H. J. Heinz (HNZ)

Q3 2012 Earnings Call

February 17, 2012 8:30 am ET


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

Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President

Edward J. McMenamin - Senior Vice President of Finance


Kenneth Goldman - JP Morgan Chase & Co, Research Division

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

David Palmer - UBS Investment Bank, Research Division

Thilo Wrede - Jefferies & Company, Inc., Research Division

Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division

Eric R. Katzman - Deutsche Bank AG, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

Andrew Lazar - Barclays Capital, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

David Driscoll - Citigroup Inc, Research Division



Good morning. My name is Frances, 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 Third Quarter Earnings Release Conference Call. This call is being recorded at the request of the H.J. Heinz Company. [Operator Instructions] I'd 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 Roach Nollen

Thank you, Frances, and good morning, everyone. I'd like to welcome you to our conference call and webcast. Copies of the slide used in today's presentation are available at 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 statement 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 and today's press release, which lists 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 measures are available in the company's earnings release and on our website at heinz.com.

Please note, we plan to file our third quarter 10-Q next Tuesday, February 21. Our complete financial highlights pages or stat pages will become available with the filing of the 10-Q and will be posted on the Investor Relations section of the heinz.com towards the bottom of the page. The P&L is out there today.

Now onto today's call. We'd like to request that you limit your questions during the Q&A session to 1, single-part question, in order to ensure adequate time for all who wish to participate and to ensure we end the call timely.

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

Arthur B. Winkleblack

Thanks, Meg. Good morning, everyone. Today, Ed and I will take you to through our Q3 results and expectations for the remainder of the fiscal year, and we'll try to be brief since we'll be seeing all of you next week at CAGNY. Overall, we're very pleased with our results for this quarter, highlighted by strong top line growth and good P&L leverage. Key facets of the performance for Q3 include strong sales growth, again, driven by Emerging Markets, Global Ketchup and our Top 15 brands; continuing investments in marketing, processes and systems to drive future growth and productivity; and a double-digit increase in EPS, reflecting solid growth in operating income and a better-than-expected tax rate. In short, we drove both top and bottom line growth despite a very challenging environment in developed markets.

Turning to our ex items P&L scorecard for the quarter, you can see that currency translation had a negligible effect. Overall, sales grew by more than 7%, operating income increased better than 4% and EPS was up 13%. That's a good result as we continue to increase the investment in our brands and on Project Keystone while tightly controlling other spending. EPS got a boost from the favorable tax rate, which was 20% for the quarter. Again, this was better than expected and added $0.07 to the year-on-year increase in EPS. The most difficult result for the quarter was gross margin. While this margin level represents a continuation of sequential improvement in the business and is our high watermark so far this fiscal year, it was still 140 basis points below last year. And to put this into perspective, our gross margin performance for the quarter was the third best in the peer group. We've left off specific company names here, but you can see that the whole group is working to overcome the harsh commodity inflation buckling the industry. We're obviously not satisfied with this and our expectations are that commodity inflation, while not going away, will continue to moderate, easing the pressure on gross margins somewhat. With that said, let's turn back to the top line story.

We're very proud of the fact that we've now driven 27 consecutive quarters of organic growth. And this quarter's organic growth of 4.6% represents our highest growth rate in nearly 3 years. Importantly, all segments reported positive organic sales growth in the quarter, led by the Rest of World and Asia/Pacific segments, but also reflecting positive growth in the difficult developed markets of Europe and North America. Again, this quarter, the formula for growth is based on our trio of growth engines: Emerging Markets, Global Ketchup and our Top 15 brands.

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