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| HNZ > SEC Filings for HNZ > Form 10-Q on 29-Nov-2007 | All Recent SEC Filings |
29-Nov-2007
Quarterly Report
Results of Continuing Operations
Sales for the three months ended October 31, 2007 increased $291 million, or 13.0%, to $2.52 billion, with growth in all five business segments. Volume increased 5.5%, with solid growth in Europe, the North American Consumer Products segment, Australia and the emerging markets (Russia, Indonesia, China, India, Poland, Latin America, Czech Republic, Egypt, South Africa and Middle East). Notably, the emerging markets achieved a 10.0% volume increase and accounted for 22% of Heinz's total sales growth in the second quarter of Fiscal 2008. Net pricing increased sales by 2.6%, mainly in the North American segments, as well as our business in Latin America. Foreign exchange translation rates increased sales by 5.0%.
Sales of the Company's top 15 brands grew 13.8% from the year-ago quarter, as sales of ketchup rose 5.0% and sales of beans and soups increased 15.7%. The growth in the top brands was led by Heinz®, Smart Ones®, Classico®, Boston Market®, and Plasmon®.
Gross profit increased $85 million, or 10.1%, to $932 million, benefiting from favorable volume, pricing and foreign exchange translation rates. The gross profit margin decreased to 36.9% from 37.9%, as pricing and productivity improvements were more than offset by increased commodity costs, reflecting higher costs for dairy, oils, tomato products and other key ingredients.
Selling, general and administrative expenses ("SG&A") increased $47 million, or 10.2%, to $511 million. As a percentage of sales, SG&A decreased to 20.2% from 20.8%. The 10.2% increase in SG&A is due to a 23.0% increase in marketing expense to support brands across the Company, a 16.7% increase in research and development costs and higher selling and distribution costs resulting from increased volume as well as foreign exchange translation rates.
Total marketing support (recorded as a reduction of revenue or as a component of SG&A) increased $66 million, or 12.6%, to $586 million on a gross sales increase of 12.7%. Marketing support recorded as a reduction of revenue, typically deals and allowances, increased $48 million, or 10.8%, to $491 million, and decreased as a percentage of gross sales to 16.3% from 16.6%, in line with the Company's strategy to reduce spending on less efficient promotions and realignment of some list prices. Marketing support recorded as a component of SG&A increased $18 million, or 23.0%, to $95 million, as we increased consumer marketing across the Company's businesses supporting our top brands.
Operating income increased $38 million, or 9.9%, to $421 million, reflecting the strong sales growth, productivity improvements and solid operating performance.
Net interest expense increased $14 million, to $87 million, largely due to higher debt in Fiscal 2008, related primarily to share repurchase activity, as well as rate increases. Other expenses, net, increased $4 million to $11 million, chiefly due to increased currency losses on foreign currency contracts designed to mitigate volatility of earning from foreign subsidiaries, partially offset by a gain recognized on the sale of our business in Zimbabwe.
The effective tax rate for the current quarter was 29.8% compared to 34.8% last year. The effective tax rate in the current quarter reflects discrete benefits totaling approximately $7 million primarily resulting from repatriation costs. The effect of discrete items and a greater percentage of income generated in lower taxed foreign jurisdictions are the primary reasons for the reduced tax rate. We expect a current year annual effective tax rate of around 31%.
Income from continuing operations was $227 million compared to $197 million in the year earlier quarter, an increase of 15.0%. Diluted earnings per share from continuing operations was $0.71 in the
current year compared to $0.59 in the prior year, up 20.3%, which benefited from a 3.8% reduction in fully diluted shares outstanding.
Discontinued Operations
In the fourth quarter of Fiscal 2006, the Company completed its sale of the European Seafood and Tegel® poultry businesses, in line with the Company's plan to exit non-strategic businesses. The Company recorded a loss of $3.3 million ($5.9 million after-tax) from these businesses for the second quarter and six months ended November 1, 2006, primarily resulting from purchase price adjustments pursuant to the transaction agreements. In accordance with accounting principles generally accepted in the United States of America, these adjustments have been included in discontinued operations in the Company's consolidated statements of income.
During the first quarter of Fiscal 2008, the Company changed its segment reporting to reclassify its business in India from the Rest of World segment to the Asia/Pacific segment, reflecting organizational changes. Prior periods have been conformed to the current presentation. (See Note 8 to the condensed consolidated financial statements for further discussion of the Company's reportable segments).
