The Rising Influence of Rising Affluence

[DewDiligence]

HNZ Reports FY4Q12 Results and Issues FY2013 Guidance

[HNZ closed slightly down (0.6%) today as the combination of FY4Q12 results, a slightly lower FY2013 and 3-5-year outlook, and the increased dividend more or less canceled each other out. For HNZ, the story has been pretty much the same for several quarters: tepid results in the US and Europe combined with stunning growth in emerging markets. FY4Q12 sales in emerging markets grew 17% YoY in constant currencies; sales in China *doubled* YoY, partly as a result of the 2010 Foodstar acquisition (#msg-51552987).

HNZ’s non-GAAP EPS guidance for FY2013 (ending Apr 2013) is now $3.52-3.62 on a constant-currency basis, down from the prior guidance rage of $3.60-3.70; still, the new range represents a 5-8% increase vs FY2012. The new FY2013 guidance also calls for organic sales growth (i.e. constant-currency sales growth excluding acquisitions and divestitures) of >4%.

HNZ also issued a 3-5-year outlook that includes organic sales growth of 4-5%, constant-currency non-GAAP EPS growth of 6-9% (down from the prior range of 7-10%), and a doubling of sales in emerging markets to $5B in 2016, representing about 1/3 of HNZ’s 2016 worldwide sales. Of this $5B, at least $1B of sales is expected to come from *each* of China, Brazil, Indonesia, and Eastern Europe.

HNZ raised the dividend 14% to an annualized rate of $2.06; at the current share price, this represents a dividend yield of 3.9%. Please see #msg-75947589 for links to HNZ’s webcast slides.]

http://news.heinz.com/press-release/finance/heinz-fourth-quarter-eps-rose-174-081-special-charges-054-reported-and-sales-g

›Heinz Fourth-Quarter EPS Rose 17.4% to $0.81 before Special Charges ($0.54 Reported) and Sales Grew 5.6% Driven by Emerging Markets and Global Ketchup

Thursday, May 24, 2012 8:00 am EDT

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

Fiscal 2012 Fourth-Quarter Highlights

• Sales grew 5.6% to $3.05 billion

• Heinz delivered its 28th consecutive quarter of organic sales (volume plus price) growth (4.5%)

• Emerging Markets delivered 17.0% organic sales growth (30.7% reported)

• Global Ketchup posted 8.3% organic sales growth (6.8% reported)

• Top 15 Brands delivered organic sales growth of 4.8% (7.7% reported) led by Heinz®, Master®, ABC® and Complan® brands

• Operating income grew 6.9% to $414 million, excluding special charges ($301 million reported)

• Net income grew 16.8% to $261 million, excluding special charges. Reported net income was $175 million

Fiscal 2012 Full-Year Highlights

• Sales grew 8.8% to a record $11.6 billion, fueled by growth in Emerging Markets, Top 15 Brands and Global Ketchup

• Emerging Markets generated strong double-digit organic sales growth, up 16.4% (40.9% reported), and a record 21% of the Company’s total sales

• Global Ketchup delivered organic sales growth of 8.0% (9.7% reported)

• Top 15 Brands delivered 5.0% organic sales growth (12.3% reported)

• EPS grew 9.5% to $3.35, excluding special charges ($2.85 reported)

• Reported net income was $923 million; Net income before special charges was $1.09 billion

• The Company generated strong operating free cash flow (OFCF) of $1.08 billion. Excluding special charges, OFCF was $1.21 billion

Fiscal 2013 Outlook

• Heinz expects organic sales growth of at least 4%

• Heinz expects constant currency EPS growth of 5-8% on a continuing operations basis and excluding special items in FY12

• The Company anticipates more than $120 million in incremental business building investments

• Emerging Markets expected to approach 25% of Company’s total sales

• At recent average foreign exchange rates, expected EPS growth could be reduced by 2%

• The Company anticipates another strong performance in cash flow, targeting operating free cash flow of $1.1 billion

PITTSBURGH – H.J. Heinz Company (NYSE:HNZ) today reported strong fourth-quarter results, including 5.6% sales growth and 17.4% growth in earnings per share to $0.81 excluding special charges for productivity initiatives ($0.54 reported).

