Heinz Profits Up 11%; Marketing Spending Down


H.J. Heinz Company reported profits up 11% for its fiscal '09 third quarter ending Jan. 28 to $242.3 million, or 76 cents per share. The results exceeded analysts' profit expectations of 64 cents per share.

Companywide sales declined 7.5% to $2.4 billion, largely due to unfavorable currency exchange rates. However, organic or constant-currency sales rose 1.6% on an 8% average price increase. Unit volume was down 6.4%.

Most sales growth came from emerging markets, which showed a gain of 22.4%, or 32.2% on an organic basis. European sales were down 13%, but up 5% on an organic basis.

Sales for North American consumer products were down 6% to $761.6 million, and down 2% on an organic basis.

During an analysts' conference call, EVP/CFO Art Winkleblack noted that Nielsen data showed total center-store unit sales in U.S. grocery stores down 3.6% for the 12 weeks preceding Jan. 24, and down 4.6% for the last four weeks of that period.



Sales declines in Ore-Ida frozen potatoes and Smart Ones and Boston Market frozen entrees were partially offset by growth in Heinz Ketchup and Classico pasta sauce, which is benefiting from consumers' emphasis on affordable meals.

Frozen entrees are historically vulnerable during recessions because parents focus spending on meals for their children, according to the Heinz executives, and price increases hurt units for both the entrees and Ore-Ida. However, Ore-Ida's year-to-date organic sales were up 13%, in part reflecting a successful launch of the brand's Steam n' Mash product line. In entrees, Heinz is expanding selections across meal times to drive sales, including launching Smart Ones breakfast sandwiches.

Sales for the first nine months increased 3% to $7.61 billion, including organic growth of 6% and net pricing increases that contributed 7%. Operating income was down 2.8% to $1.16 billion, although up 3.7% on an organic basis. Net income rose 15%, to $748 million.

Heinz's results also reflect an increasing emphasis on operational cost reductions. In his presentation at the recent annual Consumer Analyst Group of New York (CAGNY) conference, Heinz Chairman, President and CEO William R. Johnson noted that "reducing costs to drive margins will become increasingly important going forward as we anticipate an industry-wide slowdown in price-driven top-line growth."

In Q3, Heinz reduced selling, general and administrative costs by nearly 10% to $382 million.

Heinz' marketing expenditures line is also down, declining by 15.2% to $79 million in Q3 and by 2.5% to $270 million in the first nine months. During the Q3 conference call, Winkleblack attributed most of the period's spending decline to the currency scenario, although he also noted that media costs have come down and that Heinz is "hammering away" on those costs. For the full year, spending should be about flat on a stable-currency basis--although couponing may increase somewhat, he added.

The success of Heinz Ketchup's "Grown Not Made" campaign in Europe, along with pricing increases, contributed to 9% organic sales growth for ketchup in Q3 companywide. After recently introducing a new label replacing the iconic pickle with a tomato bearing that new tagline in the U.S., Heinz is scheduled to roll out a major integrated campaign centered on that theme here in April or May.

The ketchup initiatives reflect a broader strategy: Heinz, like other major consumer goods marketers, is focused on its core products and categories, and reserving innovation for "well-tested" and "breakthrough" ideas (like Ore-Ida Steam n' Mash), Johnson confirmed during CAGNY. (Johnson also played down the threat of private labels, noting that "research confirms that consumers still prefer leading brands in most categories.")

Heinz reaffirmed its full-year fiscal '09 guidance of EPS in the range of $2.87 to $2.91 (a gain of between 9% and 11%) and full-year organic sales growth (combined volume and net price) of about 6%.

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