H.J. Heinz reports fiscal Q1 net earnings of US$258M, up 14.1% from year-ago period, benefitting from growth in emerging markets and improving results in US, Australia; sales down 1.5% to US$2.79B

Nevin Barich

PITTSBURGH , August 29, 2012 (press release) – Fiscal 2013 First-Quarter Results – Continuing Operations, Excluding Fiscal 2012 Productivity Charges:

Heinz delivered its 29th consecutive quarter of organic sales growth (volume plus price) of 4.8%.

Reported sales declined 1.5% to $2.79 billion, reflecting a -5.6% foreign currency exchange impact.

Emerging Markets delivered 19.3% organic sales growth (+11.2% reported) and represented a record 26% of total Company sales.

Top 15 Brands delivered organic sales growth of 5.9% (+0.1% reported).

Global Ketchup posted 3.7% organic sales growth (-1.2% reported).

Operating income was essentially flat (+10.7% reported), including a -5.3% foreign currency impact.
Net income grew almost 10% to $279 million. Reported net income increased 23.2%.

EPS increased 10% (+24.3% reported).

On a constant currency basis, sales grew 4.2%, operating income increased 5.1% and EPS rose 15.2%, which excludes non-recurring items in the prior year.

Reconciliations of non-GAAP amounts are set forth in the attached financial tables. Results excluding charges for productivity initiatives in Fiscal 2012 represent the Company’s reported results adjusted to exclude charges for workforce reductions, factory closures and other implementation costs taken in Fiscal 2012 to accelerate growth. Organic sales are defined as volume plus price or total sales growth excluding the impact of foreign exchange and acquisitions and divestitures. Operating free cash flow is defined as cash from operations less capital expenditures net of proceeds from disposal of Property, Plant & Equipment. Also, constant currency as used in this press release is defined as the reported amount adjusted for translation (the effect of changes in average foreign exchange rates between the current period and the corresponding prior year) and the impact of current-year foreign currency translation hedges.

H.J. Heinz Company (NYSE:HNZ) today reported strong first-quarter results, with growth of 10.1% 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.”

Continuing Operations

In the fiscal quarter ended July 29, reported sales declined 1.5% to $2.79 billion, reflecting the unfavorable impact of 5.6% from foreign currency exchange rates. Net pricing increased 2.3%, led by Emerging Markets, as well as the U.K. and the U.S. Volume increased 2.5%, 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%, 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%, led by Emerging Markets, which posted organic sales growth of 19.3% for the quarter (11.2% reported). Emerging Markets represented a record 26% of total Company sales.

The Company's Top 15 Brands achieved organic sales growth of 5.9% (0.1% 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% (1.2% decline on a reported basis), led by strong growth in Brazil, Russia and China.

On a reported basis, gross profit grew 1.9% to $1 billion and gross margin increased 120 basis points to 35.9%. Excluding charges for productivity initiatives in Fiscal 2012, gross profit decreased 1.3%, 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% on a constant currency basis (2.4% decline on a reported basis) as the Company continued to invest behind its leading brands.

Reported SG&A expenses (excluding marketing) decreased 3.8% to $476 million. SG&A as a percentage of sales declined to 17.1% from 17.5% 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% and declined to 17.1% of sales from 17.2%. 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% to $410 million. Excluding charges for productivity initiatives in Fiscal 2012, operating income was virtually flat due to a 5.3% unfavorable impact from foreign exchange (up 5.1% on a constant currency basis).

The effective tax rate for the current quarter was 17.7% compared to a prior year reported rate of 23.3% (24.0% 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% to $279 million from $227 million a year ago. Excluding charges for productivity initiatives a year ago, net income rose 9.5%, also impacted by 5.5% of unfavorable foreign exchange.

Reported diluted earnings per share from continuing operations grew 24.3% to $0.87 from $0.70 a year ago. Excluding charges for productivity initiatives last year, EPS grew 10.1% 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%, operating income increased 5.1% and EPS rose 15.2%, 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.

Discontinued Operations

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% organic sales growth;

Constant currency EPS growth of 5-8% 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% to $759 million, while organic sales increased 0.9%. Net pricing increased 1.0%. Overall, volume was flat as the U.S. retail business delivered 1.2% 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% 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%. Operating income decreased 3.9% to $183 million, down 2.9% on a constant currency basis.

Europe

Reported sales declined 7.2% to $778 million, due to an 8.8% impact from unfavorable foreign exchange translation rates. Organic sales grew by 2.0% in a difficult economic environment. Net pricing increased 2.9%, largely driven by the U.K., Benelux and Eastern Europe. Volume decreased 0.9%, 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% on a constant currency basis.

Asia/Pacific

Reported sales decreased 1.9% to $658 million as unfavorable foreign exchange translation rates decreased sales by 6.1%. Organic sales increased 4.1%, including pricing of 1.4%. Volume increased 2.7%, 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% to $73 million and increased almost 30.0% 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.

