Heinz, Smucker Report Rosy Q2 Financials

On Friday, H.J. Heinz Company and The J.M. Smucker Company each reported significant gains in sales, profits and earnings for the second quarter of 2008.

Heinz's sales for the period grew 3.5% to $2.61 billion, driven by organic growth of 5.8% companywide and organic growth of 8.5% for the top 15 brands. Net income increased by 21%, to $277 million. Earnings jumped 22.5%, to $0.87 per share.

Organic sales gains--particularly in North American consumer products (up 11%) and in regions outside of Europe and Asia/Pacific (up 34%)-- offset higher commodities costs. All segments except U.S. Foodservice saw organic gains. Performance also reflected the company's strategic decision to hedge translation exposures on key currency exchange rates.

Overall net pricing in the quarter increased 7.1%. Sales were partially offset by a 1.3% decline in volume and a 3.3% negative impact from changes in foreign exchange rates.

Organic ketchup sales grew 12%, driven by new packaging formats in Europe and pricing globally. The U.S. launch of Ore-Ida Steam n' Mash potatoes--one of Heinz's most successful new product launches in recent years--combined with the timing of price increases, drove double-digit sales growth for the Ore-Ida brand. T.G.I. Friday's frozen meal sales also posted strong growth, driven by the launch of T.G.I. Friday's Complete Skillet Meals.



For the first six months of the year, Heinz sales increased 8.9% to $5.2 billion, with organic sales growth of 7.9%. Net pricing increases across the brand portfolio increased sales revenue by 6.2%.

Volume increased 1.7% YTD, led by growth in North American consumer products, continental Europe, Heinz branded products in the U.K. and emerging markets. The top 15 brands had 10.5% organic growth, led by the Heinz, Ore-Ida and ABC brands. Acquisitions, net of divestitures, increased sales by 0.9%. Foreign exchange translation rates increased sales by 0.2%.

Net income was $506 million, a 17% gain that included a $97-million increase in currency gains. Year-to-date diluted earnings per share was $1.59, up 18.7% from first-half 2007.

Heinz reaffirmed its FY 2009 guidance of full-year organic sales growth of at least 6% and EPS in the target range of $2.87 to $2.91 for the year.

Commenting on the first-half results, Heinz chairman, President and CEO William R. Johnson noted that Heinz will "shift investments in marketing and R&D toward value-oriented innovation, which is more important than ever to consumers."

This, notes Christopher Shanahan, research analyst, chemicals, materials and food for marketing researcher Frost Sullivan, points up a significant challenge ahead in 2009--not just for Heinz, but most F&B consumer goods companies.

"With commodities and energy prices now declining after a long period of rising sharply, and with the U.S. economy going into a period of deflation, there will be significant pressure on food and beverage companies that have been raising their prices substantially during 2008 to justify their prices to both retailers and consumers in 2009," Shanahan says. Competition from private-label goods is already a factor, and could become more intense, he notes.

"F&B companies have as a whole been performing significantly better than the rest of the market this year--in fact, they've kept the market from being even worse than it is," Shanahan adds. "And we're likely to see another round of big-margin gains by key F&B companies in the next quarter. But the question is whether 2008's performance can be sustained in 2009. To justify their prices, branded F&Bs are very likely going to need to engage in innovative, yet constrained, marketing next year." Increased Internet marketing is likely to be a key part of such efforts, he predicts.

Smucker's Net Sales Up 19% for Q2

Meanwhile, at J.M. Smucker--which completed its acquisition of Folger's on Nov. 6--net sales for the second quarter were up 19%, to $843 million. Net income was up 3%, to $51.5 million. Income per diluted share rose 8%, to $0.94.

Acquisitions of Europe's Best and Knott's Berry Farm contributed $35.8 million in net sales, while the exchange impact of the weakening Canadian dollar reduced net sales by $8.2 million. Excluding acquisitions and foreign exchange, net sales increased 15%.

Price increases were the primary driver of the net sales gains; however, volume gains in most product categories also contributed. Volume gainers included Smucker's fruit spreads, Pillsbury baking mixes and frostings, Hungry Jack potatoes and pancakes, Eagle Brand sweetened condensed milk, and Crisco shortening and oils. Volume declines were primarily limited to flour and industrial oils.

The number of meals prepared and consumed at home continues to trend upward as a result of the economy, "and is currently at levels not seen since 1994," pointed out Tim Smucker, chairman of the board and co-CEO. "Our brands are considered by many families to be essential items in any pantry."

Year-to-date, Smucker's net sales also jumped 19% to $843.1 million, and net income also rose 3%, to $93.7 million. Income per diluted share gained 8%, to reach $1.71.

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