H. J. Heinz Company F2Q08 (Qtr End 10/29/08) Earnings Call Transcript

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H. J. Heinz Company (HNZ) F2Q09 Earnings Call November 21, 2008 8:30 AM ET


Meg Nollen - Vice President, Investor Relations

William R. Johnson - Chairman and Chief Executive Officer

Art Winkleblack - Executive Vice President and Chief Financial Officer

Ed McMenamin - Senior Vice President, Finance, and Corporate Controller


Terry Bivens - J.P. Morgan

Robert Moskow - Credit Suisse

Alexia Howard - Sanford Bernstein Research

David Palmer - UBS Investment Research

Andrew Lazar - Barclays Capital

Ann Gurkin - Davenport & Co. of Virginia, Inc.

David Driscoll - Citi Investments


Good morning. My name is [Regina] and I will be your conference operator today. At this time I'd like to welcome everyone to the H. J. Heinz Company fiscal year 2009 second quarter earnings release conference call. (Operator Instructions)

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

Meg Nollen

Thank you, Regina, and good morning, everyone. I'd like to welcome you to our conference call and webcast. Copies of the slides used in today's presentation are available on our website at Heinz.com.

Joining me on today's call are Bill Johnson, Chairman and CEO, Art Winkleblack, EVP, and CFO, and Ed McMenamin, Senior VP Finance and Corporate Controller will also be available during our question-and-answer session.

Before we begin with our prepared remarks, please refer to the forward-looking statement currently displayed. This is also available in our earnings release this morning and in our most recent SEC filings.

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 30, 2008 Form 10-K, which lists some of the factors that could cause actual results to differ materially from those in our predictions. Heinz undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by securities law.

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

Please note we plan to file our second quarter 10-Q this afternoon. Our related financial highlights pages or stat pages will then become available in the Investor Relations section of the website towards the bottom of the page.

Now, with the formalities out of the way, let me turn the call over to Bill Johnson. Bill?

William R. Johnson

Thank you, Meg. Good morning, everyone. We have a lot to discuss today, so thank you for joining us on the call.

I will commence with a brief review of our second quarter results and then focus on what we are doing and have been doing to address a very challenging economic environment.

Regarding our second quarter, needless to say, we are pleased with the results, particularly given the unprecedented economic environment we're all facing. Our reported results were highlighted by 5.8% organic sales growth, which, I might add, now represents 14 consecutive quarters of top line organic growth, also characterized by very strong EPS growth at 23%, and operating free cash flow of $145 million, an increase of $12 million versus last year.

Our second quarter results reflect some key actions that we have taken in preparation for a slowing economy. The most notable was our decision in early August to hedge the majority of our currency exposure in anticipation of a strengthening dollar. This means we have given ourselves time to adapt to the new market environment, which will likely include lower commodity costs next year.

We remain on track to meet our fiscal 2009 sales and EPS targets, with full year organic sales growth of at least 6% and EPS in the range of $2.87 to $2.91.

Importantly, Heinz positions in most countries and categories remains strong as we rebalance our growth agenda to shift marketing investments toward value-oriented innovation and significantly ramp up our cost reduction focus.

And finally, regarding the global economy, we have been very concerned about a slowdown for some time, and we think that it is prudent to assume that this will be the environment in which we operate for some time to come. Given this, Heinz has been executing against five dynamics you will hear about today and in future quarters. We call them the five Cs - consumers, costs, cash, commodities and currency.

Let's now take a brief high-level look at our overall performance in the second quarter through several different lenses, beginning with our top 15 brands.

Our top 15 brands, which represent about 70% of Heinz sales, grew approximately 8.5% organically in the quarter, led by the flagship Heinz brand, which reached nearly $1 billion in quarterly sales for the first time.

Focusing on our three core categories, ketchup, condiments, and sauces were up nearly 8%, led by very strong organic growth of 12% in our global ketchup business. Meals and snacks grew 2%, and infant nutrition was flat versus prior year following a very robust Q1 performance.

The North American consumer products business delivered yet another superior quarter of top and bottom line growth. Organic sales increased 11%, fueled by commodity related price increases and some year-over-year incremental buy-in related to those actions. The Consumer Products team is aggressively pursuing new value-oriented initiatives to address the current economic climate. Examples include a classical in-store display program communicating a $10 family meal solution and a better value Heinz gravy jar.

Consumer Products also successfully launched on-trend new products during the quarter, including a range of Smart Ones breakfast and TGIF skillets, which are off to a great start. The introduction of Ore-Ida Steam 'n Mash is one of our most successful launches in many years. Its success demonstrates how consumers will balance innovation news and value whatever the state of the economy may be.

Smart Ones continued its drive in the new meal occasions with the successful launch of the Morning Express line of breakfast sandwiches and quesadillas, the first full line of breakfast items in the frozen nutritional category. Separately, Smart Ones is feeling the effect of the intense promotion activity in the category, but our base consumption, importantly, is still up and the only one favorable. And to this point we have opted not to participate in the profitless prosperity that comes with chasing incremental promotion driven volume.

In U.S. Food Service we saw some sequential improvement in the quarter, but it clear that the industry has not turned the corner, and consequently we expect our Food Service business to continue to lag the rest of our portfolio. Food Service is very sensitive to economic conditions, and as you have seen from recent reports, industry traffic is soft and may take some time to improve. Nevertheless, we are working on initiatives to position this business for profitable growth when the market does recover.

Organic growth in Europe during the quarter reflects solid results in our U.K. ambient business, strong organic sales in Continental Europe, and difficult comps in Russia. Italy was down slightly, reflecting market conditions, but year-to-date is in line with our internal plans and continues to make good progress.

Our ketchup business in Europe achieved record market shares in Spain, Sweden, Austria, Switzerland, and Denmark during the quarter. This growth reflects in large part the successful introduction of the new top down PET bottle, which the redesigned label, and the Grown, Not Made marketing campaign which leverages our unique tomato heritage and our all-natural positioning.

We continue to have confidence in our European businesses because of the determination of our leaders, the strength of our brands, and our favorable share positions. Importantly, we are addressing the challenging European economy through an increased focus on brand, benefit and value messages as exemplified by better value, bigger pack sauces and a new, small, top-down ketchup that has a lower entry price point. Additionally, the U.K. has recently commenced a new marketing campaign highlighting how Heinz beans can provide a healthy lunch for less than one British pound.

