Aug 20, 2009
Executives
Meg Nollen - VP of IR Art Winkleblack - EVP and CFO Ed McMenamin - SVP of Finance and Corporate Controller
Analysts
David Palmer - UBS Alexia Howard - Sanford Bernstein Jon Feeney - Janney Montgomery Scott Ed Roesch - Soleil Capital Chris Growe - Stifel Nicolaus David Driscoll - Citi Investment Research Eric Serotta - Consumer Edge Research Ed Aaron - RBC Capital Markets Andrew Lazar - Barclays Capital Brian Spillane - Bank of America Terry Bivens - JPMorgan Eric Katzman - Deutsche Bank
Operator
Good morning. My name is Rachel and I will be your conference operator today.
At this time, I would like to welcome everyone to the H.J. Heinz Company fiscal year 2010 first quarter earnings release conference call.
This call is being recorded at the request of H.J. Heinz Company.
(Operator Instructions) I would now like to turn the call over to Meg Nollen, Vice President, Investor Relations. Ms.
Nollen, you may begin your conference.
Meg Nollen
Good morning. Thank you, Rachel.
I would 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.
Joining me on today’s call are Art Winkleblack, Executive Vice President and CFO and Ed McMenamin, SVP of Finance and Corporate Controller. Before we begin with our prepared remarks, please refer to this forward-looking statement currently displayed.
This 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 your understanding of the company and its results.
We ask you to refer to our April 29, 2009 Form 10-K, 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 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 as well as on our website at heinz.com.
Please note we plan to file our first quarter 10-Q by the end of the week, and in addition, this will be the first quarter that we will be filing our information in XBRL format. 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 Art Winkleblack. Art?
Art Winkleblack
Thanks, Meg. Good morning, everybody.
We are very pleased with our start to the fiscal year. In line with the priorities that we articulated in May, we focused on profit and cash and delivered strong results in the quarter.
We also delivered almost 2% organic sales growth, a solid result in this challenging global economy and in light of the fact as we overlap a double-digit sales increase in Q1 last year. We continue to execute our strategic plan driving growth in our top brands and in the emerging markets, and we are highly disciplined in managing cost and working capital.
We invested almost $0.04 in upfront productivity charges to improve ongoing performance, and at the end of the quarter, we very effectively exchanged some high cost debt from much less expensive 30-year bonds. In terms of key financial highlights for the quarter, obviously foreign exchange was a major headwind, but on a constant currency basis, sales increased 4.5%, operating income grew about 6% and EPS was up almost 10%.
Ed will give you more detail on the financials in a few minutes, but we’re off to a good start for the year. Additionally, as we told you in May, we are highly focused on driving cash flow and we delivered outstanding results for the quarter.
Operating free cash flow was a $121 million in Q1, up a $176 million from prior year. Now, putting the quarter into perspective, we have now driven 17 quarters in a row of organic sales growth.
As you can see, the high watermark for this growth was Q1 of last year when we drove double-digit organic sales up 10.2%. As we look forward, Q2 will be another tough overlap and then we should see stronger comparatives in the back half of the year.
As you know, Heinz is comprised of a highly focused portfolio, anchored by the almost $4 billion Heinz brands. Our top 15 brands represent about 70% of our sales and their growth continues to set the pace for the company.
On an organic basis, these brands were 2.2% for the quarter, about 0.5 point ahead of the rest of the portfolio. Turning to our core categories; on a constant currency basis, our growth was led by an almost 6% increase in infant/nutrition and better than 5% growth on ketchup and sauces.
The growth in infant/nutrition was driven primarily by strong results in India, Latin America, Canada and Russia, while growth in ketchup and sauces was paced by US Foodservice, Russia, Latin America and Poland. Within the meals and snacks category, soup and beans posted positive constant currency growth, while frozen meals were weighed down by broad category softness.
Consistent with our long-term strategy, we continue to drive excellent growth in our emerging markets. For the quarter, organic sales grew 14% and these markets represented almost 16% of total sales.
That’s up 80 basis points from Q1 FY09. Each year, we’ve grown the emerging market mix which is up 570 basis points versus Q1 of FY06.
We believe this positions us well for the future, and we continue to look for ways to expand our emerging market business and achieve our 20% target in FY13. Now, let's take a quick spin around the world of Heinz starting with North American Consumer Products.
We are pleased with the positive sales growth and a double-digit operating income growth in NACP. North America effectively balanced the price/volume equation, driving positive constant currency sales on top of 10% organic growth last year.
Even with increasing commodity costs, the team restored gross margin by 200 basis points and operating margin by 260 basis points. This reflects carryover net pricing, strong productivity and fixed cost control, along with increased marketing spending.
In the back half of the year, we expect increased innovation in consumer marketing. However, the second quarter will be a difficult comparison given the timing of price increases last year.
The continued growth in the mix of full price sales in North American Consumer Products is a strong indicator of the health of our business. For the quarter, 88% of our total US retail sales were sold off the shelf at full price.
In so doing, we traded off some of our low margin incremental volumes in the short-term. This was a key factor in our improved gross margin for the quarter.
Our strategy continues to be primarily based on strong innovation and consumer marketing, but we will also increase promotional activity on a targeted basis when and where necessary. As mentioned on May 28, we are planning to increase companywide consumer marketing this year by 4% to 6% on a constant currency basis.
US retail business will be a key part of this. During the quarter, we increased TV spending on our write-up and Heinz ketchup and executed strong print campaigns on Classico, Lea & Perrins and Heinz 57.
In Q1, total company consumer marketing was up 3% on a constant currency basis, despite reduced cost per GRP and the fact that Q1 was our highest quarterly spending last year. With regard to Smart Ones, we continue to pursue our strategy of innovation on our category leading 24X7 platform and have further launches planned for the remainder of the year.
Sales for the brand were down for the quarter, primarily reflecting three main factors. As we've seen, this category tends to be correlated with consumer confidence, and as a result, the category continues to be down and in fact has been down for over a year.
There has also been heavy promotional activity in the category, and we've purposely avoided unprofitable promotions. Lastly, the timing of new product launches and advertising is more back half oriented this year, while the bulk of our prior year innovation occurred early in FY09.
Now that said, we are very pleased to see Smart Ones continuing to set new records in Canada and we fully expect the category in the US to rebound over time, in line with improvements in the economy and in the Weight Watcher classroom business. In the meantime, we are executing plans to improve the buy rate among our heavy users.
