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| HNZ > SEC Filings for HNZ > Form 10-Q on 24-Feb-2009 | All Recent SEC Filings |
24-Feb-2009
Quarterly Report
Overview
Despite the weakened global economic environment, the Company expects to achieve its goals for Fiscal 2009 for sales growth (as defined by volume and net price), EPS and cash flow. The Company has adapted its strategies to address this difficult economic environment with a concentration on the following:
• Shifting investments in marketing and research and development toward delivering value to customers.
• Continuing our focus on emerging markets where economic growth remains well above the global average.
• Increasing emphasis on improving margins and increasing cash flow.
The Company is focused on improving productivity, tightly managing fixed costs and capital spending, and reducing the cash conversion cycle.
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 plan to achieve this year's EPS projections of $2.87 to $2.91. The Company also expects operating free cash flow (cash flow from operations less capital expenditures plus proceeds from disposals of PP&E) to be approximately $850 million in Fiscal 2009.
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 January 28, 2009 decreased $196 million, or 7.5%, to $2.41 billion, as foreign exchange translation rates had an 11.4% unfavorable impact. Net pricing increased sales by 8.0%, as price increases have been broadly implemented across the Company's portfolio to help offset higher commodity costs. Volume decreased 6.4%, largely resulting from declines in the North American Consumer Products and U.S. Foodservice segments, the U.K., Italy, New Zealand and China. Volume has been impacted by the weakened global economy, the timing of current and prior year price increases on the Company's products, and competitive pricing in a number of key businesses. Acquisitions, net of divestitures, increased sales by 2.4%.
Gross profit decreased $81 million, or 8.7%, to $854 million, and the gross profit margin decreased to 35.4% from 35.8%. The decline in gross profit is largely due to a $107 million impact from unfavorable foreign exchange translation rates, increased commodity costs and reduced volume, which more than offset increased pricing and productivity improvements. Although there has been a general decline in commodity market prices, there are a number of factors causing commodity costs to be higher than the prior year. These include the time-lag in recognizing potential cost reductions due to the mix of different commodities, duration of forward supply contracts, transaction currency rate impacts, and movement through the Heinz supply chain. As a result, prices for some of the Company's key ingredients and packaging are still 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") decreased $57 million, or 10.7%, to $473 million, and decreased as a percentage of sales to 19.6% from 20.3%. These decreases are mainly
due to a $55 million impact from foreign exchange translation rates and reduced general and administrative expenses ("G&A") due to lower accrued incentive compensation expense and a life insurance settlement benefit received in the current quarter. These decreases were partially offset by additional SG&A from the current year acquisitions of Golden Circle Limited, a fruit and juice business in Australia, and Benedicta, a sauce business in France.
Operating income decreased $24 million, or 6.0%, to $382 million, reflecting a $52 million unfavorable impact from foreign exchange translation rates, reduced volume and increased commodity costs, partially offset by net price increases.
Net interest expense decreased $14 million, to $70 million, reflecting a $16 million increase in interest income, partially offset by a $2 million increase in interest expense. The improvement in interest income is due to favorable mark-to-market gains in the current quarter on a total rate of return swap which was entered into in conjunction with the Company's remarketable securities on December 1, 2008. Future mark-to-market adjustments on the total rate of return swap will be primarily derived from changes in the fair value of the dealer remarketable securities. Interest expense benefited from lower average interest rates in Fiscal 2009, which offset the higher coupon on the remarketable securities, and was also impacted by higher average debt.
Other income/(expense), net, improved by $19 million, to $16 million, largely due to currency gains resulting 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. Future movements in key currencies could result in additional gains, or potential losses, on these forward 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 No. 12 in Item 1, "Financial Statements," for further information on derivative contracts.
The effective tax rate for the current quarter was 26.0% compared to 31.6% last year. The decrease in the effective tax rate is primarily due to lower repatriation costs, foreign tax planning, and a deferred tax charge in the prior year resulting from an Italian tax law change. We expect a current year annual effective tax rate of approximately 29%.
Net income was $242 million compared to $219 million in the prior year, an increase of 10.9%, due to increased currency gains, reduced net interest expense and a lower effective tax rate, partially offset by lower operating income as a result of foreign currency movements. Diluted earnings per share were $0.76 in the current year compared to $0.68 in the prior year, an increase of 11.8%, which also reflects a 0.8% reduction in fully diluted shares outstanding.
The impact of fluctuating exchange rates in Fiscal 2009 has had a relatively consistent impact on all components of operating income on the consolidated statement of income.
