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| HNZ > SEC Filings for HNZ > Form 10-Q on 21-Nov-2008 | All Recent SEC Filings |
21-Nov-2008
Quarterly Report
Overview
Heinz delivered solid results for the first-half of Fiscal 2009, with balanced growth in both developed and emerging markets. Heinz will accelerate its focus for the balance of the year on improving productivity and margins in light of the current economic climate. The Company will also shift investments in marketing and research and development toward delivering value to customers. Heinz anticipates that it will achieve full year combined sales volume and net price growth of 6%+. During Fiscal 2009, Heinz entered into foreign currency contracts that are expected to largely offset the impact of the strengthening dollar on earnings translation from our key foreign operations for the full year on net income and EPS. This action underpins our target of achieving this year's EPS projections of $2.87 to $2.91.
We remain confident in our business fundamentals, but as we look beyond Fiscal 2009 and in light of the volatile economic conditions, we will closely monitor currency and commodity movements before we communicate our financial outlook for Fiscal 2010.
Results of Operations
Sales for the three months ended October 29, 2008 increased $89 million, or 3.5%, to $2.61 billion. Net pricing increased sales by 7.1%, as price increases have been broadly implemented across the Company's portfolio to help offset significantly increased commodity costs. Volume decreased 1.3%, as strong performances in the North American Consumer Products segment, Continental Europe and India were more than offset by declines in other parts of the portfolio. U.S. Foodservice volumes were soft due to a slowdown in restaurant traffic as well as low price competition on non-branded products. Russia and European frozen volumes were down from the prior year reflecting double digit price increases implemented to mitigate significant commodity cost increases. In Indonesia, as expected, the earlier timing of Ramadan resulted in a shift of volume from the second quarter to the first quarter. Our top 15 brands grew 5.4% for the quarter, driven by increases in Heinz®, Ore-Ida®, Smart Ones®, Pudliszki®, and Bagel Bites® products. Acquisitions, net of divestitures, increased sales by 1.0% while foreign currency translation reduced sales by 3.3%.
Gross profit decreased $11 million, or 1.2%, to $921 million, and the gross profit margin decreased to 35.2% from 36.9%. These declines are largely due to increased commodity costs, unfavorable foreign exchange and the volume decline, which more than offset pricing and productivity improvements. Although commodity market prices are beginning to show signs of decline, there is a time-lag in recognizing potential cost reductions due to the mix of different commodities, dynamics in the commodity supply market, duration of forward supply contracts and movement through the Heinz supply chain. As a result, prices for all of the Company's key ingredients and packaging are still well above prior year levels and continue to have an unfavorable impact on the Company's gross profit as compared to the prior year.
Selling, general and administrative expenses ("SG&A") increased $24 million, or 4.6%, to $534 million, and increased as a percentage of sales to 20.5% from 20.2%. These increases are mainly due to increased spending on global task force initiatives including system capability improvements, timing in recognition of incentive compensation expense and increased selling and distribution costs ("S&D"), partially offset by movements in foreign exchange translation rates.
Operating income decreased $35 million, or 8.2%, to $386 million, reflecting unfavorable foreign exchange, increased commodity costs and incremental investments in task forces.
Net interest expense decreased $14 million, to $73 million, resulting from lower average interest rates in Fiscal 2009. Other income/(expense), net, improved by $87 million, to $77 million, as a $93 million increase in currency gains was partially offset by a gain in the prior year on the sale of our business in Zimbabwe. The currency gains resulted primarily from forward contracts that were put in place to help mitigate the unfavorable impact of translation associated with key foreign currencies for all of Fiscal 2009. $23 million of the currency gains relate to contracts that covered second quarter earnings and $69 million relates to the balance of Fiscal 2009. Future movements in key currencies could result in additional gains, or potential losses, on these contracts. For the full year, gains or losses on these contracts are expected to be largely offset by changes in the translation of earnings of our key foreign businesses. See Note 12 in Item 1, "Financial Statements," for further information.
The effective tax rate for the current quarter was 29.0%, down 80 basis points compared to 29.8% last year. The decrease in the effective tax rate is due to lower repatriation costs and the beneficial settlement of an uncertain tax position, partially offset by reduced tax planning benefits in foreign jurisdictions. We expect a current year annual effective tax rate of approximately 30%.
Net income was $277 million compared to $227 million in the prior year, an increase of 21.9%, due to increased currency gains, reduced net interest expense and a lower effective tax rate, partially offset by lower operating income. Diluted earnings per share was $0.87 in the current year compared to $0.71 in the prior year, up 22.5%, which also benefited from a 1.1% reduction in fully diluted shares outstanding.
