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| HNZ > SEC Filings for HNZ > Form 10-Q on 26-Feb-2008 | All Recent SEC Filings |
26-Feb-2008
Quarterly Report
Results of Operations
Sales for the three months ended January 30, 2008 increased $316 million, or 13.8%, to $2.61 billion, with growth in all five business segments. Volume increased 5.2%, driven by a 9.8% volume increase in Asia/Pacific, combined with solid growth in Europe, North American Consumer Products and U.S. Foodservice segments. Notably, the Company's emerging markets (Russia, Indonesia, China, India, Poland, Latin America, Czech Republic, Egypt, South Africa and Middle East) achieved an 8% volume increase and accounted for over 20% of Heinz's total sales growth in the third quarter of Fiscal 2008. Net pricing increased sales by 3.4%, mainly in the North American Consumer Products and European segments, as well as our businesses in Latin America and Indonesia. Foreign exchange translation rates increased sales by 5.3%.
Sales of the Company's top 15 brands grew 16.8% from the year-ago quarter, as sales of ketchup rose 7.8% and sales of beans and soups increased 15.8%. The growth in the top brands was led by Heinz®, Ore-Ida®, Smart Ones®, Classico®, Weight Watchers®, and ABC®.
Gross profit increased $83 million, or 9.8%, to $935 million, benefiting from favorable volume, pricing and foreign exchange translation rates. The gross profit margin decreased to 35.8% from 37.1%, as pricing and productivity improvements were more than offset by increased commodity costs, reflecting higher costs for dairy, oils, grains and other key ingredients.
Selling, general and administrative expenses ("SG&A") decreased as a percentage of sales to 20.3% from 20.7%, but increased $54 million, or 11.3%, to $529 million. The 11.3% increase in SG&A is primarily due to a 16.2% increase in marketing expense and 18.5% increase in research and development costs to support brands across the Company, and higher selling and distribution costs resulting from foreign exchange translation rates and increased volume.
Total marketing support (recorded as a reduction of revenue or as a component of SG&A) increased $54 million, or 9.5%, to $618 million on a gross sales increase of 12.8%. Marketing support recorded as a reduction of revenue, typically deals and allowances, increased $41 million, or 8.4%, to $525 million, and decreased as a percentage of gross sales to 16.7% from 17.4%, 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 $13 million, or 16.2%, to $93 million, which was primarily in our U.S. retail frozen business as we continued supporting our top brands.
Operating income increased $30 million, or 7.9%, to $406 million, reflecting the strong sales growth, productivity improvements, solid operating performance and favorable foreign exchange which more than offset significant commodity cost increases.
Net interest expense increased $13 million, to $84 million, largely due to higher debt in Fiscal 2008, related primarily to share repurchase activity. Other expenses, net, decreased $7 million to $3 million, chiefly due to gains on foreign currency contracts designed to mitigate volatility of earnings from foreign subsidiaries.
The effective tax rate for the current quarter was 31.6% compared to 26.0% last year. The current quarter's tax rate is higher than the prior year's primarily due to the negative effects of a tax law change in a foreign jurisdiction that occurred during the current quarter and a benefit in the prior year from the reversal of a foreign tax reserve. These items were partially offset by reduced repatriation costs in the current period. The current year annual effective tax rate is expected to be approximately 31%.
Net income was consistent with the prior year quarter at $219 million, reflecting the 560 basis point increase in the tax rate. Diluted earnings per share was $0.68 in the current year compared to $0.66 in the prior year, up 3.0%, reflecting the higher tax rate and a 3.3% reduction in fully diluted shares outstanding.
