Fiscal 2011 Third-Quarter Highlights:
- Reported sales grew 1.5% to $2.72 billion, organic sales up 1.7%, constant currency sales rose 2.9%
- Emerging Markets delivered 14.1% organic sales growth (14.6% reported) and 16% of the Company’s total sales
- Top 15 brands achieved 3.8% organic sales growth (2.1% reported)
- North American Consumer Products reported 3% sales growth on higher volume
- Gross profit margin improved by 30 basis points
- Operating Income increased 0.4% to $438 million
- Total Company net income grew 19.8% to $274 million
- Net income from continuing operations rose 3.7%
- Earnings per share from continuing operations grew 1.2%
- Operating free cash flow of $438 million, in line with very strong third quarter last year
- On a constant currency, continuing operations basis, operating income grew 2.1% and EPS 3.6%
H.J. Heinz Company (NYSE:HNZ) announced that it has agreed to acquire an 80% stake in Coniexpress S.A. Industrias Alimenticias, a leading Brazilian manufacturer of the Quero brand of tomato-based sauces, tomato paste, ketchup, condiments and vegetables. The acquisition of the Quero business, which has annual sales of approximately $325 million, accelerates Heinz’s growth in Latin America and gives the Company its first major business in Brazil, the world’s fifth most populated nation.
Heinz also reported strong third-quarter results with growth of 1.5% in sales, an increase of 20% in total Company net income, and higher earnings per share of $0.84. Heinz delivered organic sales growth of more than 14% in Emerging Markets, led by China, India, Indonesia and Russia, as well as organic growth of 3.8% in its Top 15 brands and higher sales and volume in North American Consumer Products.
“The Quero brand is a natural fit with the global capabilities of Heinz and gives us a scalable growth platform in Brazil, a key Emerging Market with nearly 200 million consumers and a growing economy,” said Heinz Chairman, President and CEO William R. Johnson. “This transaction is another significant step in our Emerging Markets strategy. With Quero, Heinz will be well positioned in the key Emerging Markets of Brazil, Russia, India, and China as well as Indonesia. We expect the Quero business to approximately double Heinz’s sales in Latin America in the first full year.”
The Quero brand holds number one or number two positions in numerous tomato-based categories in Brazil and the leading position in vegetables. The acquisition comes with a modern factory that is centrally located in Nerópolis and a new, fully automated distribution center. The Quero business has nearly 1,800 employees. Terms of the transaction were not disclosed. Heinz expects to close the transaction in the next few months.
Mr. Johnson said: “Quero will benefit from the same ‘buy-and-build’ strategy that has fueled our success in other Emerging Markets. We intend to drive growth in the Quero product line through increased innovation and marketing, by applying our proven capabilities with the modern trade and by leveraging our technical expertise in tomato products, ketchup, sauces and vegetables. The business provides an excellent platform from which to expand sales and distribution of Heinz-branded products across Brazil.”
Quero is already a leader in small, independent stores and shops throughout the country. Heinz expects to build on that position by leveraging its experience in larger supermarkets and commercial outlets.
Mr. Johnson said: “Brazil has been on our priority list for some time because it generates about 45% of Latin America’s Gross Domestic Product and is one of the fastest growing economies in the world. It is a market with attractive economic growth, a large number of middle-class consumers and strong upside potential.”
He said Heinz now expects Emerging Markets to generate more than 20% of its total sales in Fiscal 2012, which begins on April 28. This reflects continuing strong organic sales growth and the acquisitions of the Quero business, and Foodstar, a leading soy sauce manufacturer in China that Heinz purchased in November to accelerate growth in the world’s second-largest economy.
Heinz expects the Quero acquisition will be modestly dilutive to earnings in Fiscal 2012 as the Company invests in the business to drive growth, but accretive to earnings starting in Fiscal 2013.
Heinz was advised in this transaction by J.P. Morgan Securities, LLC.
Fiscal 2011 Third-Quarter Results
In the quarter ended January 26, Heinz reported sales of $2.72 billion and achieved its twenty-third consecutive quarter of organic sales growth. Sales reflected volume growth of 0.5%, a 1.2% benefit from the acquisition of Foodstar in China and net price increases of 1.2%. Foreign exchange translation rates reduced sales by 1.4%.
Operating income increased 0.4% to $438 million. Total Company net income grew 19.8% to $274 million from $229 million in the year-earlier quarter. Earnings per share from continuing operations increased 1.2% to 84 cents per share, reflecting higher sales, volume and mix, improved margins and a more favorable effective tax rate.