And finally, our emerging markets continued to deliver outstanding results. They accounted for 14% of total Heinz sales and 39% of our sales growth in the quarter. We continue to be very well positioned in these markets and expect to continue driving double-digit organic top and bottom line growth on a constant dollar basis across the balance of fiscal 2009 and beyond.

The GDP in emerging markets is still positive, and consumer classes continue to expand. Importantly, consumers in these markets are very brand oriented. We will continue to invest behind our brands to drive distribution, awareness, and trial in markets like China, India, and Indonesia.

Now let me address how we project our business going forward. It would be an understatement to say that the world has changed since we met three months ago. What started as a Wall Street financial crisis has quickly morphed into a global recession with increasing levels of uncertainty and angst. It remains to be seen how global economies will respond to the various stimulus measures being implemented, but at Heinz we foresaw some of the headwinds and have been preparing for an extremely and extended difficult time.

Our decision, for example, to hedge most of our foreign exchange exposure for the balance of fiscal 2009 in early August, as I said earlier, was a proactive step designed to insult the company from the strengthening of the U.S. dollar that we anticipated at that time. This action has had the desired effect of allowing us to continue with planned investments in SAP and our task forces in fiscal 2009, while also giving us time to implement more aggressive productivity measures to bridge to the benefits we eventually expect from declining commodity costs.

In a worldwide town hall meeting with our global employees last week, I discussed our strategy to position Heinz for success in these recessionary times by focusing on the five Cs I mentioned earlier.

Regarding the first C, consumers, we all need to recognize that in the current environment there are things we cannot control. We should not waste time agonizing over these, but instead focus on what we can control, beginning with our actions to help consumers survive this difficult period. We are fortunate in this downturn to have an experienced leadership team, a balanced portfolio of strong brands, and a diverse geographic mix of businesses. We produce and sell affordable comfort foods like soups, beans, potatoes, ketchup and sauces and pasta meals that should fit well into this new environment.

While consumers are clearly delaying discretionary big-ticket purchases, most Heinz products are relatively inexpensive everyday items that help consumers add flavor, nutrition, and enjoyment to their lives.

Our global brand equities are stronger than ever, reflecting our significant investments in innovation and marketing over the past three years. We learned this week, for example, that Heinz has once again been named the number one food brand in the University of Michigan's annual American customer satisfaction index for the ninth consecutive year.

Having said all of this, the squeeze on discretionary income means that our brands must offer consumers value for money. This is not a new phenomenon for those of us who have been around awhile, although admittedly it may be more intense this time around. And while there is evidence of some drift to private label, consumers will generally remain loyal to our brands if we give them reason. This is true for our developed markets and particularly for our emerging markets. Rest assured we will protect our market leadership and brand equity in this environment.

It is also true that the overall strength of our number one brands and the success of many of our recent innovations should provide some protection against competitive attack, but tertiary brands will undoubtedly be squeezed.

The tough global economy is an opportunity to communicate to consumers how our products fit their challenging needs or to create new ones that do. Research indicates that consumers see traditional Heinz products as trustworthy, consistent, tasty, and convenient. In marketing ourselves as the perfect family solution, we will subtly dial up value for money and affordable luxury and more overtly dial up our health and nutrition credentials.

Our initiatives to meet consumers' needs for more affordable products will include reconfigured pack sizes and new offerings for alternate channels where appropriate. Advertising and promotion plans are being adjusted to reinforce the overall value of our products and to accommodate some new ideas like the dissemination of recipe booklets describing how to prepare inexpensive nutritious meals at home quickly and conveniently.

Marketing spending, which we have increased by over 40% during the last several years, is being scrutinized to ensure that it delivers consumer value and acceptable returns to Heinz going forward. It may at times be redirected to more directly influenced purchase behavior through promotions, bonus packs and other similar such efforts.

We have placed additional resources against value engineering initiatives designed to reduce product costs while maintaining quality and ensure that we are giving consumers what they want in this environment. Resources have also been redirected to packaging to accelerate cost reduction efforts and create new value packs in some markets, smaller sizes in other markets, and to eliminate costly nice haves that don't add much consumer value, such as multicolor shipping containers, for example.

Turning to cost, we recognize that we cannot rely on pricing to succeed in the new environment, and we are accelerating productivity and redoubling our efforts on rebuilding margins. This is not a change in strategy, but reflects a more nuanced and balanced focus on sales growth and productivity, with particular emphasis on improving margins.

Both gross and operating margin improvement will be a priority. We plan on less pricing going forward, but we do anticipate some offsetting benefits from the decline in commodity prices over time. Controlling fixed expenses will continue to be a strong priority.

Significant cost out and margin improvement opportunities have been identified by our global supply chain and business systems task forces, with particular opportunities in consolidating procurement and attacking indirect spend. We are still evaluating many of these ideas.

Moving to cash, cash now more than ever is king, and we are exploring every opportunity to enhance our cash flow. We are in fact appointing an internal cash czar to lead this effort. Inventory reduction will be a major point of emphasis. Consequently, we have given our company specific goals to reduce their number of SKUs and to limit capital spend. Treasury, under the direction of [Lynn Cullo] has done a masterful job of managing liquidity and is continuing to look for ways to drive improved cash.

Turning to commodities, while the price of oil and certain other inputs has declined, inflation still exists for many key Heinz inputs, and the lower prices have not yet worked their way through supply agreements. As we go forward, we expect to recognize the benefit of declining commodity prices. We are also reevaluating sourcing opportunities based on the changes in currency to find lower cost alternatives.

Finally, on currency, we have witnessed the most rapid appreciation in the U.S. dollar in memory, with many currencies giving up 3 to 5 years of gains against the dollar in just a few months. While no one could have foreseen such a rapid rise in the dollar, we did anticipate and plan for a gradual strengthening during the summer and wisely hedged our foreign exchange exposure for fiscal 2009. As I said, this prudent action has protected our ability to deliver earnings this fiscal year while helping us to sustain our planned growth initiatives and productivity investments.

We are now halfway through fiscal 2009, and while much has changed since we last met, what has not changed is the strength and depth of our team, the improved position of our key brands, the favorable geographic mix of our business, the fact that we now have a very focused portfolio, and the appropriateness of our strategy. We are focused on finishing fiscal 2009 well and meeting our organic sales and EPS targets. We have an experienced and strong bench and are taking aggressive action to enhance our balance sheet and address changing consumer behavior.

We expect challenging trading conditions going forward and our plans have been geared to this. Clearly, it will not be easy and we must be prepared for the unknown; however, I remain confident in our resiliency and ability to respond to this more difficult environment. I look forward to giving you a further update in February, when we should have better visibility on currency trends, commodity costs, and overall economic conditions and therefore our outlook for fiscal 2010.