North American Consumer Products
Sales of the North American Consumer Products segment increased $85 million, or 12.6%, to $756 million. Volume increased 6.7%, due primarily to Smart Ones® frozen entrees and desserts, Boston Market® frozen entrees and Classico® pasta sauces. Smart Ones® was the largest contributor to the overall volume improvement and is largely a result of increased consumption, new products and anticipated price increases in the third quarter. These volume improvements were partially offset by declines in Heinz® ketchup, due to a shift in the timing of sales resulting from an August price increase and competitor promotions, and in Ore-Ida® frozen potatoes, reflecting the effects of a price increase at the beginning of this fiscal year. The Ore-Ida® frozen potatoes price increase, along with reduced promotions on Classico® pasta sauces, resulted in overall price gains of 3.0%. The prior year acquisition of Renee's Gourmet Foods increased sales 0.9% and favorable Canadian exchange translation rates increased sales 1.9%.
Gross profit increased $24 million, or 8.3%, to $310 million, due primarily to the volume and pricing increases. The gross profit margin decreased to 41.0% from 42.6%, due to increased commodity costs along with increased manufacturing costs in the Canadian business. Operating income increased $12 million, or 6.9%, to $177 million, driven by strong sales growth and partially offset by increased marketing and research and development costs.
Europe
Heinz Europe posted very strong results in the quarter as sales and operating income increased 18.0% and 14.8%, respectively. Overall, sales increased $133 million, or 18.0%, to $872 million. Volume increased 9.1%, principally due to strong performance on Heinz® ketchup, soup, beans and salad cream, Italian infant nutrition and Pudliszki® branded products in Poland. Net pricing increased sales 1.3%, resulting chiefly from commodity-related price increases taken on products in Russia as well as price increases on Weight Watchers® and Aunt Bessie's® branded products in the frozen business in the U.K. Divestitures reduced sales 1.6% and favorable exchange translation rates increased sales by 9.2%.
Gross profit increased $44 million, or 14.9%, to $339 million, driven largely by the increased volume and price along with favorable foreign exchange rates. The gross profit margin decreased to 38.9% from 39.9% due to increased commodity costs and higher manufacturing costs in our business
in the Netherlands. Operating income increased $21 million, or 14.8%, to $160 million, due to the increase in sales and gross profit, partially offset by an $11 million increase in marketing primarily supporting our Italian infant nutrition and U.K. businesses.
Asia/Pacific
Heinz Asia/Pacific posted very strong results in the quarter as sales and operating income increased 16.8% and 21.8%, respectively. Overall, sales increased $57 million, or 16.8%, to $396 million. Volume increased 3.5%, reflecting strong results in Australia, India and China, related primarily to new product introductions and increased marketing. Pricing increased 2.6% reflecting increases on soy sauce and syrup in Indonesia, LongFong® frozen products in China and nutritional products in India. Acquisitions, net of divestitures, increased sales 2.2%, primarily due to the first quarter acquisition of the license for the Cottee's® and Rose's® premium branded jams, jellies and toppings business in Australia and New Zealand. Favorable exchange translation rates increased sales by 8.4%.
Gross profit increased $21 million, or 18.6%, to $132 million, and the gross profit margin increased to 33.3% from 32.8%. These increases were due to increased volume and pricing, favorable sales mix and favorable foreign exchange translation rates, partially offset by increased commodity costs. Operating income increased by $10 million, or 21.8%, to $56 million, primarily due to the increase in gross profit, partially offset by increased marketing and general/administrative expenses.
U.S. Foodservice
U.S. Foodservice sales of $406 million increased slightly during the quarter. Pricing increased sales 2.1%, largely due to commodity-related price increases and reduced promotional spending on Heinz® ketchup, tomato products and frozen soup. Overall volume decreased 1.7%, reflecting declines in tomato products and frozen appetizers, partially offset by an increase in frozen desserts. Divestitures reduced sales 0.3%.
Gross profit decreased $10 million, or 8.5%, to $113 million, and the gross profit margin decreased to 27.8% from 30.4% as higher commodity costs, particularly oil and dairy, were only partially offset by increased pricing. Operating income decreased $8 million, or 13.5%, to $51 million, due primarily to increased commodity costs, partially offset by reduced general and administrative expenses.
Rest of World
Sales for Rest of World increased $16 million, or 21.7%, to $92 million. Volume increased 6.7% due primarily to strong performance across all the businesses within this segment, highlighted by increased infant nutrition sales in Latin America. Higher pricing increased sales by 13.8%, largely due to price increases and reduced promotions in Latin America as well as commodity-related price increases in South Africa. This growth was enhanced by 1.3% due to favorable foreign exchange translation rates.
Gross profit increased $6 million, or 22.5%, to $34 million, due mainly to increased pricing, higher volume and improved business mix. Operating income increased $2 million, or 23.4% to $13 million.
