Good morning. At this time, I would like to welcome everyone to the H.J. Heinz Company's fiscal year 2011 quarter one earnings call. (Operator Instructions) I'd now like to hand the call over to Meg Nollen, Senior Vice President, Investor Relations. Ms. Nollen, you may begin your conference.

I'd like to welcome everyone to our conference call and webcast. Copies of the slides used in today's presentation are available on our website at heinz.com. You'll notice that our slides have a new look about them. With the start of a new fiscal year, we switched to a white background. It's easier to print and copy and uses far less ink, in line with our sustainability goals. Joining me on today's call are Bill Johnson, Chairman, President and CEO; and Ed McMenamin, Senior Vice President, Finance. Before we begin with our prepared remarks, please refer to the forward-looking statement currently displayed, which is also available in this morning's earnings release and in our most recent SEC filings. To summarize, during our presentation, we may make forward-looking statements about our business that are intended to assist you in understanding the company and its results. We ask you to refer to our April 28, 2010, Form 10-K and today's press release which lists some of the factors that could cause actual results to differ materially from those in these statements. Heinz undertakes no obligation to update or revise any forward-looking statements whether as a result of a new information, future events or otherwise, except as required by securities laws. 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 on the company's earnings release and on our website at heinz.com. Please note we plan to file our first quarter 10-Q by the end of the day today. Our related financial highlights pages or stat pages are available now in the Investor Relations section of the website towards the bottom of the page. Importantly, these stat pages provide a coordinated historical restatement for discontinued operation. Now on to today's call. Bill will review Heinz strong performance and the current business climate, and Ed will provide a financial review of the quarter. Bill will return to discuss our full year outlook and offer concluding comments. Then of course we'll be available to take your questions. We'd like to request that you limit your questions during the Q&A session to one in order to ensure adequate time for all who wish to participate. With the formalities out of the way, let me now turn the call over to Bill Johnson.

Thanks, Meg, and good morning everyone. Today I will briefly review our company's solid first quarter performance since Art Winkleblack, our CFO, who typically does this call could not be with us due to an urgent family matter. And we wish Art all the best. As we reported this morning, Heinz delivered strong results in the first quarter despite a very tough economic environment. I'll have more to say about this challenging climate in a few minutes. Globally, we grew organic sales by nearly 4%, driven primarily by our 22% growth in emerging markets behind this well-positioned and winning and strong growth in ketchup. We also improved gross margins on higher productivity and net pricing, increased brand investments by almost 10% to drive growth, delivered growth of around 10% in operating income and EPS, which increased to $0.75, achieved 13% growth to net income and drove an increase in operating free cash flow of nearly 80%. Overall, Heinz is off to a good start to the year. Our results from continuing operations were event stronger on a constant currency basis as we grew sales by nearly 4%, OI almost 13% and EPS by about 15%. Foreign currencies had an unfavorable impact on sales, operating income and EPS, as Ed will discuss in a few minutes. I'm proud of the fact that Heinz is now delivering 21 consecutive quarters of organic sales growth. Emerging markets delivered 12% volume growth to lead the way for Heinz. Excluding our U.S. Foodservice business, we also delivered 2% volume growth in developed markets despite weak economies, driven by North American Consumer Products. U.S. Foodservice delivered strong profit growth, reflecting our success in simplifying the business, but sales (marred) the industry trend of lower restaurant traffic as consumers continued to dine and entertain more at home.…

I'm pleased to take you through our Q1 results, which showed solid improvement in all of our key financial metrics despite the challenging global economic conditions. Looking first at EPS, since currency and last year's discontinued operations that had an impact on our comparisons, I'll start with three key perspectives on our results. First, we think it's helpful to look at the results on a constant currency basis, which continues to be an important measure to focus on, given the volatility of foreign exchange. I'd like to point out that our constant currency definition only includes translation and related hedges. We no longer include any transaction currency impacts. Constant currency EPS was $0.78, up almost 15% versus last year. Our current favorable results were impacted by about $0.03 from unfavorable currency. These were largely due to the euro and the pound as well as the devaluation in Venezuela, which occurred at the end of the third quarter last year. Reported EPS from continuing operations was $0.75, up more than 10% from prior year. And finally, including the one set unfavorable impact from discontinued operations last year, total company reported EPS was up $0.08 or 12%. Now, let me focus on our P&L scorecard. We delivered improvement in every metric on both the reported and constant currency basis. Net sales grew by 1.6%. And on a constant currency basis, it was up 3.7%, well within our 3% to 4% target for the year. The organic growth was 2.5% volume improvement and 1.1% increase from pricing. Our focus on gross margin is paying off, with an improvement of 90 basis points to 36.6%. Productivity improvements are the main driver here, which along with higher pricing and favorable mix has been able to overcome increased commodity cost. In addition, the gross margin comparison…