Now I'd like to turn this over to Art to take you through the details of the quarter.

Art Winkleblack

Thanks, Bill, and good morning, everyone.

As you've seen, we posted very solid top and bottom line numbers for the quarter, and now I'll give you a deeper look at the internal dynamics of the results.

Let's first take a look at our P&L scorecard. Overall, sales grew 3.5% and EPS was up 23%. Within the P&L, gross margin was down 170 basis points as we took the brunt of the highest quarterly commodity inflation we've ever seen. Consumer marketing was down 4%, but was about flat on a constant currency basis. Operating income was off 8% to prior year, but in line with our own internal operating plan on a constant currency basis. Versus prior year, the entire reduction reflects the dramatic downturn in foreign currencies against the U.S. dollar, the worst cross rate between the pound and the euro since the inception of the euro, our investment in global task forces, and a spike in diesel fuel costs. Also, remember that Q2 operating income last year was well higher than any other quarter.

Within the P&L, the first thing to remember is that GAAP accounting standards require the body of the income statement to be translated at average actual currency rates. Thus, the impact of the declining currencies rolled through the numbers in the top half of the P&L and the benefit of the hedge is recognized below operating income.

Now for perspective, from the first day of the quarter to the last day of the quarter, the Aussie dollar dropped 29%, the New Zealand dollar dropped 20%, the U.K. pound dropped almost 18%, and the euro dropped 17%. The currency hedges we put in place protected net income, but clearly had no impact on revenue or operating income.

Now turning back to the P&L, the impact of foreign exchange rates on the top line was 3.3 percentage points unfavorable for the quarter and was even larger at operating income. The OI impact was about 6.2%, approximately half relating to the appreciation of the dollar and the other half reflecting the incremental product costs in the U.K. from the decline of the pound versus the euro.

As Bill mentioned, we made the decision to lock our key currencies for translation purposes in early August. To date, that has proven to be a very valuable decision. The impact of that hedge is below operating income in the net interest and other line. The marked-to-market benefit of this action was $92 million for the quarter, $23 million of which was attributable to second quarter earnings and $69 million or about $0.13 related to the back half of the year. These hedges simply locked in four of our top currencies at rates close to those assumed in the high performance plan we launched on May 29 and buys us time to adapt to the new world economic environment.

Now shifting to revenue, you can see that we drove organic sales growth for the quarter of 5.8% following organic growth of 10% in Q1 and 8% in Q2 last year. The growth this quarter was driven completely by price as we continued to work to keep up with inflationary cost pressures. Volume for the quarter was down 1.3%. We generated strong volume growth in North American Consumer Products, Continental Europe, India, and the Middle East, but these increases were more than offset by soft sales in U.S. Food Service and the European frozen business. Excluding the latter two businesses, volume was up slightly on the balance of the portfolio. Again, foreign exchange reduced sales by 3.3% as virtually all currencies depreciated against the dollar during the quarter.

Finally, acquisitions improved sales by 1%, reflecting the acquisition of Wyko at the end of last fiscal year and the Q2 acquisition of Benedicta. Both acquisitions are good bolt-ons in our core sauces category in Europe.

Turning to net sales performance by segment, North American Consumer Products had another strong quarter, even with the difficult economic environment. NACP produced organic growth of 11% driven by Ore-Ida potatoes, Heinz ketchup, and Smart Ones. Net pricing of 8% and the volume from new products such as Ore-Ida Steam 'n Mash and TGI Friday skillet meals, helped drive this improvement. Unfavorable Canadian exchange rates reduced sales in the segment by 1.5%.

Europe produced solid organic growth of 4.5% driven by net pricing of 7.2%, as pricing was required in order to help offset market inflation. Volume in Europe decreased 2.8% while lapping a 9% rise in Q2 last year as notable increases on Heinz ketchup and beans as well as Pudliszki branded products in Poland were more than offset by declines on frozen products in the U.K. and non-Heinz branded products in Russia. Excluding frozen and Russia, volume for the quarter in Europe was up. Sales benefited 3.5% from the Benedicta and Wyco acquisitions, while foreign exchange reduced sales by 6%.

Asia-Pacific delivered organic growth of 1.5% despite the impact of Ramadan timing in Indonesia and lower volume in Australia, where we had a weak September but have since seen a rebound. Pricing increased 5.2%, partially offset by a 3.7% decline in volume. India posted another great volume performance, led by the Complan brand, and Japan had a strong quarter, while exchange rates reduced sales by 3.9%.

And U.S. Food Service continues to be hit hard by economic trends which have resulted in reduced foot traffic in many of our restaurant customers. Pricing in the segment was up 2.6%, while volume declined 5.1% as we continued to eliminate SKUs and exit unprofitable business.

In the Rest of World segment, total sales increased 30%, driven by 33.5% organic growth. Volume was up 6%, reflecting continued momentum in Latin America and the Middle East and net pricing increased 27% based upon cost-related pricing across the portfolio. Foreign exchange reduced sales in this ROW segment by 3.5%.

As I noted earlier, gross margin was down in Q2. We estimate market inflation on our basket of commodities was approximately 15% for the quarter, the highest inflation we've ever seen. Packaging, potatoes, beans, meats, edible oils, and food additives were all up significantly. Additionally, the cost of goods in the U.K. sourced from Europe were impacted by the change in the pound-euro cross rate. In aggregate, marketing increases represented an impact of 880 basis points to our gross margin. A combination of net price gains affected forward contracting on a number of commodities and other productivity initiatives clawed back about 80% of the market inflation.

By the end of the quarter, most commodities had come off their historic highs, but many are still well above prior year levels and will take time for the price changes to work through the commodity complex. We are contracted on most of our commodities for the reminder of the fiscal year and continue to anticipate our commodity costs to remain higher than prior year through the end of Q4.

Turning to operating income by segment, NACP grew 8% due to strong organic sales. Volume growth, which benefited somewhat by the timing of price increases, higher pricing and productivity improvements offset increased commodity costs to generate strong bottom line results. The Canadian exchange rate reduced profit by about 1%.

Europe's operating income was down 16% from a difficult comp last year, despite very solid organic sales results. Of this variance, currency translation and the euro-pound cross rate account for about 13 points and commodity inflation in excess of pricing accounted for the rest.

Operating income in the Asia-Pacific was down 9%, 6 points of which related to currency. The remainder reflects lower volumes in Australia and the timing of sales in Indonesia.