With regard to new product development, we are very enthused about our recent innovations in pizzas and flatbreads, which are favorites in the nutritional aisle. We recently launched many pizzas to strengthen our snack line and also rolled out Artisan Creations stone-fired crust pizza and flatbreads, which use new bread-to-bread technology and is achieving strong consumer preference.
Also we began shipping Smart Ones soup in Canada during July. We offer four varieties of soup, all of which come with zero Weight Watcher points.
We expect stronger volumes in Smart Ones during the back half of the year, as we'll be lapping a pre-price increase buying during Q2 of last year. Importantly, we have a strong and broad-based portfolio in North America and we continue to innovate across the business with on trend choices for this economy.
During the quarter, we introduced a new Cut Red potato offering in our successful Ore-Ida Steam n' Mash line launched any time [pace of the year] under the TGI Friday's brand and offered new extensions of our popular TGIF Skillet Meals. I'm turning to our US Foodservice business, we had a good quarter.
For the first time in six quarters, organic sales were virtually flat to prior year, and importantly, profit was up significantly versus a difficult Q1 last year. Clearly, the foodservice industry continues to be very tough with relatively high unemployment causing weak traffic.
Despite this we achieved a strong profit improvement as hard work by the team to simplify and upgrade the business is beginning to pay off. These efforts include renewed partnerships and product innovation with some key national accounts, carryover net pricing, continuing skew rationalization, improved mix, warehouse consolidation, and numerous simplification and productivity initiatives.
Net-net, gross margin was up almost 300 basis points though still behind FY08 levels. Now let's turn to Europe.
As you'll recall we are comping a very strong 12% constant currency sales growth last year which is the most difficult comparison of the year for Europe. While we have seen recent reports that the economies in Germany and France are improving, much of Europe remains in recession.
As a result, the competitive environment continues to be difficult. Despite this constant currency sales and profits increased 3% and almost 2% respectively.
The team has done a good job focusing on our core categories and brands growing where we want to grow and rationalizing SKUs that are less profitable. We're working hard to spur demand by bringing value to the consumer.
Overall, we've posted constant currency profit growth behind carryover pricing, supply chain productivity, and good fixed cost management. Now, Heinz ketchup remains very strong across Europe.
We increased consumption in value terms in all 12 of our key markets, lead by Russia, Poland, and the Nordics, and we're number one in most of these Markets, and still growing. Across Europe we're continuing to drive innovation.
A few examples include a reduced salt and sugar variety of our convenient Snap Pot Beanz in the UK, Plasmon premium vegetables and a stand up receivable pouch for infants in Italy where Plasmon is a clear number one. A variety of new items added to the [homing] line of bakery and pasta offerings, continued strength of the Top-Down Ketchup and the 'Grown not made' campaign and new infant cereals and foodservice dip pots in Russia.
In Asia Pacific we achieved almost 15% constant currency sales growth largely driven by the Golden Circle acquisition plus positive organic growth for the region. Here again, Q1 last year was very strong with constant currency sales up 18%.
From a profit perspective India and Indonesia posted very strong results which were offset by lower profit in Australia and Long Fong in China. The competitive and commodity cost environments in Australia remain difficult and as expected Golden Circle has not yet contributed to the bottom line as this is their seasonally low period.
We're very excited about the prospects for Golden Circle as it expands our already strong presence in Australia and is a terrific health and wellness platform. This is a great brand and as you can see by the share results the business is very healthy.
We expect that this brand will benefit even further from our marketing and distribution expertise. The integration is going well, and should generate meaningful synergies over time.
We anticipate a significant contribution from Golden Circle and expect the acquisition to increase our combined sales in Australia and New Zealand to US $1 billion. Our Rest of World segment continues to deliver robust growth with double-digit increases in sales and operating income on a constant currency basis.
Growth has been driven primarily by our Latin American business. We're also excited about our prospects in Mexico and we believe that this represents a big opportunity in a big market.
Recently, we started up a new infant nutrition line, launched a new 100% pure fruit wet baby food and within a two-year time frame have achieved a double-digit share of the ketchup market there, the ninth largest ketchup market in the world. Importantly, this new pure fruit line of baby food, one endorsement of the Mexican Pediatric Association so net-net we're making good progress in that country.
Now, we've given you an overview of the results. Let's talk about some of the other key drivers in the business.
Bill has talked a number of times about the five C's and just to refresh your memory those are consumers, currency, commodities, cost and cash. I think it's important that we continue to update you on these factors in this economic environment.
Let's begin with consumers. Clearly, the environment remains difficult across most of the developed markets.
The bad news is that consumer confidence in the US and the UK remains at relatively low levels but the good news is that they have bounced off the low point in March. Inversely correlated to this confidence level is the development of private label food sales.
While private label surged during 2008 and early 2009 more recently the growth has been moderating as consumer confidence has improved. Consumers still prefer great brands like ours and we expect that private label growth and share will settle down as time goes by, albeit at somewhat higher levels than before the recession.
The real action and growth is happening in the emerging markets where Heinz clearly differentiates itself from the domestic peer group. The IMF forecast that developed markets GDP will be down this year while emerging markets will continue to grow.
Heinz is well positioned with the GDP in our key rick-up markets projected to grow at healthy rates in FY10 and beyond. Currency was clearly a major headwind during the quarter.
While recent rates have been more positive the pound, Aussie dollar and Kiwi dollar are still 17% to 18% worse than year ago levels. Additionally the euro was off 11% versus Q1 last year.
We're hoping that the last couple of months represent a longer term trend that would provide some upside for us but I believe it's too early in the year to make a call on currency. The other currency impact is the cross-rate of the pound with the US dollar and with the Euro.
That’s a major factor for us in the cost of materials imported into the UK. Focusing on Pound, Euro, you can see that the market-rate topped out at about .96 back in December.
The higher this rate, the worse it is for us. Fortunately, the rates backed off recently and is now at about .86.
On the right side we've shown our effective rate for the first quarter of this year and the past two years. These rates are influenced by the timing of currency hedges and while we benefited from hedges in past years it makes our comparison a bit tougher this year.
We hope that the cross rate continues to moderate over time and return to its historic range but again it's too early to make a call on the rate for the year. As discussed on May 28 we expected commodity inflation in the 7% to 8% range which included the impact of roughly 2.5% from transaction cross-rates.
As anticipated, we experienced strong inflation in tin plate potatoes and tomatoes during the first quarter which more than offset improvements in other commodities like resin and dairy. Overall, net input costs including the impact of cross rates and supply contracts were up about 6% during the quarter.