North American Consumer Products
Sales of the North American Consumer Products segment increased $71 million, or 9.4%, to $827 million. Volume increased 2.9%, driven largely by Ore-Ida® frozen potatoes, Heinz® ketchup, and frozen meals and snacks. The Ore-Ida® growth was driven by new products such as Steam n' Mashtm, as well as higher demand by our customers in anticipation of price increases. The Heinz® ketchup improvement was largely due to a shift in the timing of sales resulting from price increases. The frozen meals and snacks increase was driven by increased consumption of Bagel Bites® and new product introductions under the TGI Friday's® brand, including TGI Friday's® Skillet Meals. These increases were partially offset by declines in Delimex® products related to a supply interruption. Net prices grew 8.0% reflecting price increases taken across the majority of the product portfolio over the last year to help offset higher commodity costs. Unfavorable Canadian exchange translation rates decreased sales 1.5%.
Gross profit increased $21 million, or 6.6%, to $330 million, due primarily to the sales increase. The gross profit margin decreased to 39.9% from 41.0%, as increased pricing and productivity improvements only partially offset increased commodity costs. Operating income increased $14 million, or 7.9%, to $192 million, due to the strong increase in sales, partially offset by higher commodity costs and increased S&D due to higher volume.
Europe
Heinz Europe sales increased $16 million, or 1.8%, to $888 million. Net pricing increased 7.2%, driven by Heinz® ketchup, beans and soup, broad-based increases in our Russian market, frozen products in the U.K. and Italian infant nutrition products. Volume decreased 2.8%, as increases on Pudliszki® branded products in Poland and Heinz® beans in the U.K. were more than offset by declines on frozen products in the U.K., decreases on infant nutrition products in Italy, and Heinz® soup as a result of promotional timing. Volume declines were also noted in our Russian business, in part due to double digit price increases executed to offset significant commodity cost increases. Acquisitions, net of divestitures, increased sales 3.5%, primarily due to the acquisition of the Bénédicta® sauce business in France in the second quarter of this year and the Wyko® sauce business
in the Netherlands at the end of Fiscal 2008. Unfavorable foreign exchange translation rates decreased sales by 6.0%.
Gross profit decreased $23 million, or 6.8%, to $316 million, and the gross profit margin declined to 35.6% from 38.9%. These declines are largely a result of increased commodity costs, unfavorable foreign exchange translation rates, cross currency rate movements between the Euro and British Pound, reduced volume and higher manufacturing costs in the U.K. and Ireland. These declines were partially offset by improved pricing. Operating income decreased $25 million, or 15.8%, to $135 million, due largely to increased commodity costs and unfavorable foreign exchange rates.
Asia/Pacific
Heinz Asia/Pacific sales decreased $10 million, or 2.4%, to $386 million. Pricing increased 5.2%, due to increases on ABC® products in Indonesia, convenience meals in Australia and nutritional beverages in India. This pricing helped offset increased commodity costs. Volume decreased 3.7%, reflecting declines in ABC® syrup in Indonesia, due to the timing of the Ramadan holiday, and declines across the Australian and New Zealand product portfolios, which are being impacted by timing of price increases and promotional activities and the recessionary economy in those markets. Volume was strong in our Indian business, driven by the Complan® brand. Unfavorable exchange translation rates decreased sales by 3.9%.
Gross profit decreased $3 million, or 2.6%, to $129 million, and the gross profit margin remained flat at 33.3% as increased pricing and improved product mix almost completely offset unfavorable foreign exchange translation rates, increased commodity costs and declines in volume. Operating income decreased by $5 million, or 9.1%, to $51 million, primarily reflecting the volume decline in Australia and the timing of Ramadan.
U.S. Foodservice
Sales of the U.S. Foodservice segment decreased $15 million, or 3.8%, to $391 million. Pricing increased sales 2.6%, as price increases have been taken across the product portfolio, particularly on Heinz® ketchup and portion control condiments. Volume decreased by 5.1%, due primarily to declines in frozen soup, appetizers and portion control products. The volume reflects reduced restaurant foot traffic and the pro-active exiting of lower margin products and customers.
Gross profit decreased $12 million, or 10.2%, to $102 million, and the gross profit margin decreased to 26.0% from 27.8%, due to higher commodity costs and lower volumes. Operating income decreased $13 million, or 24.8%, to $39 million, which is primarily due to the decline in gross profit. Our Foodservice business has experienced a disproportionate impact on margins from commodities while realizing price increases below the corporate average.