On a constant currency, continuing operations basis, sales rose 2.9%, operating income 2.1% and EPS 3.6%. These increases were achieved while overlapping the highest profit quarter of the prior year. Currency movements had a $0.02 unfavorable impact on EPS in the third quarter, as 63% of the Company’s sales were generated outside the U.S.
Mr. Johnson said: “Heinz delivered strong third-quarter results, reflecting our strategic focus on accelerating growth in Emerging Markets and driving innovation and marketing behind the leading brands in our portfolio. Overall, Heinz continues to demonstrate that we are one of the most consistent and best-performing companies in the packaged foods industry, with strong businesses and brands, and a winning strategy in a changing world.”
Emerging Markets were the most dynamic growth driver for Heinz, delivering volume growth of 7.2% as the Company reported higher sales and volume of Complan® and Glucon-D® nutritional beverages in India, ABC® branded products in Indonesia, Heinz® branded products in Russia, particularly Ketchup, and Heinz infant nutrition products in China. The November acquisition of Foodstar, a leading manufacturer of soy sauce and fermented bean curd, added to strong organic sales growth in China. Pricing in Latin America also contributed to the growth in Emerging Markets. Overall, Emerging Markets generated 16% of the Company’s total reported sales as Heinz continued to launch new products and expand marketing and distribution in these highly populated markets with growing economies and rising numbers of new middle-class consumers.
North American Consumer Products, posted strong results, with 3.0% sales growth and 3.6% volume growth. The volume increases were led by Heinz Ketchup and Heinz Gravy, which had a record holiday season, Ore-Ida® frozen potatoes, Smart Ones® nutritional entrees, and Classico® pasta sauces. Heinz invested behind its leading brands in North America to drive growth and innovation and supported its product line with cost-effective marketing and disciplined promotion.
The growth in the Company’s Top 15 brands was led by Heinz branded products, ABC, Complan and Smart Ones. Heinz delivered organic sales growth of 3.0% in ketchup (flat on a reported basis), led by higher sales and volume in the U.S. and Russia.
Gross profit increased 2.3% to $1.03 billion and the gross profit margin increased to 37.8% from 37.5%, an improvement of 30 basis points, as productivity improvements, favorable sales mix in U.S. retail products, higher volume and net pricing more than offset current commodity costs. Gross profit benefited from the impact of the Foodstar acquisition, but that benefit was more than offset by a $16 million unfavorable impact from foreign exchange translation rates.
Selling, general and administrative expenses increased 3.7%, largely reflecting costs associated with the Foodstar acquisition, and Heinz’s increasing investment in Keystone, a company-wide initiative to leverage global scale and enhance productivity by implementing global capabilities, systems and processes.
The effective tax rate for the quarter was 26.1%, compared with 27.2% last year.
Operating free cash flow was strong at $438 million.
Third-Quarter Marketing Highlights
- In the U.S., the T.G.I. Friday’s branded product line announced the launch of its first single-serve entrees, including five bag meals and four tray meals. The brand also introduced single-step preparation skillet meals for two.
- The Smart Ones brand launched value packs of breakfast sandwiches and mini-cheeseburger sliders.
- Heinz began shipping Dip & Squeeze® foodservice Ketchup in the U.S. to kick off the national launch.
- Ore-Ida, the number-one brand of frozen potatoes in the U.S., introduced attractive new packaging. Also, Ore-Ida Sweet Potato fries became the top-selling SKU in the fast-growing sweet potato segment.
- Heinz Ketchup introduced a limited edition glass bottle in the U.S.
- In Canada, Heinz Ketchup achieved a record 83% share of market.
- In the U.K., Heinz launched HP® Sauce with Guinness® and announced the upcoming launch of Heinz Tomato Ketchup with Balsamic Vinegar.
- In Australia, Heinz introduced a new variety of its LOL® fizzy fruit juices and new easy-pour packaging for Golden Circle® juices.
- In Russia, Heinz introduced its first line of canned vegetables.
- In Indonesia, the ABC brand launched Black Gold®, a new variety of soy sauce, supported by a digital and television campaign. ABC also launched a new hot variety of soy sauce.
- In India, Heinz expanded the launch of its Complan Memory and Complan Nutri-Gro® varieties of nutritional beverages.