U.S. Foodservice

Both reported and organic sales grew 2.4% to $315 million. Pricing increased sales 2.6% while volume remained relatively flat. Operating income rose 12.7% to $37 million.

Rest of World

Reported sales increased 16.5% to $281 million, as unfavorable foreign exchange translation decreased sales by 15.1%. Organic sales grew 31.7%, including pricing of 6.8%. Volume increased 24.9%, driven by Brazil, where the Heinz and Quero brands delivered strong normalized volume growth of 36.0%; 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% to $31 million, but increased 3.0% on a constant currency basis despite overlapping very strong profit results in the first quarter of Fiscal 2012.

Conference Call/Webcast on First-Quarter Fiscal 2013 Results

H.J. Heinz Company will host a conference call and Webcast for Securities Analysts and Media (listen only) to discuss the Company’s first-quarter Fiscal 2013 results and its Fiscal 2013 outlook today, August 29, 2012, at 8:30 a.m. Eastern time.

The meeting will be hosted by:

Art Winkleblack, Executive Vice President and Chief Financial Officer
Ed McMenamin, Senior Vice President, Finance
Margaret Nollen, Senior Vice President, Investor Relations & Global Program Management Officer
A Webcast of the meeting and the presentation slides will be available to the general public in real-time and archived for playback on the Company Website, www.Heinz.com.

Live Event Dial-in Details:

Participants:
Institutional Investors/Analysts – U.S. Dial-In: 1-866-515-2913
Institutional Investors/Analysts – International Dial-In: 1-617-399-5127
Passcode: Heinz Earnings

Listen Only:
Media – U.S. Dial-In: 1-877-280-4954
Media – International Dial-In: 1-857-244-7311
Passcode: Heinz Earnings

SAFE HARBOR PROVISIONS FOR FORWARD-LOOKING STATEMENTS:

This press release and our other public pronouncements contain forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are generally identified by the words “will,” “expects,” “anticipates,” “believes,” “estimates” or similar expressions and include our expectations as to future revenue growth, earnings, capital expenditures and other spending, dividend policy, and planned credit rating, as well as anticipated reductions in spending. These forward-looking statements reflect management’s view of future events and financial performance. These statements are subject to risks, uncertainties, assumptions and other important factors, many of which may be beyond Heinz’s control, and could cause actual results to differ materially from those expressed or implied in these forward-looking statements. Factors that could cause actual results to differ from such statements include, but are not limited to:

sales, volume, earnings, or cash flow growth,

general economic, political, and industry conditions, including those that could impact consumer spending,

competitive conditions, which affect, among other things, customer preferences and the pricing of products, production, and energy costs,

competition from lower-priced private label brands,

increases in the cost and restrictions on the availability of raw materials, including agricultural commodities and packaging materials, the ability to increase product prices in response, and the impact on profitability,

the ability to identify and anticipate and respond through innovation to consumer trends,

the need for product recalls,

the ability to maintain favorable supplier and customer relationships, and the financial viability of those suppliers and customers,

currency valuations and devaluations and interest rate fluctuations,

changes in credit ratings, leverage, and economic conditions and the impact of these factors on our cost of borrowing and access to capital markets,

our ability to effectuate our strategy, including our continued evaluation of potential opportunities, such as strategic acquisitions, joint ventures, divestitures, and other initiatives, our ability to identify, finance, and complete these transactions and other initiatives, and our ability to realize anticipated benefits from them,

the ability to successfully complete cost reduction programs and increase productivity,

the ability to effectively integrate acquired businesses,

new products, packaging innovations, and product mix,

the effectiveness of advertising, marketing, and promotional programs,

supply chain efficiency,

cash flow initiatives,

risks inherent in litigation, including tax litigation,

the ability to further penetrate and grow and the risk of doing business in international markets, particularly our emerging markets; economic or political instability in those markets, strikes, nationalization, and the performance of business in hyperinflationary environments, in each case such as Venezuela; and the uncertain global macroeconomic environment and sovereign debt issues, particularly in Europe,

changes in estimates in critical accounting judgments and changes in laws and regulations, including tax laws,

the success of tax planning strategies,

the possibility of increased pension expense and contributions and other people-related costs,

the potential adverse impact of natural disasters, such as flooding and crop failures, and the potential impact of climate change,

the ability to implement new information systems, potential disruptions due to failures in information technology systems, and risks associated with social media,

with regard to dividends, dividends must be declared by the Board of Directors and will be subject to certain legal requirements being met at the time of declaration, as well as our Board’s view of our anticipated cash needs, and

other factors described in “Risk Factors” and “Cautionary Statement Relevant to Forward-Looking Information” in the Company’s Annual Report on Form 10-K for the fiscal year ended April 29, 2012 and reports on Forms 10-Q thereafter.

The forward-looking statements are and will be based on management’s then current views and assumptions regarding future events and speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by the securities laws.

ABOUT HEINZ: 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® entrées, 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®.

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