Now let me quickly wrap up. As I outlined yesterday at our annual shareholder meeting, we are reaffirming the full year expectations for fiscal 2011 that I announced on May 27 at our analyst day. On a constant currency basis, we expect sales growth of 3% to 4% and operating income and EPS growth of 7% to 10%. We also expect to deliver operating free cash flow of more than $1 billion for the second straight year. Here are a few more details about the rest of the year as we see it. First, our Q1 marketing was up almost 10%. I still expect full year marketing to approximate that of fiscal 2010. Second, we plan to accelerate investments for the rest of the year, ramping up the second quarter for initiatives like Project Keystone significantly. This will increase productivity by harmonizing global processes and systems. Third, after posting an effective tax rate of 25.3% in Q1, as Ed said, we still expect the full year rate to be around 28%. And finally we expect shares outstanding to be slightly higher than last year. Reflecting these factors, and while I really do not like providing quarterly guidance, I would anticipate that Q2 will mirror our first quarter profit with slightly higher earnings in the third and fourth quarters. In summary, we are off to a really good start in a very difficult environment. Our business fundamentals are healthy, our people are executing extremely well, and we continue to focus on the things that will make the difference as we work to generate high quality earnings and strong cash flow. Now I'll turn the call over to Meg, and we'll open it up for your questions.

Just wanted to let everyone know that Heinz will be presenting at the Barclays Back-To-School Conference on September 8th at 2.15 pm. We hope to see you there, and if you can't make it please dial in to Heinz.com for the webcast. So with that, we'd be happy to take your questions.

(Operator Instructions) Our first question comes from the line of Vincent Andrews of Morgan Stanley.

I guess my question would just be, in the quarter, one of your largest customers was running some substantial promotions, and we were hearing, and I think most people were, in ketchup that was of no cost to you. Could you just discuss how that affected your sales and your volume and how that might impact sales in the balance of the year in terms of will there be some getting back or anything?

I think overall, you got to remember that organic ketchup sales for the quarter were up about 8%, 7% volume growth in Europe. So this was all not a function of that large customer that you're referring to. I think with that large customer, we saw a couple of things happen; one, our share in our large customer rose precipitously, much of which was due to pulling retail volume away from competitors, not from Heinz. Additionally, our retail businesses did pretty well, as you could see by our market shares which grew. I think it's fair to look at it, if you want to get into the detail, about a quarter of the U.S. retail volume increase came from the incremental Wal-Mart volumes. So let me repeat that. About a quarter of the U.S. retail volume increase came from incremental Wal-Mart volume for the quarter. And as we told you once before, our case rate to the customer did not change. And so, I think generally, we felt that we came out of it pretty well. We saw again, huge competitive shifts to our business as noted in our share of that large customer, and our retail businesses continue to do pretty well. But also, Smart Ones, Classico, and our other businesses had a terrific quarter. And then more encouragingly was, we grew 7% volume in ketchup in Europe. So just generally, our ketchup business globally is doing extremely well.

Our next question comes from the line of Ed Aaron of RBC Capital.

Actually I just wanted to follow up on the prior question if I could. I was wondering about it, did you see other retailers follow suit, and sponsors and promotions of their own on ketchup? And then should we be at all concerned about, if any pull-forward of demand from the second quarter here and how that might affect volume in just the very near term?

A couple of comments on that. First, no, we did not see that program replicated at many other customers. Although, remember, in the first quarter we see a lot of the Memorial Day activity and the July 4 activity. So we do get promotion activity as we try to work through the major holidays, which are big ketchup consumption and users' time. So while we did not see it replicated, we had a very strong quarter from the perspective of retail merchandising, and that's why our shares were so good. I think on the second quarter, time will tell and we'll see how we go through the quarter, but again, a great percentage of the incremental volume we picked up came from competitors. We saw a significant shift from private label and other branded competitors, from retail to Wal-Mart in order to buy Heinz ketchup at a Dollar. And one of the things it does show is, in our mind and the thing we always balance against is the power of that brand priced competitively. And so it's something we continue to balance against. But again, I want to say very clearly that a great deal of the incremental pickup came from competitors outside of retail that moved in to buy the product on especially Wal-Mart, and our retail business did well behind our July 4 and Memorial Day promotions.

One quick follow-up, just on the gross margin, you're tracking a bit above your full year guidance which I think was for about 50 basis points. You did mention plans to accelerate some investments. Is it fair to assume that those investments show up on the gross margin lie in that, and that's why we should mix that upside on that line item for the full year, because I don't think the inflation outlook changes much over the balance of the year, if I heard correctly?

I don't think my comments mentioned that we didn't expect upside in gross margin for the year. So I still think we feel pretty solid about a 50 basis point to a 100 basis point improvement in gross margin this year. And the investments are going to be fairly significant, and they will primarily hit us at the SG&A line for investments in Project Keystone based on the successful rollout we've experienced in the Benelux we'll continue to push rapidly on that. But our gross margins for the year should be in line or better than we said at the May meeting, and offset somewhat by the incremental SG&A that I expect us to get this year as we ramp up to roll out on Keystone.

Our next question comes from the line of Chris Growe of Stifel Nicolaus.