U.S. Food Service improved on a sequential basis from Q1 of this year, but was down to prior year by 25%. Reduced earnings reflect the impact of lower traffic at restaurant customers, reduction of SKUs, limited pricing, and significant commodity cost increases.

And finally, our Rest of World segment delivered excellent results this quarter, up 16%, driven by strong volume and pricing across the region. The currency hit to OI in this region was only 1%.

Now let's move to the balance sheet. Capital expenditures were up slightly as a percentage of sales, reflecting the purchase of SAP licenses. Excluding the licenses, CapEx would have been about 100 basis points lower. With that purchase behind us and in light of the recent changes in economic conditions across the globe, we will be managing CapEx very tightly. And by the way, we're pleased that we have successfully completed our global process design for SAP and are now building it out for rollout into Continental Europe.

Our second quarter cash conversion cycle was 57 days, up 9 days from the prior year largely due to a reduction in day’s payable outstanding. This lower DPO relates to the closure of net investment hedges last year which did not impact operating free cash flow or the P&L. As you would expect in this environment, we are very closely monitoring receivables and have established plans to more aggressively manage inventories. Operating free cash flow increased 9% from last year at $145 million, including $82 million from the settlement of the translation currency hedges that I discussed earlier.

Now let's shift gears and take just a quick look at our performance through the first half of the year. Through six months, sales are up almost 9% and EPS has grown by approximately 19%, so we've posted a strong first half at both the top and bottom line. A few points to note:

Gross profit is up $85 million, while gross margin is down 140 basis points, reflecting the much higher than planned commodity costs in our first half and the effect of the pound-euro cross rate.

Marketing spending is up 4% as we've sustained our new higher levels of consumer support. Bill mentioned that we'll be taking a hard look at how to best spend our A&P funds in this new environment.

SG&A costs are up year-on-year reflecting higher volumes, increased fuel costs, task force spending, and the timing of compensation accruals. The result is that OI is roughly flat through the first half. As we've mentioned before, SG&A costs and comparisons will be much better in the back half of the year than in the first six months.

EPS is benefiting from lower net interest costs, almost 2% fewer shares outstanding, and the translation currency hedges which are only partially offset by a 60 basis point increase in tax rate.

Organic sales on a year-to-date basis are up about 8%, reflecting volume growth of almost 2% and net pricing of over 6%. The impact of currency translation is roughly flat year-to-date while acquisitions have contributed about a point to top line growth.

Looking at sales by segment, you can see that all segments are up double-digit year-over-year except U.S. Food Service. In terms of organic growth, Rest of World leads the pack at 35%. North American CP is up double-digit at 11%, Asia-Pac is up 8.5%, and Europe is up almost 7.5%.

From an operating income standpoint on a percentage basis, ROW leads at 20% growth, Asia-Pacific is up 10%, and NACP has grown 9%. Europe is down 2%, reflecting about a 6 point hit from the combination of currency translation and the cross rate impact. And finally, Food Service is off 33% as we work to simplify and improve the business in a tough environment.

Now let's move to the year-to-date balance sheet.

CapEx at 2.4% is better than prior year by 40 basis points despite the system spending I mentioned earlier.

Cash conversion cycle at 54 days is up 7 days from the prior year due to the decrease in accounts payable. Again, the change in DPO reflects the closure of net investment hedges last year. The combination of DSO and DII is flat, but we're driving to improve it going forward.

Operating free cash flow is up about 6% year-to-date as the settlement of translation hedges was largely offset by higher working capital and the paying of compensation accruals early in the fiscal year.

Importantly, we have over $900 million of cash on the balance sheet. We've moved our leverage statistics in the right direction, as net debt-to-EBITDA improved to 2.3 times, and we continue to regularly access the commercial paper market, albeit at a bit higher rates.

Finally, we're pleased that we have continued to improve our after-tax ROIC, which is up 110 basis points over the last 12 months.

With regard to the full year, at the first quarter earnings call we reconfirmed our organic sales growth target of 6% plus and narrowed our earnings outlook to the top half of our original $2.83 to $2.91 EPS range. As Bill mentioned, this remains our target for the year, and we have certainly helped protect our ability to deliver this EPS goal by locking in four of our top currencies.

In terms of quarterly phasing, we expect volume, operating income, and EPS to be stronger in Q4 than in Q3, due in part to timing differences in year-over-year pricing and investment spending.

Our FY '09 target for operating free cash flow remains at around $850 million.

Now some of you have asked about our pension plans. As you'd expect, we are monitoring our pension funds as a result of the recent declines in global equity markets and will evaluate if any discretionary contributions are warranted. We'll make decisions on this later in the fiscal year. Now having said this, we are driving to cover any additional pension funding from a number of cash flow improvement initiatives.

In summary, as Bill stated, we'll give you an update on fiscal 2010 in February, when we should have better visibility on currency trends, commodity costs, and overall economic conditions.

With that, I'd like to turn it over to you for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Terry Bivens - J.P. Morgan.

Terry Bivens - J.P. Morgan

Looking at Europe and the European [break in audio] volumes, is that [break in audio].

William R. Johnson

[break in audio] depends on that later on. But generally the ambient business in the U.K. was very strong, as it was across the rest of Continental Europe.

So if you take, as Art said, if you take the frozen business in the U.K. and Food Service out, our volume overall as a company would have been up in the quarter.

Terry Bivens - J.P. Morgan

And just a quick one, staying on the frozen theme in the U.S., any signs that Nestle might be lightening up on promotion there in frozen entrees?

William R. Johnson

I'm not going to comment about any particular company, although I am sitting here drinking a bottle of Nestle Pure Life water. I think in the context of the environment, the Smart Ones, as I said in my comments, is up from a base consumption standpoint, and is the only brand up from a base consumption standpoint. We have opted to this point to not participate in this profitless volume chase, and we'll continue to see how the category moves.

Our new product activity has done very well and, as I said, we now have the only full line of breakfast items in the frozen nutritional category. Overall, this year we are projecting record sales and profits coming out of Smart Ones. That has not changed. And at end the quarter, overall business was up.

So we are staying above the fray right now. We would anticipate it calming down over the next 30 to 60 days, and if it doesn't, then we'll reevaluate what we do. But right now, Smart Ones continues to perform well from a base consumption standpoint, which obviously is far more profitable and has a lot of new product activity in the marketplace and other is planned in the future.


Your next question comes from Robert Moskow - Credit Suisse.