North American Consumer Products
Sales of the North American Consumer Products segment decreased $46 million, or 5.7%, to $762 million. Net prices grew 5.8% reflecting price increases taken across the majority of the product portfolio over the last year to help offset higher commodity costs. Volume decreased 7.6%, as new product introductions, including TGI Friday's® Skillet Meals, and volume improvements in Heinz® ketchup were more than offset by declines in Ore-Ida® frozen potatoes, Smart Ones® and Boston Market® frozen entrees and Delimex® frozen meals and snacks. The majority of the volume decline was due to a shift in the timing of sales resulting from price increases which occurred early in the third quarter of this year versus early in the fourth quarter of last year. The frozen entrees brands were impacted by softness in the category and aggressive competitive promotions and other activity. The Delimex® decrease was related to lost distribution due to a supply interruption in the first half of Fiscal 2009. Unfavorable Canadian exchange translation rates decreased sales 3.8%.
Gross profit decreased $11 million, or 3.4%, to $314 million, due primarily to volume declines and unfavorable foreign exchange translation rates. The gross profit margin increased to 41.2% from 40.2%, as pricing and productivity improvements were only partially offset by increased commodity costs. Operating income increased $8 million, or 4.4%, to $191 million, as reductions in selling and distribution expense ("S&D"), aided by declining oil prices, as well as reduced G&A and marketing expense more than offset the decline in gross profit.
Europe
Heinz Europe sales decreased $119 million, or 12.9%, to $804 million due to unfavorable foreign exchange translation rates which reduced sales by 20.9%. Net pricing increased 9.7%, 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 4.8%, mainly due to declines in Heinz® beans and pasta meals in the U.K. and infant nutrition products in Italy. Acquisitions, net of divestitures, increased sales 3.2%, 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.
Gross profit decreased $54 million, or 15.7%, to $291 million as a result of foreign exchange movements. The gross profit margin declined to 36.2% from 37.4%, reflecting increased commodity costs, cross currency rate movements between the Euro and British Pound, and higher manufacturing costs in the U.K. and Ireland. These declines were also due to unfavorable mix partially offset by improved pricing. Operating income decreased $31 million, or 18.8%, to $133 million, due largely to unfavorable foreign exchange rates.
Asia/Pacific
Heinz Asia/Pacific sales decreased $32 million, or 8.3%, to $354 million. Pricing increased 7.2%, reflecting increases on convenience meals in Australia, frozen vegetables in New Zealand and ABC® products in Indonesia, along with other price increases to help offset increased commodity costs. Volume decreased 7.6%, reflecting declines in Long Fong® frozen products in China, ABC® products in Indonesia and convenience meals in Australia. Declines were also noted in New Zealand, which is being impacted by consumer trade down to private label products. Volume was strong in our Indian business, driven by the Complan® brand. The acquisitions in the third quarter of this year of Golden Circle Limited, a fruit and juice business in Australia, and La Bonne Cuisine, a chilled dip business in New Zealand, increased sales 8.9%. Unfavorable exchange translation rates decreased sales by 16.9%.
Gross profit decreased $10 million, or 7.9%, to $111 million, largely due to unfavorable foreign exchange translation rates, partially offset by the favorable impact of acquisitions. The gross profit margin increased slightly to 31.3% from 31.2%, as increased pricing offset increased commodity costs and unfavorable mix. Operating income decreased by $9 million, or 22.7%, to $31 million, reflecting unfavorable exchange translation rates.
U.S. Foodservice
Sales of the U.S. Foodservice segment decreased $20 million, or 5.1%, to $380 million. Pricing increased sales 4.6%, as price increases have been taken across the product portfolio, particularly on Heinz® ketchup, portion control condiments and frozen soup. Volume decreased by 8.7%, due primarily to declines in frozen soup, desserts and appetizers and portion control products. The volume reflects reduced restaurant foot traffic, promotional timing and our plan to exit lower margin products and customers. Divestitures reduced sales 0.9%.
Gross profit decreased $16 million, or 14.5%, to $93 million, and the gross profit margin decreased to 24.6% from 27.3%, due to lower volumes and higher commodity costs, impacted by prior year gains on commodity derivative contracts which did not qualify for hedge accounting.
Operating income decreased $10 million, or 22.4%, to $36 million, which is primarily due to the decline in gross profit, partially offset by lower S&D. 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 $21 million, or 22.4%, to $114 million. Volume increased 2.7% driven by increases in Latin America and the Middle East. Higher pricing increased sales by 29.5%, 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 9.7%.
Gross profit increased $6 million, or 17.2%, to $39 million, due mainly to increased pricing and higher volume, partially offset by increased commodity costs. Operating income increased $1 million, or 5.4% to $12 million.
Results of Operations
Sales for the nine months ended January 28, 2009 increased $228 million, or 3.1%, to $7.61 billion. Net pricing increased sales by 6.9%, as price increases were taken across the Company's portfolio to help offset increases in commodity costs. Volume decreased 1.2%, as volume improvements in our emerging markets were more than offset by declines in our U.S., Australian and New Zealand businesses, which have been impacted by the recessionary economic environment. Acquisitions, net of divestitures, increased sales by 1.4%. Foreign exchange translation rates decreased sales by 3.9% as approximately 60% of the Company's sales are in international markets.