In this quarter, if you look at the shipping of the infant formula in China, was that a meaningful factor in kind of your emerging market volume or even your volume growth in China?

No. It surely contributed to line growth in China, but it was not a meaningful factor at all in the overall emerging market performance. In fact, I wouldn't expect it to become a meaningful factor until probably a latter part of this fiscal year. Now, we're starting to ramp up some in September, but really October, November. It surely contributed in China but it was not material to the emerging market performance for the quarter.

And then do you have any, kind of a better look at the transaction benefit now between the Pound and euro. Is that looking to be positive for the year if you use the current rates?

Well, the first quarter is an unfavorable comparison to last year. After that we think we're going to be pretty close. The reason why we pulled it out of our constant currency measures that for this year, it will be relatively small impact. Still looks slightly unfavorable but not the $40 million and $50 million figures that we are seeing the last two years.

Our next question comes from the line of Eric Katzman of Deutsche Bank.

I guess, this is a quick follow up to Chris' question, Bill, do you think that we have to give up on the $0.20 of profit that you've lost given the cross rate.

I don't know that we say we have to give up on it, Eric. But we're certainly not seeing it coming back in droves right now. I mean remember, there's two components to that cross rate. You've got the dollar Pound cross rate impact in terms of transaction, and you've got the Euro, Pound cross rate impact. And we are obviously not seeing the pick up in the dollar-pound cross rate impact in terms of transaction and you've got the euro-pound cross rate impact and we're obviously not seeing the pick up in the dollar-pound cross rate that we would have hoped for. We are seeing some in the euro and they pretty much balance each other. My perspective is until you see the euro-pound cross probably the 80 may be 81 decile and get down into the upper 70s where it was a couple of years ago and until you see $1 come back against the pound or the pound come back against the $1 to $1.60-plus level, we'll see some gradual incremental improvement. But we are not going to see a full return to picking that up.

Switching over to the Foodservice business, a couple of question around that. I noticed that you highlighted that you've won more McDonald's business. So congratulations on that. And I guess you're continuing to circle the U.S. The U.S. is the biggest market. Is it possible for you to, especially given the lower cost base, with the restructuring in U.S. Foodservice? Is it possible to quantify, kind of what it could mean if you were to take over McDonalds in the U.S., and then, given that there is $0.99 ketchup out there, do you think that there was any, let's say family dining, as supposed to a QSR. But like family dining that may have gone over to Wall-mart and purchased ketchup product there rather than ordering through table top food service account?

May be very little, but let me break out foodservice sales to give you some perspective. Our ketchup organic growth, well we actually had organic growth in ketchup and foodservice in the first quarter, we're up between 3% and 4% organically on ketchup in Q1. The big hit on foodservice in the first quarter was primarily Frozen Deserts and Frozen Soups. Frozen Desserts related to some special one-off promotions we had last year with the couple of key customers that we do not repeat this year. And some softness in the mid-tier restaurant chains and the same thing with frozen soups. So if you sort of bifurcate the foodservice business, our ketchup business actually had a pretty decent quarter in U.S. foodservice and it was really pulled down by the frozen businesses, predominantly Frozen Desserts. In terms of the McDonalds question, Eric, I mean how many angels can dance on the head of a pen? I want to be very careful with my answer there, because while we pick up there business outside the United States, it's been a difficult slog force in the U.S. to try to get traction outside of Pittsburgh and Minneapolis. I can say this to you without terrible quantification, I would be a meaningful impact to the company's foodservice business in the United States from both a topline and potentially form a profit standpoint. Obviously, the question will always be at what cost did you provide to get that business. But it clearly is something we continue to strive for, clearly is something that would have a material benefit to the organizations. And clearly is on radar for us to keep pushing. We now have a lot of our business outside the United States. We have a great working relationship with them. We'll start shipping the products in Asia towards the latter of part of this fiscal year. So I think we just continue to push ahead and prove to them that we can be the kind of partner that they can be proud of and that they can depend on. And once we then crack that, then I can be a lot more specific. But it clearly we would have a benefit to company's foodservice business.

And for those that they didn't see that in the release, you might want to extend on the new business.

It depends on the business but we picked up ketchup in number of markets. And then we picked up ketchup and toppings in a number of other markets in Asia. We are adding capacity, which I think we mentioned at the analyst day meeting. Although I don't recall, we are adding capacity in both Indonesia and in China, to address the incremental volume needs that we anticipate. We will ramp up and start shipping this product again towards the latter part of this fiscal year. And so we should have virtually a full years benefit in fiscal '12 from most of this. There'll be a couple of markets where we slowly move in behind whoever it is we are replacing. And so now we have a big piece of the business in Canada, Russia, Western Europe and the Asian region. and we continue to talk to them about other opportunities.

Our next question comes from the line of Robert Moskow of Credit Suisse.

