Overseas Growth Helps to Boost Heinz Q1 Performance

In the fiscal quarter ended July 28, reported sales grew 1.6% to $2.48 billion as Heinz delivered 3.6% organic sales growth across its global portfolio. Operating income increased 9.9% to $406 million.

Sep 2 2010 --- H.J. Heinz Company has reported solid growth in first-quarter sales, operating income and earnings per share, driven by accelerating double-digit sales growth in Emerging Markets and strong growth in North American Consumer Products.

In the fiscal quarter ended July 28, reported sales grew 1.6% to $2.48 billion as Heinz delivered 3.6% organic sales growth across its global portfolio. Operating income increased 9.9% to $406 million. Earnings per share from continuing operations grew to $0.75 from $0.68 a year ago. Net income increased to $240 million from $213 million, or $0.67 per share, a year ago, which included a net loss of $2.2 million, or $0.01 per share from discontinued operations in Fiscal 2010. On a constant currency basis, sales grew 3.7%, operating income increased 12.6% and EPS rose 14.7%.

Heinz Chairman, President and CEO William R. Johnson said: “I am pleased with our strong first-quarter results which were led by continued momentum in Emerging Markets and good results in North American Consumer Products. Emerging Markets accounted for a record 18% of the Company’s total sales.”

Mr. Johnson added: “Globally, Heinz delivered strong organic sales growth in a difficult economic environment, including 8% growth in ketchup and almost 6% growth in our Top 15 brands. We continued to invest in innovation and marketing as the Company delivered our 21st consecutive quarter of organic sales growth.”

The sales growth in the Company’s Top 15 brands was led by the global Heinz brand, including Heinz Ketchup, Complan nutritional beverages in India, ABC brand products in Indonesia and Smart Ones in the U.S. Ketchup sales were driven by higher sales and volume in the U.S. and Russia, one of the world’s largest ketchup markets. Heinz consumer marketing investments in the quarter increased by almost 10% to drive growth and innovation. The Company still expects full-year Fiscal 2011 consumer marketing investments to be in line with Fiscal 2010.

Volume increased by 2.5%, propelled by volume growth of almost 12% in Emerging Markets and more than 5% in North American Consumer Products. Net pricing increased sales by 1.1%. Acquisitions increased sales by 0.1%. Foreign exchange translation rates reduced reported sales by 2.1%.

Gross profit increased 4.1% to $908 million and gross profit margin increased to 36.6% from 35.7%, a 90 basis point improvement, as higher volume, net pricing and productivity improvements were partially offset by foreign exchange translation rates and higher commodity costs.

The growth in operating income was driven by higher sales and gross margin as SG&A expenses were essentially flat in the quarter despite higher marketing expenses. Prior-year results included $16 million in up-front productivity costs. Net interest expense increased $8 million, to $63 million, reflecting a $20 million prior-year gain on a total rate of return swap that was partially offset by lower average interest rates. The effective tax rate for the quarter was 25.3% versus 28.5% last year, largely reflecting increased benefits from foreign tax planning and the benefit of a statutory tax rate reduction in the U.K., partially offset by higher repatriation costs.

Currency movements had a $0.03 unfavorable impact on EPS in the first quarter, after taking into account the net effect of current and prior-year currency translation contracts and foreign currency movements on translation. Currency transaction impacts were not material this quarter. For the quarter, 62% of the Company’s sales were generated outside the U.S.

Operating free cash flow increased 80% to $217 million, reflecting improved working capital, reduced pension funding, strong profit growth and disciplined capital management.

First-Quarter Marketing Highlights
• In Russia, Heinz achieved a record value share of 22.5% in Ketchup and Sauces.
• Heinz became a strategic supplier of ketchup and toppings to McDonald’s restaurants in much of Asia/Pacific, South Africa and India.
• In India, Heinz delivered volume growth of almost 30%, led by Complan and Glucon-D nutritional beverages and growth in Nycil powder.
• In Indonesia, Heinz successfully launched new cordials and Duo Fruit, a multi-flavored squash product.
• Heinz increased distribution of its newly-launched line of infant formulas in China.
• In New Zealand, the Company’s Wattie’s brand was voted the 2010 “Most Trusted Brand” in a Reader’s Digest poll of consumers.
• In the U.K., Heinz continued its successful “It Has to Be Heinz”™ campaign, and launched new varieties of its popular salad cream.
• In Canada, Heinz baby cereal won a Grand Prix award for best new product from the Canadian Council of Grocery Distributors.
• In the U.S., innovation and brand support through the Consumer Value Program drove higher volumes of Heinz Ketchup and Smart Ones products. Simply Heinz™, a new variety of Heinz Ketchup made with sugar, was named “Best Ketchup” in Self Magazine’s 2010 Healthy Food Awards.

Heinz reaffirmed its previously-announced outlook for Fiscal 2011. For the full year, the Company expects to deliver, on a constant currency basis:

• Sales growth of 3 to 4%,
• Operating income growth of 7 to 10%, and
• Growth of 7 to 10% in earnings per share.

Heinz also expects to generate operating free cash flow of more than $1 billion for the second consecutive year.

Mr. Johnson said: “Heinz is off to a good start in Fiscal 2011 and we remain confident about the Company’s business fundamentals, despite the difficult economic climate. While we anticipate that our full-year results will be impacted by foreign currency movements, we plan to continue executing our well-established strategy to grow our core portfolio, accelerate growth in Emerging Markets, strengthen and leverage global scale and make talent an advantage for Heinz.”