CAG ConAgra Brands Inc

H.J. Heinz Co. (HNZ) posted better-than-expected second quarter 2012 adjusted earnings of 81 cents per share, exceeding the Zacks Consensus Estimate by a penny. The earnings also surpassed the prior-year earnings of 78 cents by 3.8%.

Including productivity initiatives charges of 8 cents, earnings declined 6.4% to 73 cents in the reported quarter.

About 3 cents of the increases in earnings were driven by increased sales, lower taxes and favorable foreign exchange rates. Robust sales growth was fueled by developing markets that were backed by acquisitions and strong global performance of Ketchup. Heinz’s Top 15 brands also grew organically in the quarter, contributing to the growth.

Quarterly Sales Details

During the quarter, total sales climbed up 8.3% to $2.83 billion in the second quarter, led by a 15.8% organic sales growth in emerging markets. Further, acquisitions of the Quero brand in Brazil and the Foodstar operations in China fuelled sales growth by 5.0%. However, total sales lagged the Zacks Consensus Estimate of $2.93 billion.

Volume declines of 2.9% partially overshadowed the solid higher net pricing of 4.4% in the quarter, which led to an organic sales growth of 1.5%. In addition, acquisitions, net of divestitures, added 4.4% to sales growth. The favorable foreign exchange rates also contributed to the 2.4% increase in top-line.

Heinz Ketchup generated 6.5% organic sales growth, with solid pricing across the company’s markets and higher volumes in Europe, Latin America and Asia markets.

The company’s Top 15 brands also delivered 3.0% organic sales growth, driven by Heinz brand products, Complan nutritional beverages in India, ABC soy and chili sauces in Indonesia, and T.G.I. Friday’s frozen meals in the U.S.

Segment and Margin Details

On a reported basis, sales of Europe and Asia/Pacific segments witnessed strong growth rates of 5.8% and 11.6%, respectively, while sales for North American Consumer Products and U.S. Foodservice segments declined 1.1% and 2.8%, respectively, during the quarter.

Sales in Rest of World segment more than doubled to $248.2 million in the quarter, which resulted from the Quero acquisition in Brazil, higher volumes and pricing, offset by unfavorable foreign exchange translation rates.

Excluding productivity charges, Heinz’s gross profit grew to $997.0 million reflecting higher pricing, acquisitions and the favorable foreign exchange impact. However, they were offset by higher commodity costs and lower volumes. Gross margin fell 180 basis points to 35.2% in the reported quarter, owing to sluggish performance in Australia and U.S. Foodservice segment.

Excluding the charges, SG&A expenses as a percentage of sales mounted to 21.3% from the prior-year quarter, driven by a 9.3% increase in marketing, investments in emerging markets, increased spending for Project Keystone and the impact of acquisition. Operating income, however, declined 5.2% to $395 million.

Cash Flow and Outlook

In the second quarter of 2012, Heinz generated $234.7 million of cash from operations, deployed $101.4 million towards capital expenditures, leading to a free cash flow of $131.3 million.

Moving forward, the company affirms its full year 2012 earnings expectation to grow in the range of 6% - 8% within $3.24 to $3.32, excluding the impact of productivity initiatives but including the incremental investment in Keystone.

Heinz also expects its sales to grow in the range of 7 to 8% for 2012.

For fiscal 2012, Heinz also expects strong operating free cash flow of approximately $1.15 billion, before special charges. On a reported basis, operating free cash flow is expected to be around $1 billion.

In addition, as announced on May 26, 2011, the company expects to incur special charges of $160 million in operating income, 35 cents per share of earnings for fiscal year 2012 for one-time initiatives to drive global productivity and manufacturing efficiency. Heinz also anticipates investing $130 million of cash this year in these productivity initiatives.

Heinz which competes with ConAgra Foods, Inc. (CAG) and Campbell Soup Co. (CPB) currently has a Zacks #3 Rank, implying a short-term Hold recommendation.

 
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