Robert Moskow - Credit Suisse

You mentioned, Bill, that you expect commodity costs to start to fall, and you also said that that would trigger pricing to come down. There's a lot of people worried about price deflation now, and I wanted to know how far down do you think your pricing can go? Do you think that in fiscal 2010 your pricing would still be positive? And let's say it is slightly positive, do you think your volumes will improve once your pricing is lower?

William R. Johnson

Well, Rob, in the first place, in my comments I did not mention that pricing would come down. What I said is that prices for commodities will come down over time. We're already seeing that, obviously, with oil at $50, with corn back in the 370, 380 range and wheat down and soy oil and so forth. So we're already seeing that.

Obviously, with all the pricing that's been taken, which has not yet compensated for the commodity hits we've taken, it's our intent to hold as much of this pricing going forward as we can. We would expect pricing in fiscal 2009 for the rest of this year to be positive in every quarter. Again, I don't want to comment beyond that because we do need to look at where commodities and currencies and the overall economy will be.

But historically in the food industry, a lot of this pricing has not been given back. Consumers adjust to the price, they adjust to the value being added to the brands, and from a marketing perspective, it's certainly our goal to continue to get people to focus on the creative values that we've added to a lot of these products through our innovation processes, our new items, our mix up and so forth. And I don't think you'll see all of this or even a great deal of this pricing come back.

Now there is no doubt that you will see, my guess is, going forward, trade deals and so forth begin to adjust a little bit higher and you'll see shifts in marketing from most of the peer group to go back into value oriented things that, for one reason or another, according to the accountants have to be accounted for above the line. But I don't think anyone should expect to see this pricing being given back.

Robert Moskow - Credit Suisse

So does that mean that - are you done asking for more list price increases? In your conversations with retailers over the last month or so, have you been asking for any more list prices or are you done asking for list prices?

William R. Johnson

No, no. During the second quarter we took a fairly significant amount of price, as you can see in the results. We are still in the process of implementing some pricing. Obviously, it's gotten a little more difficult, but we're getting it through and the discussions are not particularly friendly right now; they're very difficult discussions. But I think in the context of measuring against the cost hits that we've taken and against what we're seeing in the marketplace right now, they're discussions that have a great deal of merit and I think generally will prove fruitful to us and, frankly, to our customers over a period of time.

But it will vary by geography. It will vary by product. It will vary by, obviously, level of market strength. Some prices will be more successfully gotten than others, but generally, while we're through with the majority, there’s still a few areas where we're going to price in the next couple of quarters.

Robert Moskow - Credit Suisse

If the lever then is to deal back a little bit more on the promotional angle, do you think that your systems and your processes are better now than they were five years ago so that, when you are dealing back, that you're going to be more effective and get a better response?

William R. Johnson

Well, I want to clarify your misconception of what I said. I didn't necessarily say we would deal back. I said deal spending above the line may increase as a function of some of the promotion activities and things we do. For example, coupons and certain tax things and so forth will reflect above the line.

Obviously, in some areas where it gets competitive we may or may not decide to deal back, but I think we've proven over the last three or four years that our systems are highly adept now on a global basis of measuring and getting us acceptable returns on this. I mean, overall, remember, we've brought down D&A spending by 400 basis points versus where we were five or six year ago. In the U.S., we've brought it down considerably more than that. And so I'm not at all worried about that.

What I am more concerned about is to make sure that whatever we do, whether it's spending directly against the consumer, spending against the customer, that we're getting an acceptable return for our shareholders, and driving the right kinds of behavior from our marketing and sales people. That's really the focal point of any effort we make.


Your next question comes from Alexia Howard - Sanford Bernstein Research.

Alexia Howard - Sanford Bernstein Research

Just following on from Rob's question about the outlook for '10 and I know that you're giving us guidance for next year as yet, but all things being equal, if foreign currencies remain roughly where they are, if commodity market prices remain roughly where they are, and if pricing manages to stay fairly stable next year, because of the foreign currency hit, are we still likely to see a major sort of rebasing of the earnings base that you're growing off because those currency hedges are rolling off or do you anticipate that the slowing commodity inflation would largely basically offset some of that negative impact from the currency situation?

William R. Johnson

As I said, we'll talk to you more about this in February when we get a better handle on where the currency markets are and where the commodity markets are and what the global state of the economy is.

I mean, I think you have to recognize that we hedged this year in anticipation of a gradual decline - or gradual strength in the U.S. dollar, and what we've seen is precipitous erosion. Now if you can tell me where the global economies are going to be in the next three or four months and how those currencies are going to roll forward, I'd be very interested, Alexia, but I think there's just simply no way at this point in time to predict currency or commodities.

I mean, I think we have not seen OPEC come back to meet yet. I don't know what they're going to do visa-vis oil. I don't know what's going to happen with demand for other commodities. I can make you an argument commodity costs will get better and currency will stay where it is, or I can make you an equal argument the dollar will strengthen more or weaken. I mean, it's just  that's why we're not in a position to predict or look forward beyond that.

Having said that, the other thing you also have to remember, while we're seeing commodity costs come down, they have not come down through the P&L yet because we are locked in for this year in many areas and because it takes awhile to work through the supply contracts and the market conditions. And frankly, back to the comment Rob asked about pricing, people who are selling these commodities are holding on to their prices as long as they possibly can. Ultimately market demand and supply situations will dictate that they change, but we just don't know exactly how that's going to manifest itself between now and April.

And a final comment is, you know, many of our peer companies are ending their fiscal year. We're still only halfway through our fiscal year, and so our efforts are really focused on delivering against this fiscal year. And as we get better visibility going forward, then we'll be back to you with what we think's likely to happen.

Alexia Howard - Sanford Bernstein Research

And then just coming back to the European business, can you talk a little bit about the current situation on the Italian baby food business? I know that's been a challenging market for some time, but given the slowdown, particularly in Southern Europe, is that becoming more challenging going forward or is it kind of status quo?

And also the U.K., I guess, shelf staple business - the sauces, the soups, the beans - they were obviously very strong performers earlier in the year. What are you seeing there given the private label strength in the U.K.?

William R. Johnson

Well, let me take Italy. Italy is exactly where we thought it would be. In fact, Italy, to be quite blunt with you, is not on my list of things that I spend my evenings thinking about. Italy is doing relatively well. I have a sheet in front of me that shows in about half our segments our shares are up. Where we're seeing some pressure is in the wet category, but it's basically category driven, not necessarily share driven. Our share on a 12-week basis and on a 4-week basis is the same as it's been on a 52-week basis, and we're seeing what we expected to see in Italy, which is a consumer that's under a great deal of pressure.

