Heinz Reports Q2 Sales Growth of 8.3%, Led by Emerging Markets and Global Ketchup

Sales in the quarter ended October 26, 2011 grew to $2.83 billion, fueled by Emerging Markets, which delivered 15.8% organic sales growth (50.3% reported).

Nov 21 2011 --- H.J. Heinz Company has reported second-quarter sales growth of 8.3% and earnings per share of $0.81 before special items ($0.73 reported), led by double-digit organic sales growth and acquisitions in Emerging Markets and strong growth in Global Ketchup. Sales were also driven by organic growth in the Company’s Top 15 brands.

“Given our growing strength in Emerging Markets and our continuing focus on productivity, we believe Heinz is well positioned to continue driving solid organic growth in this challenging economic environment.” Heinz Chairman, President and CEO William R. Johnson said: “Led by our trio of growth engines – Emerging Markets, Global Ketchup and our Top 15 brands – reported sales grew more than 8 percent and Heinz delivered organic sales growth for the 26th consecutive quarter despite the challenging economic environment in Developed Markets, especially in Australia and U.S. Foodservice. Overall, we saw a combination of continued strength in Emerging Markets, the U.K. and much of Europe, and mixed results in other developed markets, where consumer confidence fell to its lowest level in 30 years.”

Sales in the quarter ended October 26, 2011 grew to $2.83 billion, fueled by Emerging Markets, which delivered 15.8% organic sales growth (50.3% reported). The acquisitions of the Quero brand in Brazil and the Foodstar business in China increased total Company sales by 5.0% as they continued to perform well.

Globally, ketchup delivered 6.5% organic sales growth (8.9% reported), propelled by pricing across the Company’s markets as well as higher volume in Europe, Latin America and Asia.

The Company’s Top 15 brands delivered 3.0% organic sales growth (12.3% reported), led by Heinz brand products, Complan nutritional beverages in India, ABC soy and chili sauces in Indonesia, and T.G.I. Friday’s frozen meals in the U.S.

Overall, the Company's organic sales growth of 1.5% reflected a 4.4% increase in net pricing, partially offset by a 2.9% volume decline. Acquisitions, net of divestitures, increased reported sales by 4.4%. Favorable foreign exchange translation rates increased sales by 2.4%.

Excluding special charges, gross profit grew 3.2% to $997 million largely due to higher pricing, acquisitions and the favorable impact from foreign exchange, partially offset by lower volume and higher commodity costs. Gross profit margin excluding special items decreased 180 basis points to 35.2%, half of which was due to weak performance in Australia and U.S. Foodservice. Market inflation on the Company’s commodities was approximately 10% for the quarter. This double-digit inflation was driven by sweeteners, resin, beans and dairy products. Reported gross profit grew 0.4% to $970 million and reported gross profit margin declined 270 basis points to 34.3%.

Excluding special charges, SG&A increased 9.6% to $602 million and increased as a percentage of sales to 21.3%, reflecting increased investments in the business. The higher SG&A primarily reflected the impact of acquisitions, a 9.3% increase in marketing, investments in Emerging Market businesses and incremental investments in Project Keystone -- the Company’s ongoing initiative to harmonize processes and systems on a global scale. Reported SG&A increased 11.4% to $612 million and increased as a percentage of sales to 21.6%.

Excluding special charges, operating income declined 5.2% to $395 million. Reported operating income decreased 14.2% to $358 million.

The effective tax rate for the second quarter was 19.6% excluding special charges (18.0% reported) versus 26.7% a year ago. The lower effective tax rate was primarily due to effective foreign tax planning and the beneficial resolution of a foreign tax case.

Excluding special charges, net income grew 4.4% to $263 million. Including special charges this year, Heinz’s reported net income was $237 million, versus $251 million last year. Earnings per share excluding special charges grew 3.8% to $0.81 from $0.78 a year ago. Higher sales, lower taxes and favorable foreign exchange rates contributed to the $0.03 improvement in EPS. Reported EPS was $0.73 versus $0.78 a year ago. Heinz generated $131 million of operating free cash flow in the quarter.

As the Company announced on May 26, 2011, Heinz is incurring special charges in Fiscal 2012 for initiatives to improve global productivity and manufacturing efficiency. At that time, the cost impact of these projects was estimated to be $160 million at operating income, $130 million of cash flow and $0.35 of EPS. In the second quarter, Heinz recorded pre-tax charges of $37 million, $18 million of cash flow and $0.08 per share related to these initiatives. The Company believes it is on track with these projects in terms of timing, cost and benefits.

In order to further address the difficult environment in which the Company is operating, additional initiatives were approved by the Heinz Board of Directors in November. As a result, the Company expects to close another three factories worldwide. In the aggregate, these projects are expected to increase total special charges for the year by $55 million pre-tax, $20 million of cash flow and $0.15 per share. Certain projects included in the plan are subject to consultation and any necessary agreements being reached with appropriate employee representative bodies, trade unions and works councils as required by law.

Mr. Johnson said: “Developed Markets are experiencing low consumer confidence, high unemployment and economic uncertainty. As a result, Heinz is launching a number of innovative new products in the third quarter that have been tailored specifically to meet the needs of U.S. consumers with tight grocery budgets.”

In the U.S., the new products will feature compelling price points ranging from $0.99 to $1.99, including:

•  A 10-ounce variety of Heinz Ketchup in innovative stand-up pouch packaging with a spout at a suggested retail price of $0.99;
•  A 9-ounce retail version of the Heinz Yellow Mustard found in restaurants, at a suggested retail price of $0.99;
•  New sizes of Heinz Worcestershire sauce and Heinz 57 sauce priced around $1;
•  The U.S. debut of Heinz Home Style Beans in varieties priced slightly higher than $1 and
•  A new 1-pound version of Ore-Ida French fries, ideal for a family of four, at a suggested price of $1.99.

In Europe, Heinz will launch a number of products priced around 1 Euro, including entry-priced varieties of Plasmon baby food, the leading baby food brand in Italy. Heinz is also responding to consumers’ desire to economize on a price-per-ounce basis by introducing Extra Free packs of Heinz beans and soup in the U.K. as a way to reward loyal consumers and compete on value, and a 1 ½-liter version of Heinz Ketchup across Continental Europe.

Heinz is on track for its previously announced constant currency EPS outlook of $3.24 to $3.32, excluding special charges for productivity initiatives. Heinz continues to expect constant currency sales growth of 7 to 8% and EPS growth of 6 to 8% for Fiscal Year 2012, excluding special charges, but including the incremental investment in Keystone.

Heinz also expects strong operating free cash flow of approximately $1.15 billion for Fiscal 2012, before special charges. On a reported basis, operating free cash flow is expected to be around $1 billion.

For the full fiscal year, Heinz expects a global effective tax rate in the mid 20’s.

“Given our growing strength in Emerging Markets and our continuing focus on productivity, we believe Heinz is well positioned to continue driving solid organic growth in this challenging economic environment,” Mr. Johnson concluded.