Heinz Reports Solid First-Quarter Results with Sales Growth of 14.9%

Overall, the Company’s global portfolio delivered organic sales growth of 3.1% despite the difficult economic environment in Developed Markets. The organic growth reflected higher net pricing (+3.8%), primarily in the U.S., U.K. and Latin America, in response to sharply rising commodity costs.

Aug 24 2011 --- H.J. Heinz Company reported first-quarter sales growth of 14.9%, fueled by dynamic growth in Emerging Markets and higher global sales of ketchup and the Company’s Top 15 brands. Excluding special charges for productivity initiatives, Heinz also reported 4% growth in earnings per share and a 5.9% increase in net income.

Sales in the quarter ended July 27, 2011 rose to $2.85 billion, led by 13% organic sales growth in Emerging Markets (45.2% reported) and the acquisitions of the Quero brand in Brazil and the Foodstar business in China, which increased total Company sales by 4.6%. Globally, ketchup delivered 8.3% organic sales growth (14.6% reported) as volume increased in Latin America, Europe and China. The Company’s Top 15 brands (excluding the Quero and Master brands) delivered strong organic growth of 6.2%, led by Heinz branded products globally, as well as higher sales of T.G.I. Friday’s frozen meals and Classico pasta sauces in North America, Complan nutritional beverages in India and ABC brand sauces in Indonesia.

Overall, the Company’s global portfolio delivered organic sales growth of 3.1% despite the difficult economic environment in Developed Markets. The organic growth reflected higher net pricing (+3.8%), primarily in the U.S., U.K. and Latin America, in response to sharply rising commodity costs. Volume was down 0.7% as stronger volume in Emerging Markets, the U.K., Continental Europe, Canada and Japan was more than offset by softer volume in Australia and the U.S. The Company’s top-line growth also reflected favorable foreign exchange rates (+7.2%).

Heinz Chairman, President and CEO William R. Johnson said: “Emerging Markets generated a record 23% of our sales in the first quarter, up from 18% a year ago. Our strategy to accelerate growth in Emerging Markets organically and through acquisitions in countries with fast-growing populations helped Heinz deliver strong top-line growth and solid operating results despite the economic downturn in Developed Markets. Heinz also drove strong growth in global ketchup and our Top 15 brands by focusing on value-added consumer innovation and new product development.”

As the Company announced on May 26, 2011, Heinz expects to incur special charges of at least $160 million pre-tax income – or $0.35 per share – in Fiscal 2012 for one-time initiatives to drive global productivity and manufacturing efficiency. Heinz also anticipates investing at least $130 million of cash this year in these productivity initiatives.

In the first quarter of Fiscal 2012, Heinz recorded initial charges of $41 million pre-tax, or $0.09 per share, for costs related to exiting four previously announced factories and other productivity initiatives. These special charges were recorded in the non-operating segment.

Excluding the productivity charges, gross profit increased to $1.02 billion ($985 million reported). The increase reflected solid organic sales growth, the acquisitions of Foodstar in China in November 2010 and the Quero brand in Brazil in April 2011, and the favorable impact from foreign exchange. Excluding special charges, gross profit margin decreased 90 basis points to 35.7% (34.6% reported), reflecting significantly higher commodity costs, which were partially offset by higher pricing and productivity improvements. Foreign exchange translation and the acquisitions reduced gross margin by 20 bps and 40 bps respectively.

During the quarter, the Company continued to invest strongly in the businesses. Excluding the productivity charges, SG&A expenses as a percentage of the Company’s sales increased to 21.3% (21.6% reported) from 20.2%. This reflects a 15% increase in marketing, investments in Emerging Markets, higher fuel costs and increased spending for Project Keystone, the Company’s global program to harmonize and standardize systems and processes under a common SAP technology platform. Excluding special items, operating income increased 1.1% to $410 million, while reported operating income decreased 8.9% to $370 million. Excluding special charges, the effective tax rate for the first quarter was 24% (23.2% reported) versus 25.3% last year, primarily reflecting a corporate tax rate reduction in the U.K.

Excluding special items, first-quarter net income grew to $255 million. Including special items, reported net income was $226 million versus $240 million a year ago.

Excluding special charges, first-quarter earnings per share grew to $0.78. Currency translation and translation hedges had a $0.05 favorable impact on EPS. EPS was diluted by a 1% increase in shares outstanding. Including the special items, Heinz reported first-quarter diluted earnings per share was $0.70 versus $0.75 a year ago.

Heinz generated $97 million of operating free cash flow in the quarter.

Operating Results By Business Segment

North American Consumer Products

Sales of the North American Consumer Products segment grew 1.7% to $775 million. Net pricing rose 3.1%, reflecting increases across many brands and reduced trade promotions. Volume declined 3.1%, reflecting the Company’s decision to exit the Boston Market product line in the quarter and declines in Heinz Ketchup, Ore-Ida potatoes and Weight Watchers Smart Ones single-serve meals (all due to the impact of promotional timing and price increases). Classico pasta sauces reported higher volume and the launches of T.G.I. Friday’s single serve meals and Weight Watchers Smart Ones bagged meals posted higher volume. Favorable Canadian exchange translation rates increased sales 1.6%. Operating income was unchanged from last year at $191 million.

Europe

Heinz Europe sales grew 17.5% to $838 million, with organic sales growth of 4.9%. Volume increased 2.2%, led by Heinz soup and Weight Watchers from Heinz frozen meals in the U.K., as well as increases in ketchup across Europe and market share gains by Orlando™ tomato-based sauces in Spain. Net pricing increased 2.7%, driven by price increases across Europe and reduced promotional activity, particularly in the U.K. Favorable foreign exchange translation rates increased sales by 12.6%. Operating income increased 19.5% to $137 million, reflecting constant currency growth of 7%. Higher pricing was partially offset by increased marketing investments, higher commodity costs and increased G&A due to investments in Project Keystone.

Asia/Pacific

Heinz Asia/Pacific sales grew 20.2% to $671 million. Constant currency sales in Emerging Markets increased by 21%, while Developed Market sales decreased by 3% reflecting the impact of soft sales in Australia. Favorable exchange translation rates increased sales by 13.1%. The acquisition of Foodstar in China in the third quarter of Fiscal 2011 increased sales in the segment by 6% as sales of its Master brand soy sauces were strong. Pricing increased 1.7% as negative pricing in Australia partially offset gains in other markets. Volume decreased 0.7%, reflecting soft volume in Australia, which has been impacted by a challenging retail and competitive environment. Complan nutritional beverages in India, Ketchup and baby food in China, frozen potatoes and sauces in Japan and ABC products in Indonesia all delivered higher volume. Operating income declined 14.6% to $61 million, due to poor operating results in Australia.

U.S. Foodservice

Sales of the U.S. Foodservice segment declined 1.1% to $325 million. Pricing increased sales 2.3% while volume decreased by 3.4%, reflecting declining restaurant traffic. Operating income decreased 20.1% to $32 million primarily due to sharply higher commodity costs, a lag of price increases in national accounts and rising fuel costs for distribution.

Rest of World

Sales for Rest of World more than doubled to $241 million. The acquisition of Quero, a leading brand of tomato-based sauces, ketchup and vegetables in Brazil, increased sales 68.1%. Higher pricing increased sales by 27.9%, largely due to increases in Latin America taken to mitigate inflation. Volume increased 4.4%, propelled mainly by ketchup and baby food in Latin America. Foreign exchange translation rates increased sales 2.5%. Operating income more than doubled to $32 million, resulting from higher pricing and the addition of Quero.