Fourth-quarter sales grew to $3.05 billion, led by double-digit growth in Emerging Markets, higher Global Ketchup sales and growth in our Top 15 Brands. Sales also benefited from two extra shipping days in the quarter, which ended April 29, 2012.

Heinz Chairman, President and CEO William R. Johnson said: “Heinz delivered strong fourth-quarter results led by our trio of growth engines – Emerging Markets, Global Ketchup and our Top 15 Brands. Excluding special charges, Heinz grew earnings per share by more than 17% and we delivered our 28th consecutive quarter of organic sales growth, supported by increased investments in marketing, productivity and Emerging Markets capabilities.”

Emerging Markets were the biggest growth driver in the fourth quarter with organic sales growth of 17.0% (30.7% reported). The acquisition of Quero in Brazil drove an additional 3.1% increase in total sales in the fourth quarter.

Global Ketchup delivered organic sales growth of 8.3% in the fourth quarter (6.8% reported) driven by higher sales in Latin America, North America, the U.K. and Russia.

The Company’s Top 15 Brands delivered organic sales growth of 4.8%, (7.7% reported). The organic growth was fueled by the Heinz® brand globally, Master® soy sauce in China, Complan® nutritional beverages in India and ABC® sauces and drinks in Indonesia.

Overall, the Company's global portfolio delivered organic sales growth of 4.5% (5.6% reported) in the quarter, reflecting a 3.0% increase in net pricing and 1.5% growth in volume. Acquisitions, net of divestitures, increased reported sales by 2.4%. Unfavorable foreign exchange translation rates decreased sales by 1.3%.

Heinz incurred charges in the fourth quarter for initiatives to improve global productivity. In the quarter, Heinz recorded pre-tax charges of $113 million or $0.27 per share related to these initiatives.

Gross profit grew 1.2%, excluding charges for productivity initiatives, largely due to higher pricing, productivity improvements and the acquisition of Quero®, partially offset by higher commodity costs. Gross profit margin, excluding charges, decreased 150 basis points to 34.8% as higher commodity costs and an unfavorable sales mix more than offset higher pricing and productivity improvements. Including charges, gross profit decreased 4.4% to $1 billion and gross profit margin decreased 340 basis points to 32.9%.

Marketing for the quarter increased 7.7% and 10 basis points as a percentage of sales. SG&A expense, excluding marketing, decreased 4.3% on a dollar basis to 17.1% of sales, before charges for productivity initiatives. Including the charges but excluding marketing, SG&A rose 5.6% to $576 million and was flat as a percentage of sales at 18.9%. This includes higher investment spending on Project Keystone, a global project to upgrade and harmonize systems and processes. Operating income grew 6.9%, excluding charges for productivity initiatives. Including the charges, Heinz reported operating income of $301 million.

The effective tax rate, excluding the impact of productivity initiatives in the fourth quarter, was 23.2% versus 29.3% a year ago.

Net income grew 16.8%, excluding charges for productivity initiatives. Including charges, Heinz reported net income of $175 million.

Heinz reported operating free cash flow of $608 million in the quarter.

FY12 Full-Year Results

Sales for the full year grew 8.8% to $11.6 billion, driven primarily by double-digit growth in Emerging Markets, which generated a record 21% of the Company’s total sales, as well as strong growth in the Company’s Top 15 Brands and in Global Ketchup. Sales also benefited from two extra shipping days during the year.

The accelerating growth in Emerging Markets reflected organic sales growth of 16.4% (40.9% reported) and the Fiscal 2011 acquisitions of Quero® in Brazil and Foodstar in China, which drove an additional 4.0% increase in total Company sales.

Global Ketchup delivered strong organic sales growth of 8.0% (9.7% reported) for the year, driven by strong performance in Latin America, North America, the U.K. and Russia.