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
North American Consumer Products continued to deliver consistently strong results, with sales and operating income up 13.0% and 13.3%, respectively. Overall, sales increased $93 million, to $808 million. Volume increased 5.4%, due primarily to Smart Ones® frozen entrees, largely due to new products such as Fruit Inspirations® and Anytime Selections®, as well as Classico® pasta sauces, due to new products and a shift in timing of sales resulting from a recent price increase. Ore-Ida® frozen potatoes and Boston Market® frozen entrees also contributed to the volume improvement. Net pricing increased 4.5% largely due to Fiscal 2008 price increases instituted on Ore-Ida® frozen potatoes, Heinz® ketchup and Smart Ones® frozen entrees. Favorable Canadian exchange translation rates increased sales 3.0%.
Gross profit increased $38 million, or 13.3%, to $325 million, due primarily to the volume and pricing increases. The gross profit margin increased slightly to 40.2% from 40.1%, as increased commodity costs were offset by productivity improvements, pricing and favorable mix. Last year's results were impacted by increased manufacturing costs resulting from inefficiencies during the start-up phase of a plant consolidation. Operating income increased $22 million, or 13.3%, to $183 million, driven by strong sales growth, which was partially offset by increased marketing, research and development and general and administrative ("G&A") costs.
Europe
Heinz Europe grew sales and operating income by 13.5% and 8.2%, respectively. Overall, sales increased $110 million, to $923 million. Volume increased 3.9%, principally due to the strong performance of Heinz® ketchup and soup in the U.K., Pudliszki® branded products in Poland, and new product introductions across continental Europe, such as Weight Watchers® Big Soups in Germany, Austria and Switzerland and new Honig® convenience meal varieties in the Netherlands. Net pricing increased sales 2.7%, resulting chiefly from prior year commodity-related price increases taken on convenience meal products in the U.K. and various products in Russia. Divestitures reduced sales 1.2% and favorable exchange translation rates increased sales by 8.1%.
Gross profit increased $22 million, or 6.8%, to $346 million, driven largely by increased volume and price and favorable foreign exchange rates. The gross profit margin decreased to 37.4% from 39.8% due primarily to increased commodity costs and higher manufacturing costs in our U.K. and European frozen businesses, which was mitigated somewhat by the pricing increases. Operating income increased $12 million, or 8.2%, to $164 million, due to the increase in sales and favorable foreign exchange rates, partially offset by increased commodity and selling and distribution expenses.
Asia/Pacific
Heinz Asia/Pacific sales and operating income increased 27.4% and 38.2%, respectively. Overall, sales increased $83 million, or 27.4%, to $387 million. Volume increased 9.8%, reflecting strong improvements across all businesses within this segment, resulting primarily from new product introductions and increased marketing. Leading these improvements were Australia, Indonesia and China. Pricing increased 4.2% reflecting increases on ABC® soy sauce and beverages in Indonesia, LongFong® frozen products in China and nutritional products in India. Acquisitions, net of divestitures, increased sales 2.8%, 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 10.7%.
Gross profit increased $26 million, or 27.0%, to $120 million, and the gross profit margin remained consistent at 31.2%. The increase was 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 $11 million, or 38.2%, to $41 million, primarily due to the increase in sales, partially offset by an increased marketing investment.
U.S. Foodservice
U.S. Foodservice sales increased $15 million, or 3.8%, to $401 million. Volume increased 4.3%, largely due to promotional timing and new products, partially offset by reduced industry traffic reported by many of our customers. Specifically, the volume growth benefited from new frozen dessert product sales to the Company's casual dining customers as well as increases in frozen soup. Pricing decreased sales by 0.5% as price increases in frozen soup were more than offset by declines in frozen desserts.
Gross profit decreased $7 million, or 6.0%, to $109 million, and the gross profit margin decreased to 27.3% from 30.1%, reflecting higher commodity and energy costs. This segment continues to be disproportionately hit by double-digit increases in commodity costs, approximately one-third of which were offset by gains on commodity derivative contracts which did not qualify for hedge accounting. Operating income decreased $8 million, or 13.9%, to $47 million, due primarily to the increase in commodity costs.