I know you don't like to give quarterly guidance, but you kind of did. But operating profit flat, quarter-to-quarter, and then the tax rate is going to be higher too. So I think consensus numbers are a little high for second quarter. Can you give us a sense of just fundamentally though, is there anything that you think will be different in the October quarter versus the July quarter? Will sales be a little bit weaker because of the comparisons to the ketchup promotion in the July quarter? Is there anything in the next three months that you're doing in the market that's anything different from the July quarter, just in terms of what you're doing with consumers. Credit Suisse: I know you don't like to give quarterly guidance, but you kind of did. But operating profit flat, quarter-to-quarter, and then the tax rate is going to be higher too. So I think consensus numbers are a little high for second quarter. Can you give us a sense of just fundamentally though, is there anything that you think will be different in the October quarter versus the July quarter? Will sales be a little bit weaker because of the comparisons to the ketchup promotion in the July quarter? Is there anything in the next three months that you're doing in the market that's anything different from the July quarter, just in terms of what you're doing with consumers.

No, I don't think ketchup has any impact on what I've said. I think the impact came from a couple of things. We're going to get a significant hit in Indonesia from the rising cost of chilies and sugar. We're having very difficult time even procuring chilies enough to support our chilly sauce products in Indonesia. So we've now resolved that problem. It's going to be towards the latter part of the quarter, beginning in next quarter that we're sort of out of woods on the chilly and sugar issue in Indonesia. The chilly issue was a big issue for us, as they had a significant crop failure. The second thing is that you're going to see a significant ramp up in SG&A in the second quarter, to fund some of the keystone initiatives as we are very encouraged, I hope prematurely so, we're very encouraged by the success we had in the ramp up in the Benelux. And we're going to continue to accelerate those efforts including looking heavily in the United States and in other European markets as we push that ahead; that will be a significant investment in Q2 in SG&A. And then I think the third thing is, we will continue to ramp up the launch of infant/nutrition in China. You'll see some incremental spending behind the infant/nutrition in March in that quarter. And then obviously, the Ramadan timing, with Ramadan coming back into the first quarter and now the second quarter will have somewhat of an impact on our volume. And then we've got some FX issues in the second quarter. And then obviously you mentioned the tax rate, but generally what I would like to say is the fundamentals of our business are sound, and frankly in this economy very sound. But I just want everybody to be careful and let us not get terribly euphoric about the continuation of our great performance. And believe me, first quarter was a darn good quarter on top of the four great quarters we had last year. But I just think we're trying to be cautious as we approach the rest of this year. And so there is a lot of, sort of small items that add up to bigger items in Q2. Ed, do you have anything you want to add.

Again, just with the timing we're still very confident for the full year outlook, 3% to 4% topline growth, 7% to 10% overall in EPS growth.

And I think Art had added at analyst day the incremental spend on our keystone project, is about $35 million this year. So that launched at the end of July and you'll see that ramp for the rest of the year.

You'll see a pretty significant spending in Q2 behind keystone. Remember, we just ramped up Benelux on August 23. So the bulk of that expenditure is going to hit us in Q2. And I feel good about margins, I feel good generally about the fundamentals of the company, but we're going to have some shift in spending.

The quarter's this year will look a little different.

Yes, I think Ed's point is the right point. We are still very highly confident in the year.

Hey, Meg, can you quantify for us the upfront spending this year versus last year, maybe not before? But how much more on the upfront are we doing this year? And then keystone I guess is part of that. Credit Suisse: Hey, Meg, can you quantify for us the upfront spending this year versus last year, maybe not before? But how much more on the upfront are we doing this year? And then keystone I guess is part of that.

If you're referring to keystone that will be up about $30 million to $40 million this year.

But there's also upfront spending that's called out in your release today? Credit Suisse: But there's also upfront spending that's called out in your release today?

What you're referring to is the upfront spending that we did last year in Q1 if you recall, we spent about $16 million or so on some downsizing activities in Europe and in the U.S.

And we still have some of those coming in the second half of actually the last three quarters of this year behind some initiatives we're looking at in Europe. And so there'll be some incremental spend in the last three quarters. I don't want to quantify yet, because frankly, we have not taken the Board through it, we gave them a preview of it the other day. But we'll have some one off spend in the last three quarters of the year for something that I think we're very enthused about in Europe. We'll get back to you on that probably during the November call, certainly no later than CAGNY.

Our next question comes from the line of Andrew Lazar of Barclays Capital.

A couple of things, first I guess, Bill, I wanted to try and take advantage of having you on the call also from a broader industry question, maybe to start it off. I don't want to develop too much on the calendar second quarter for the industry, but it just seemed like a lot of things changed in that second quarter for the industry, and not a lot of it was for the better. And there's been a lot of theories on what happened and why things got so promotional, was it manufacturer led, was it retailer led; and I'm trying to get a sense from at least your own perspective, what happened? And do you think the second quarter marks a peak from an industry sort of competitiveness promotional perspective or not, and if, so why? And I guess what does it mean for also your own CBT program going forward in North America?