The good news is that we're seeing some market prices receding and similar with currencies, we're hoping we see some modest improvement over the remainder of the year on those items that are not yet fully contracted. Turning to costs, you may recall that our target is to keep fixed costs flat in developed markets.
That’s excluding the impact of M & A while also containing fixed cost growth to no more than half the growth rate of sales in emerging markets. I'm pleased to say we're on track with this goal for the quarter and we anticipate being on target for the full year.
To further improve ongoing productivity we spent a total of 16 million or about $0.04 this quarter in up front productivity charges. These charges primarily relate to the closure of a plant in Mexico and headcount reductions in Europe in foodservice.
We mostly sit in the quarter with our terrific cash flow. As I mentioned cash is a major focus for the company and I believe an appropriate move in this economy.
Our results for the quarter reflect strong working Capital Management, particularly on inventory and the US and Europe and tight control of capital spending. Finally, before I turn it back to Ed, I'd like to compliment our Treasury team on the very successful execution of the exchange of our high cost dealer and marketable securities or doctors as we call them.
After the end of the quarter we successfully exchanged 681 million of the 800 million of outstanding doctors for 30 year bonds with a 708 coupon, the advantages of the exchange are that we lowered the coupon from 15.6% to 708 on the 681 million exchange. While much of this benefit was built into our plant range this should allow us to achieve the lower end of our net interest expense projection for FY10.
We've extended the maturity schedule on this sizeable block of funds from three years to 30 years which reduces our bond maturities in 2011. I think that's a real advantage in this unpredictable credit market.
Along the same line, we reduced the risk of having to remarket so much debt on a specific date which runs the risk of having bad timing like we did back in December. Now as always, we remain committed to retaining our current investment grade credit ratings and outlook.
With that said, I'd now like to turn it over to Ed. Ed?
Ed McMenamin
Thanks, Art and good morning, everyone. Putting the significant impacts of currency aside, I think you'll agree that we had a solid quarter, particularly considering the strong top line growth and 14% EPS growth we reported last years first quarter.
First let me hit the highlights on the P&L scorecard. We've added a column to our traditional scorecard to show our results on a constant currency basis.
I will reference this in my comments but to ensure that everyone has a complete understanding of the adjustments I'll bridge these constant currency results to our reported results on the next slide. Net sales grew by 4.5% on a constant currency basis but after the impact of a 9% currency headwind, net sales were down 4.5%.
Notably, organic sales grew almost 2% as a 6% increase in pricing more than offset a 4% volume decline, as we made trade-offs this quarter temporarily sacrificing some low margin volume to improve overall profitability. Carryover pricing and productivity improvements supported our gross margin, which continued to be challenged by higher commodity costs.
Although gross margin at 35.4% is down 80 basis points, remember that Q1 last year had our highest margin of the year. This quarter gross margin was unfavorably impacted by lower margin acquisitions and a $7 million charge for front-end costs on a few new productivity initiatives.
Now, as you can see in the table, half of the gross margin decline was due to currency movements. We continue to increase our investment in consumer marketing on a constant currency basis.
Operating income increased 5.6% on a constant currency basis, while investing in up front productivity charges of $7 million in cost of goods sold and $9 million in SG&A, for a total of $16 million or about 4% of operating profit. This increase in operating income was driven by the company's focus on price realization, targeted promotions and tight cost control.
At $0.67, EPS was down almost 7%, but on a constant currency basis, EPS was up a very healthy 9.7%, benefiting from gains on the total rate of return swaps, which offset the incremental cost of the doctors. Now, let me take you through the details between our reported results and our constant currency look.
This chart summarizes the significant impact of our currency on our results. Our definition of constant currency strips out the translation impacts of all currencies, the additional transaction costs due to the UK cross-rates as well as any gains or losses on currency translation hedges in both the current and prior year.
Currency translation hurt our P&L from top to bottom, starting with the $233 million or 9% reduction to revenue and ending with $0.08 or around 11% unfavorable impact to EPS. Additional expense from the UK cross-rate reduced gross margin by 50 basis points and ultimately cost $0.03 of EPS.
Finally, current quarter translation hedges resulted in a $5 million loss at NPBT for a $0.01 EPS impact. Q1 FY09's NPBT has been adjusted by $1 million for currency losses that were recognized last year, but was too small to change EPS.
This currency bridge will become even more important as the year progresses, particularly as we lap the second quarter of fiscal 2009, which included almost $100 million of currency gains from translation hedges. Before I get into the details of our P&L, I'd like to mention that our income statement presentation looks a bit different due to the company's adoption of a couple of accounting changes.
The first change impacts the presentation of the P&L between operating income and net income. FAS 160 requires that we move minority interest expense from other expenses to a new line entitled non-controlling interest.
Bottom line, the H.J. Heinz Company net income is the same number that you've been used to seeing as net income, just a new name, and a slightly different way of getting there.
In addition, the company has adopted a new standard, which requires an adjustment to the EPS calculation for income allocated to participating securities. In our case, this relates to a portion of our outstanding RSUs.
We put the amount just above EPS so that you can follow the calculation. It wasn't large enough to change EPS this quarter, but by year-end, the accounting change will impact both FY10 and FY09 by about $0.01.
Please refer to our 10-Q for more details. Getting back to the results, I'll focus on a few of the items that were not on the scorecard.
Gross profit dollars were up 4% on a constant currency basis, aided by pricing and productivity improvements. SG&A was up 2% on a constant currency basis, but more importantly, down 30 basis points as a percentage of sales, despite $9 million in up front productivity charges.
This reduction reflects the company's focus on fixed cost management and even greater priority given the current economic environment. The next few slides will discuss the drivers of operating income in more detail, so I'll focus on the items below here.
Net interest and other expenses were down $6 million, benefiting from a $20 million mark-to-market gain on the total rate of return swap. This roughly offsets the higher interest cost on the doctors.
Art covered the doctors' transaction already, but I will mention that in conjunction with this exchange, the company terminated the total rate of return swap. So going forward, there will be no more mark-to-market adjustments for these swaps.
That said, those mark-to-market gains did offset the additional expense of the securities not just for the quarter but since they were remarketed last year. The company's effective tax rate was fairly consistent to prior year at 28.5% and roughly in line with the tax rate we're expecting for the full year.
Now, let's take a deeper look at sales. As I said, the first quarter delivered organic sales growth of almost 2%.
