Heinz Profits Up 11% in Q3

Excluding the impact of foreign exchange, sales grew 3.9% with organic sales growth of approximately 2%, driven by ketchup, infant nutrition and soup in the UK. Overall third-quarter sales of $2.41 billion declined 7.5% from the prior year due to the impact of foreign exchange.

26/02/09 H. J. Heinz Company has announced that third-quarter earnings per share rose 12% to $0.76. The strong EPS growth reflected increased pricing, the Company’s strategic decision to hedge translation exposures on key currencies, and higher organic sales of brands such as Heinz Ketchup and soup, and Classico pasta sauces. Net income grew 11% to $242 million, boosted by favorable mark-to-market gains, as well as a lower effective tax rate of 26%.

Heinz reported a 25% increase in operating free cash flow to $233 million in the third quarter, reflecting effective working capital management and tight control over capital spending.

Excluding the impact of foreign exchange, sales grew 3.9% with organic sales growth of approximately 2%, driven by ketchup, infant nutrition and soup in the UK. Overall third-quarter sales of $2.41 billion declined 7.5% from the prior year due to the impact of foreign exchange. Lower volume for the quarter reflected the timing impact of overlapping price increases, a weak economic environment and the Company’s strategic decision not to match deep discounts in certain categories.

Heinz Chairman, President and CEO William R. Johnson said, “Heinz delivered solid third-quarter net income and strong cash flow in a challenging economic climate.”

In the U.S., the successful launch of Ore-Ida Steam n’ Mash potatoes helped offset some of the unfavorable volume impact related to the timing of price increases. Classico pasta sauce organic sales gained a solid 9%, and globally, Heinz branded products grew organically by 8%, aided by higher retail ketchup volume.

Overall, net pricing in the quarter improved 8%, and acquisitions net of divestitures increased sales by 2%. Sales were offset by a 6% decline in volume and an 11% negative impact of foreign exchange translation rates.

Organic sales in Europe grew 5% and 9% in Emerging Markets as both segments benefited from cost-justified pricing actions. Organic sales declined in the U.S. Consumer Products, U.S. Foodservice and Asia/Pacific segments largely reflecting the timing impact of overlapping price increases, the recessionary environment, and competitive promotional pricing in a number of categories.

Third-quarter operating income of $382 million was down 6% from $406 million in the prior quarter due to currency. Excluding the unfavorable impact from foreign exchange translation rates and UK transaction rates, operating income would have increased almost 9%.

For the third quarter, market prices for the Heinz commodity basket were up 11% from a year ago, led by packaging, potatoes, and tomatoes. Gross margin declined 40 basis points, as commodity inflation, including the impact of the Euro/Pound transaction cross rate, was only partially offset by net price gains, procurement savings and other productivity initiatives.

Net profit before tax included an incremental $17 million mark-to-market gain resulting from translation hedges on key currencies for the remainder of FY2009. In addition, net profit before tax was aided by $14 million in mark-to-market gains on a total rate of return swap, which was entered into in conjunction with the remarketing of Company debt securities on December 1, 2008, reducing the overall cost to the Company.

The tax rate for the third quarter was 26%, down from 31.6% in the third quarter last year. The lower rate reflected lower repatriation costs, increased foreign tax planning and a deferred tax charge in the prior year resulting from an Italian tax law change. As a result, we now expect a current year annual effective tax rate of approximately 29%.

Heinz has reaffirmed its FY2009 guidance for EPS and organic sales. The Company anticipates EPS in the target range of $2.87 to $2.91 for FY2009, with full-year organic sales growth of around 6%.

“Our business remains fundamentally sound with strong cash flow and a balanced portfolio of leading brands that deliver good value to consumers,” Mr. Johnson said.