• by Karlene Lukovitz  @KLmarketdaily, November 20, 2010

H.J. Heinz Company's fiscal 2011 second quarter and first-half results show growth being driven more than ever by emerging markets -- a reality reflected in marketing investment shifts toward these regions, confirmed President and CEO William R. Johnson.

Heinz reported strong financials for the second quarter of its 2011 fiscal, exceeding analyst expectations.

EPS rose to $0.78 versus $0.76 in Q2 2010, or 2.6% (6.6% on a constant-currency basis). Reported global sales declined 1.2% to $2.61 billion, but organic sales (excluding currency translation effects) grew 0.9%. The company's top 15 brands saw global organic growth of 2.7%, including 3.3% growth for Heinz Ketchup.

The company raised its operating free cash-flow outlook for the full year by 15% to $1.15 billion, and reaffirmed its full-year guidance, on a constant-currency basis, for sales (3-4% growth), operating income and EPS (both projected at 7-10% growth).

Reflecting ongoing dynamics common to all global food marketers -- as well as Heinz's strategic focus on aggressive expansion in China (where it just completed the acquisition of soy sauce maker Foodstar) and other Asia-Pacific markets in particular -- the company saw 10% organic sales growth in emerging markets in Q2, and 2.6% volume growth in these markets (versus global volume growth of 0.3%).

For the full first half, emerging markets accounted for more than 16% of global sales, up from 15% in fiscal 2010. Heinz expects these markets to account for 20% of total sales by fiscal 2013, and 25% or more in the longer term.

Reported sales for North American consumer products grew 1.4% to $803 million, volume increased 1.6%, and Heinz saw N.A. market-share gains in top categories Heinz Ketchup, Smart Ones meals and Ore-Ida potatoes. Ore-Ida Sweet Potato Fries attained the number-one retail share in the U.S. frozen sweet potato market, according to the company.

However, North American consumer product sales grew just 0.6% in constant currency terms, and the U.S. foodservice business saw reported sales decline 2.9% and volume decline 4.6%. The foodservice volume decline primarily reflected lower frozen dessert sales as a result of continued weakness in restaurant traffic, Heinz reported.

Heinz executives noted some "glimmers of hope" in the U.S. Restaurant/foodservice traffic, which shows some signs of improvement, and the company is projecting flat sales for this segment in its second half -- a positive indicator relative to recent declines.

Still, during the Q&A portion of the Q2 results call for analysts, Johnson said he expects that U.S. consumer products sales volume in the second half will "probably be flattish." He also cautioned that North American results will be up against "difficult comparables," given that a major cooperative marketing/promotional program with retailers in the region helped drive sales performance in last year's second half.

U.S. consumers are "in a funk" and making purchasing decisions in a "trade-off" mindset, Johnson said, pointing to Nielsen data showing that 27% now report having no discretionary income.

From a marketing perspective, Heinz's global spending was down 3.6% (to $99 million) in Q2, but up 2.6%, to $202 million for the first half.

Asked about marketing ROI, Johnson noted that Heinz is engaged in a "marketing productivity process" aimed at "being a little more ruthless" about assessing ROI and investing in brands/products and markets with the greatest potential for growth. An investment shift toward China and other emerging markets is already underway, and that trend will continue going forward, he said.

Heinz is throttling back on aggressive trade promotions, and expects such trade spending to be flat for the year, the company reported.

Asked about Heinz's pricing strategy within the context of commodities cost inflation, Johnson declined to discuss specifics, but emphasized that the company will continue to make careful decisions based on its own dynamics, including the specific market, brand and other factors. Heinz raises prices only where it has been determined that "the elasticity is there," he said, noting his own awareness that "the consumer is very fickle today."

However, Johnson also noted that for Heinz, even if volumes are impacted by price increases, "the net/net over time is positive," and pointed out that the company had realized net price increases of 2% to 2.5% during each of the four fiscal years 2007 to 2010.

The CEO also stressed that "premiumization is related to innovation." Even in the current economic scenario, U.S. sales have been strong for the Simply Heinz variety, because many consumers are willing to pay more for a product containing no high-fructose corn syrup, Johnson said. He added that Heinz is confident of major success with its new "Dip & Squeeze" ketchup packaging innovation for the foodservice industry. (The packets are higher-priced but hold three times the amount of ketchup in a traditional packet, and can be peeled open for dipping, or squeezed in the standard fashion.)

"My view of the marketer's job is to ensure enhancing the levels of innovation so that the consumer is indifferent to higher price," Johnson summed up.