The Company's Top 15 Brands produced organic sales growth of 5.0% (12.3% reported) for the year, driven by the Heinz®, Master®, Complan® and ABC® brands. Favorable foreign exchange increased sales by 1.8% while the decision to exit the Boston Market® license reduced sales by 0.5%.

Overall, the Company's global portfolio delivered organic sales growth of 3.5% for the year, reflecting a 3.8% increase in net pricing and a 0.3% decline in volume. Acquisitions, net of divestitures, increased reported sales by 3.5%. Favorable foreign exchange translation rates increased sales by 1.8%.

For the full year, Heinz incurred special charges for initiatives to improve global productivity of $224 million pre-tax or $0.50 of EPS and $122 million of cash flow, in line with Company expectations.

Gross profit grew 4.7%, excluding special charges for productivity initiatives, to $4.14 billion for the year. Pricing and productivity more than offset total inflation at gross profit. In line with food industry trends, gross profit margin declined 140 basis points to 35.5%, reflecting commodity cost inflation, unfavorable sales mix and the impact of recent acquisitions, partially offset by higher pricing and productivity improvements. Including charges for productivity initiatives, gross profit increased 1.2% to $4 billion and gross profit margin declined 260 basis points to 34.3%.

Heinz increased its marketing spending for the year by 9.4% to support growth and build brand equity. Heinz also invested almost $80 million in Project Keystone.

Operating income for the year grew 1.7%, excluding special charges for productivity initiatives, to $1.68 billion. Higher sales and effective cost management more than offset the impact of lower gross margin and higher marketing investment. Including the charges, Heinz reported full-year operating income of $1.45 billion.

Net income attributable to the H.J. Heinz Company grew 9.8%, excluding charges for productivity initiatives, to $1.09 billion, driven by higher sales and a lower effective tax rate. Including the charges, reported full-year net income was $923 million.

Earnings per share for the year grew 9.5%, excluding charges for productivity initiatives, to $3.35. EPS was favorably impacted by $0.06 from currency translation and translation hedges. Including special charges, Heinz reported diluted earnings per share of $2.85.

On a constant currency basis, full-year sales grew 7.0% and earnings per share increased 7.5%, excluding charges for productivity initiatives.

Heinz reported strong Return on Invested Capital (ROIC) of 19.2% excluding charges related to productivity initiatives. Heinz expects ROIC in FY13 to be 20.0%.

Heinz reported strong operating free cash flow of $1.08 billion, its third consecutive year exceeding $1 billion. Excluding special charges, OFCF was $1.21 billion.

Fiscal 2013 Outlook

Heinz expects organic sales growth of at least 4%. The Company also expects constant currency EPS growth of 5-8% ($3.52 to $3.62) from continuing operations, excluding special charges in FY12. Heinz also expects operating free cash flow of $1.1 billion. The Company also anticipates more than $120 million in incremental business building investments. Heinz expects the effective tax rate to be in line with Fiscal 2012.

Commenting on the outlook, Mr. Johnson said: “In Fiscal 2013, Heinz expects to deliver strong growth in sales and earnings per share, reflecting double-digit growth in Emerging Markets, strong investments in our brands and businesses, the benefits of prior year productivity initiatives and effective cost management.”

Over the next three to five years, Heinz is aiming for constant currency EPS growth of 6 to 9% and organic sales growth of 4 to 5% on average.

Heinz also announced today that it will raise the annualized common stock dividend by 14 cents to $2.06 per share, an increase of 7.3%, reflecting confidence in the Company’s strong performance and cash flow. (See separate press release).

FOURTH-QUARTER AND FULL-YEAR OPERATING RESULTS BY BUSINESS SEGMENT

North American Consumer Products

In the fourth quarter, reported sales decreased 2.2% to $843 million. Organic sales increased 0.4%. Net pricing increased 2.1% while volume declined 1.7%, primarily reflecting softness in Ore-Ida potatoes. Unfavorable foreign exchange translation rates decreased sales by 0.4%. Sales decreased 2.2% from the Company's divestiture of the Boston Market® license. Operating income decreased 5.0% to $192 million, reflecting lower sales, higher commodity costs and increased marketing, partially offset by a reduction in general and administrative expenses.