Rest of World
Sales for Rest of World increased $28 million, or 30.0%, to $120 million. Volume increased 6.3% driven by increases in Latin America and the Middle East. Higher pricing increased sales by 27.2%, largely due to inflation in Latin America, and commodity-related price increases in South Africa and the Middle East. Foreign exchange translation rates decreased sales 3.5%.
Gross profit increased $8 million, or 23.9%, to $42 million, due mainly to increased pricing and higher volume, partially offset by increased commodity costs. Operating income increased $2 million, or 16.2% to $15 million.
Results of Operations
Sales for the six months ended October 29, 2008 increased $424 million, or 8.9%, to $5.20 billion. Net pricing increased sales by 6.2%, as price increases were taken across the Company's portfolio to help offset increases in commodity costs. Volume increased 1.7%, due to solid growth in the North American Consumer Products segment, Continental Europe, Heinz® branded products in the U.K. and the emerging markets. These increases were partially offset by volume declines in the U.S. Foodservice segment and frozen foods in the U.K. Despite difficult economic conditions, our top 15 brands grew 10.7%, led by the Heinz®, Ore-Ida® and ABC® brands. Acquisitions, net of divestitures, increased sales by 0.9%. Foreign exchange translation rates increased sales slightly by 0.2%.
Gross profit increased $85 million, or 4.8%, to $1.85 billion, benefiting from favorable volume and pricing. The gross profit margin decreased to 35.7% from 37.1%, as pricing and productivity improvements were more than offset by increased commodity costs.
SG&A increased $94 million, or 9.5%, to $1.08 billion, and was up slightly as a percentage of sales to 20.7% from 20.6%. The 9.5% increase in SG&A is due to an increase in marketing expense and higher S&D resulting from increased volume and higher fuel costs. SG&A was also impacted by increased spending on global task force initiatives including system capability improvements and timing in recognition of incentive compensation expense. Operating income decreased $9 million, or 1.1%, to $779 million, as the strong sales growth was offset by increased commodity costs and increases in SG&A.
Net interest expense decreased $29 million, to $136 million, largely as a result of lower average interest rates in Fiscal 2009. Other income/(expense), net, improved by $88 million, to $69 million, as a $97 million increase in currency gains was partially offset by increased minority interest expense and a prior year gain on the sale of our business in Zimbabwe. The currency gains resulted primarily from forward contracts that were put in place to help mitigate the unfavorable impact of translation associated with key foreign currencies for all of Fiscal 2009. $22 million of the currency gains relate to contracts that covered earnings for the first six months of Fiscal 2009, and $69 million relates to the balance of the fiscal year. Future movements in key currencies could result in additional gains, or potential losses on these contracts. For the full year, gains or losses on these contracts are expected to be largely offset by changes in the translation of earnings of our key foreign businesses. See Note 12 in Item 1, "Financial Statements," for further information.
The effective tax rate for the six months ended October 29, 2008 was 28.9% compared to 28.3% for the comparable period last year. The current and prior year effective tax rates both reflect a discrete benefit resulting from the tax effects of law changes in the U.K. of approximately $10 million and $12 million, respectively. The effective tax rate in the current year is higher than the rate in the prior year due to reduced tax planning benefits in foreign jurisdictions partially offset by reduced repatriation costs and the beneficial settlement of uncertain tax positions.
Net income was $506 million compared to $432 million in the prior year, an increase of 17.0%, due to higher gross profit, the increased currency gains and reduced net interest expense, partially offset by increased SG&A and a higher effective tax rate. Diluted earnings per share was $1.59 in the current year compared to $1.34 in the prior year, up 18.7%, which also benefited from a 1.9% reduction in fully diluted shares outstanding.
North American Consumer Products
Sales of the North American Consumer Products segment increased $148 million, or 10.4%, to $1.57 billion. Volume increased 3.7%, driven largely by Ore-Ida® frozen potatoes, Heinz® ketchup and the new TGI Friday's® Skillet Meals. The Ore-Ida® growth was due to new products such as Steam n' Mashtm, combined with a shift in the timing of sales resulting from price increases. The Heinz® ketchup improvement was largely due to a shift in the timing of sales in anticipation of price increases. These increases were partially offset by declines in Delimex® frozen snacks due to a supply interruption. Net prices grew 6.9% reflecting price increases taken across the majority of the product portfolio over the last year to help offset higher commodity costs. Unfavorable Canadian exchange translation rates decreased sales 0.2%.