There's a couple of things for us that I think are kind of interesting. We no longer break out G&A spending for a lot of reasons. But I can tell you that our G&A spending, our deal announcement in the first quarter was actually slightly favorable to the third and fourth quarters last year for Heinz. So that may surprise some of you, but our trade spending was no higher, in fact, slightly favorable to the last two quarters of last year. However, we are seeing an industry that is fundamentally lacking, in my view, discipline when it comes to trade spending. And not seeing the pickups in terms of volume and share that they have historically associated with a kind of incremental spending that we are seeing in some of the categories. Again, I come back to frozen entrees. There is absolutely no sense in chasing consumers out the door, and that's exactly what's happening in the bulk of our Smart Ones business benefited in the first quarter from a promotion partially from the innovations, particularly in the breakfast area where we're doing very, very well. The second thing that I think is changing, Eric, and I think the industry is wrestling with are commodities. Commodities, which look to be very favorable four, five or six months ago are now changing, particularly packaging commodities; glass, resin have shifted direction. Now, oil prices have been bobbing all over like fish on a line, I don't know where that's going to end up. But I think the commodity cost plus the impact on the increased grain cost recently is something that I think the industry is wrestling with. Third, the inability or the unwillingness, and I'm frankly not sure which it is of the industry to take appropriate actions to improve…

Following up on that comment, about a month ago, we had the trade finance groups together from some of the largest business units we have around the world. I think over the last few years, we've spoken a lot about the progress we've made on trade spending and controlling that, understanding the returns we're getting. And what we did, was we saw the changing environment last year, I think as Bill said, steadied it out this year. Tried to get those teams together to make sure that we're sharing the best practices at the levels where these guys are giving feedback to their sales team. So we got all those folks together in Toronto about a month ago, making sure that everybody understood the best practices and analytics, what are they doing. How are they measuring IRI, Nielsen impacts in terms of lift and that sort of stuff, we're also involving that with the global sales council led by Chris Warmoth, to make sure that the finance teams, the sales teams and the marketing teams are working together to make sure that as the environment changes on these returns, we're adapting quickly and making sure we're getting the best return on the investment we can.

Actually I think we're seeing a variance by category in terms of responsiveness. And so we're able to identify or acknowledge responses and take that money and put it where it is.

Yes, we're moving money around pretty aggressively. And again, I think you'll see this going forward, you're going to see considerable shifts long-term and recourse allocation to the market so that it give us quick returns versus those that aren't. That may not be the greatest thing to ever happen to United States or Western Europe, but it is a good thing to happen to our shareholders and to the long-term health of this organization.

I appreciate that perspective and to close the loop on that, my sentence then from your remarks is that it's probably a little early from an industry perspective to kind of say, hey, it was the peak, and maybe it just gets a little less bad from here, you will have to see how things play out. But my sense is with merchandising programs being sort of set, whatever it is, two quarters in advance, we've got to kind of brace for still a bit of a rough road on the competitive front for a period of time, I would assume.

That's sort of my sense Erik. And the other thing is, the only thing that's going to get it out of this is real innovation in news and market shifts in terms of resources that were allocated. And as you know, those don't happen over night. And I think frankly, a lot of companies have been caught flat-footed by what's going on, because these are tried and true remedies that we've used historically to cure whatever ales us, and they simply aren't as effective now as they've historically been. And I think in that context, I think the real play for us long-term is continuing to find ways to develop and grow in these emerging markets.

We've been kicking around quite a bit, both internally and with the board, and I think in that context, two things to keep in mind. One, we are seeing more M&A opportunities in emerging markets now than we've seen maybe in the last five years. And we're trying to figure out the best ways to deploy our capital, not just to produce a short-term benefit, but long-term health of the organization. And with emerging markets sales representing almost 18% of the business in the first quarter and I still think for the year it will be somewhere between 16%, 17%, somewhere in that range. Our goal is to figure out ways to continue to drive that while building the infrastructure and reach necessary in some of the void markets where we are. And in some of the markets now, where we think we can leverage and much like Foodstar in China which we're waiting on the government to approve. And so my preference beyond dividends is to still continue to look for those M&A opportunities that exist in the emerging markets. I can tell you actually, we are not spending much time looking for M&A opportunities in the United States or Western Europe. Our focus is almost entirely on the emerging world. Secondly, we are looking at ways to mitigate the delusion that we've suffered somewhat on the shares outstanding. So I think we'll be more definitive as we get through the next quarter and get back to you in November. But we're trying to figure out the best way to balance both of those against the opportunities for share buyback. And the final thing I would say Erik, and the market knows this with me, I'm not a huge proponent of buybacks, because you always buy at the wrong time and at the wrong price, and I don't know what's going to happen to the market or the economy. So I would much prefer to see us put our money into assets and to businesses that make difference over a three-to-five year period than do something that makes a difference over a two-to-three quarter period. So that's really what our focus is, and as I said, we have significant opportunities that we're looking at.

Our next question comes from the line of Bryan Spillane of Bank of America-Merrill Lynch.