Gross profit increased $4 million, or 0.1%, to $2.71 billion, as higher net pricing and the favorable impact of acquisitions was offset by a $104 million unfavorable impact from foreign exchange translation rates, higher commodity costs, including transaction currency costs in the U.K., and lower volume. The gross profit margin decreased to 35.6% from 36.6%, as pricing and productivity improvements were more than offset by increased commodity costs.
SG&A increased $37 million, or 2.4%, to $1.55 billion, and slightly improved as a percentage of sales to 20.4%. The $37 million increase in SG&A is due to increased spending on global task force initiatives, including system capability improvements, and the SG&A from recent acquisitions, partially offset by lower accrued incentive compensation expense, a life insurance settlement benefit received in the current year, and a $49 million impact from foreign exchange translation rates.
Operating income decreased $33 million, or 2.8%, to $1.16 billion, reflecting a $55 million unfavorable impact from foreign exchange translation rates.
Net interest expense decreased $43 million, to $207 million, reflecting a $28 million decrease in interest expense and a $15 million increase in interest income. Interest expense benefited from lower average interest rates in Fiscal 2009, which more than offset the higher coupon on the remarketable securities. The improvement in interest income is due to favorable mark-to-market gains in the current year on a total rate of return swap which was entered into in conjunction with the Company's remarketable securities on December 1, 2008. Future mark-to-market adjustments on the total rate of return swap will be primarily derived from changes in the fair value of the dealer remarketable securities.
Other income/(expense), net, improved by $106 million, to $85 million, as a $114 million increase in currency gains was partially offset by 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.
Future movements in key currencies could result in additional gains, or potential losses on these forward 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 on derivative contracts.
The effective tax rate for the nine months ending January 28, 2009 was 28.0% compared to 29.4% 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 lower than the rate in the prior year primarily due to reduced repatriation costs and the favorable resolution of uncertain tax positions.
Net income was $748 million compared to $651 million in the prior year, an increase of 14.9%, due to increased currency gains, reduced net interest expense and a lower effective tax rate, partially offset by lower operating income reflecting unfavorable foreign currency movements. Diluted earnings per share was $2.35 in the current year compared to $2.01 in the prior year, up 16.9%, which also benefited from a 1.6% reduction in fully diluted shares outstanding.
The impact of fluctuating exchange rates in Fiscal 2009 has had a relatively consistent impact on all components of operating income on the consolidated statement of income.
North American Consumer Products
Sales of the North American Consumer Products segment increased $102 million, or 4.6%, to $2.33 billion. Net prices grew 6.5% reflecting price increases taken across the majority of the product portfolio over the last year to help offset higher commodity costs. Volume decreased 0.4%, as increases in Ore-Ida® frozen potatoes, Heinz® ketchup and new TGI Friday's® Skillet Meals were more than offset by declines in Delimex® frozen meals and snacks. The Ore-Ida® growth was due to new products such as Steam n' Mashtm and the Heinz® ketchup improvement was largely due to promotional timing and increased consumption. Lower sales of Delimex® frozen meals and snacks was due to a supply interruption in the first half of Fiscal 2009. Unfavorable Canadian exchange translation rates decreased sales 1.5%.
Gross profit increased $34 million, or 3.7%, to $945 million, due primarily to increased pricing partially offset by unfavorable foreign exchange translation rates. The gross profit margin decreased to 40.5% from 40.9%, as increased pricing and productivity improvements only partially offset increased commodity costs. Operating income increased $38 million, or 7.4%, to $551 million, reflecting the increase in gross profit.
Europe
Heinz Europe sales increased $49 million, or 1.9%, to $2.61 billion. 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. These increases were partially offset by increased promotional spending in the U.K on Heinz® ketchup, salad cream and beans. Volume decreased 0.8%, primarily due to reduced volume in Russia and Italy, and declines on frozen products as a result of price increases, reduced promotions and supply constraints, partially offset by new product introductions in the U.K. and Continental Europe. Acquisitions, net of divestitures, increased sales 2.7%, 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. Unfavorable foreign exchange translation rates decreased sales by 7.2%.
Gross profit decreased $28 million, or 2.8%, to $964 million, and the gross profit margin decreased to 36.9% from 38.7% as unfavorable foreign exchange translation rates, cross currency
rate movements between the Euro and British Pound, increased commodity costs and higher manufacturing costs in the frozen food plants were only partially offset by improved pricing. Operating income decreased $38 million, or 8.2%, to $425 million, due to unfavorable translation and transaction foreign currency impacts, increased S&D, a portion of which was from acquisitions, and higher G&A reflecting investments in task forces and systems.
