okay. Over here, Bill over here.

Bill Dempsey

Just on the Emerging Market long-term outlook, the multiyear outlook, 15% sales growth, could you sort of give us a sense of how pricing versus volume works into that projection because pricing has been such a major factor for Emerging Market, CPG companies in the past few years. So looking out beyond this year of inflation, how you think about that 15%.

William R. Johnson

It's going to have to be more volume driven than pricing driven. And I think you should assume it will be starting out maybe 40 volume, 60 price, and I think it will shift to 60 volume, 40 price. I mean if you look at Russia, for example, in Russia -- and you don't see the full benefits of our Russian situation because when we bought Petrosoyuz business, it had a lot of sub tier brands. Our strategy over the years has been to grow the Heinz brand, which is now 70% of the portfolio. So the Heinz brand in Russia grew volume in the fourth quarter 17% and net sales over 20%. It was almost all volume driven, same with Venezuela in the fourth quarter and so generally, we're seeing a shift to more volume and less price. Now I will tell you that the one benefit we will get in the Emerging Markets more so than probably we've gotten in the developed market the last couple of years is the improvement of mix. And so how mix manifests itself and that we can have a debate on whether that's volume or price or a combination of both but we're going to see a substantial mix improvements as we get consumers to move up market into better value items where we get more leverage. And so I think in that context, I think the best way to look at it is it depends on the market. But I think the best way to look at it over time is probably going to be a little more volume and a little bit less price over time. But we'll have years where it skews the other way for whatever reasons. Either we have some kind of inflationary hit somewhere in the market or there is an opportunity because of a raw material scarcity that we can price up aggressively and we'll take the opportunity to do that. But generally, the single biggest reason that emerging market gross margins are not where developed market margins are is on a price per unit basis. So ultimately, the goal over time is to get those prices up.

Margaret Roach Nollen

Okay? David. Okay.

Unknown Analyst

I'd like to ask a question on China. So Hein, can you discuss a little bit more about the Infant/Nutrition specifically on infant formula when we look at maybe the #1 company that I would look at here, Mead Johnson, their China growth 40%, #1 in China, Hong Kong, how do you benchmark the performance of your infant formula launch? And then holistically, when you look at the Infant/Nutrition that you have, all the baby products, they are certainly very successful. Is the resource allocation right here? I mean, is there any distraction that goes on because you want to win in infant formula but you have won on the baby side of it? Do you have all the right pieces of the puzzle here?

William R. Johnson

Think of the hippo and tick bird. The symbiosis between the tick bird and the hippo. The tick bird eats the ticks off the hippo and save the hippo's life and then the hippo runs over people on the way to water. Generally, what's happening in China, before he gets the microphone is that the support behind formula has been instrumental in driving baby food growth. Hugely important. And so the symbiosis between the 2 has really worked well from that standpoint. It's also worked well from -- we're the only company that can walk into the retailer and say we have a full line to offer you. But that's particularly true and Hein can elaborate on this in the baby stores. So...

Hein Schumacher

I think you're right Bill, I think first of all, we need to focus ourselves. We didn't go into the market with the same sort of force, of course, as Mead Johnson currently has. I mean, they're simply a much bigger business and we chose to go with it more selectively. That being said, if we're looking at our growth, I would say it's definitely around the same type of growth as you've just mentioned or it's sometimes even better but obviously, coming off a lower base. Now as I said, we do focus ourselves. We focus ourselves on baby stores because we do drive the total assortment. And it is just much more effective to do that in that format rather than, let's say, in the hypermarkets and in the modern trade around that whole country, which is for example what Mead does. Just to give a perspective, if you go into a hypermarket in China, it’s very interesting, infant milk formula is a completely different segment than baby food. I mean, they are not even close in the store. While in the baby stores, they're actually coming together. And that's why we're focusing on that. Now then coming back to your question on the investments, yes, I mean, I don't think it distracts. What we currently do more and more though, I should say that, is that when we market infant milk formula, we also market the Heinz brand and therefore our total assortment, so we're sort of tacking that on. Actually, we’re tacking it on literally because we have a commercial on infant milk formula and then we take a pause and then we do a short after ad -- on the total baby food assortment. So we're trying to leverage the halo effect on the total.