This growth was led by a 6% increase in net pricing, which was largely due to price increases taken later in fiscal 2009 to offset increased commodity costs. Volume decreased 4.3% as favorable volume in the emerging markets particularly India, Russia, and Poland, was more than offset by declines in the US and UK businesses.
Acquisitions net of divestitures increased sales by 2.9% primarily from the Golden Circle acquisition and last, but hardly least, foreign exchange translation rates reduced sales by 9%. I've already took you through a review of the segments performance, so I'll just make a few points on this slide.
As you can see, every region delivered increases in organic and constant currency basis with the exception of US Foodservice, but even in foodservice, organic sales were virtually flat. More importantly, at the operating income line, the strategy to eliminate less profitable volume is paying off, as you'll see in a few minutes.
Just to focus in Europe briefly, you can see that on a constant currency basis we delivered 3% growth, but after a 17% headwind from currency, we reported a 14% decline in overall sales, which underscores the impact currency had on our results for the quarter. Asia/Pac has also suffered significant currency headwinds of about 12%, and again, this quarter, our emerging market strategy continued to pay off with these businesses contributing 14% organic growth.
As I noted earlier, gross margin decreased 80 basis points to 35.4% on a reported basis, but on a constant currency basis, only down half as much to 35.8% and slightly ahead of that FY09's full year margin. Aside from the currency impact, the lower margin acquisitions and the investment in future productivity in the form of severance and asset write-downs reduced margins by almost 80 basis points.
So isolating those items, pricing and productivity have more than offset the impact of commodities and other inflation. Turning to operating income by segment, North American Consumer Products grew 10% on a reported basis and more than 12% on a constant currency basis, as increased pricing and productivity improvements more than offset higher commodity costs, reduced volume and unfavorable foreign exchange rates.
In addition, the growth reflects SG&A savings, which helped fund increased marketing investment. The improvements in S&D and G&A were driven by tight cost control and reduced fuel costs.
Europe's results were up 2% on a constant currency basis, stripping out the 22% impact of currency movements on both translation and UK transaction cost. This constant currency improvement reflects higher pricing and productivity improvements, which more than compensated for volume and higher input cost.
The Asia/Pacific segment's operating income was down on both the reported and constant currency basis. Translation accounted for three quarters of the reported decline.
The remaining amount was due to Australia and Long Fong. These declines were partially offset by excellent results in our Indian business.
US Foodservice is a good story for the quarter with operating income of 25%. Pricing and productivity improvements more than offset increased product costs and unfavorable volume partly due to skew rationalization.
The profit increase also reflects S&D savings from reduced volume and improved efficiencies driven by last years distribution network upgrade. Finally, the Rest of World segment delivered great results this quarter, up $5 million or 43% on a reported basis.
Now let's move to the balance sheet scorecard. Capital Expenditures of $49 million or 2% of sales up 40 basis points from the prior year, but in line with our expectation of around 2.5% of sales for the full fiscal year.
Our first quarter cash conversion cycle was 49 days, down two days from the prior year. Operating free cash flow showed significant improvement from last year, up $176 million.
We generated $121 million of cash flow this quarter, driven by improvements in quick operating working capital, most notably inventory. Net debt to EBITDA increased slightly, due to the impact of currency on earnings, while most of our debt is US dollar denominated.
Five quarter average ROIC, was 18.2%, up 150 basis points. We've remained on track for our targeted ROIC for FY '10 of approximately 17.5%.
We've reduced quick operating working capital and CCC improved two days. Despite the difficult trade environment, our Day Sales Outstanding were flat, before the receivable securitization and better by three days including it.
There was a significant six day improvement in inventories as a result of the companies continued efforts to create a more flexible supply chain. Finally, accounts payable partially offset these improvements of the seven day decline, a portion of which is tied to the inventory reductions and the resulting decrease in amounts due to suppliers.
Of the $207 million improvement in receivables, $132 million was a result of the accounts receivable securitization program established in Q1. These continued efforts to drive strong cash flows delivered a $177 million reduction in net debt, even with the acquisition of Golden Circle, and making discretionary pension contributions.
As I mentioned earlier, we delivered excellent operating free cash flow. QOWC improved by $150 million in the quarter.
In addition to the $132 million of cash received in connection with the securitization program. We utilized the additional cash from receivable securitization to make incremental discretionary contributions to our pension plans, funding $144 million this year, compared to only $28 million last year.
The Company expects to make approximately $260 million to pension contributions in fiscal 2010, $200 million of which is discretionary. As I mentioned, capital expenditures are in line with our plans and finally dividends reflect the annualized rate increase to $1.68 per share that we announced in May.
In summary, we're pleased with our performance this quarter, which again demonstrates our ability to grow the business organically, focus on cost control and drive strong cash flow. With that, I'll now turn it over to Art to update you on our full year outlook.
Art Winkleblack
Thanks, Ed. Before I turn it over to the Q&A, I'd like to just say a couple of final remarks here.
Overall, we're off to a very good start to the year with strong constant currency growth in sales, operating income and EPS. We delivered excellent cash flow performance and maintained strong discipline on inventory.
Currency rates obviously remain a significant headwind, and we're continuing to invest for the future with ongoing spending on Project Keystone, up front productivity charges and increased consumer marketing on a constant currency basis. For the full year, we reiterate our constant currency guidance of 4% to 6% growth in sales, 6% to 8% growth in operating income, 5% to 8% growth in EPS, and 850 to 900 million in operating free cash flow.
Based on the flow of the year, last year, and the timing of our key initiatives this year, we expect second half sales comparatives to be better than in the first half. I'll point out again, that our strong and sharply focused portfolio should be well positioned to capitalize on continued growth in emerging markets, and normalization of foreign currency rates over time.
Additionally based on yesterdays close, our dividend yield stands at an industry high of nearly 4.5%. Thanks.
Now, I'd like to open it up, turn it over to the operator and take your questions.
Operator
(Operator Instructions) Your first question comes from David Palmer with UBS.
David Palmer - UBS
Obviously, you confirmed guidance for the year, but there was likely performance in the quarter that was above or below plan in your thinking, what could you maybe give us highlights and low lights on that, and secondly, with regard to pricing and mix in the quarter, obviously you had six points across the globe. How much of that was price and mix and perhaps could you give us a rough idea of how pricing might fall off through the rest of the year, if indeed you expect that to happen and if there's any major differences between the regions on that, that would be helpful?