Just two questions if I could. The first and I guess this maybe follows up on some of the comments that you just made in response to Andrew's question. Bill, just at the analyst day, I think that you were talking about the economic environment the consumer is having improved or that the environment was improving. So if you could just talk about how you're adjusting or if you're adjusting your plans for the balance of the year, given now, you're kind of seeing that the environment isn't improving, and they actually be deteriorating. So that it means that you dial back on our plans for innovation, do you shift spending in one region to another. Just at all, how you adjust your plans relative to that? And then the second question for Ed, just in terms of the cash flow question. Given that refinancing rates are as good as they are now, is there an opportunity for you to refinance some of your notes in order to drive the interest rate down even further?

On your first question, yes, we're changing the channel. I think you have to look at taking money and deploying it where you know you are going to get a return like we have seen in the emerging markets where we got a very responsive reaction to consumer spending. And we'll balance the trade spend against consumer spend against other ways to continue to try to drive the business. Our focus right now is containing to improve innovation; continuing to drive growth in the emerging markets, disproportionate growth; continuing to funnel money behind ketchup on a global basis to improve trial and penetration, and that's having a huge impact on us in Europe and in some of the other markets; continuing to look for customer opportunities much like the McDonalds move in the Asian markets. I think being conscious was spending in some of the developed markets where you want to avoid pouring good money after bad, and where you want to be cautious about, as I've said, and I've been using this term for almost 18 months now chasing consumers out of the door, because no matter what you do from a promotional standpoint, you're not going to change their mindset and let you get to the point where it becomes silly, what I think has happened in some cases. But I think overall, for us, it's a balancing act of putting resources behind those businesses and those areas where we know we're going to get a return behind those innovations that we think as a highlight with a bit of success or if successful would be. I think it's return to the company like health and nutrition, and are watching very carefully our spend by business in each of the developed markets in which we operate. I think for us Bryan, it is just a balancing. But in some markets we are changing the channel. I mean we are looking at it in an entirely different way to try to entice consumers backend of the business or excite them again about the brands and the business and try to figure out ways to tap into the increased usage at home and so forth. Yes, we are spending a lot of time reviewing marketing plans and initiatives and activities including live activity and social media for the last nine months of this year. So I think it is fair to say that I've never believed in changing the game plan at half time, but I do think you'll see some different place called in the second half of the year that should impact our business. And I'll let Ed answer the debt question.

The treasury team is looking it at very proactively. We have real long-term debt coming due this year, but we do in the years to come. We're aware that the rates do look pretty attractive. But as we've discussed in the past, a lot of our long-term debt which we lock (inaudible) floating and those rates are significantly below anything we could lock on in the mid-term. So we're making sure we've got access to liquidity. The markets look very good, but even the rates today necessarily wouldn't make a refinancing attractive from an average interest rate perspective. But we will be out there. We are not going to wait for the last minute to move forward.

Our next question comes from the line of Ann Gurkin of Davenport.

I just wanted to understand emerging markets as a percentage of sales. Should we assume or just should I hit that target sooner than expected either to acquisitions or through the strong performance we've seen?

Are you talking about the 20%?

Right

I think there is a chance. How is that for an answer.

And the second thing is an update on the adoption of Dip & Squeeze from your customers?

Yes. The equipment is still not in facilities yet. It goes in this fall and we should begin shipping by the end of the year. The customer reaction has been very positive. We've actually got a lot of retail testing going on and that reaction has been quite positive. And I think the biggest issue for us is going to be basically stopping the fighting going on at the President's Council of Meetings between the President, all of them want this for their own market. We've had some very interesting discussions with the business union leaders who will want to know why the U.S. should get it first. The U.S. keeps reminding them it was their idea, and they keep reminding me, you've said origination of ideas doesn't matter to he who has got the best opportunity. So I think our biggest issue is an internal issue on the feeling that is occurring over. Let me have it in my mark. I am still very optimistic about Dip & Squeeze. It's being launched into a very typical food service market. So we'll see how it plays out. We start shipping end of the year and I am very optimistic.

Our next question comes from the line of Priya Ohri-Gupta of Barclays Capital.

Given your commentary around the increased service on emerging markets and greater M&A opportunities, are you still looking to continue with the buy and build strategy or would you look to entertain any ideas doing something larger scale?

Define larger scale.

Not bolt-on.

We are looking at businesses of all sizes in the emerging markets. Our preference is still the buy and build approach which has worked so well for us. But the beauty for us is, if you look at our regions where we have emerging markets, whether it be Asia, whether it be Eastern Europe and Russia, whether it be Latin America, whether it be Africa, we now have management teams in place that are perfectly capable of handling incremental businesses of almost any size and producing growth, much as we've done by taking out our Egyptian partner now, and that business is doing extremely well for us in the Middle East. So I think it's going to depend on the opportunity; I think it's going to depend obviously on the cost return; I think it's going to depend on the capabilities of the management team and the strength of the business. But my preference is buy and bill, but I want to be very clear, that does not preclude us from doing something at a larger scale.

How willing would you be to flex your current rating in order to do something of a one-time nature?