Results of Continuing Operations
Sales for the six months ended October 31, 2007 increased $480 million, or 11.2%, to $4.77 billion. Volume increased 4.0%, as continued solid growth in the North American Consumer Products segment, Australia, New Zealand and the emerging markets were combined with strong
performance of Heinz® ketchup, beans and soup in Europe and Italian infant nutrition. The emerging markets produced a 10.2% volume increase and accounted for 22.1% of Heinz's total sales growth for the six months ended October 31, 2007. These increases were partially offset by volume declines in the U.S. Foodservice segment. Net pricing increased sales by 2.7%, mainly in the North American Consumer Products and U.S. Foodservice segments, as well as our businesses in the U.K. and Latin America. Divestitures, net of acquisitions, decreased sales by 0.3%. Foreign exchange translation rates increased sales by 4.8%.
Sales of the Company's top 15 brands grew 12.2% from prior year, led by strong increases in Heinz®, Smart Ones®, Classico®, Boston Market®, Plasmon® and Weight Watchers®. These increases are a result of the Company's strategy of focused innovation and marketing support behind these top brands.
Gross profit increased $151 million, or 9.3%, to $1.77 billion, benefiting from favorable volume, pricing and foreign exchange translation rates. The gross profit margin decreased to 37.1% from 37.7%, as pricing and productivity improvements were more than offset by increased commodity costs. The most significant commodity cost increases were for dairy, oils, tomato products and other key ingredients.
SG&A increased $66 million, or 7.2%, to $983 million. As a percentage of sales, SG&A decreased to 20.6% from 21.4%. The increase in SG&A is due to a 24.1% increase in marketing expense, a 15.2% increase in research and development costs and higher selling and distribution costs resulting from increased volume as well as foreign exchange translation rates. These increases were partially offset by reduced general and administrative expenses, which benefited from effective cost control and headcount reductions that took place last year. Additionally, the prior year included costs related to the proxy contest of approximately $12 million.
Total marketing support (recorded as a reduction of revenue or as a component of SG&A) increased $73 million, or 7.1%, to $1.10 billion on a gross sales increase of 10.0%. Marketing support recorded as a reduction of revenue, typically deals and allowances, increased $37 million, or 4.2%, to $913 million, but decreased as a percentage of gross sales to 16.1% from 16.9%, in line with the Company's strategy to reduce spending on less efficient promotions and realignment of some list prices. Marketing support recorded as a component of SG&A increased $36 million, or 24.1%, to $183 million, as we increased consumer marketing across the Company's businesses supporting our top brands.
Operating income increased $85 million, or 12.1%, to $788 million, reflecting the strong sales growth, productivity improvements and solid operating performance, despite increased commodity costs.
Net interest expense increased $24 million, to $165 million, largely due to higher debt in Fiscal 2008 due to share repurchase activity, and to rate increases. Other expenses, net, increased $5 million to $19 million, chiefly due to increased currency losses on foreign currency contracts designed to mitigate volatility of earnings from foreign subsidiaries, partially offset by a gain recognized on the sale of our business in Zimbabwe.
Both the current and prior year-to-date effective tax rates were 28.3%. The current year effective tax rate is benefiting from a greater percentage of income occurring in lower taxed foreign jurisdictions. The effective tax rate in the current year also reflects discrete benefits of approximately $23 million resulting primarily from the tax effects of law changes in foreign jurisdictions and repatriation costs. During the first quarter of Fiscal 2007, a foreign subsidiary of the Company revalued certain of its assets, under local law, increasing the local tax basis by approximately $245 million. This revaluation reduced Fiscal 2007 tax expense by approximately $35 million. Of this $35 million tax benefit, approximately $27 million was recorded in the first six months of Fiscal 2007.
Income from continuing operations was $432 million compared to $392 million in the prior year, an increase of 10.4%, due to the increase in operating income, which was partially offset by a higher
net interest expense. Diluted earnings per share from continuing operations were $1.34 in the current year compared to $1.17 in the prior year, up 14.5%, which also benefited from a 3.3% reduction in fully diluted shares outstanding.
North American Consumer Products
Sales of the North American Consumer Products segment increased $134 million, or 10.4%, to $1.42 billion. Volume increased 5.1%, due primarily to Smart Ones® frozen entrees and desserts, Boston Market® frozen entrees and Classico® pasta sauces. The Smart Ones® volume improvement is largely a result of increased consumption, new products and anticipated price increases in the third quarter. These volume improvements were partially offset by a decline in Ore-Ida® frozen potatoes reflecting the effects of a price increase at the beginning of this fiscal year. The Ore-Ida® frozen potatoes price increase, along with reduced promotions on Classico® pasta sauces and Smart Ones® frozen entrees, resulted in overall price gains of 2.5%. The prior year acquisition of Renee's Gourmet Foods increased sales 1.4% and favorable Canadian exchange translation rates increased sales 1.4%.