Thanks.
Art Winkleblack
David, I think in reality we did exactly what we set out to do. We focused on profit and margins and cash flow and that's exactly what we got, so I'm particularly pleased with the strong cash flow and the margin performance.
The thing that I was pleased to see was that, while we were overlapping 10% sales growth last year, we still delivered organic sales up 2% for the quarter, so I think that was good. In terms of highlights and low lights, I don't think anything was too far off what we expected, certainly North America had a good strong first quarter both on the retail side and on the foodservice side.
Pricing was strong for the quarter as you pointed out. Overtime that will dissipate just based on the fact that our pricing has been carryover pricing from prior year as opposed to new pricing, but all in line with our expectations and our plans.
I think the key that we continue to look at and work toward is hitting the right balance between consumer marketing and trade spending and trying to hit the right price points in this difficult economy.
David Palmer - UBS
So you still think that by the end of the year you'll be having some price mix lift, but perhaps just smaller than what we have here in the first quarter?
Art Winkleblack
Yeah, I think that would probably be fair to say.
David Palmer - UBS
Lastly on Europe, your volume down four was actually heartening given the comparison I think was up six and comparison get a heck of a lot easier for the rest of the year. How should we be thinking about that line, a straight two year trend would imply significantly positive volume numbers in Europe, but perhaps it's not the right way to think of it?
Art Winkleblack
Yeah, I think we did have pretty good volume performance there given the very, very strong Q1 of last year that we had. If you think about Europe the European continent is stronger, the further you go North and East.
We had good strong results in places like Germany and Poland and particularly strong in Russia. We are pleased with the Italian market as well while the birth rate in Italy isn't doing us any great favors so we did pretty nicely there.
Northern Europe, the Benelux countries were pretty solid. The weaker parts of the economy are really France and Spain, Spain having a very difficult time economically.
In the UK some pretty good strong performance in some of the categories particularly from a value standpoint, but volume continues to be challenged. So, I think we will see how the year progresses.
We're off to a good start as I mentioned, but I think we don't have any dilutions that the European continent will continue to be a tough place to operate and so we're trying to again do the right thing from innovation standpoint, continue to invest in marketing and also make sure that we're bringing the right kind of value and price points to the consumers.
Operator
Your next question comes from Alexia Howard with Sanford Bernstein.
Alexia Howard - Sanford Bernstein
Good morning everyone. Hi.
I have a question about uses of cash and the prioritization of that going forward. It seems to me I don't think there were any share repurchases this quarter.
You've obviously made a couple of smaller bolt-on acquisitions over the last year. Could you just talk a little bit about now that the cash flow does seem to be strengthening nicely, and if margins start to improve through the course of the year that could continue from here on, but how are you thinking about uses of cash?
Art Winkleblack
Yeah, good question, Alexia. I don't think we're thinking about it much differently than when we talked to you in May.
The reality is obviously we're first and foremost prioritizing on cash for dividends. As you know, we increased the dividend this year, while many other companies across other industries were taking dividends down.
So we're pleased to have taken that up. So dividends continue to be up.
We are also looking for more small bolt-on acquisitions that fit into our three core categories and/or would strengthen our emerging market presence Then finally, given the volatility in the economy, we're still looking strongly at debt reduction and keeping some dry powder available for whatever might come.
Alexia Howard - Sanford Bernstein
If I could just slip in one quick follow-up. On sugar prices obviously we're getting a lot of questions right now, given the spiking that's going on there.
Are you hedged out on that? How concerned are you about the way that particular input has been moving recently?
Art Winkleblack
Yes. Sugar prices aren't a big factor for us; they were up in the quarter but not a huge factor for us.
We are hedged in a number of places, that's a local buy. As you know, we use different sugars fructose in the United States and sucrose outside of the United States.
So it varies, but it's something that is part of our commodity headwind, but given our positions, contractual positions and things, not overly concerned with it.
Operator
Your next question comes from Jon Feeney with Janney.
Jon Feeney - Janney Montgomery Scott
I particularly want to dig in on the Europe situation, just kind of get an update. I think that's probably where you had the most dramatic sort of shift down if you look at the second half of last year’s fiscal?
Specifically, conversations with retailers have gotten kind of contentious across the board with a lot of major EPG companies. Could you just update us in terms of how you're feeling about the second half of this year in Europe specifically and how any recent conversations or market feedback you've gotten from European retailers or even consumers play into that?
Art Winkleblack
I don't think there's much new to report there. It hasn't been an easy situation for many, many months now.
Certainly, we're not expecting any great rebound in most developed markets around the world in terms of GDP and things like that. So I think it's going to continue to be tough.
The only thing we can do is to continue to do the right thing by the category and to try to work with the retailers on win-win propositions for all involved. We're trying to drive the right balance between consumer marketing and hot price points, certainly in this economy, places like the UK and the US hitting certain price points is more critical than ever.
So we're looking hard at pack sizes and things that could allow us to hit certain price points. So we're trying to bring value to the consumer, while also doing the right thing for the category because some of this I think Bill would use the term profitless prosperity, put some of the categories in a lose-lose position where a lot of the promotion spending in the category is down.
So we continue to work it, and it just varies across the region as to how those conversations go, but never easy.
Ed McMenamin
I think one thing you mentioned was the tough discussions last year. Last year is when we took most of those price increases.
This year, I think we're not going to see many price increases in the developed markets. So those tough discussions are largely behind us.
Art Winkleblack
From pricing standpoint I think that's right, and again, we continue to try to add value and bring innovation to the categories.
Jon Feeney - Janney Montgomery Scott
Just one other area when I think about the second half of this year is particularly is US Foodservice. Now, a volume decline a six on the kind of pricing you've taken seems like a kind of category like performance considering how much pressure there is there.
Where are your sort of exposure points within the foodservice arena in the US and what should we look for in terms of recovery as a sign that your business is going to get better? Is it quick serve?
Is it casual dining?
Art Winkleblack
I think as we look at the business and you look at some of the traffic trends in casual and even now in QSR to some extent, there is nothing particularly positive going on in that arena where the unemployment where it is. We're not counting on any great rebound in that area.
So we expect traffic to continue to be a headwind for us and the general industry to be down. Additionally, we're also trying to be very disciplined on what the SKUs.
We go to market with. We've done a lot of SKU rationalization and we'll continue to do that.