Well, we like where we are now. And right now, certainly based just on what we are seeing and what we are talking about, that should not be an issue for us. Again it's something, and I've said this forever, if something dramatically material came up that fundamentally changed the company and made us a far better company, that's obviously something we've discussed with the Board. I've have also said historically, I'm not going to bet the ranch on something I don't fully understand. So we are committed to the rating we have now; we like the rating. We have room within the rating to do the kinds of things we're talking about doing. But again, as I've said in the past if something significant came up that really was fundamentally transformative and made us that much better, we'd obviously always take a look and consult with the Board. And with an understanding of the rating, it ensues that we are committed to where we are now.

And I think if you take a look at the cash flow with dividend the last couple of years and this discipline we've had on capital management, the flexibility we have for these types of acquisition is much greater than what would have been looking at just a couple of years ago.

And Ed raises a point that I would like to comment on as a further answer to Andrew's question earlier. The other thing I think the industry has got to have to do is manage its capital better. There's a lot of capital still going into an industry with a consumer that's scratching his or her head trying to figure out what they want to do. And I think capital discipline and management is a process that all of us are going to have to continue to employ, because we just need to make sure that capital's going and resources are going to where the opportunities really are, not to where the opportunities were.

Our next question comes from the line of David Palmer of UBS.

Ed, a question on Europe. You said increased competition in Europe (amid) category softness in your prepared remarks. Could you maybe give a little bit of color there? Where is the category softness increasing? Of course, that means the consumer, and I am wondering if you think that as you read between the lines in your categories, is the consumer environment worsening or just kind of remaining at the same soft level in key markets, perhaps driving some debt but discounting by competitors? So any color would be useful.

The category that's most weak that we are seeing globally weak is soup. We are seeing soup weakness everywhere; Europe, Australia, United States in Foodservice. I mean soup is just weak. And I don't know if we're seeing a move to Homemade soup, we're still trying to assess it. Our shares are doing reasonably well, but the categories are soft. So that's really where we saw softness in Europe in the quarter in both the U.K. and the German soup businesses. There are some competitive issues, but that fundamentally is not my concern right now; my concern is the category on a global basis. Condiments & Sauces seem to be doing relatively well in Europe. Our beans business has been fairly solid. The launch of Fridge Pack will be okay. So basically in Europe what we saw was soup. Now the other area, that weakness we saw was infant feeding category in Italy. The category has been very soft for the last 18 months or so as a function of I think the Italian economy and the Italian consumer really trying to figure out what they're going to do. Our shares have been holding okay and our Italian business from a profit standpoint is fine. But I think that infant nutrition in Italy as a category, and soup generally everywhere, I cannot think for us anyway that the soup category is doing particularly well anywhere around the globe.

And despite the softness in the soup category that we mentioned, U.K. volume has actually gone up. So the balance of the portfolio there is doing reasonably well.

The U.K. business is clearly outperforming our peers.

The only separate thing I wanted to mention is, in the U.S. is it all troubling? And this kind of goes on the heels of your previous comments that more and more packaged food categories and companies are complaining about the consumer confidence and just cyclical factors in general. Meanwhile, in the U.S., you are seeing concurrent strength, maybe even improving strength in fast food and on-the-go channels like sea stores that just matter of months ago we would have thought would be more cyclical than these at-home food categories. It's tough for me to reconcile from my perspective, but perhaps a bit of the blame goes back to the energies that have been applied to those categories. But any thoughts would be helpful there.

I don't think there's a clear trend David. Obviously as I said earlier, our ketchup business and foodservice from an organic sales standpoint was positive in the first quarter. So we're seeing some of the same things you're seeing on quick-serve. But to me the thing is that I've been around a long time; you fish where the fish are, and I think people are throwing the hooks deeper and putting more bait on the hooks in the markets where there are no fish, or the fish aren't biting. And so, we're going where the fish are biting, which are markets where the middle class is emerging and still aspirational and are inclined towards westernizing some of their food purchase, but more importantly westernizing their lifestyles in terms of better ways of living. And so to me, the industry is still over a period of time has to make the shift away from a dependence on things that have historically been fairly easy for them to understand, and shift to those areas where the real opportunities are. Whether it be aspects of customers that are different, whether it be aspects of the globe that are different, whatever it maybe. And for some reason, and I've said this to you guys publicly before and as I said, I don't make many friends in this industry, but for some reason this industry is incredibly slow at adapting and adopting to the changing realities of the world. And I think that's where our company, frankly is well positioned, because of the mindset of the management team that we have that's focused on fishing where the fish are.

Can we move quickly, I know there're several people that somehow got stuck in queue, and we're way past time and I want to give everybody a quick opportunity, so let's move quick.

Our next question comes from the line of Terry Bivens of JPMorgan.

Just I know it's late, so I'll be quick with this. Most of our data indicates that the lift from promotion is really decaying pretty rapidly for a lot of categories. Judging from your remarks on frozen, is that the case with you guys in frozen category? And if you could just give us a wee bit of color on what Nestle is up to their post-acquisition.