Fiscal 2011 Outlook
As Heinz announced on February 24, 2011 at the annual conference of the Consumer Analyst Group of New York (CAGNY), the Company expects full-year-reported EPS in the range of $3.04 to $3.10, up from its previous range of $2.95 to $3.05. This outlook for Fiscal 2011, which ends April 27, reflects the flow-through of currency movements and the Company’s plans to increase fourth-quarter investments while allowing for the effect of potential market disruptions in areas of the Middle East and Latin America. Additionally, this outlook does not include any potential one-time, transaction related costs if the Quero acquisition closes in this fiscal year. Heinz also raised its outlook for full-year operating free cash flow to $1.2 billion, up from its previous projection of $1.15 billion.
Heinz maintained its constant currency outlook for operating income growth of 7 to 10% and now sees full-year sales growth in the range of 2 to 3%. This revised sales outlook primarily reflects the impact of a month-long labor stoppage in Venezuela and the slower than expected recovery in the U.S. foodservice industry.
OPERATING RESULTS BY BUSINESS SEGMENT
North American Consumer Products
Sales of the North American Consumer Products segment increased 3.0% to $839 million on higher volume, led by Classico pasta sauces, Smart Ones frozen entrees, Ore-Ida frozen potatoes, Heinz Ketchup and gravy, reflecting new products and the impact of the Consumer Value Program (CVP). Net prices decreased 1.7%, reflecting increased trade promotion, primarily through the CVP, which began late in the third-quarter of Fiscal 2010. Favorable Canadian exchange translation rates increased sales 1.0%. Operating income increased 13.7% to $235 million.
Heinz Europe sales decreased 5.3% to $832 million as unfavorable foreign exchange translation rates decreased sales by 5.3%. Net pricing increased 2.5% as a result of reduced promotional activity in the UK particularly on Heinz soup, and pricing in Italian infant nutrition. Volume decreased 2.5%, as increases in Heinz branded products in Russia were more than offset by declines in soup in the UK and Germany, Italian infant nutrition, and across certain product categories in The Netherlands. Operating income grew 4.7% to $163 million.
Heinz Asia/Pacific sales grew 16.8% to $584 million, with 4.5% volume growth led by Complan and Glucon-D nutritional beverages in India, ABC products in Indonesia, and infant feeding and Long Fong® frozen products in China. Sales in Australia were impacted by competitive activity and soft category trends. Pricing decreased 0.6%. The Foodstar acquisition in the third quarter of Fiscal 2011 increased sales 5.9%. Favorable exchange translation rates increased sales by 7.0%. Operating income decreased 9.2% to $43 million.
Sales of the U.S. Foodservice segment declined 0.5% to $353 million. Pricing increased sales 2.3%, largely due to Heinz Ketchup, reduced trade promotions and prior-year price increases on non-ketchup tomato products. Volume decreased by 2.8%, reflecting the industry trend of weak restaurant traffic and declines in frozen desserts and soup, and non-branded sauces. Operating income increased 12.7% to $48 million.
Rest of World
Sales for Rest of World decreased 14.5% to $114 million as foreign exchange translation rates decreased sales 25.0%, largely due to the devaluation of the Venezuelan currency late in the third quarter of Fiscal 2010. Higher pricing increased sales by 14.8%, largely due to price increases in Latin America taken to mitigate inflation. Volume decreased 4.3%, reflecting a decline in Venezuela that more than offset volume growth in the Middle East and South Africa. Operating income decreased $9 million, or 52.3% to $8 million.
For the nine months ended January 26, 2011, Heinz reported sales of $7.82 billion. Total net income attributable to H.J. Heinz Company was $766 million, or $2.37 per diluted share, compared with $673 million, or $2.11 per diluted share a year ago. On a constant currency, continuing operations basis, sales rose 2.5%, operating income grew 6.1% and EPS increased 7.9%. On a reported continuing operations basis, sales rose 0.6%, operating income grew 3.9% and EPS increased 4.4%. Year-to-date Operating Free Cash Flow of $951 million increased 11.5% from the record cash flow of $853 million in the first three quarters of Fiscal 2010.
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H.J. Heinz Company, offering “Good Food Every Day”™ is one of the world’s leading marketers and producers of healthy, convenient and affordable foods specializing in ketchup, sauces, meals, soups, snacks and infant nutrition. Heinz provides superior quality, taste and nutrition for all eating occasions whether in the home, restaurants, the office or “on-the-go.” Heinz is a global family of leading branded products, including Heinz® Ketchup, sauces, soups, beans, pasta and infant foods (representing over one third of Heinz’s total sales), Ore-Ida® potato products, Weight Watchers® Smart Ones® entrees, T.G.I. Friday’s® snacks, and Plasmon infant nutrition. Heinz is famous for its iconic brands on six continents, showcased by Heinz® Ketchup, The World’s Favorite Ketchup®.