Gross profit increased $45 million, or 7.7%, to $631 million, due primarily to the sales increase. The gross profit margin decreased to 40.2% from 41.3%, as increased pricing and productivity improvements only partially offset increased commodity costs. Operating income increased $30 million, or 9.0%, to $360 million, reflecting the strong increase in sales, partially offset by higher commodity costs and increased S&D due to higher volume and fuel costs.
Europe
Heinz Europe sales increased $168 million, or 10.2%, to $1.81 billion. Volume increased 1.5%, principally as the U.K. and Continental Europe benefited from new product introductions. Volume increases were achieved on Heinz® ketchup across Europe, Heinz® beans and salad cream in the U.K. and Pudliszki® branded products in Poland. These increases were partially offset by reduced volume in Russia and declines on frozen products in the U.K. as a result of price increases and supply constraints. Net pricing increased 5.9%, driven by Heinz® ketchup, beans and soup, broad-based increases in our Russian market, frozen products in the U.K. and Italian infant nutrition products, partially offset by increased promotional spending in the U.K. Acquisitions, net of divestitures, increased sales 2.3%, primarily due to the acquisition of the Bénédicta® sauce business in France during the second quarter of this year and the Wyko® sauce business in the Netherlands at the end of Fiscal 2008. Favorable foreign exchange translation rates increased sales by 0.5%.
Gross profit increased $27 million, or 4.1%, to $673 million, driven by increased sales. Although foreign exchange translation has favorably impacted sales, cross currency purchases between the Euro and British Pound more than offset the benefit at gross profit. The gross profit margin decreased to 37.2% from 39.4%, as increased commodity costs and higher manufacturing costs in the frozen food plants were only partially offset by the improved pricing. Operating income decreased $7 million, or 2.3%, to $292 million, as the increase in sales was offset by higher commodity costs, volume and fuel-related increases in S&D and higher general and administrative expenses ("G&A") reflecting investments in task forces and systems.
Asia/Pacific
Heinz Asia/Pacific sales increased $77 million, or 10.0%, to $844 million. Volume increased 3.0%, as significant improvements on nutritional beverage sales in India, frozen foods in Japan and ABC® products in Indonesia were partially offset by declines in convenience meals in Australia and New Zealand. Australia and New Zealand are being impacted by timing of price increases and promotional activities and the economic downturn. Pricing increased 5.4%, due to increases on seafood and ABC® sauces and syrup in Indonesia, convenience meals in Australia, nutritional beverages in India and Long Fong® frozen products in China. This pricing helped offset continuing increases in commodity and fuel costs. Acquisitions and favorable exchange translation rates both increased sales by 0.8%.
Gross profit increased $29 million, or 11.3%, to $286 million, and the gross profit margin rose to 33.9% from 33.5%. The improvement in gross profit was due to increased volume and pricing, which
more than offset increased commodity costs. Operating income increased by $10 million, or 9.6%, to $117 million, primarily reflecting the increase in sales and gross margin, partially offset by increased S&D related to higher volume and fuel costs, higher G&A and increased marketing spending.
U.S. Foodservice
Sales of the U.S. Foodservice segment decreased $26 million, or 3.3%, to $744 million. Pricing increased sales 2.1%, largely due to increases on Heinz® ketchup, portion control condiments and tomato products. Volume decreased by 4.8%, as higher volume on frozen desserts was more than offset by declines in other products. The volume reflects reduced restaurant foot traffic, the pro-active exiting of lower margin products and customers, as well as increased competition on our non-branded products.
Gross profit decreased $33 million, or 15.2%, to $181 million, and the gross profit margin decreased to 24.3% from 27.7%, due to higher commodity costs and lower volumes. Operating income decreased $31 million, or 33.0%, to $64 million, which is primarily due to the decline in gross profit.
Rest of World
Sales for Rest of World increased $58 million, or 33.0%, to $233 million. Volume increased 9.3% driven by increases in Latin America and the Middle East. Higher pricing increased sales by 26.0%, largely due to inflation in Latin America and commodity-related price increases in South Africa and the Middle East. Foreign exchange translation rates decreased sales 2.3%.
Gross profit increased $18 million, or 27.9%, to $80 million, due mainly to increased pricing and higher volume, partially offset by increased commodity costs. Operating income increased $5 million, or 19.9% to $28 million.