For the full year, sales decreased 0.7% to $3.24 billion. Organic sales increased 0.5%. Net pricing increased 2.8%. Volume declined 2.3%, impacted by reduced promotional activity and price increases. Favorable foreign exchange translation rates increased sales by 0.3%. Sales were reduced by 1.6% from the Company's divestiture of the Boston Market® license. Operating income decreased 2.5% to $812 million.

U.S. Foodservice

In the fourth quarter, both reported and organic sales grew 3.5% to $382 million. Net pricing increased 2.3%. Volume increased 1.2%, led by growth in branded ketchup and sauces. Operating income grew 38.4% to $52 million, reflecting higher sales and a streamlined cost structure.

For the full year, both reported and organic sales grew 0.4% to $1.42 billion. Pricing increased 2.6%. Volume decreased 2.2%, reflecting ongoing weakness in restaurant traffic and the impact of pricing. Operating income declined 5.5% to $166 million, due to higher commodity costs.

Europe

In the fourth quarter, reported sales grew 1.2% to $905 million. Organic sales increased 5.3%. Net pricing increased 3.7% and volume increased 1.6%, led by the U.K. and Russia. Unfavorable foreign exchange translation rates decreased sales by 4.1%. Operating income decreased 1.0% to $165 million, reflecting unfavorable foreign exchange and higher marketing expense, partially offset by lower general and administrative expenses.

For the full year, sales grew 6.3% to $3.44 billion. Organic sales increased 4.3%. Net pricing increased 3.7% and volume increased 0.6%. Favorable foreign exchange translation rates increased sales by 1.9%. Operating income grew 4.8% to $609 million.

Asia/Pacific

In the fourth quarter, reported sales grew 4.0% to $673 million, led by Emerging Markets. Organic sales increased 3.1% as net pricing increased 2.0% and volume increased 1.1%, led by China, Indonesia and Japan, partially offset by volume decreases in Australia and Long Fong. Favorable foreign exchange translation rates increased sales by 0.9%. Operating income increased by 5.3% to $51 million, fueled by Emerging Markets businesses.

For the full year, sales grew 10.7% to $2.57 billion. Organic sales increased 2.2%. Pricing increased 2.5% while volume decreased 0.3%, as soft volume in Australia more than offset strong growth in Japan, Indonesia, and China. The acquisition of Foodstar in China during the third quarter of Fiscal 2011 increased sales 3.1%. Favorable exchange translation rates increased sales by 5.4%. Operating income decreased 6.9% to $206 million primarily due to lower profit in Australia.

Rest of World

In the fourth quarter, reported sales grew 111.1% to $247 million. Organic sales increased 39.5%. Volume increased 27.7%, driven by improvement in Latin America and the Middle East. The acquisition of Quero® in Brazil at the end of Fiscal 2011 increased sales 75.5%. Higher pricing across Latin America increased sales by 11.8%. Foreign exchange translation rates decreased sales 3.9%. Operating income increased 33.5% to $22 million, resulting from stronger volume and pricing, and the Quero® acquisition.

For the full year, sales grew 108.3% to $979 million. Organic sales increased 33.4% as pricing increased 21.5% and volume increased 11.9%, primarily due to increases in Heinz® Ketchup and baby food in Latin America. The acquisition of Quero® in Brazil at the end of Fiscal 2011 increased sales 76.6%. Foreign exchange translation rates decreased sales 1.7%. Operating income increased 96.9% to $105 million.

2012 Investor and Analyst Meeting – Webcast

Heinz will host its 2012 Investor and Analyst Meeting today from 1 – 5 p.m. Eastern Time. The meeting will be hosted by William R. Johnson, Chairman, President and Chief Executive Officer. A Webcast of the meeting will be available to the general public in real-time and archived for playback on the Company Website, www.Heinz.com. The Fiscal Year 2012 presentation is now available on the Company Website and all 2012 Investor and Analyst Meeting presentations will be posted to the Company Website approximately one hour prior to the start of the meeting at 1 p.m.‹