So Italy, as I said, is not on my list of worries. It's doing exactly as we anticipated it would do. I'm actually pleased with some of the things that we've just reviewed and their plans going forward. And again, most of our share positions are flat to up in Italy, so Italy is not a major concern for me.

In terms of the U.K., in most of our categories you have to remember that historically, across the board, private label has been about a third of those businesses. That has changed a bit in the last, say, two months, as they've gained a little more share, but it's the tertiary brands that are really feeling the pain. Our share in soup is up; our position in beans is stable. Our ketchup share is pushing around 80% and our ketchup business in all of Europe was up 12% organically during the quarter.

What we are seeing is that, as I said, the secondary tertiary brands are being pressed. If you look at our ambient portfolio in the U.K., six months ago we would have told you that about 75% of that ambient portfolio was in share value growth. Today we would tell you it's about two-thirds, so fundamentally not much of a shift in terms of those businesses in share value growth or value share growth in the U.K. from where we were.

Private label, on the other hand, many of their categories, in fact, are showing value share growth, but again, it's a function of a lot of other things and they're not taking it necessarily from us.

But I also don't want to mislead you. The environment in the U.K. is challenging, but our ambient business was organically up in the quarter, both from a volume and a sales standpoint, and had it not been for frozen, that's the way it would have reflected back through the P&L.


Your next question comes from David Palmer - UBS Investment Research.

David Palmer - UBS Investment Research

My question's on Europe. Obviously, there was some noise with regard to shipment give and takes and first quarter versus the second quarter, and so looking at it as a first half, the European profit, down a small amount; obviously, there was a bigger decline in the second quarter. But how can we think about the second half and the whole year in terms of the European segment? Do you see your profits increasing for that second half?

And then, with regard to where you're seeing pressure on volumes in particular, you noted that the U.K. was seeing some private label tick up but that you might not be impacted and that Italy was holding up. So if there is any sort of volume pressure out there, where is it in Europe?

William R. Johnson

Well, the volume pressure in Europe's in frozen, clearly, where we are seeing it in roasted potatoes in the quarter and in our frozen desserts business, as I said. And I don't want to mislead you. We are seeing some volume pressure in many of our businesses across Europe, but generally we've overcome that with strength in our condiments and sauces business, strength in our beans and soups businesses. And so it's generally across Europe. If you take the frozen and the Russian nonHeinz piece out, our volume organically in the quarter would have been up.

I think from a profit standpoint, the one thing you have to keep in mind on Europe, on a constant dollar basis we expect Europe to continue to do fairly well this year from a profit standpoint and to be up versus last year on a constant dollar basis. Having said that, the currency impact we've seen thus far and obviously we'll see going forward in Europe, is going to be pretty significant. We saw a sizeable hit to sales this quarter of around 6% or so from FX and that trickled down to be even worse in terms of profit.

And there's two elements there that you've got to keep in mind. The first element is not only the change in the translation impact of the euro and the pound, in addition to the zloty and the ruble and a few other currencies, but you have to look at the cross rate between the pound and the euro.

About 18 months ago, the cross rate between the pound and the euro - and we produce virtually all of our baby food and all of our ketchup on the continent and ship it to the U.K. - a year and a half or so ago the cross rate was around $0.65 - $0.66. That cross rate has increased by over 20%. It's now at $0.84, which is the highest, as Art said; it's been since the launch of the euro. And so what we're getting in the U.K. right now from a profit standpoint is the double whammy of declining translation value and the incremental cost associated with bringing product in from the continent. Now, we're looking at things to offset that, but we do not anticipate much improvement in that short term.

Having said that, long-term, as it has been historically, we would expect some equilibration between the pound and the euro because of the fact that they're such significant trading partners. It's not in their best interest to see the kind of divergence and bifurcation we've seen in their trading power.

So other than that, in the continent, our volume in the continent was strong pretty much across the board, particularly in sauces, where we were up as a function of the launch of the new PET bottle, and generally in other areas. Our drinks business did reasonably well in Europe in the quarter. So fundamentally the strength of the company, the fundamentals of most of our European businesses short of frozen and the non-Heinz businesses in Russia, is pretty good. Pudliszki was up 20% in the quarter.

So am I projecting that forward? No. All I'm saying to you is reporting on what we've seen thus far, while it's a challenging environment and getting more difficult, which there is no doubt, right now we seem to be fairly well positioned - the secondary tertiary brands are getting more impact  but it's something we're going to have to watch going forward and we're pressing a lot of value initiatives in those markets to protect our share.

David Palmer - UBS Investment Research

I think you said that hedges are giving you visibility on that through the second half of the year, the fiscal year. Roughly what is your forecasted currency drag that Heinz will experience over the next couple of quarters?

Art Winkleblack

I'm not sure of your question. In terms of - the beauty of the fact that we have locked our top four currencies or four of the key currencies is that, to the extent that the dollar continues to strengthen, that will be offset by the hedge that we have in place. And so to the extent that it goes up or down, there'll be an offsetting impact from the hedge.

Now, we're still exposed to movement of some of the smaller currencies that we didn't hedge, you know, the Indian currency, Indonesian currency, things like that. Those are relatively small for us, though, from a profit standpoint. But we feel like we're quite well hedged and covered for the balance of the year.

William R. Johnson

And I think another way to look at it is if, going back to Art's comments about $23 million of impact in the second quarter versus $69 for the rest of the year that came through, you should assume that that $69 million - $0.13 or so, as Art said, is going to come out of the back half of the year in terms of the EPS impact.

David Palmer - UBS Investment Research

I guess I'm just thinking what exactly would - you would know the currency rate of the second half versus your second half a year ago, in terms of the translation, negative, which presumably, to your point on the $69 million, will be far less than the market rate negative to your income statement.

Art Winkleblack

Yes, I'm not sure how to exactly answer it, but I think one way to look at it is, you know, where these currencies go over the next five and a half months, who knows? They could go up; they could go down. So we will be quite variable at the operating income line because whatever the currencies end up being will translate through directly at an average actual rate to the operating income line. And the point I was trying to make earlier is that whatever that is will then be offset as it comes down to EPS.

But if you take our EPS year-to-date and you take our range that we have talked about for the full year, you can kind of back into what we expect from an EPS standpoint and remember that the fourth quarter will be quite a bit stronger than the third quarter in terms of just quarterly shaping.

Meg Nollen

Give me a call this afternoon. We can work on it.


