H.J. Heinz Co. (NYSE:HNZ) reported strong first-quarter results, with growth of 10.1 percent in earnings per share from continuing operations (excluding special charges a year ago). The results reflected double-digit sales growth in Emerging Markets, improved results in the U.S. and Australia, higher volume and pricing, improved productivity and a favorable tax rate.
“Heinz delivered strong results and our 29th consecutive quarter of organic sales growth, despite the difficult economic environment, higher commodity costs and headwinds from foreign currency,” said Chairman, President and CEO William R. Johnson. “Heinz is off to a good start in Fiscal 2013, led by our trio of growth engines – Emerging Markets, Global Ketchup and our Top 15 Brands.”
In the fiscal quarter ended July 29, reported sales declined 1.5 percent to $2.79 billion, reflecting the unfavorable impact of 5.6 percent from foreign currency exchange rates. Net pricing increased 2.3 percent, led by Emerging Markets, as well as the U.K. and the U.S. Volume increased 2.5 percent, led by strong growth in Emerging Markets, as well as growth in Japan, the U.K. and the U.S. Divestitures reduced total sales by 0.6 percent, primarily reflecting the exit from the Boston Market® license in the U.S. and the sale of a small soup business in Germany.
Heinz delivered organic sales growth of 4.8 percent, led by Emerging Markets, which posted organic sales growth of 19.3 percent for the quarter (11.2 percent reported). Emerging Markets represented a record 26 percent of total Company sales.
The Company's Top 15 Brands achieved organic sales growth of 5.9 percent (0.1 percent reported), led by Quero®, Master®, Golden Circle, ABC®, Weight Watchers® Smart Ones®, Heinz® and Ore-Ida®. Global Ketchup delivered organic sales growth of 3.7 percent (1.2 percent decline on a reported basis), led by strong growth in Brazil, Russia and China.
On a reported basis, gross profit grew 1.9 percent to $1 billion and gross margin increased 120 basis points to 35.9 percent. Excluding charges for productivity initiatives in Fiscal 2012, gross profit decreased 1.3 percent, largely due to a $55 million unfavorable impact from foreign exchange, and gross margin increased 10 basis points. The gross margin improvement was driven by higher pricing and productivity, which more than offset higher commodity costs.
Marketing for the first quarter increased 4.5 percent on a constant currency basis (2.4 percent decline on a reported basis) as the Company continued to invest behind its leading brands.
Reported SG&A expenses (excluding marketing) decreased 3.8 percent to $476 million. SG&A as a percentage of sales declined to 17.1 percent from 17.5 percent a year ago, due to effective cost management, the overlap of prior-year productivity charges and the impact of foreign exchange. Excluding charges for productivity initiatives a year ago, SG&A (excluding marketing) decreased 2.0 percent and declined to 17.1 percent of sales from 17.2 percent. During the quarter, Heinz increased investments in Project Keystone, the Company’s global initiative to upgrade and harmonize systems and processes; and in greater capabilities in Emerging Markets.
Operating income grew 10.7 percent to $410 million. Excluding charges for productivity initiatives in Fiscal 2012, operating income was virtually flat due to a 5.3 percent unfavorable impact from foreign exchange (up 5.1 percent on a constant currency basis).
The effective tax rate for the current quarter was 17.7 percent compared to a prior year reported rate of 23.3 percent (24.0 percent excluding charges for productivity initiatives). The Company continues to expect a full-year tax rate in the low twenties for Fiscal 2013.
Net income from continuing operations grew 23.2 percent to $279 million from $227 million a year ago. Excluding charges for productivity initiatives a year ago, net income rose 9.5 percent, also impacted by 5.5 percent of unfavorable foreign exchange.
Reported diluted earnings per share from continuing operations grew 24.3 percent to $0.87 from $0.70 a year ago. Excluding charges for productivity initiatives last year, EPS grew 10.1 percent from $0.79 a year ago. EPS this year was reduced by $0.04 from unfavorable foreign currency translation and translation hedges.
