Heinz Reaffirms Guidance

Heinz (HNZ - Analyst Report) reported modest results for the first quarter with earnings of 67 cents per share, which was 5 cents above the Zacks Consensus Estimate of 62 cents. However, earnings were down 6.9% year over year.

Quarterly net sales fell 4.5% year over year to $2.47 billion, primarily attributable to a 9% unfavorable impact from foreign exchange and a 4.3% drop in volume. The declines were partially offset by a 6% gain from pricing and a 2.9% benefit from divestitures. The current economic weakness reduced the overall product demand and hurt the top line. Organic sales, excluding the impact of foreign exchange, grew 1.7% during the quarter.

The North American Consumer Products segment reported a 1.9% drop in sales as volumes fell 4.9%. The decline was attributable to lower promotional volume in Ketchup and frozen meals, which was partially offset by increases from the new T.G.I. Friday’s snacks and skillet meals. Organic sales of the segment increased 0.5%.

Europe experienced a 4.3% decline while organic sales grew 0.8%, primarily due to price increases. Unit volume in Asia/Pacific declined 2.2% due to softness in Australia. However, organic sales increased 1.9% for the quarter primarily due to pricing actions.

Foodservice volume shrank 6% and organic sales contracted 0.4% due to lower US restaurant traffic and SKU reductions. In addition, commodity costs continued to disproportionately impact the foodservice business.

Volume in Heinz’s operations in the rest of the world fell 3.3% despite increases in ketchup and baby food in Latin America. The decline was primarily attributable to the unfavorable currency impact. However, organic sales rose 22.9%.

Overall gross margins contracted 74 basis points (bps) to 35.4% versus 36.2% in the year-ago quarter. This was due to higher commodity costs despite positive pricing and productivity improvements.

Heinz’s top 15 brands generated sales of approximately 70%, led by the namesake brand, Ore-Ida potatoes and T.G.I. Friday’s snacks and skillet meals. The company also reported a robust cash flow of $121 million, compared to a cash usage of $55 million in the prior-year quarter. The improvement was primarily due to a strong focus on working capital, particularly reducing inventory.

Based on the performance in the first quarter, management reaffirmed its guidance for fiscal 2010. On a constant currency basis, management expects sales growth of 4% to 6%, operating income growth of 6% to 8%, and EPS growth of 5% to 8%. The ketchup category is expected to grow 9%.

Management believes that increased investments in marketing and R&D will drive growth of the company going forward. Heinz expects approximately $250 million in productivity savings (2.5% of sales). Foreign currency translations and UK transaction rates are expected to hurt results in fiscal 2010. Inflation in 2010 is expected to be in the range of 6% to 7%.