Rest of World
Sales for Rest of World increased $15 million, or 18.7%, to $93 million. Volume increased 2.5% due primarily to increased infant nutrition and tomato paste sales in Latin America. Higher pricing increased sales by 15.0%, largely due to commodity-related price increases in Latin America and South Africa. This growth was enhanced by 1.2% due to favorable foreign exchange translation rates.
Gross profit increased $5 million, or 18.4%, to $33 million, due mainly to increased pricing, higher volume and improved business mix. Operating income increased 11.0% to $11 million.
Results of Continuing Operations
Sales for the nine months ended January 30, 2008 increased $795 million, or 12.1%, to $7.38 billion, reflecting growth in all five business segments. Volume increased 4.4%, 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 9.5% volume increase and accounted for over 20% of Heinz's total sales growth for the nine months ended January 30, 2008. Net pricing increased sales by 2.9%, mainly in the North American Consumer Products, European and
U.S. Foodservice segments and our businesses in Latin America and Indonesia. Divestitures, net of acquisitions, decreased sales by 0.2%. Foreign exchange translation rates increased sales by 4.9%.
Sales of the Company's top 15 brands grew 13.8% from prior year, led by strong increases in Heinz®, Smart Ones®, Classico®, Boston Market®, Plasmon®, Weight Watchers® and ABC®. These increases are a result of the Company's strategy of focused innovation and marketing support behind these top brands.
Gross profit increased $234 million, or 9.5%, to $2.71 billion, benefiting from favorable volume, pricing and foreign exchange translation rates. The gross profit margin decreased to 36.6% from 37.5%, 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 $120 million, or 8.6%, to $1.51 billion. As a percentage of sales, SG&A decreased to 20.5% from 21.1%. The increase in SG&A is due to a 21.4% increase in marketing expense, a 16.3% 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 the benefits of effective cost control and headcount reductions that took place last year and prior year costs related to the proxy contest.
Total marketing support (recorded as a reduction of revenue or as a component of SG&A) increased $126 million, or 7.9%, to $1.71 billion on a gross sales increase of 11.0%. Marketing support recorded as a reduction of revenue, typically deals and allowances, increased $78 million, or 5.7%, to $1.44 billion, but decreased as a percentage of gross sales to 16.3% from 17.1%, 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 $49 million, or 21.4%, to $277 million, as we increased consumer marketing across the Company's businesses supporting innovation and our top brands.
Operating income increased $115 million, or 10.6%, to $1.19 billion, reflecting the strong sales growth, productivity improvements and favorable foreign exchange, partially offset by increased commodity costs.
Net interest expense increased $37 million, to $250 million, largely as a result of higher debt in Fiscal 2008 related to share repurchase activity, and to rate increases. Other expenses, net, decreased $2 million to $22 million, as losses on foreign currency contracts designed to mitigate volatility of earnings from foreign subsidiaries were more than offset by a gain recognized on the sale of our business in Zimbabwe.
The current year-to-date effective tax rate was 29.4% compared to 27.5% for the prior year. The current year effective tax rate benefits from a greater percentage of income occurring in lower taxed foreign jurisdictions and lower repatriation costs. However, these benefits were more than offset by prior year nonrecurring items. 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 $31 million was recorded in the first nine months of Fiscal 2007. During the third quarter of Fiscal 2007, final conditions necessary to reverse a foreign tax reserve were achieved, and as a result, the Company realized a non-cash tax benefit of $64.1 million. Also, during the third quarter of Fiscal 2007, the Company modified its plans for repatriation of foreign earnings, and as such, recorded incremental tax charges of $62.9 million in the prior year quarter.
Income from continuing operations was $651 million compared to $611 million in the prior year, an increase of 6.6%, due to the increase in operating income, which was partially offset by a higher net interest expense and a higher effective tax rate. Diluted earnings per share from continuing
operations were $2.01 in the current year compared to $1.83 in the prior year, up 9.8%, which also benefited from a 3.3% 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 nine months ended January 31, 2007, 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.
