HNZ H.J. Heinz Company

H.J. Heinz Co. (HNZ) posted robust adjusted earnings of 78 cents per share in the first quarter of fiscal 2012. The result was above the Zacks Consensus Estimate of 76 cents and also ahead of 75 cents per share recorded in the year-ago quarter.

In the first quarter of 2012, Heinz recorded initial charges of $41 million pre-tax, or 9 cents per share, for costs related to exiting four previously announced factories and other productivity initiatives.

The adjusted earnings in the first quarter of 2012 exclude charges for productivity initiatives and include the currency impact of 6 cents per share. Including the special charges, Heinz posted earnings of 70 cents as against earnings of 75 cents in the prior-year quarter.

Profits in the quarter were attributable to robust sales growth fuelled by emerging markets that were backed by acquisitions and strong performance of brands like T.G.I. Friday’s frozen meals and Classico pasta sauces in North America, Complan nutritional beverages in India and ABC brand sauces in Indonesia. Heinz also drove strong growth in global ketchup and the Top 15 brands by focusing on value-added consumer innovation and new product development.

Quarterly Sales Details

During the quarter, total sales climbed up 14.9% to $2.85 billion from $2.48 billion in the prior-year quarter, led by a 13% organic sales growth in emerging markets and acquisitions of the Quero brand in Brazil and the Foodstar business in China, which increased total sales by 4.6%. Total sales surpassed the Zacks Consensus Estimate of $2.77 billion.

Higher net pricing of 3.8%, primarily in the U.S., U.K. and Latin America, generated an organic sales growth of 3.1%, despite the difficult economic environment in developed markets. However, volume declined 0.7% in the first quarter of 2012, as stronger volume in emerging markets -- the U.K., Continental Europe, Canada and Japan -- was more than offset by softer volume in Australia and the U.S. The favorable foreign exchange rates of 7.2% contributed to the increase in top-line.

Segment and Margin Details

On a reported basis, sales of the North American Consumer Products, Europe, Asia/Pacific segments witnessed strong growth, while sales for Rest of World segment more than doubled to $241 million in the reported quarter, driven by the Quero acquisition and higher volumes, pricing and favorable foreign exchange rates.

However, only U.S. Foodservice segment posted a decline of 1.1% over the prior year quarter primarily reflecting volume declines. Further, the increase in commodity costs, a lag of price increases in national accounts and rising fuel costs for distribution led to the decrease in operating income.

Excluding productivity charges, Heinz’s gross profit grew to $1.02 billion reflecting solid organic sales growth, the acquisitions of Foodstar and Quero, and the favorable impact from foreign exchange. However, gross margin fell 90 basis points to 35.7% in the reported quarter, owing to higher commodity costs, partially offset by higher pricing and productivity improvements. Foreign exchange translation and the acquisitions also reduced gross margin by 20 bps and 40 bps respectively.

Excluding the charges, SG&A expenses as a percentage of sales mounted to 21.3% from 20.2% in the prior-year quarter, driven by a 15% increase in marketing, investments in emerging markets, higher fuel costs and increased spending for Project Keystone. Therefore, operating income inched up 1.1% to $410 million.

Cash Flow and Outlook

In the first quarter of 2012, Heinz generated $164.8 million of cash from operations, deployed $74.3 million towards capital expenditures, leading to a free cash flow of $97.1 million.

Moving forward, the company expects its full year 2012 earnings to grow in the range of 6% - 8% in the range of $3.24 to $3.32, excluding the impact of productivity initiatives. For the second quarter of 2012, Heinz expects its earnings to be in line with, or slightly higher than the prior year.

Heinz also expects its sales to grow in the range of 7 to 8% for the full year of 2012, including higher costs for Project Keystone, while excluding the special charges for productivity initiatives.

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 exceed $1 billion.

In addition, as announced on May 26, 2011, the company expects to incur special charges of at least $160 million pre-tax income, or 35 cents per share for fiscal year 2012 for one-time initiatives to drive global productivity and manufacturing efficiency. Heinz also anticipates investing at least $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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