Heinz Reports 5.8% Organic Sales Growth, and a 22.5% Increase in EPS to $0.87 in Second Quarter

Heinz reported second-quarter revenue of $2.61 billion, a 3.5% increase, led by higher sales of North American Consumer Products. Net income grew 21.9% to $277 million.

21/11/08 H. J. Heinz Company announced strong second-quarter earnings of $0.87 per share, a 22.5% increase from a year ago, reflecting higher sales and the benefit of the Company’s strategic decision to hedge translation exposures on key currency exchange rates for the quarter and for the remainder of the Fiscal Year. Heinz benefited from 5.8% organic sales growth, led by the Company’s Top 15 brands, which posted organic sales growth of 8.5%. Heinz reported second-quarter revenue of $2.61 billion, a 3.5% increase, led by higher sales of North American Consumer Products. Net income grew 21.9% to $277 million.

Heinz Chairman, President, and CEO, William R. Johnson said, “I am pleased with the Company’s second-quarter results particularly given the difficult economic environment. The Company drove strong organic sales growth with many of our leading brands pricing to mitigate substantially higher commodity costs.”

*Reconciliation of non-GAAP sales and cash flow numbers are set forth in the attached financial tables. Organic sales is defined as volume plus price or total sales growth excluding the impact of foreign exchange and acquisitions and divestitures.

All segments generated year-over-year organic sales growth for the quarter, except U.S. Foodservice. The organic growth was led by a 34% increase in the Rest of World segment, 11% growth in North American Consumer Products, 4% growth in Europe and a 2% organic increase in Asia/Pacific despite the timing impact of the Ramadan holiday. Emerging markets posted organic sales growth of 11.5%. Overall, net pricing in the quarter, which ended on October 29, improved by 7.1%, and acquisitions net of divestitures increased sales by 1%. Sales were partially offset by a 1.3% decline in volume and a 3.3% negative impact from changes in foreign exchange rates.

For the quarter, market prices for the Heinz commodity basket increased almost 15%, led by increased costs for packaging, potatoes, tomatoes, edible oils and meats. Commodity inflation and unfavorable foreign exchange rates, including the impact of the Euro/Pound cross rate on European product costs, were only partially offset by net price gains, procurement savings and other productivity initiatives, resulting in a gross margin decline of 170 basis points. Due to effective forward purchasing, the net impact of commodity cost increases was limited to 10%. While some commodity prices have begun to decline since crude oil hit its all-time high closing price of $146 on July 11, 2008, there is a time lag in recognizing potential cost reductions due to the mix of commodities, dynamics in the commodity supply market, duration of forward supply contracts and movement through the Heinz value chain.

Net profit before tax increased 20.6% reflecting lower net interest costs and a $92 million pre-tax currency benefit from the Company’s decision to establish translation hedges on key currencies. The currency gains resulted primarily from forward contracts that were put in place to help mitigate the unfavorable impact of translation associated with key foreign currencies for all of FY2009. $23 million of the currency gains relate to contracts that covered second-quarter earnings, and $69 million relates to the balance of FY2009.

SG&A increased by 5% in the quarter, largely reflecting higher fuel costs and strategic investments in global task forces and R&D. Heinz reported operating income for the quarter of $386 million versus $421 million in the year-earlier period. The decline reflects the recent dramatic change in foreign currency translation rates, the Euro/Pound cross rate impact on cost of goods sold in the UK, investments in global task forces, and the continuation of high commodity costs.

The tax rate for the quarter was 29.0% versus 29.8% in Q2 last year reflecting tax planning initiatives and one-time settlement benefits. Net income increased 21.9% and operating free cash flow (cash flow from operations less capital expenditures net of proceeds from disposal of PP&E), was $145 million, up 9%.

Heinz reaffirms its FY2009 guidance for organic sales and for EPS. The Company anticipates that it will deliver full-year organic sales growth of at least 6% and EPS in the target range of $2.87 to $2.91 for the Fiscal Year, which ends April 29, 2009.

“Our first-half results demonstrate that the Company’s growth strategy is working. Heinz will accelerate its focus on boosting productivity and margins in light of the current economic climate. We will also shift investments in marketing and R&D toward value-oriented innovation, which is more important than ever to consumers. As we look beyond FY2009, we remain confident in our business fundamentals, but in light of the volatile economic conditions, we will closely watch currency and commodity movements before we advise investors of our financial outlook for FY2010,” Johnson said.