Gross profit increased $40 million, or 7.4%, to $586 million, due primarily to the volume and pricing increases. The gross profit margin decreased to 41.3% from 42.4%, due primarily to increased commodity costs. Operating income increased $21 million, or 6.7%, to $330 million, due to the increase in gross profit, partially offset by increased selling and distribution expenses, reflecting higher volumes, and increased marketing and research and development costs.
Europe
Heinz Europe sales increased $213 million, or 15.0%, to $1.64 billion. Volume increased 5.9%, principally due to strong performance on Heinz® ketchup, soup and beans, Italian infant nutrition, Pudliszki® branded products in Poland, and Heinz® sauces and infant feeding products in Russia. These increases were partially offset by volume declines on frozen products due to the elimination of some low profit items. Net pricing increased sales 2.3%, resulting chiefly from price increases taken on Heinz® ketchup, beans and soup as well as price increases on Weight Watchers® and Aunt Bessie's® branded products. Divestitures reduced sales 1.8% and favorable exchange translation rates increased sales by 8.6%.
Gross profit increased $79 million, or 13.9%, to $646 million, and the gross profit margin decreased to 39.4% from 39.8%. The 13.9% increase reflects improved pricing and volume and the favorable impact of exchange translation rates, while the decline in gross profit margin is largely due to increased commodity costs and higher manufacturing costs in our business in the Netherlands. Operating income increased $40 million, or 15.3%, to $298 million, due to the increase in gross profit, partially offset by increased marketing expense of $21 million in support of our strong brands across Europe.
Asia/Pacific
Heinz Asia/Pacific sales increased $112 million, or 17.2%, to $767 million. Volume increased 4.8%, reflecting strong results in Australia, New Zealand, India and China, related primarily to new product introductions and increased marketing of $7 million. Pricing increased 1.9% as increases on soy sauce and nutritional beverages in Indonesia, LongFong® frozen products in China and nutritional products in India, were partially offset by price declines in convenience meals in Australia. Acquisitions, net of divestitures, increased sales 0.8%, and favorable exchange translation rates increased sales by 9.7%.
Gross profit increased $45 million, or 21.2%, to $257 million, and the gross profit margin increased to 33.5% from 32.3%. These increases were due to increased volume, pricing, favorable
sales mix and foreign exchange translation rates, despite increased commodity costs. Operating income increased by $27 million, or 33.9%, to $107 million, primarily reflecting the increase in gross profit and the impact of headcount reductions that occurred over the last year, partially offset by increased marketing expense.
U.S. Foodservice
Sales of the U.S. Foodservice segment decreased $3 million, or 0.4%, to $770 million. Pricing increased sales 2.6%, largely due to commodity-related price increases and reduced promotional spending on Heinz® ketchup and frozen soup. The core ketchup and sauces business performed well, with ketchup sales up 4.4%. Overall volume decreased 2.2%, reflecting declines in the non-branded portion control business, tomato products and frozen appetizers which more than offset the increase in Heinz® ketchup. Divestitures reduced sales 0.8%.
Gross profit decreased $22 million, or 9.2%, to $213 million, and the gross profit margin decreased to 27.7% from 30.4% as increased commodity and manufacturing costs along with the volume decline were only partially offset by increased pricing and productivity. Operating income decreased $20 million, or 17.1%, to $95 million, due primarily to increased commodity costs.
Rest of World
Sales for Rest of World increased $23 million, or 15.2%, to $175 million. Volume increased 6.5% due primarily to infant nutrition sales in Latin America as well as strong performance across our Middle East business. Higher pricing increased sales by 11.6%, largely due to price increases and reduced promotions in Latin America as well as commodity-related price increases in South Africa. Divestitures reduced growth 3.5% and favorable foreign exchange increased sales 0.5%.
Gross profit increased $9 million, or 17.0%, to $63 million, due mainly to increased pricing, higher volume and improved business mix. Operating income increased $4 million, or 20.2% to $23 million.