North American Consumer Products
Sales of the North American Consumer Products segment increased $227 million, or 11.3%, to $2.23 billion. Volume increased 5.2%, 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 and new products. 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 more efficient promotions on Classico® pasta sauces and price increases on Smart Ones® frozen entrees, resulted in overall price gains of 3.2%. The prior year acquisition of Renee's Gourmet Foods in Canada increased sales 0.9% and favorable Canadian exchange translation rates increased sales 2.0%.
Gross profit increased $79 million, or 9.4%, to $911 million, due primarily to the volume and pricing increases. The gross profit margin decreased to 40.9% from 41.6%, as increased pricing, favorable mix and productivity improvements only partially offset increased commodity costs. Operating income increased $42 million, or 9.0%, to $513 million, due to the strong increase in sales, partially offset by higher commodity costs and increased marketing and research and development costs.
Europe
Heinz Europe sales increased $323 million, or 14.4%, to $2.56 billion. Volume increased 5.1%, 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. Volume also benefited from new product introductions across continental Europe, such as Weight Watchers® Big Soups in Germany, Austria and Switzerland. These increases were partially offset by volume declines on U.K. frozen products due to the elimination of some low profit items. Net pricing increased sales 2.5%, resulting chiefly from commodity-related price increases taken on Heinz® ketchup, beans and soup, and Weight Watchers® and Aunt Bessie's® frozen products. Divestitures reduced sales 1.6% and favorable exchange translation rates increased sales by 8.4%.
Gross profit increased $101 million, or 11.3%, to $992 million, and the gross profit margin decreased to 38.7% from 39.8%. The 11.3% 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 U.K., European frozen and Netherlands businesses. Operating income increased $52 million, or 12.7%, to $463 million, due to higher sales, partially offset by higher commodity costs and increased marketing spending of $22 million in support of our strong brands across Europe.
Asia/Pacific
Heinz Asia/Pacific sales increased $196 million, or 20.4%, to $1.15 billion. Volume increased 6.3%, reflecting strong improvements across all businesses within this segment, particularly Australia and India, related primarily to new product introductions and increased marketing, up $14 million, or 30.4%. Pricing increased 2.6% as increases on soy sauce and 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 1.5%, and favorable exchange translation rates increased sales by 10.0%.
Gross profit increased $71 million, or 23.0%, to $377 million, and the gross profit margin increased to 32.7% from 32.0%. These increases were due to increased volume, pricing, favorable sales mix and foreign exchange translation rates, which more than offset increased commodity costs. Operating income increased by $38 million, or 35.0%, to $148 million, primarily reflecting the increase in sales and gross margin, partially offset by increased marketing expense from investment in our brands along with increased selling and distribution and G&A expenses, due primarily to foreign exchange translation rates.
U.S. Foodservice
Sales of the U.S. Foodservice segment increased $12 million, or 1.0%, to $1.17 billion. Pricing increased sales 1.6%, largely due to commodity-related price increases and reduced promotional spending on Heinz® ketchup and frozen soup, partially offset by declines in frozen desserts. The core ketchup and sauces business performed well, with ketchup sales up 3.9%. Overall volume was flat, reflecting higher ketchup and frozen dessert volume offset by lower industry traffic which resulted in declines in the non-branded portion control business, tomato products and frozen appetizers. Divestitures reduced sales 0.5%.
Gross profit decreased $28 million, or 8.1%, to $323 million, and the gross profit margin decreased to 27.6% from 30.3% as increased commodity and manufacturing costs were only partially offset by increased pricing and productivity. Operating income decreased $27 million, or 16.1%, to $142 million, due primarily to the significant increase in commodity costs.
Rest of World
Sales for Rest of World increased $38 million, or 16.4%, to $268 million. Volume increased 5.2% due primarily to infant nutrition sales in Latin America as well as strong performance across our Middle East business. Higher pricing increased sales by 12.8%, largely due to price increases and reduced promotions in Latin America as well as commodity-related price increases in South Africa. Divestitures reduced growth 2.3% and favorable foreign exchange increased sales 0.8%.