William R. Johnson

Let me tell you the sacrifices our people make when we move into new markets. Hein comes out of the Netherlands and his name was Schumacher. But we've decided that since he's in China, the Schumacher doesn't fit, so we're going to change his name to Hein Schu and it captures the first part of it and if we agreed, Meg and I agreed with this with a couple of our European investors 2 weeks ago when we were in Europe that they felt the name Schumacher was not conducive to a Chinese manager so we agreed with a couple of our large shareholders in Europe to change his name to Schu and he has graciously agreed to do that. I don't know that Margaux, his wife, has agreed but Hein has.

Margaret Roach Nollen

Hein you also though, have the Internet online sales as well.

Hein Schumacher

Yes, sure but I think, I mean, even on the Internet I mean there are strange dynamics and you can actually see it. In infant formula, the biggest sellers on the Internet are actually not the products that are on shelves in China and the Internet is already 10% of the total market. So just to give a perspective, these are all opportunities for us and obviously looking into it.

Unknown Attendee

But you can say today that you have market shares in the cities where you've introduced infant formula to the extent that what you foresee it as a sustainable business over the course of time, is that a true statement?

Hein Schumacher

Yes, we're definitely not pulling out. We've had those in these internal discussions because they are an integral part of our portfolio and to your point, we have market shares that we think are sustainable and -- well, I think that's more importantly, we have off take that make it sustainable. I mean, obviously, were starting up sometimes in certain geographies and you could say okay, you start with 1%, then 2%, 4%, 5% market share. But I think much more importantly is to say we have a metric, which I won't disclose here but I would say, we have a metric that says how many cans do we need to sell per store to make this sustainable and we feel we're hitting that in the areas that we target and that we focus on.

Christopher J. Warmoth

And I think the important thing, David, is where we have put our efforts, we're seeing very consistent growth. So I think this synergy between baby food and formula, which, if I'm honest -- when we started out, I think we were very conscious of it, but I think we've learned a lot more about it. So Hein, in his presentation, talked about the golden baby stores. There we're seeing both formula and baby food really starting to grow and that is where you'll have a promoter, you'll have a merchandiser and they can work very effectively across both.

Margaret Roach Nollen

Great. David? We'll take Andrew, and then because we're starting to run out of time...

Andrew Lazar - Barclays Capital, Research Division

In the U.S. I guess this is for both of you guys, Scott and Bill. It was interesting you're talking about Yum! before. Yum! in the U.S. has always had a bit of a long-term restructuring story in the U.S. as they've been fired up to invest heavily in the places where the ROI has been very good from a marketing standpoint and they can see the greenfield is greater of course, in China for them than some other places. But in the U.S., it's often that a long-term restructuring in other words, they're trying to lower their fixed cost to de-risk the market. And then they're often sacrificing top line and it looks pretty sloppy and it didn't stop for 1 or 2 years, it happened for many, many years. I'm wondering if you're thinking, to some of the things we’re seeing right now, this is going to probably be the way it's going to be for a while in the U.S. where you're going to invest or try to invest maybe more on the must-get-right brands like an Ore-Ida because maybe you took your eye off the ball there going for some growth in a market that may not be as responsive to that. And then at the same time, letting some of the other stuff kind of go away in an educated way. But we are going to have to squint through some numbers for quite some time here in the U.S.

Scott O'Hara

Yes, I think we've got the portfolio where we want it right now, David. I mean, obviously I think, like any business, you're going to continue to look at your portfolio and make sure that you feel like you can win and if you feel like you need to make adjustments, you'll do that if you think it's going to drive shareholder value. I think what we did last year with the Foodservice, Frozen Desserts business was something we would've liked to have done for a while. You have to find the right opportunity and we found it and so we were able to execute that in May. And then on the T.G.I. Friday's thing, as I mentioned, we really believed in that and that was essentially going to be a new growth area for us, it was going to be non-nutritional frozen entrees. Unfortunately, the category collapsed, that didn't help but then also, we just didn't believe at the end of the day that the brand was resonating enough with the consumer. And so we pulled the plug on that one. Outside of that, I think if you look at our brand portfolio, it's very strong. We have very strong share positions in the categories that we play. So I feel good about where we're at with that business in the U.S. and I think our challenge is we got to continue to drive it.

