H. J. Heinz (HNZ)

Q1 2012 Earnings Call

August 23, 2011 8:30 am ET

Executives

Margaret Nollen - Senior Vice President of Investor Relations, Global Program Management Officer and Office of the Chairman

Arthur Winkleblack - Chief Financial Officer and Executive Vice President

Edward McMenamin - Senior Vice President of Finance

Analysts

William Sawyer - Crédit Suisse AG

Jessica Schmidt - JP Morgan Chase & Co

Alexia Howard - Sanford C. Bernstein & Co., Inc.

Christopher Growe - Stifel, Nicolaus & Co., Inc.

Jonathan Feeney - Janney Montgomery Scott LLC

Eric Serotta - Wells Fargo Securities, LLC

Robert Dickerson - Consumer Edge Research, LLC

Bryan Spillane - BofA Merrill Lynch

Edward Aaron - RBC Capital Markets, LLC

David Palmer - UBS Investment Bank

Karen Lamark - Federated Investors

David Driscoll - Citigroup Inc

Presentation

Operator

Good morning. My name is Chanel, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the H.J. Heinz Company Fiscal Year 2012 First Quarter Earnings Release Conference Call. This call is being recorded at the request of the H.J. Heinz Company. [Operator Instructions] I'll now like to turn the call over to Meg Nollen, Senior Vice President of Investor Relations. Ms. Nollen, you may now begin the conference.

Margaret Nollen

Thank you, Kelly, and good morning. I'd like to welcome everyone to our conference call and webcast. Copies of the slide used in today's presentation are currently available on our website at heinz.com. Joining me on today's call are Art Winkleblack, Executive Vice President and CFO; and Ed McMenamin, Senior Vice President, Finance.

Before we begin, with our prepared remarks, please refer to the forward-looking statements currently displayed, which is also available in this morning's earnings release and in our most recent SEC filings.

To summarize, during our presentation, we may make forward-looking statements about our business that are intended to assist you in understanding the company and its results. We ask you to refer to our April 27, 2011, Form 10-K, as well as today's press release today, which should list some of the factors that could cause actual results to differ materially from those in these statements. Heinz undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by securities laws.

We may also use non-GAAP financial measures in our presentation, as the company believes such measures allow for consistent period-to-period comparison of the business. The most directly comparable GAAP financial measures and reconciliations of these non-GAAP financial measures are available in the company's earnings release and on our website at heinz.com.

Please note we plan to file our first quarter 10-Q later this week. Our complete financial highlights pages, or stat pages, will become available with the filing of the Q and will be posted on the Investor Relations section of heinz.com, towards the bottom of the page. The P&L should be out there today.

Now on today's call. Art will review our category and regional segment performance, and Ed will review our first quarter financial results and scorecards. We've got about 30 minutes of prepared remarks and we'll use the remainder of that hour to take your questions. We'd like to request you limit your questions during the Q&A session to one single-part question in order to ensure adequate time for all who wish to participate and to ensure we end the call on a timely basis.

So with the formalities out of the way, let me now turn the call over to Art Winkleblack. Art?

Arthur Winkleblack

Thanks, Meg. And good morning, everyone. We're pleased to take you through our first quarter performance where we posted solid results in a very difficult environment. This morning, we will be presenting our P&L excluding special items, which you'll recall from our Analyst Day are the onetime charges for productivity initiatives planned for this fiscal year. Overall, the quarter slightly exceeded our expectations despite the tough economy in Developed Markets and a more challenged U.S. consumer, all of which has been headline news in July and August.

For the quarter, we grew revenue at a double-digit pace. Posted solid organic sales growth driven by our trio of growth engines, the Top 15 brands, Emerging Markets and Global Ketchup. We achieved excellent growth from our newest acquisitions, Foodstar in China and Quero in Brazil. Increased marketing and stepped-up investment in the business, including Project Keystone, our European supply chain hub and other capability building initiatives, and we weathered a very tough commodity cost comparison. In short, we're off to a solid start to the year while continuing to adapt our strategies and tactics to meet the changing consumer dynamic.

In terms of key P&L metrics, sales grew nearly 15%. Operating income increased by 1 point and EPS rose 4%. We'll take you through the detail behind the numbers, but these results included solid base business performance, the benefit of favorable currency and the impact of the acquisitions we made late last fiscal year, which are off to a very strong start.

But before getting into the specifics, I want to profile some of the key themes running through the first quarter results. These include strong top line growth from Emerging Markets, Global Ketchup, Top 15 brand, acquisitions and currency. Price increases across our portfolio, which still lag very high commodity inflation. Increased SG&A, reflecting our aggressive investments in marketing and business-building capabilities. A slightly lower tax rate, driven by a decrease in the U.K. corporate tax rate. Approximately 3 million more shares outstanding, and a foreign currency tailwind in our key markets. All of this combined to generate solid EPS growth on an X-items basis.

Turning to organic sales, our Emerging Markets once again drove the majority of the organic sales increase, posting 13% growth for the quarter. And on a constant currency basis, sales in Emerging Markets were up nearly 40%, including recent acquisitions.

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