Gross profit increased $14 million, or 17.5%, to $96 million, due mainly to increased pricing, higher volume and improved business mix. Operating income increased $5 million, or 17.0% to $34 million.
Liquidity and Financial Position
For the first nine months of Fiscal 2008, cash provided by operating activities was $471 million, an increase of $81 million from the prior year and in line with the Company's operating plan. The increase in Fiscal 2008 versus Fiscal 2007 is primarily due to favorable movement in accounts payable, income taxes and cash paid in the prior year for reorganization costs related to workforce reductions in Fiscal 2006, partially offset by higher inventories and receivables. The higher inventory levels were required to support customer service demands created by the Company's strong growth. The Company continued to make progress in reducing its cash conversion cycle, with a reduction of 2 days, to 50 days in Fiscal 2008 compared to Fiscal 2007, primarily reflecting improvements in 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 $90 million over the five to twenty year tax amortization period.
Cash used for investing activities totaled $303 million compared to $227 million last year. Capital expenditures totaled $201 million (2.7% of sales) compared to $151 million (2.3% of sales) last year, which reflect capacity-related spending in support of future growth and an ongoing investment in improved systems. Proceeds from disposals of property, plant and equipment were $2 million compared to $42 million in the prior year, representing the disposal of 12 plants during the prior year. In Fiscal 2008, cash paid for acquisitions, net of divestitures, required $25 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 nine months of Fiscal 2007, acquisitions, net of divestitures, used $91 million primarily related to the Company's purchase of Renée's Gourmet Foods and the purchase of the minority ownership in our Heinz Petrosoyuz business in Russia. Divestitures in the prior year included 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. In addition, transaction costs related to the European seafood and Tegel® poultry divestitures were also paid during the prior year.
Cash used by financing activities totaled $232 million compared to $236 million last year. Proceeds from short-term debt and commercial paper were $403 million this year compared to $456 million in the prior year. Payments on long-term debt were $4 million in the current year compared to $51 million in the prior year. Cash used for the purchases of treasury stock, net of proceeds from option exercises, was $322 million this year compared to $305 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 $366 million, compared to $348 million for the same period last year, reflecting an 8.6% increase in the annual dividend on common stock. During the third quarter of Fiscal 2008, the Company terminated interest rate swaps that were previously designated as fair value hedges of fixed rate debt obligations. The notional amount of these contracts totaled $235 million. The Company received $40 million of cash, which has been presented in the condensed consolidated statements of cash flows within financing activities as a component of other items, net.
In February 2008, the Company terminated additional interest rate swaps with a total notional amount of $377 million. The Company received $70 million of cash, which will be presented in financing activities in the consolidated statements of cash flows. This $70 million gain, along with the $40 million received in the current quarter, will be amortized to reduce interest expense over the remaining term of the corresponding debt obligations (average of 22 years). Also, in February 2008, the Company terminated the cross currency swaps that were previously designated as net investment hedges of foreign operations. The notional amount of these contracts totaled $1.6 billion, and the Company paid $93 million of cash to the counterparties, which will be presented in investing activities in the consolidated statements of cash flows. The unwinding of the net investment hedges and interest rate swaps described above were completed in conjunction with the reorganization of our foreign operations and our interest rate swap portfolio.
At January 30, 2008, the Company had total debt of $5.48 billion (including $221 million relating to the SFAS No. 133 hedge accounting adjustments) and cash and cash equivalents of $645 million. Total debt balances since prior year end increased primarily due to share repurchases. Total debt is expected to be reduced by year-end fiscal 2008 as the Company anticipates strong cash flow in the fourth quarter of 2008.
The Company and H.J. Heinz Finance Company maintain a $2 billion credit agreement that expires in August 2009. The credit agreement supports the . . .
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