So I think as we said in May, we don't really expect any growth, and in fact, probably a little bit down in terms of organic sales over the full year, but where we do expect to make real gains is at the profit line where a lot of the hard work that the guys have put in and simplifying the business, improving processes, getting the innovation engine growing again. There's lots of good things going on there that I think will allow us to grow profit somewhat this year.
It won't be large, but after the last couple of years with profit declining pretty significantly, we're pleased to see that sort of bottom out and then start heading back northward. So we're expecting positive things, but I wouldn't take the 25% growth that we saw in Q1 and then extrapolate that.
Meg Nollen
To your point, Jonathan though, while our volumes may look in line with industry, there's offsets there. So there really is some very strong innovation going on.
The partnership with our national accounts and key distributors, the work that our guys are doing to refocus this business and get back to the branded proposition is really paying off and stay and I think a lot of the effort that has been made over the last six, nine, 12 months in our foodservice business has been masked by the general industry malaise. So a lot of kudos and credit to the work that they've been doing, but there's some growth in there and we're very excited about that.
Operator
Your next question comes from Ed Roesch with Soleil Capital.
Ed Roesch - Soleil Capital
Can you just remind us on the up front productivity spending? How much are you expecting to do this year, and then, are those initiatives that you use in the targeted 2% or 3% productivity gain?
Art Winkleblack
Ed, we're always looking for opportunities from a productivity standpoint to improve the portfolio. We saw some good opportunities in the first quarter to do that.
So we reduced headcount in certain areas. We took out a plant in Mexico.
So I think doing the right thing for the business. I wouldn't say we have an expectation for going forward as to exactly what we will or won't do, but I will say we always look for good projects that have a high return.
So we'll post you as the year goes along, but so far we're pleased with the projects that we did identify and execute.
Ed Roesch - Soleil Capital
Art, those contribute to your stated 2% or 3% productivity goal or are those somehow on top of that number?
Art Winkleblack
I think it will help get us there for sure. How exactly we're awfully early in the year, how exactly the numbers play out I wouldn't venture a guess but we're feeling good about the ultimate measure there on that productivity which is our gross margin, so I think track the gross margin and you'll see the benefits coming through.
Ed Roesch - Soleil Capital
You mentioned tin plate, could you just tell us what the expectation is for the year, how much that should be up?
Art Winkleblack
I wish I knew the exact specifics on that and it was one of our largest increases this year that was also a large increase in the back half of last year so my recollection is that toward the back half of the year, that overlap ought to start normalizing a bit, but I can't remember exactly where we are contractually on that.
Ed McMenamin
I think we're looking at plus 10% on metals. We don't usually get into the details of it but it's a substantial increase.
That’s already mentioned metals, potatoes and tomatoes are the big drivers of the increase this year.
Ed Roesch - Soleil Capital
Okay, thank you and one last one Art. Just I know the environment is challenging on the financing side but I was just curious about the [A.R.]
securitization and that seems like sort of a one type of move to do that and it is a great boost to cash flow but other than a tricky environment and everything, can you just kind of speak to why the timing is right to do that now?
Art Winkleblack
Yeah, well I think first of all, it really, the A.R. securitization on a net basis didn't do anything for our operating free cash flow because we fundamentally used that money to put into our discretionary funding of the pension plan so those two pretty much net to zero, but the A.R.
securitization we felt like it was a great diversification of our debt portfolio. It's a very cost effective mechanism, not much over LIBOR and as you know, LIBOR is very, very low right now, so it's a good cost effective debt mechanism.
It's not quite as low cost as commercial paper but it's a whole lot less expensive than bonds. It allows us to sort of moderate our dependence or usage of commercial paper, and it's kind of a rolling financial mechanism that doesn't have a set maturity date, so I think from a lot of angles we're very pleased that we've got it in place.
Operator
Your next question comes from Chris Growe with Stifel Nicolaus.
Chris Growe - Stifel Nicolaus
Just a couple quick, kind of follow-up questions for you. The first one, Art relative to your volumes they were down a little more than I expected this quarter but would you still think there could be volume growth for the year?
As pricing received is what I'm thinking later in the year?
Art Winkleblack
I think as we look at it and I think back in May we talked about volumes being relatively flat for the year, our toughest overlap as we discussed a little bit earlier is really in Q1 and Q2, so I would expect volume to be down through the first half. Back half probably better than that and we'll see how it shapes, whether the year comes in slightly differently in terms of the shape and what not of the P&L, I don't know yet.
It's early in the year, but again, I think we feel pretty good about the organic sales results that we've posted and confident in the full year.
Meg Nollen
I think on a retail basis, your comment probably trends more true, Chris, where there continues to be the negative push is on the foodservice side both with the industry as well as with the SKU rationalization we're doing.
Art Winkleblack
The other side of it is we're very excited about what's going on in the emerging markets not only from an organic sales standpoint but volumes in a number of those markets was very good. So to the extent, we can continue to push down the path on our strategy to drive the emerging markets.
We are [heavy and] up the investment in those markets to really sustain some good volume growth.
Chris Growe - Stifel Nicolaus
Then I just had a question for you on the cost savings and the $250 million you called out with back in May. Is that a kind of a divide by four and that's what comes through each quarter is it going to phase in throughout the year?
I guess it also relates to what you're calling upfront costs. Could those pick up as well to get out those cost savings or how should we look at those two factors for the year?
Art Winkleblack
It's a little bit more back half oriented is my recollection on that, Chris and we've got I think we're very pleased with the productivity that we've gotten in our manufacturing operations and in distribution and logistics, so we're off to a strong start there and I think ahead of the game in some of those cases. One of the harder things to determine in this volatile commodity environment with some commodities coming down, some going up, is what is the procurement productivity number vis-à-vis the market and so we're sorting through that, but net-net we feel good about our productivity profile and again, we had mentioned that despite some acquisitions that had lower margins and the impact of the UK transaction costs, we expect our gross margin to be at least flat this year which I think is a good result.
Operator
Your next question comes from David Driscoll with Citi Investment Research.
David Driscoll - Citi Investment Research
Art, sales in the quarter is certainly better than I expected. You beat the consensus by about a nickel.
Foreign exchange by my calculations given where current rates are is at least $0.10 better than I think the $0.46 negative impact that you gave in the May call. Interest expense looks like that should be about a nickel benefit versus the 3% increase that was at the top end of the range.
Commodities as you cited both in your prepared comments and certainly what we can all see are trending down and does look like it could be a material impact as the year progresses forward. When I add each of these pieces up, it really is quite material in terms of how much better the situation is today than where we were back in May.
