Heinz reports drop in profits, but rise in sales

01/03/06 H.J.Heinz Company reported “strong operating results and significant progress” on its strategy for growth during the third quarter that ended January 25, 2006. Net income for the quarter, on a total-company GAAP basis, was $116.6 million, or $0.35 per diluted share, versus $152.4 million, or $0.43 per diluted share, last year.

In continuing operations, sales increased by 5.7% (9.4% on a constant currency basis) for the quarter, driven by an increase of 2.9% in volume/mix and an increase due to acquisitions, net of divestitures, of 6.6%. These increases were partially offset by an unfavorable foreign exchange impact of 3.7%. Operating Free Cash Flow for the quarter was $58 million, despite the impact of spending for special items. Excluding the impact of special items, Operating Free Cash Flow would have been up over 30% from the same period last year. EPS from continuing operations increased 5%, to $0.39 from $0.37 last year. EPS from continuing operations, excluding special items, decreased by $0.08 to $0.50 due to higher interest costs and a significantly higher tax rate during the quarter.

Overall, Heinz's third quarter sales increased 5.7% (9.4% on a constant currency basis). Volume increased 2.9%, driven primarily by good results in the North American Consumer Products segment, as well as the Australian and U.K. businesses. Every operating segment achieved year-on-year volume growth. These volume increases were partially offset by declines in the European Frozen Food and the Italian infant nutrition businesses. Net pricing was virtually flat, and foreign exchange translation rates decreased sales by 3.7%. Acquisitions, net of divestitures, increased sales by 6.6%, and consisted primarily of the acquisition of HP Foods, Nancy's Specialty Foods, Inc., Petrosoyuz, and Appetizers And, Inc.

Adjusted gross profit increased 1.7%, due primarily to the favorable impact of acquisitions and higher sales volume, partially offset by unfavorable exchange rates. Adjusted gross profit margin was 36.5%, a decline from 37.9% in the prior year, largely due to increased commodity costs, particularly in the U.S. and Indonesian businesses. Adjusted operating income grew 8.1%, as the adjusted gross profit increase combined with reduced General & Administrative expenses ("G&A") to offset increased fuel and transportation costs, particularly in the U.S. businesses. The increase in adjusted operating income was offset by increased net interest expense and a higher effective tax rate, resulting in the 13.8% decrease in EPS.