Asia/Pacific
Heinz Asia/Pacific sales increased $45 million, or 3.9%, to $1.20 billion. Pricing increased 6.0%, due to increases on sardines and ABC® sauces and syrup in Indonesia, convenience meals in Australia, nutritional beverages in India and frozen vegetables in New Zealand. This pricing partially offset increased commodity costs. Volume decreased 0.5%, as significant improvements on nutritional beverage sales in India, frozen foods in Japan and ABC® products in Indonesia were more than offset by declines in Long Fong® frozen products in China and convenience meals in Australia and New Zealand. Australia and New Zealand are being impacted by timing of promotional activities and consumer trade down to private label products given the economic downturn. Acquisitions increased sales 3.5%, due to the third quarter acquisitions of Golden Circle Limited, a fruit and juice business in Australia, and La Bonne Cuisine, a chilled dip business in New Zealand. Unfavorable foreign exchange translation rates decreased sales by 5.1%.
Gross profit increased $19 million, or 5.2%, to $397 million, and the gross profit margin rose to 33.1% from 32.7%. The improvement in gross profit was due to increased pricing and acquisitions, which more than offset increased commodity costs and unfavorable foreign exchange translation rates. Operating income increased by $1 million, or 0.7%, to $149 million, as the increase in gross profit was offset by increased S&D and G&A, a portion of which is due to acquisitions.
U.S. Foodservice
Sales of the U.S. Foodservice segment decreased $46 million, or 3.9%, to $1.12 billion. Pricing increased sales 3.0%, largely due to increases on Heinz® ketchup, portion control condiments, frozen soup and tomato products. Volume decreased by 6.1%, reflecting reduced restaurant foot traffic, our plan to exit lower margin products and customers, as well as increased competition on our non-branded products. Divestitures reduced sales 0.8%.
Gross profit decreased $48 million, or 15.0%, to $274 million, and the gross profit margin decreased to 24.4% from 27.6%, due to higher commodity costs and lower volumes. Operating income decreased $42 million, or 29.5%, to $100 million, which is primarily due to the decline in gross profit.
Rest of World
Sales for Rest of World increased $79 million, or 29.3%, to $347 million. Volume increased 7.0% 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 4.9%.
Gross profit increased $23 million, or 24.2%, to $119 million, due mainly to increased pricing and higher volume, partially offset by increased commodity costs. Operating income increased $5 million, or 15.2% to $39 million.
Liquidity and Financial Position
For the first nine months of Fiscal 2009, cash provided by operating activities was $506 million, an increase of $35 million from the prior year. This reflects a $98 million cash inflow from the settlement and maturity of foreign currency forward contracts that were discussed previously, partially offset by additional contributions made this year to fund the Company's pension plans and the current year payment of the long-term incentive compensation accruals from Fiscal 2008.
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 8 days, to 58 days in the first nine months of Fiscal 2009, 4 days of which was due to the settlement of hedge contract liabilities that were outstanding in the prior year.
During the first nine months of Fiscal 2009, the Company contributed $48 million to fund its obligations under its pension and postretirement plans. Recent adverse conditions in the equity and bond markets have caused the actual rate of return on the pension plan assets during Fiscal 2009 to be significantly below the Company's assumed long-term rate of return of 8.2%. Also, the discount rates are uncertain and are expected to differ from the 5.5% rate disclosed at Fiscal 2008 year-end. As a result of these two 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 $651 million compared to $303 million last year. In the first nine months of Fiscal 2009, cash paid for acquisitions, net of divestitures, required $274 million, primarily related to the acquisitions of Golden Circle Limited, a fruit and juice business in Australia, and La Bonne Cuisine, a chilled dip business in New Zealand, in the third quarter of this year, and Benedicta, a table top sauce, mayonnaise and salad dressing business in France, in the second quarter of this year. This amount was partially offset by the sale of a small portion control foodservice business in the U.S. In the first nine months of 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. Capital expenditures totaled $183 million (2.4% of sales) compared to $201 million (2.7% 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. The current year increase in restricted cash represents collateral that the Company is required to maintain in connection with a total rate of return swap entered into during the third quarter of Fiscal 2009. See Note 12 in Item 1, "Financial Statements," for further information.
Cash provided by financing activities totaled $361 million compared to cash used of $232 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 $361 million this year compared to $4 million in the prior year. Proceeds from commercial paper and short-term debt were $179 million in the current year compared to $403 million in the prior year. Cash proceeds from option exercises, net of treasury stock purchases, provided $82 million of cash in the current year. Cash used for the purchases of treasury stock, net of proceeds from option exercises, was $322 million in the prior year. Dividend payments totaled $394 million, compared to $366 million for the . . .
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