H. J. Heinz Company
) posted better-than-expected first quarter 2013 adjusted earnings
of 87 cents per share, beating the Zacks Consensus Estimate of 83
cents by 4.8%. Earnings also exceeded the prior-year earnings by
10.1% due to lower costs.
During the quarter, the company completed the sale of its U.S.
Foodservice frozen desserts business. This transaction resulted in
a $31.5 million pre-tax loss, which has been recorded in
Total sales declined 1.5% to $2.79 billion, down 1.5% largely
due to currency headwinds of 5.6%. Organically, revenues were up
4.8% while constant currency organic sales climbed up 4.2%, led by
strong growth of core drivers, emerging markets and its top 15
brands. Revenues, however, slightly missed the Zacks Consensus
Estimate of $2.8 billion.
Volume gains of 2.5% along with solid net pricing of 2.3% in the
quarter contributed to the sales growth. Divestitures, primarily
exiting the Boston Market license in the U.S. and divesting a soup
business in Germany, reduced total sales by 0.6%.
The emerging markets were the largest growth driver in the
quarter, recording organic sales growth of 19.3%, while reported
growth was 11.2%. Global Ketchup sales grew 3.7% organically
(declined 1.2% on a reported basis), driven by strong performance
in Brazil, Russia and China.
The company's top 15 brands recorded 5.9% organic sales growth
(growth of 0.1% on reported basis), driven by strong sales of
brands like Quero, Master, Golden Circle, ABC, Weight Watchers
Smart Ones, Heinz and Ore-Ida.
slipped 7.2% to $778 million in the reported quarter mainly due to
an unfavorable impact of foreign exchange. Organically, revenues
were up 2.0% (8.0% on a constant currency basis) despite a
difficult economic environment. Pricing registered an increase of
2.9% mainly boosted by U.K., Benelux and Eastern Europe. Volume
declined 0.9% due to weak economic conditions and soft sales in
Continental Europe and Italy. The segment witnessed a 7.8% increase
in operating income to $148.2 million on a constant currency
Sales in the
North American Consumer Products
segment, which sells products to grocery channels in the US,
declined 2.0% during the quarter to $759 million. Organically,
sales were up 0.9% due to a pricing benefit of 1.0%. Volume
remained flat as U.S. retail business' 1.2% organic growth was
offset by a decline in Canada.
The divestiture of the Boston Market license negatively impacted
sales by 1.8%. Unfavorable Canadian exchange translation rates
decreased sales b y1.1%. The segment witnessed a 2.9% increase (up
2.9% on a constant currency basis) in operating income to $185.3
million on a constant currency basis.
slipped 1.9% to $658 million in the reported quarter mainly due to
unfavorable foreign currency translation. Organically, revenue was
up 4.1% with both pricing and volume registering increases of 1.4%
and 2.7%, respectively.
Volumes were up due to strong performances in Indonesia, India,
China and Japan, which partially offset the weakness of Long Fong
frozen products in China. The segment's operating income increased
29.5% (30.0% on a constant currency basis) to $79.3 million due to
strength in the emerging markets.
Sales in the
segment, which manufactures and sells some branded and customized
products to food outlets and distributors across US, increased 2.4%
to $315 million in the reported quarter. Organic revenue was also
up 2.4%. Pricing increased 2.6% and volume remained flat. The
segment's operating income reported a 12.7% increase to $37 million
driven by higher sales and cost management.
Sales in the
Rest of World
segment increased 16.5% to $281 million in the quarter in spite of
unfavorable foreign exchange translation. Organically, revenues
were up 31.7%, driven by a significant volume growth of 24.9%.
Volume was primarily driven by growth in Brazil. Pricing increased
6.8%. The segment's operating income was up 3.0% (up 3.0% on a
constant currency basis) to $33.3 million.
Excluding productivity charges, Heinz's gross profit declined
1.3% to $1.0 billion, reflecting a $55 million unfavorable impact
from foreign exchange. Gross margin, however, went up 10 basis
points to 35.9% in the reported quarter, owing to higher pricing
Adjusted operating income went up 5.1% on a constant currency
basis to 431.9 million driven by gross margin gains. Marketing
expense went up 4.5% to $123.4 million as the company invests to
boost sales of its leading brands.
The company maintained its organic sales growth guidance to be
at least 4%. It maintained its constant currency adjusted earnings
per share expectation to increase 5-8% over fiscal 2012 levels.
However, the company lowered its free cash flow expectation to $1.0
billion from previously-expected level of $1.1 billion.
We currently have a Neutral recommendation on Heinz. The stock
carries a Zacks #3 Rank (a short-term Hold rating).
We are encouraged by the company's robust portfolio of brands,
especially its top 15 brands, which account for over 70% of sales
and continue to drive growth. Moreover, we believe the upside
potential in emerging markets, strong marketing investments and
ongoing cost saving efforts will boost long-term growth.
However, continued sluggishness in the North American consumer
business, its largest segment, is a significant concern. Though
management's effort to turn around this business is encouraging, we
prefer to stay on the sidelines until the company's efforts shows
HEINZ (HJ) CO (HNZ): Free Stock Analysis Report
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