Emerging Markets Boost Heinz Q3 Sales

Strong volume growth of 4.3% in U.S. Retail and 9.1% in the U.K. as Heinz increased its third-quarter marketing investments by 41% to drive volume growth and strengthen brand equity.

26 Feb 2010 --- For the fiscal third quarter ended January 27, 2010, Heinz reported sales of $2.68 billion, operating income of $437 million and EPS of $0.83 from continuing operations. The Company’s performance was driven by organic sales growth, and improved gross margin (up 180 basis points) resulting from productivity improvements and higher net pricing. EPS growth for the quarter was favorably impacted by $0.01 from net currency movements. Operating free cash flow increased 88% to $439 million, reflecting Heinz’s strong profit growth and its strategic focus on cash.

Top-line growth for continuing operations was fueled by:

* Organic sales growth of 15.5% (18.0% reported) in Emerging Markets, led by higher sales in Indonesia, Russia and India;
* 5.3% organic sales growth (15.2% reported) in the Company’s Top 15 brands; and
* Strong volume growth of 4.3% in U.S. Retail and 9.1% in the U.K. as Heinz increased its third-quarter marketing investments by 41% to drive volume growth and strengthen brand equity.

Heinz Chairman, President and CEO William R. Johnson said: “Our excellent third-quarter performance reflects strong execution of our strategy to accelerate growth in Emerging Markets and increase consumer marketing and innovation to drive volume growth in key developed markets, especially the U.K. and U.S. retail businesses. After delivering our 19th consecutive quarter of organic sales growth, Heinz remains on track to deliver our recently increased Fiscal 2010 EPS outlook of $2.82 to $2.85 from continuing operations.”

Heinz delivered global organic sales growth of 3.0% (reported 12.7%), led by the 15.5% organic (18% reported) growth in Emerging Markets.

The dynamic growth in Emerging Markets was led by higher sales of Complan and Glucon D nutritional beverages in India, ABC brand sauces and beverages in Indonesia, and Heinz Ketchup in Russia, the world’s second-largest ketchup market, where Heinz now holds the number-one share.

Total volume increased 1.2% as growth in U.S. Retail and the U.K. was partially offset by lower volume in Australia and U.S. Foodservice. Volume in U.S. Foodservice reflected industry trends and the Company's efforts to simplify the business through SKU reductions.

Net pricing increased sales by 1.8%, primarily reflecting the carryover impact of price increases taken in the fourth quarter of Fiscal 2009 across the Company’s portfolio to help offset increased commodity costs.

Acquisitions, net of divestitures, increased sales by 2.9%, driven largely by the prior year acquisition of Golden Circle in Australia. Foreign exchange translation rates increased sales by 6.9% compared with the third quarter of the prior year.

Gross profit margin increased 180 basis points to 37.5%, reflecting productivity improvements, along with higher net pricing and volume. Input costs rose approximately 4%, reflecting higher costs for commodities such as potatoes, oils, glass and tinplate, and the impact of transaction currency costs.

SG&A increased 21.7% in the quarter, reflecting a 41% increase in marketing investments, a $30 million impact from foreign exchange translation rates, acquisitions, higher pension expenses and the timing of variable compensation accruals.

The Company’s 13.8% growth in operating income largely reflected organic sales growth, productivity improvements and the favorable impact from foreign exchange translation rates, partially offset by higher SG&A and commodity costs.

Other expenses were up $20 million due to prior year currency gains.

The effective tax rate for the third quarter of Fiscal 2010 was 27.2%, up 130 basis points from 25.9% a year ago.

EPS from continuing operations was $0.83, up 9.2% versus year ago. Including discontinued operations (discussed below), Heinz reported third-quarter net income of $229 million, or $0.72 per share versus $242 million, or $0.76 per share in the third quarter of Fiscal 2009.

In the third quarter of Fiscal 2010, the Company sold two businesses, whose operating results have been included in discontinued operations:

* Appetizers And, Inc., a frozen hors d’oeuvres business in the U.S. Foodservice segment, resulting in a $15 million pre-tax ($10 million after-tax) loss; and
* The private label frozen desserts business in the U.K., resulting in a $31 million pre-tax ($24 million after-tax) loss.

The divestiture of these businesses is not expected to have a material effect on the ongoing profitability of the Company.