Liquidity and Financial Position
For the first six months of Fiscal 2009, cash provided by operating activities was $214 million, virtually flat with prior year. This reflects additional contributions made this year to fund the Company's pension plans, increases in working capital, and the current year payment of the long-term incentive compensation accruals from Fiscal 2008, partially offset by an $82 million cash inflow from the settlement and maturity of foreign currency forward contracts that were discussed previously. The Company entered into new foreign currency contracts simultaneously with the settlement of the forward contracts discussed above, continuing the coverage for the balance of the year. The Company's cash conversion cycle increased 7 days, to 54 days in the first six months of Fiscal 2009, which was largely related to lower average accounts payable, due to the settlement of hedge contract liabilities that were outstanding in the prior year.
During the first six months of Fiscal 2009, the Company contributed $36 million to fund its obligations under its pension and postretirement plans. Recent adverse conditions in the equity markets have caused the actual rate of return on the pension plan assets to be significantly below the Company's assumed long-term rate of return of 8.2%. Also, the discount rates are expected to be higher than the 5.5% rate disclosed at Fiscal 2008 year end. As a result of these two partially offsetting factors, the Company is reevaluating the funding levels for the remainder of Fiscal 2009 and the full-year 2009 contributions may exceed the original projection of $80 million.
Cash used for investing activities totaled $232 million compared to $206 million last year. In the first six months of Fiscal 2009, cash paid for acquisitions, net of divestitures, required $103 million, primarily related to the acquisition of Benedicta, a table top sauce, mayonnaise and salad dressing business in France. This amount was partially offset by the sale of a small portion control foodservice business in the U.S. In the first six months of 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. Capital expenditures totaled $124 million (2.4% of sales) compared to $132 million (2.8% of sales) in the prior year. In response to recent changes in economic conditions across the globe, the Company is reevaluating all non-critical capital projects.
Cash provided by financing activities totaled $449 million compared to cash used of $136 million last year. Proceeds from long-term debt were $850 million in the current year. The current year proceeds represent the sale of $500 million 5.35% Notes due 2013 as well as the sale of $350 million or 3,500 shares of H.J. Heinz Finance Company's (a subsidiary of Heinz) Series B Preferred Stock. The proceeds from both transactions were used for general corporate purposes, including the repayment of commercial paper and other indebtedness incurred to redeem H.J. Heinz Finance Company's Series A Preferred Stock. As a result, payments on long-term debt were $338 million this year compared to $2 million in the prior year. Proceeds from commercial paper and short-term debt were $118 million in the current year compared to $337 million in the prior year. Cash proceeds from option exercises, net of treasury stock purchases, provided $80 million of cash in the current year. Cash used for the purchases of treasury stock, net of proceeds from option exercises, was $242 million in the prior year. Dividend payments totaled $263 million, compared to $244 million for the same period last year, reflecting a 9.2% increase in the dividend on common stock for Fiscal 2009.
At October 29, 2008, the Company had total debt of $5.73 billion (including $206 million relating to the SFAS No. 133 hedge accounting adjustments) and cash and cash equivalents of $928 million. Total debt balances since prior year end have increased as the Company is holding higher levels of cash and cash equivalents during this period of economic uncertainty. Funding requirements for the Benedicta acquisition and the seasonal build-up of working capital also contributed to the increase in debt. The Company anticipates that debt will decrease throughout the balance of the fiscal year as cash flows accelerate in the second half of Fiscal 2009.
The Company and H.J. Heinz Finance Company ("HFC") maintain a $2 billion credit agreement that expires in August 2009. The credit agreement supports the Company's commercial paper borrowings. Although the Company has not historically renewed these types of credit agreements early, the Company anticipates that it and HFC will enter into a new credit agreement during the first six months of 2009. Until such time as a new credit agreement is put in place, commercial paper borrowings that have been classified as long-term debt will be classified as short-term debt on the balance sheet in accordance with generally accepted accounting principles.
Global capital and credit markets, including the domestic commercial paper markets, have recently experienced increased volatility and disruption. Despite this volatility and disruption, the Company has continued to have access to the commercial paper market, albeit at higher spreads to LIBOR than historical norms. The Company will continue to monitor the credit markets to determine the appropriate mix of long-term debt and short-term debt going forward. The Company believes that its strong operating cash flow, existing cash balances, together with the credit facilities and other available capital market financing, will be adequate to meet the Company's cash requirements for operations, including capital expansion programs, debt maturities, acquisitions, share repurchases and dividends to shareholders. While we are confident that we will finance the Company's needs, there can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not . . .
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