You didn't change the guidance and I'd just like to explore that a little bit. Is it simply it's only the first quarter, David, and it's too early to do that or is there something here that I'm missing because again, these amounts do appear to be quite material.
Art Winkleblack
No, I think you've got it exactly right, David. It's early in the year.
We're only three months in. It's a volatile economy.
It's a volatile situation in terms of the currencies, they're up, they are down, they are sideways, and also, where the consumer goes. I think you're seeing consumer, they start to feel better and then they feel worse in a lot of these developed markets and so all we're saying is it is quite early in the year.
We do feel good about some of the things that we're seeing. Let's hope currency stays where it is or better, but boy I'll tell you, I don't know how to predict that one.
This year is just a tough year to peg from that aspect. As you mentioned on the interest expense side, we had most of the benefit of the doctors' exchange built in, but it does allow us to hopefully pick up a little bit there and we'll see where rates go from there.
So anyway I guess you've said it pretty well. Few things are looking positive, but little early in the year and we'll just keep our powder dry and see how the quarters trends out.
David Driscoll - Citi Investment Research
It feels very good right now. Thank you for those comments.
One final question. I apologize if you did say this earlier.
Can you just be as specific as possible about the pacing of pricing? There was all price increases at various points last year and I want to make sure I get the pattern reasonably right over the next three quarters?
Ed McMenamin
Yes. We don't particularly give quarterly guidance on that, David, but I think it will certainly lessen throughout the quarters.
I think each quarter we'll step down from a net pricing standpoint at least the way we're seeing world now. So I'd draw it on a relatively straight-line probably.
Meg Nollen
I think largely there's no new pricing going on with the exception of higher inflationary markets. So if you go back to last year and we can do this off-line but if you just take a look at the progression of pricing last year, it should then trend in opposite back down through the rest of the quarters this year.
Operator
Your next question comes from Eric Serotta with Consumer Edge Research.
Eric Serotta - Consumer Edge Research
Art, I was hoping you could answer a broader conceptual question about what's going on in the industry now. It seems like you clearly were executing on the strategy of sacrificing volume for profit.
At the same time, it seems that most of your peers, I don't want to say your direct competitors because certainly some of the direct competitors are doing just the opposite. A lot of the large cap US peers seem to be saying the same thing that they're sacrificing volumes for profit as well.
I guess, I'm wondering why do you think that overall volumes for the industry are so weak. With that as a back drop, why do you think the industry volumes are so weak given the continued trade down to food at home?
Art Winkleblack
Well, I think if you look probably in most categories, the base business is pretty strong. A lot of our categories we're seeing the base hanging in there with category growth or whatever the category fortunes are.
What you're seeing in many cases is a drop off and sometimes significant in incremental or promoted volume. That's as people choose not to play on the deep discount and given where commodities have gone, the other thing is you saw in the chart that we showed is that private label is a factor.
We've seen private label growth and we've talked about it for a number of months. It really did surge in 2008 and the first part of 2009.
The good news is that we're seeing that moderate, but it is still quite a bit higher than where it was and some private label continues to grow. So I think it's incumbent upon the manufacturers to keep innovating, keep doing the right thing to justify the brands and to bring innovation to the category.
That ultimately will be the right answer, also to make sure that we sharpen our pencil on some of the price points. As we look forward, we'll be looking to strike a good balance between the consumer marketing side of it and a little bit sharper on some of the price points in certain products, where we want to make sure we hit an important price position.
Meg Nollen
We're starting to run out of time. I know there are a lot of you with questions.
Can I ask you to please limit it to one question and we'll try to fire through them pretty quickly here.
Eric Serotta - Consumer Edge Research
I have a housekeeping follow-up, if you don't mind. Just wanted to clarify; is the gain on the TRS included in your guidance and where were the costs of the exchange that you did with the doctors on the P&L and how much was that?
Ed McMenamin
A bit of the gain on the TRS covers the one-time cost of the doctors. The lion's share of the cost is associated with over the 30-year note and it comes through that way.
So you'll see it's more of an exchange where we took the high cost and rolled that into 30-year notes.
Art Winkleblack
So it is built into our numbers.
Ed McMenamin
Yes.
Operator
Your next question comes from Ed Aaron with RBC Capital Markets.
Ed Aaron - RBC Capital Markets
I wanted to talk to you about inflation piece, that 6% you mentioned is below your target. I've been operating under the assumption that Q1 would probably be a high watermark for inflation this year.
Is that a correct assumption as far as how you see the world?
Art Winkleblack
No. I think a lot of it is the timing of contracts.
So while the market is certainly moderating on a number of things, not all but a number of things, what you're seeing is the impact of our contractual setup both in last year and this year. So I wouldn't expect to see a huge decrease in the commodity inflation and we're obviously watching that carefully and trying to manage that as tightly as we can.
We would love to drive some upside there, but we're not seeing a lot of that yet. We've got a sizeable portion of our products locked in for the back half already.
So there's lots of factors that play in there.
Ed McMenamin
When you look at last year, a portion of our productivity was locking in some of the commodity costs before they went up. So we were paying for cost was a lot less than what you were seeing in the market as those contracts were aloft later this year, even though the markets maybe dropping in some cases those costs that we'll be paying in the later parts of the year may be higher than the currencies last year..
Ed Aaron - RBC Capital Markets
The currency transaction piece should be helpful in the back half versus this quarter certainly, right?
Art Winkleblack
Yes. The early part of last year, currency transaction was not a huge headwind and then as the year progressed, it got pretty tough.
So yes, right now we would be a little better than we were at the end of last year.
Ed McMenamin
We'll knock on wood that we get some stability in some of these currency rates.
Art Winkleblack
It's hard at this point I would say to say that any of the currency movements are quite a trend yet.
Operator
Your next question comes from Andrew Lazar with Barclays Capital.
Andrew Lazar - Barclays Capital
I think back at the meeting in New York in May, you talked about the likelihood or an estimate of sort of the trade or promotional spend piece maybe rising this fiscal year, I think it was 30 to 40 basis points or so. I think it was Bill's point I was trying to get across that as you're going to focus on trying to do the right thing around that balance between volume and profit and the whole pricing dynamic that hopefully Heinz and maybe the industry could hold on to a reasonable portion of that given it was justified when you all took it.