Your next question comes from Andrew Lazar - Barclays Capital.

Andrew Lazar - Barclays Capital

I'm curious, you know, Bill, when you talk about a lot of the initiatives that you're looking at, which make a lot of sense, around delivering sort of the value message and what have you to consumers, can you talk a little bit about how you balance that in terms of bonus packs, things like that, with sort of the margin? I'm assuming there are ways you can kind of manage pack sizes or pack counts along with entry price points and things to kind of either maintain or improve margins, but I'm curious on that one.

William R. Johnson

No, I think that's a good point. And what we're trying to do is to ensure that anything we do going forward on a constant currency basis because of the issue we have in the U.K. and the euro and so forth, will be at least margin neutral if not margin accretive. And I think it depends on the pack, it depends on the product, and it depends on the market.

And there may be offsets other places in the P&L, but we're spending a lot of time on value engineering, which is related as much to the packaging and the exterior of the packaging and things like corrugated and so forth to get costs down as quickly as we can.

And I don't think you'll see a massive replacement of our existing business with a lot of these things, but I think you can look at it in terms of this: Historically, say, during a process of significant innovation, we might spend 5% to 10% of our resource time on value engineering and another 20% on these kinds of packs. I think what you will see is that 25% or 30% growing to 50% or 60% in terms of impact in trying to get things done from a bonus pack basis or larger sizes or so forth. And the reality is in many of our products you've got to remember that the package is the predominant expense.

And so there are some ways we can do to mitigate that, but it'll be isolated. It'll be looked at in a number of markets. You saw the gravy jar example. We've got several of those examples in Australia and the U.K. But I think fundamentally in terms of either the deals to support those or the pricing associated with those, that we're not going to take a margin hit on those.

Andrew Lazar - Barclays Capital

As you think out a little bit beyond sort of the near intermediate term - so, you know, forgetting about FX for a minute, assuming, commodity costs sort of stabilize, and that pricing, again, sort of stabilizes and the industry spends back a little bit here or there on value initiatives, as we'd expect with commodity costs coming down relative to where they are, and all of these company's hedges - thinking out beyond that timeframe, I'm curious more from an industry perspective, where do you think the industry kind of nets out relative to where it might have been two or three years ago?

So like when all of this insane volatility sort of flattens out - assuming that's what happens, okay, both from a commodity, you know, currency and kind of pricing standpoint - is there a way to think about is the industry in a better place than it might have been? Is it kind of right back in the same place, it's just the math starts working the other way where margins start going up because top line decelerates a bit?

I've been trying to get a sense if there's some change that you think will have happened because of what the industry has gone through around this kind of huge spike in commodities and pricing and now kind of the other way?

William R. Johnson

Andrew, I think that's a very good question and let me just give you - as the guy that's been in this job longer than anybody else in the industry - just give you my own perspective.

I think the industry as a whole will be in a better place, particularly if it maintains the level of pricing that its put forward now and as commodities, assuming they will, come back down, and invest some of that increment back in marketing and continued innovation to continue to bring consumers back to our products.

Now, having said that, I will tell you - I won't tell you which ones I thing - but I think there'll be some bifurcation in the industry, and I think there are going to be, over time, some clear winners and some clear losers, probably more demonstrative than at any time we've seen in the industry, certainly in the 27 plus years I've been in it, almost 27 years I've been with this company.

And I think that will reflect a couple of things - the inherent strength in the brand, the position of the portfolio, the geographic mix of businesses, because, like it or not, and as Americans many don't, the emerging market positions over the next three or four years are going to strengthen on a relative basis. The Chinese are doing things, in my view right now, better than any country in the world in terms of propping up their economy and helping their consumers with stimulus.

And so I think what you're going to see is those companies that have positioned themselves well for the long term will benefit more so than they would have, but some that are not as well positioned are going to struggle mightily. And so I think ultimately - you know, I've said this before and been wrong sometimes and right sometimes - ultimately what I think you'll start seeing three or four years out is some consolidation back in the industry as the industry bifurcates.

But I think generally, for companies like us, as long as we keep innovating, keep focusing on our brand strength, keep our geographic mix expanding into those markets that represent future growth potential, we'll be far better off three, four years down the road than we were, say, four or five years ago.


Your next question comes from Ann Gurkin - Davenport & Co. of Virginia, Inc.

Ann Gurkin - Davenport & Co. of Virginia, Inc.

An issue that we wrestle with a lot right now and I'm sure you are, too, is the consumer behavior and what changes, particularly in the past eight weeks, you've noticed with consumer behavior, both in the U.S. and overseas, whether it relates to pantry deloading, trading down, changes in buying power. I just would be curious if you're updated to any kind of significant change in trend you've seen over the past eight weeks or so and what you're kind of modeling for that behavior across your portfolio?

William R. Johnson

Well, the answer to all those comments is yes. We're seeing a bit of all of that.

I mean, I think you have to look at what's happened in the U.S. as sort of an exemplar of what is happening at least in some of the developed markets. You had the double whammy of the impact of the start of a recession and high oil prices. Now, what's happened in the last four or five weeks is you've started to see oil prices translate through to lower gasoline prices, which has put some money back in consumer's pockets. What hasn't happened as a corollary to that is an improvement in consumer confidence which, as you know, hit 38% in the U.S., which was an alltime low.

Having said that, we are seeing a couple of things that we would say certainly are temporal from a trend standpoint. One is the shift from away from home eating to in-home eating, which is fundamentally benefiting us because our margin structure's better in our center of the store products than it is in our away from home products and because many of our products, like beans and soups, condiments and sauces, etc., are used in many meals. So we're seeing some benefit from that, and there is no doubt there is a significant shift in terms of the consumer's eating habits to back home.

Secondly, we're seeing the same thing in entertaining, which is kind of an interesting phenomenon. People historically have entertained externally, by going out in groups and so forth, and we're seeing a lot more in-home food preparation for entertaining, which, again, benefits many of our businesses.

I think at the same time you've seen the benefit to businesses like potatoes, beans, center of the plate kind of opportunities where we can leverage. There's been pressure on entrees and on frozen dinners around the world. Having said that, we're doing well because we continue to expand our meal occasions on Smart Ones.

In terms of consumers themselves, consumers themselves, we're picking up in our research, are frightened. They don't know what to do. And so, as a result, they're delaying big-ticket purchases, they are not shopping as much. We're seeing some shift to discount stores and some shift to the non-measured trade - and, by the way, our business in the non-measured and the measured channels is pretty much the same in terms of how we're performing.