We'll, I don' want to comment on anybody else, other than to say that I think people are slowly learning that we're taking consumers out to door in entrees. And I said in my prepared remarks that until the consumer is more confident in the economy we're going to see this. And interestingly enough in Australia, we're starting to see a turnaround in the category as the economy is doing a little bit better. And so the nutritional categories are starting to do a little bit better in the markets where we're seeing some improved economic behavior. But I also said in early response to a question, Terry, that I think the industry is simply not seeing the lift they've historically enjoyed by aggressive promotion activity. And I think that consumers are waiting for them or consumers are going in disciplined against a shopping list that may or may not include a product that you're promoting aggressively or merchandizing someway. And I don't think anything is going to change that except the higher level of confidence. I mean, our discussions with consumers are fascinating. I mean, consumers are absolutely unclear as to what to do about anything. And I think from that perspective, I don't think anything is going to change short term. Now having said that on small ones, the other thing that you can look at is we've innovated aggressively in breakfast, our breakfast business was up pretty significantly in the quarter, and a lot of that's due to innovations, and heading a convenience area with the hot meals that I think people have really enjoyed in our T.G.I. F sliders and our Smart Ones sliders, which I predicted to you in CAGNY would do really well, are doing really well. So people are looking for comfort, they're just looking for convenience, but they're not deviating from their list.

So interestingly on Smart Ones and I know a number of you there's just some intricacies to that Nielsen data. So a lot of our innovation has been, the sliders, the peak and the wrap, et cetera. And those are showing up in cheeseburger and sandwiches, which many of you have not been incorporating. Smart Ones is doing quite well.

And if I could ask just one point of clarity, second quarter you said would mirror the first quarter in terms was it operating income or earnings per share? I missed that.

I didn't say it, but it's more EPS, but it's generally across the whole profit line, Terry.

All right, let's take one more and I apologize for those of you who got stuck in queue.

Our last question comes from the line of David Driscoll with Citi Investment.

I wanted to go back to foodservice, certainly a wonderful report on profits there. Bill, can you talk a little bit and maybe you said this in the discussion, and I just need to hear it very clearly, what is full year look-like given the strength that you saw in foodservice in ketchup? Does that really drive significantly better than expected profits within that segment for the year?

We're expecting a good year profit-wise in foodservice, and a part of that is productivity and a part of its mix. And obviously, the more ketchup we sell in foodservice on a relative basis to anything else in foodservice, the better the mix, because the margins are higher. So I think it's fair to say that we have expectations. And I always like to underline that word when my lawyers are around, if expectations for a good profit year and foodservice, and our hope is, and I'm not even underlining expectations; here our hope is that we start seeing a topline change in the second half of the fiscal year, predicated on the weak quarters last year, predicated on some return in the consumer in the second half of the year, and predicated on some of the activities we're undergoing. And the fact that most of our SKU rationalization will be behind us. But I think we're not counting on it a whole lot, because until there's some clarity on this economy and until we get some sense on what the U.S. Government is going to do from the policy standpoint, help get us out of this predicament then I think it's fair to say that the mix of productivity, SKU rationalization and our focus on customers while we really make money on foodservices really going to be the key that's going to drive what we expect to be a pretty good profit year.

I think that business for well over year, we're seeing some pressure at the topline and certainly that's pretty significant pressure in the bottomline. They reacted significantly and we though a lot about SKU rationalization and that sort of thing. A year down the road, they're really able to drive the efficiencies from that, focus on longer runs, better pricing and really drive even through the distribution system improvements that you're seeing hit the bottomline now.

Let me summarize, we are running way over. But let me summarize that, again, as I said yesterday, the shareholders I think generally, the fundamentals of the company are sound. We are working very aggressively to make sure that we do not foolish things in an environment where being foolish is much easier than not. we continue to redeploy resources against those opportunities that we think have better long term leverage and will create better long term value. as Ed said, we've reaffirmed yesterday, our outlook for the year of 3% to 4% topline on a constant currency basis and 7% to 10% EPS NOI. And I will be very blunt that of those three, I think the topline will be the one that will challenge us probably the most. Today, I don't see any reason to deviate from that, but it will be more difficult given the environments. Fortunately, our emerging market businesses are strong enough and our resource allocation processes are robust enough that we're putting money where we get our best return. So just in general, I want to thank our management who has been open minded and are sufficiently vigilant enough to see us put money where money is going to get the shareholders a great return. So with that, thank you all for your call. I would like to say that keep our family and you prayers, we could use them. He is fine other than he is dealing with a very difficult issue right now. We've gotten word that it should be okay, and everything should be fine and he should be back very shortly. We've missed him, and I hope he is listening, actually I hope he is not listening. We've missed him, and we want him back as soon as we can get him back. So thank you all for the call.

We'll be around this afternoon in IR for your call. 412-456-6020, lots of ins and outs that we talked about. I mean if you guys want to work on the details, feel free to give us a call. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.