So I'm trying to get a sense given what you've seen around sort of volume trends recently and maybe the competitive environment more broadly. Is that still a reasonable place to be and I'm trying to get at the pricing environment and promotional environment and if that will remain manageable for lack of a better word?
Art Winkleblack
Yes. I don't know if it's ever manageable, but it's one of those things where when you have a very strong brand position, you certainly stand a much higher chance of holding pricing than maybe not.
In terms of promotional spending, I think Bill had mentioned a range of about 30 to 50 basis points and I think that's probably accurate. It may be on the high end of that.
We'll see how things go. As we mentioned in May, the good news is that we now have much, much better processes systems and frankly talent dedicated to managing that.
So to the extent, we make some targeted investments in certain areas, we have the ability to watch and monitor the return we get on those whereas in the past maybe we wouldn't know. Anyway, so, yes, I do expect promotional spending to be up somewhat this year.
Operator
Your next question comes from Brian Spillane with Bank of America.
Brian Spillane - Bank of America
I wanted a clarification on the Serotta's question about the interest rate swap. The $20 million mark-to-market gain is included in the guidance you've given for net interest expense?
Art Winkleblack
Sure.
Ed McMenamin
Yes.
Brian Spillane - Bank of America
Then just one other if I could. On the pensions, now that you've made the discretionary pension contribution, is there a P&L benefit associated with that, as you book a rate of return on that contribution?
Art Winkleblack
Yes. That was built into our planned guidance that we talked about in May.
So if you'll recall we did a bit of discretionary funding in the fourth quarter of last year and then planned some for the first part of this year and there will be a bit more in the rest of the year as I mentioned of about 200 million of discretionary.
Ed McMenamin
Had we not put in the discretionary funding, the pension costs would have been up pretty significantly. I think in May we mentioned that pension costs be up about $0.02 on an EPS basis.
Meg Nollen
Yes. The key on the interest expense guidance if you go back and look and I had to do a little digging even myself, but our guidance was that net interest expense would impact our earnings growth 1% to 3%.
So that range's of 1 to 3 factored some of the work that we've been doing on the debt portfolio this year.
Operator
Your next question comes from Terry Bivens with JPMorgan.
Terry Bivens - JPMorgan
Just a quick question on the frozen business, Art. I know Wal-Mart paneled that, it can be a bit fake sometimes, but it does look like you guys have come down from a very high growth rate there, and I guess last year as I recall you were a BPI there.
I'm just wondering, when do you lap that and if you could just kind of briefly touch on current state of affairs in the frozen business given its importance to your US business?
Art Winkleblack
Yes. I think, Terry as I mentioned, the category is a difficult category in the US and it's clearly correlated to the economy and we've seen it before and it continues.
The category has been down for more than a year now. So it is a difficult category.
We are seeing very deep promotional activity by some of our competitors, that is impacting things, which is interesting because the category continues to be down while a lot of promotional money is being sent. So we would rather not participate in that to the degree we can stay away from it.
The other factor there is the timing of our product launches and some of the marketing that we did last year was early part of the year this year. It's back half of the year.
So to your question, I would expect our back half comparatives to be better and frankly in some cases, we're going to have to get a little bit more sharp on some of our price points to continue to drive the business. So it's a number of factors there.
Over time we still feel very good about it. We're bringing innovation to the category which we think is the right thing.
As long as the economy will stabilize at some point, we'll see that category return to some growth and also probably return to strength of the Weight Watcher classroom business.
Operator
Your final question comes from Eric Katzman with Deutsche Bank.
Eric Katzman - Deutsche Bank
I guess first just to comment. Art, I don't think it's right for you not to give some guidance on the up front cost.
I mean every other company in the industry that absorbs the cost gives us an outlook, and this isn't random type of stuff. I mean, you aren't going to just randomly shut down some facility in the UK tomorrow and then book it into the second quarter.
So I think going forward, you should be able to give us some guidance as to what kind of charges you're going to take through the P&L. Second, just the question is North American consumer margins of 25%, that's higher than I think I ever remember coming out of that business and obviously some of that has to do with the promotion pullback.
So sequentially as the year progresses, should we assume that that margin declines as you're kind of forced to deal more with the promotional environment particularly in frozen? Thanks.
Art Winkleblack
What we're trying to do there, Eric, is obviously trying to base sales. So that's been a key factor in the margin performance, along with the fact that we are getting very strong productivity improvements.
The supply chain is running well. We're bringing down the inventory.
I think we're doing a lot of the right things within consumer products. In terms of the margin going forward, I don't recall and probably won't give any guidance on where the margin goes from there, but just understand that in certain cases we will get a little bit sharper in terms of the balance between pricing and consumer marketing.
So I'm not sure I would count on any particular margin as we go forward. So the other piece of it is and I think you'll see stronger marketing in the second half which obviously has a cost associated with it.
So we've seen our gross margins there bounce back to where they had been historically. So we feel good about that.
We're trying to drive the business through a lot of productivity, and we'll see where the pricing front comes out versus volume.
Eric Katzman - Deutsche Bank
Why shouldn't we view 25% as kind of, I mean I just looking over the history of the industry, I mean, any time a category or a segment gets to that level, I mean it seems to me that that's just a concern. It's as if you're milking the business.
Art Winkleblack
No. Keep in mind, the cost structure, we tend to be very, very good at managing costs very aggressively and that goes all the way up and down the P&L.
So if you look at some of the overhead load that a lot of other of our peers maybe carry, we're more effective on that. So I take your point, you don't want to be driving an unsustainable margin.
Clearly, we don't believe we're doing that. We're looking to try to be as tight with cost as we possibly can in order to allow us to do the right things in the marketplace.
Meg Nollen
Some of this is a function of us walking away from those promotions. So you've seen some of the lower margin business.
We've made a choice. We're balancing things.
So this quarter in particular I think you see a very high emphasis as we showed you our base sales are incredibly strong in the retail business, and I think that's a piece of it. So as the environment tends to rationalize and get a little smarter and we execute more balance throughout the rest of the year, but marketing expense was very high in the first quarter last year as we were supporting Fruit Inspirations launch, you're going to see some very strong Smart Ones marketing and innovation in the back half so stay tuned.
So, guys, I just need to wrap it up. We've gone way over our time.
Thanks so much. We'll be available all day in Investor Relations for your calls.
You can reach us main number 412-456-6020. Look forward to talking with you today and next week.
Have a great day.
Operator
Thank you for your participation in H.J. Heinz Company fiscal year 2010 first quarter earnings release conference call.
You may now disconnect.