Liquidity and Financial Position
For the first six months of Fiscal 2008, cash provided by operating activities was $216 million, a decrease of $48 million from the prior year, but in line with the Company's operating plan. The decrease in Fiscal 2008 versus Fiscal 2007 is primarily due to higher inventories and unfavorable movement in income taxes, partially offset by favorable movement in accounts payable and approximately $45 million of cash paid in the prior year for reorganization costs related to workforce reductions in Fiscal 2006. The higher inventory levels were required to support customer service demands created by the Company's strong growth. The Company expects a return to more normal inventory levels in the back half of the fiscal year as it invests in additional capacity. The Company continued to make progress in reducing its cash conversion cycle in the first half of the year, with a reduction of 2 days, to 47 days in Fiscal 2008 compared to Fiscal 2007, reflecting improvements in receivables and accounts payable.
During the first quarter of Fiscal 2007, a foreign subsidiary of the Company revalued certain of its assets, under local law, increasing the local tax basis by approximately $245 million. As a result of this revaluation, the Company incurred a foreign income tax liability of approximately $30 million related to this revaluation which was paid during the third quarter of Fiscal 2007. Additionally, cash flow from operations is expected to be improved by approximately $100 million over the five to twenty year tax amortization period.
Cash used for investing activities totaled $206 million compared to $129 million last year. Capital expenditures totaled $132 million (2.8% of sales) compared to $90 million (2.1% of sales) last year, which reflect capacity-related spending in support of future growth and an ongoing investment in better systems. Proceeds from disposals of property, plant and equipment were $1 million
compared to $34 million in the prior year. In Fiscal 2008, cash paid for acquisitions, net of divestitures, required $37 million, primarily related to the acquisition of the license to the Cottee's® and Rose's® premium branded jams, jellies and toppings business in Australia and New Zealand and the buy-out of the minority ownership on the Company's Long Fong business in China, partially offset by the divestiture of a tomato paste business in Portugal. In the first six months of Fiscal 2007, acquisitions, net of divestitures, used $65 million primarily related to the Company's purchase of Renée's Gourmet Foods, partially offset by the sale of a non-core U.S. Foodservice product line, a frozen and chilled product line in the U.K., and a pet food business in Argentina.
Cash used by financing activities totaled $136 million compared to $236 million last year. Proceeds from short-term debt and commercial paper were $337 million this year compared to $130 million in the prior year. Payments on long-term debt were $2 million in the current year compared to $50 million in the prior year. Cash used for the purchases of treasury stock, net of proceeds from option exercises, was $242 million this year compared to $97 million in the prior year, in line with the Company's plans for repurchasing $500 million in net shares in Fiscal 2008. Dividend payments totaled $244 million, compared to $232 million for the same period last year, reflecting an 8.6% increase in the annual dividend on common stock.
At October 31, 2007, the Company had total debt of $5.31 billion (including $91 million relating to the fair value of interest rate swaps) and cash and cash equivalents of $576 million. Total debt balances since prior year end increased primarily due to share repurchases.
The Company and H.J. Heinz Finance Company maintain a $2 billion credit agreement that expires in 2009. The credit agreement supports the Company's commercial paper borrowings. As a result, these borrowings are classified as long-term debt based upon the Company's intent and ability to refinance these borrowings on a long-term basis. The Company maintains in excess of $1 billion of other credit facilities used primarily by the Company's foreign subsidiaries. These resources, the Company's existing cash balance, strong operating cash flow, and access to the capital markets, if required, should enable the Company to meet its cash requirements for operations, including capital expansion programs, debt maturities, share repurchases and dividends to shareholders.
As of October 31, 2007, the Company's long-term debt ratings at Moody's and Standard & Poor's were Baa2 and BBB, respectively.
During the first half of Fiscal 2008, the Company has experienced inflationary increases in commodity costs and expects this trend to continue for the remainder of Fiscal 2008. Strong sales growth, price increases, continued productivity improvements and the Company's geographic diversity are helping to mitigate these increases.
Contractual Obligations
The Company is obligated to make future payments under various contracts such as debt agreements, lease agreements and unconditional purchase obligations. In addition, the Company has purchase obligations for materials, supplies, services and property, plant and equipment as part of the ordinary conduct of business. A few of these obligations are long-term and are based on minimum purchase requirements. In the aggregate, such commitments are not at prices in excess of current markets. Due to the proprietary nature of some of the Company's materials and processes, certain supply contracts contain penalty provisions for early terminations. The Company does not believe that a material amount of penalties is reasonably likely to be incurred under these contracts based upon historical experience and current expectations. There have been no material changes to contractual obligations during the six months ended October 31, 2007. For additional information, refer to pages 24 and 25 of the Company's Annual Report on Form 10-K for the fiscal year ended May 2, 2007.
The Company adopted Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48") as of the beginning of fiscal year 2008. As of the end of . . .
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