The Rising Influence of Rising Affluence

[DewDiligence]

HNZ Reports FY1Q12 Results

[All told, this was an ok quarter, but nothing to rave about. FY1Q12 GAAP and non-GAAP EPS were 0.70 and 0.78, respectively. (The latter figure, which slightly exceeded analysts’ consensus, excludes $28M of after-tax restructuring costs.) HNZ reiterated its FY2012 (ending 4/30/12) non-GAAP EPS guidance of $3.24-3.32; at the midpoint of this range, the current share price represents a P/E of about 15x. (HNZ previously issued FY2013 non-GAAP EPS guidance of $3.60-3.70, which was not changed today.)

FY1Q12 sales were +15% YoY, of which +7% came from the weak dollar, +5% from acquisitions, +4% from pricing/mix, and -1% from volume. Blemishes in the quarterly results were a 1% compression of the gross margin due to higher input costs (which is affecting all food companies), a 3% decline in US volume, party due to a massive $1 Wal-Mart promotion for a 40-oz bottle of ketchup in the prior-year period and lower US restaurant traffic particularly during July (when US consumer confidence fell significantly).

On the positive side, FY1Q12 YoY sales in emerging markets were +45% in dollars, +40% in local currencies, and +13% “organically” (in local currencies excluding acquisitions). Emerging markets comprised 23% of HNZ’s total sales in the quarter, of which 4% came from the recent acquisitions of Foodstar in China (#msg-51552987) and Quero in Brazil (#msg-60572753). In short, HNZ continues to be a strong beneficiary of The Global Demographic tailwind, which is why I consider the stock a core holding in the consumer sector (#msg-66381289).

HNZ shares are down about 3% today on an up day from the broad market; this is partly due to the lackluster quarter and (IMO) partly due to a “true up” effect following HNZ’s outperformance relative to the broad market during the recent market downturn. CC slides are at
http://www.heinz.com/data/pdf/Heinz_Q1-FY12_with_Appendix.pdf .]

http://finance.yahoo.com/news/Heinz-Reports-Solid-bw-1603246527.html?x=0&.v=1

›Tuesday August 23, 2011, 7:00 am EDT

• 14.9% revenue growth, with 3.1% organic sales growth (volume plus price)
• 25th consecutive quarter of organic sales growth
• Emerging Markets delivered 45% sales growth, driven largely by acquisitions and 13% organic sales growth
• Emerging Markets set a record at 23% of total Company sales
• Sales of the Top 15 brands delivered strong organic growth of 6.2% (excluding the Quero and Master brands)
• Global ketchup sales increased 14.6%, with organic sales growth of 8.3%
• Marketing investments grew 15%
• Company recorded special charges of 9 cents per share for productivity initiatives
• Excluding special charges for productivity initiatives, net income was $255 million; including the special charges, Heinz reported net income of $226 million
• Excluding special charges, EPS rose to $0.78; including the special charges, Heinz reported EPS of $0.70
• On a constant currency basis, sales rose 7.7% with ex-items EPS of $0.73
• Heinz reaffirms Fiscal 2012 constant currency EPS outlook of $3.24 to $3.32, excluding the impact of one-time productivity initiatives

Tuesday August 23, 2011, 7:00 am EDT

PITTSBURGH--(BUSINESS WIRE)-- H.J. Heinz Company (NYSE:HNZ) today 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.

Fiscal 2012 Outlook

Mr. Johnson said: “We are looking to build on our solid first-quarter performance and believe we are on track to deliver our full-year constant currency EPS outlook of $3.24 to $3.32, excluding the impact of one-time productivity initiatives.”

Heinz continues to expect constant currency sales growth of 7 to 8% and EPS growth of 6 to 8% for the full year in Fiscal 2012, including higher costs for Project Keystone, while excluding the special charges for productivity initiatives.

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 exceed $1 billion.

Heinz expects second-quarter EPS [ending 10/31/11] to be in-line with, or slightly higher than prior year.

First-Quarter Marketing Highlights

• In the U.S., Heinz launched T.G.I. Friday’s® single-serve meals in bags and trays, Weight Watchers® Smart Ones® bagged dinners, and Heinz® Ketchup in PlantBottle™ packaging, a more sustainable package using technology from The Coca-Cola Company. Up to 30% of the bottle material is made from plants.
• In the U.K., Heinz introduced Squeeze & Stir soups, offering consumers convenient instant soups with no artificial colors, flavors or preservatives. The Company also introduced microwaveable Heinz® Pasta Pouches.
• In Europe, Heinz® Ketchup achieved record market share in Germany (the third largest Ketchup market in Europe). Heinz also introduced a new 1.5kg family size Ketchup across Europe to drive consumption.
• In China, Heinz launched new baby food pouches and Heinz® baby cereal achieved a record share in this growing market. Foodstar’s Master® brand also introduced new dark and light soy sauces, and its first oyster sauce.

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®.

MEETING WITH SECURITIES ANALYSTS – INTERNET BROADCASTS

Heinz will host an investor and analyst call today at 8:30 a.m. (Eastern Time). The call will be Webcast live on www.heinz.com and will be archived for playback. Participants (institutional investors and analysts) can call 1-877-703-6103 in the U.S. and Canada and 1-857-244-7302 internationally. A listen-only broadcast for media is available on 1-866-713-8565 in the U.S. and Canada and 1-617-597-5324 for international attendees. Corresponding slides will be available for this call on www.heinz.com. The conference call will be hosted by Art Winkleblack, Executive Vice President and Chief Financial Officer.‹