On a constant currency, continuing operations basis, sales grew 4.2 percent, operating income increased 5.1 percent and EPS rose 15.2 percent, which excludes non-recurring items in the prior year. Total Company net income including discontinued operations was $258 million; and EPS grew to $0.80.
In the first quarter of Fiscal 2013, Heinz completed the previously announced sale of its U.S. Foodservice frozen desserts business. This transaction resulted in a $31.5 million pre-tax ($20.4 million after-tax) loss, which has been recorded in discontinued operations. The frozen desserts business had reported sales of $2.5 million in the first quarter, versus $17.0 million a year ago.
Fiscal 2013 Outlook
“Our strong first-quarter results put Heinz on track to deliver our previously announced outlook for Fiscal 2013,” Mr. Johnson said.
For the full year in Fiscal 2013, Heinz expects:
- At least 4.0 percent organic sales growth;
- Constant currency EPS growth of 5-8 percent on a continuing operations basis and excluding special items in Fiscal 2012; and
- Strong operating free cash flow of more than $1 billion.
FIRST-QUARTER OPERATING RESULTS BY BUSINESS SEGMENT
North American Consumer Products
Reported sales decreased 2.0 percent to $759 million, while organic sales increased 0.9 percent. Net pricing increased 1.0 percent. Overall, volume was flat as the U.S. retail business delivered 1.2 percent organic growth, which was offset by a decline in Canada. New product innovations, (e.g. Ore-Ida®Grillers, new Smart Ones® breakfasts and meals), and new package sizes and product formats contributed growth, as did increased sales of frozen potatoes. These gains were partially offset by the Company’s decision to exit T.G.I. Friday’s® frozen meals. Sales were also unfavorably impacted by 1.8 percent from the decision to exit the Boston Market® license, which has been classified as a divestiture. Unfavorable Canadian exchange translation rates decreased sales 1.1 percent. Operating income decreased 3.9 percent to $183 million, down 2.9 percent on a constant currency basis.
Reported sales declined 7.2 percent to $778 million, due to an 8.8 percent impact from unfavorable foreign exchange translation rates. Organic sales grew by 2.0 percent in a difficult economic environment. Net pricing increased 2.9 percent, largely driven by the U.K., Benelux and Eastern Europe. Volume decreased 0.9 percent, reflecting weak economies and soft category sales in Continental Europe and Italy, partially offset by strength in Eastern Europe (especially Russia) and the U.K. Operating income was flat at $137 million but increased almost 8.0 percent on a constant currency basis.
Reported sales decreased 1.9 percent to $658 million as unfavorable foreign exchange translation rates decreased sales by 6.1 percent. Organic sales increased 4.1 percent, including pricing of 1.4 percent. Volume increased 2.7 percent, reflecting growth in Indonesia, India, China and Japan, partially offset by planned declines in Long Fong® frozen products in China, reflecting the significant streamlining of that business in the fourth quarter of Fiscal 2012. Operating income increased 18.9 percent to $73 million and increased almost 30.0 percent on a constant currency basis. Australia’s operating income doubled in the quarter as a result of last year’s productivity initiatives, SKU rationalization and improved operations.
Both reported and organic sales grew 2.4 percent to $315 million. Pricing increased sales 2.6 percent while volume remained relatively flat. Operating income rose 12.7 percent to $37 million.
Rest of world
Reported sales increased 16.5 percent to $281 million, as unfavorable foreign exchange translation decreased sales by 15.1 percent. Organic sales grew 31.7 percent, including pricing of 6.8 percent. Volume increased 24.9 percent, driven by Brazil, where the Heinz and Quero brands delivered strong normalized volume growth of 36.0 percent; and the business benefitted from an extra month of results in the quarter due to an accounting calendar change. The increase in Brazil was partially offset by softness in Venezuela, reflecting the economic environment. Operating income decreased 4.0 percent to $31 million, but increased 3.0 percent on a constant currency basis despite overlapping very strong profit results in the first quarter of Fiscal 2012.