And we're also seeing consumers say to us that they don't want risk. And so when they buy a product, they want products they know they can count on and they know that will not cost them money unnecessarily. And so again, that benefits businesses like ours and, frankly, like some of our peers, who have, I think, done fairly well in this environment.

We have seen pantry deloading. We've seen inventory destocking. We've seen some trade down to private label. Again, it's mixed on a geographic basis and it's mixed in terms of the impact on the business. We have seen consumers shift from higher-priced food areas to lower-priced food areas. And again, when you're selling beans and ketchup and so forth, that pretty much - it doesn't hit many of our products.

And we're seeing consumers being very frugal. A lot of use of coupons; a lot of purchase of larger sizes in some markets, but in other markets smaller sizes, which reduce entry price points and allow them to come back. That's one of the things true in emerging markets. We're seeing lower entry price points by buying smaller sizes.

So it's consumer behavior that, for those of us who are old and have been in this industry for awhile, have seen before. I think it's manifesting itself maybe a little differently this time because it's more widespread in the developed markets. We have not yet seen it much in the developing markets. And I think that will continue for awhile until somebody - a statesman somewhere  stands up in front of the population and says to everybody, "Here are the steps we're taking. Please understand that these steps will be effective." I've not seen any of that happen globally yet, and until a statesman somewhere takes a leadership position and tries to reassure consumers, I think consumers are going to sit and I think they're going to see savings rates go up.

But, again, they have to eat and they have to eat products like ours. So that's what we're seeing and that's what our research is pointing out.

Art Winkleblack

And, as Bill mentioned in his comments, we're addressing some of that with some of the promotions - a meal for a pound in the U.K. with beans and the $10 pasta sauce meal solution in the U.S. with Classico - so our products are well positioned for people that are trying to conserve cash.

Ann Gurkin - Davenport & Co. of Virginia, Inc.

And then secondly, if I could just go back to pricing again, do you have all of your pricing in place right now for the second half of fiscal '09 or are you still going to roll through some price changes?

William R. Johnson

The bulk of it is done, but we do have some isolated areas that we will take price in in Q3 in some markets on some products. But fundamentally, the majority of it is done, was done in Q2 or is being done as we speak. But I think, again, the bulk of it's done, and, again, there'll be some isolated areas where we think there's leverage.

Now I also want to make another point. As many of our operating presidents have pointed out, there will also be other businesses going forward where, because of innovation, because of a premium perception of the business, because of opportunities in the market, that we will take price selectively on, even on a going forward basis. It'll be fewer and far between, but there are some of those. And, you know, I think particularly as competition and peers have moved, we've seen markets shift up. But I think fundamentally the direct answer is most of it's behind us, but there's still some to come.

Art Winkleblack

Keep in mind the impact of the inflation. You know, everybody is focused on the fact that a lot of things seem to be coming down, but the market cost of our basket of commodities was up 15% for Q2. We expect some of those spot rates to stay high for awhile so, while it seems to be moving in the right direction, there's a long way to go before these prices come down.

William R. Johnson

I think the other way to look at this - we term it pricing and you term it pricing; the consumer doesn't see it that way. The consumer sees what's the value I'm getting in the product I buy.

And, you know, I think to the consumer - and I think Steam 'n Mash is a prime example of that. Steam 'n Mash, which we launched and is priced at around $3.50 to $4.00 a bag, I mean, it's literally out of stock in stores. I mean, it is doing extremely well. It's a premium-priced item. It's a convenience item. But it's such a superior product and it does replace such an inconvenient process that the business is doing extremely well; 90% of our sales are incremental in that business, and in much of what we've seen it's already become one of our top five SKUs in OreIda.

So I think it's all about the value consumers perceive out of the product and how it's being used.


Your next question comes from David Driscoll - Citi Investments.

David Driscoll - Citi Investments

Art or Bill, whoever wants to take this one, just one question on productivity. I think in your prepared comments you guys were suggesting that you can make productivity gains accelerate in fiscal 2010 and perhaps you need to because of the foreign exchange headwinds that are so visible at this point. Can you give us some comments, though; on how much you could actually see this accelerate? Is a 4% or better productivity possible?

William R. Johnson

Well, let me come back and answer two things right off the bat. First, I didn't fiscal 2010 in terms of productivity. I said we're working on productivity initiatives now to help us through the second half of this year. And I think secondly, in the context of productivity, value engineering, which we've just recently ramped up, will play a big role in that.

When you saw 2.8 points of productivity and the gross margin effect in this period, David, I don't want to give you a number because, frankly, we're still looking at a lot of the ideas, as I said in my prepared comments, that have been brought to us by the global supply chain task force and, frankly, the systems and process task forces, and a lot of those ideas are being sifted through right now and ferreted out.

But I do think we can ramp up productivity. I do think we can do better than we've done. And I do think there's going to be a big focus on value engineering initiatives and opportunities that allow us to mitigate as much of the commodity hit as we can and/or some of the impact of currency going forward.

But I want to keep my comments right now to the second half of fiscal 2009 and how that rolls forward just to be determined.

Art Winkleblack

Yes, David, just for perspective, we're just now finishing up the strategic planning process with our business units, so we're collecting those ideas, sifting through. Clearly, we feel like we've got opportunities from a procurement standpoint on a global basis, indirect procurement in a number of other areas. We will then follow with our annual operating planning process, a more detailed exercise, beginning in, say, mid January.

So we are, as Bill said, riveted on delivering this fiscal year and working toward the plans for FY '10. We'll tell you more when we know.


There are no further questions at this time. I'll turn the call back over to management for any further remarks.

William R. Johnson

I think our only remark is that, as the Chinese say, may you live in interesting times, and I certainly think that reflects this.

I would like to comment on two things. One, I think it is of great importance right now and you're seeing it around industry in general, not just the food industry, for experienced managements who have been through environments that are difficult - maybe not mirroring this, but have seen bubbles burst and have been through recessionary times - to really take leadership and statesman roles in terms of what they see going forward to get people calmed down and try to bring some sense back to what right now is a fairly senseless environment.

And the second thing I'd like to say is I hope everybody has a happy Thanksgiving and a good holiday. We did our best to move our meeting up to Friday this year instead of the Tuesday before Thanksgiving, primarily to let everyone have a week of relief and no work. So enjoy your holiday period, everyone. Thank you.

Art Winkleblack

Take care.

Meg Nollen

All right. Investor Relations will be around all day. Feel free to give us a call - 4124566020. Have a great day.


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