Heinz increased innovation and marketing to further strengthen its brand equity and meet the quality, value and convenience needs of consumers worldwide. Highlights included:

* It has to be Heinz, a new integrated marketing campaign supporting the family of Heinz brand products in the U.K., helped drive robust third-quarter volume growth while further strengthening the number-one share positions of Heinz soup and beans. In January 2010, a record 57 million cans of Heinz soup were sold in the U.K.
* In the U.S., the Consumer Value Program, a marketing initiative that includes consumer coupons, promotions and increased advertising, helped drive retail volume growth. The campaign primarily focused on Heinz Ketchup in the third quarter and is now expanding to support Weight Watchers Smart Ones, Ore-Ida, Classico and T.G.I. Friday's.
* Heinz Ketchup held strong number-one shares in 7 of the world’s Top 10 ketchup markets, including the U.S.
* Ore-Ida, the number-one brand of frozen potatoes in the U.S., launched a new four-pound value package of its popular French fries and made plans to launch Ore-Ida Sweet Potato Fries.
* In India, Complan continued to expand its fast-growing line of nutritional beverages with new products for children’s health.
* In Indonesia, ABC introduced new varieties of chili sauce and Mr. Jussie, a healthy beverage for children.
* In China, Heinz prepared to launch its first infant formula in that key Emerging Market, where the Heinz brand of baby food has high awareness and trust among mothers.
* In Russia, Heinz achieved record share in ketchup of 29.2% and market leadership in baby cereal. Heinz is preparing to launch infant formula in Russia as well.
* In February 2010, Heinz announced Dip & Squeeze, a new dual-function foodservice package for Heinz Ketchup. This breakthrough allows consumers to peel back the label for easy dipping or tear off the tip to squeeze Heinz Ketchup on their favorite foods.
* Heinz also announced Simply Heinz, a new variety of Heinz Ketchup made with sugar instead of high fructose corn syrup to give U.S. consumers another great tasting dietary and lifestyle choice.

Third-Quarter Results from Continuing Operations, By Segment

North American Consumer Products

Sales increased 7.0% to $815 million. Volume increased 2.8%, led by U.S. Retail and partially offset by lower volume in Canada. Higher volume in the U.S. reflects new product introductions, increased investments in marketing and promotions, and the timing impact of price increases taken in the prior year. Net price grew 1.0% reflecting the carryover impact of price increases, partially offset by increased promotional spending. Favorable exchange translation rates increased sales 3.0%. Operating income grew 8.2% to $207 million.

Europe

Sales grew 12.1% to $878 million. Volume increased 3.0%, largely due to increased marketing and promotional activities in the U.K. Net price decreased 0.5%, as increased promotional activity was largely offset by the carryover impact of price increases. Favorable foreign exchange translation rates increased sales by 9.7%, while negative foreign exchange transaction rates virtually offset these benefits at operating income. Operating income increased 14.8% to $156 million.

Asia/Pacific

Sales increased 41.1% to $500 million. Volume increased 2.5%, as new products, increased marketing and higher consumer demand drove significant growth, particularly in Indonesia, China and India, while volume in Australia declined. Net price increased 0.3%. Acquisitions increased sales 18.5% due to the prior year acquisitions of Golden Circle and La Bonne Cuisine. Favorable exchange translation rates increased sales by 19.9%, largely due to strengthening in the Australian dollar and New Zealand dollar. Operating income increased 51.1% to $48 million.

U.S. Foodservice

Sales of the U.S. Foodservice segment decreased 3.0% to $355 million. Net price increased sales 4.3%, while volume decreased by 7.3%, reflecting softness in U.S. restaurant traffic, promotional timing and ongoing SKU eliminations. Operating income increased 19.3% to $42 million, and benefited from operational improvements in the business, lower commodity costs and a streamlined product portfolio.

Rest of World

Sales increased 17.1% to $133 million. Net price increased sales by 19.0%, largely due to Latin America pricing to mitigate the impact of raw material and labor inflation. Volume increased 1.6% as increases in the Middle East and South Africa more than offset declines in Latin America. Acquisitions increased sales 1.0% due to the acquisition of Papillon in South Africa in the fourth quarter of Fiscal 2009. Foreign exchange translation rates decreased sales 4.6%, largely due to the devaluation of the Venezuelan Bolivar Fuerte late in the third quarter of this year. Operating income increased 42.3% to $17 million.

Year-to-Date (Continuing Operations)

In the nine months ended January 27, 2010, sales increased $275 million, or 3.7%, to $7.77 billion, reflecting net price of 4.2%, offset by a net volume decline of 2.3%. Operating income increased 4.3% to $1.21 billion.

EPS from continuing operations was $2.27, down 3.4% versus a year ago. Including discontinued operations, total net income attributable to H.J. Heinz Company was $673 million, or $2.11 per diluted share, compared with $748 million, or $2.34 per diluted share a year ago. EPS movement for the year was unfavorably impacted by $0.33 from net currency movements.