William R. Johnson

The fact we took 26% of our frozen factories out, Yes. I mean, you're right and we have to continue to recognize that. If you can't get the top line, you're going to have to take the cost out particularly, the fixed cost. And I think fixed costs are still an opportunity in the company. We run about 20% of sales, frankly, I think we ought to be at 16% of sales and we've been around 20%, ongoing now for a couple of years. And so I think there is in the productivity initiative, will help us get there as will SAP. But yes, David, I think you're probably right. And if you go back years ago, we used to talk about the U.S. company growing profits 10x and not growing or adding a single case, we improved it through mix and productivity and pricing and so forth and we're going to have to see a little of that in the U.S. market because frankly, with the exception of our ambient business, which is doing pretty well, the frozen industry in the U.S. is not growing. I mean, I'm not the only one who can stand up here and tell you that, ConAgra, Nestle, others are going to tell you that. It’s just not and we’re not going to try to perfume it and make it something it's not. So we're going to have to deal with the realities in the marketplace we operate in.

Margaret Roach Nollen

All right let's close it out with Andrew. I'm counting on you to make this a wonderful, perfect, pleasant way to end the conference.

Andrew Lazar - Barclays Capital, Research Division

Everything looks fabulous. Well it follows up on David's question but how do you weigh -- a lot of restructuring you're doing now is really running through the P&L again after the one discrete action you took last year. Did you weigh, given the environment and everything you just talked about, taking other more discrete actions to just frankly accelerate things or -- on the cost side or is there just so much you can do on an organization in a given time frame?

William R. Johnson

Well everyone keeps referencing one of our peers and the problems they had with overshooting. I think there is a balance and that balance is you have to do only what you can consciously do without affecting the quality and the propriety of your brands and I think we've done that. And there will always be opportunities. We've got some opportunities and as Art said, we're going to run those through the P&L. But no, I don't think we left anything big on the table or any big discrete ideas on the table. We'll continue to prune the portfolio as we go forward and I'm talking about both divestitures to make us a better business and really focus where we can get growth and frankly, from an SKU standpoint, getting out of businesses where we apparently don't perform well or don't bring margin. But no, Andrew, I think we are doing, from our perspective, what ought to be done. But I do think you have to be real careful in these productivity initiatives that don't -- you don't get so enamored with them that you don't pay attention to the basics.

Andrew Lazar - Barclays Capital, Research Division

And the last thing is just are there just too many frozen players? And if there are, is there a way around that or is that just what we're going to live through for a while?

William R. Johnson

Got any ideas? Yes. The frozen category is a big category and there are a lot of people in it. And I think the fact that Lever’s announced the sale of its frozen businesses in the U.S. and basically everybody in Europe is trying to get out of frozen. I think the reality is the industry itself is under pressure right now and we have to continue to play. Now the good news sometimes is you continue to invest, you continue to build and others walk away it leaves an opportunity for you. But frozen is an area we're just going to have to continue to pay attention to. And do I think there's too many? It's hard to assess that. But you go down the aisle and the freezer case and it makes the baby food business look simple. When you go down, there's 50 different brands, there's 50 different sizes of every brand, there's price points all over the place. I mean, you can buy a frozen entree for $0.89. I don't know what you get for $0.89, but you can buy one for $0.89 or you can pay $7.99. And so I think, we do have to be careful. Again having said that, Smart Ones is really not an issue for us. It's done pretty well. Unfortunately it's done well in a category that's contracted quite a bit. So we'll continue to evaluate it. But my comments in my opening remarks were not nuanced. And I basically said we're pushing like crazy into condiments and sauces, Ketchup and Sauces, and into Infant/Nutrition, that was said for a reason and not just for speculation and so we'll continue to drive growth there and we are, and I'll say this unapologetically, we are the best in condiments and sauces in the world. We do the best job, we drive the best growth, we get the best returns. I mean to be growing ketchup in today's market at 6% to 7% organically and given the kind of travails going on in Europe is pretty impressive. And I think that's true all over the world and Ketchup in China is a huge opportunity. In fact, I'd be willing to bet you within 5 to 8 years, our ketchup business in China, on a retail basis, will be bigger than our ketchup business in the U.S., that's how big the market opportunity is in China. And we're just -- we've got a 5 share in China. We're just now getting into the marketplace and Foodservice is a huge upside there for us also.

Margaret Roach Nollen

You want to wrap this up?

William R. Johnson

Bye. Thank you. Thank you for your patience. I only counted 4 or 5 of you dosing off and that's pretty good. Because Art and I were back there trying to keep each other focused on this and I leaned over and I said Art, do you have any toothpicks? And so we appreciate your patience, appreciate your forbearance. I think it'd give you great perspective respect to see our team in action and thank you for your interest in the company. So thanks a lot. Appreciate it.

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Source: H. J. Heinz's CEO Hosts 2012 Analyst and Investor Day (Transcript)
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