H. J. Heinz Company (HNZ) May 24, 2012 1:00 pm ET Executives Margaret Roach Nollen - Senior Vice President of Investor Relations, Global Program Management Officer and Office of the Chairman William R. Johnson - Executive Chairman, Chief Executive Officer, President and Chairman of Executive Committee Arthur B. Winkleblack - Chief Financial Officer and Executive Vice President Robert P. Ostryniec - Chief Supply Chain Officer and Senior Vice President David C. Moran - Executive Vice President, Chief Executive Officer of Heinz Europe Operations and President of Heinz Europe Operations Scott O'Hara Christopher J. Warmoth - Executive Vice President of Asia Pacific business Hein Schumacher Dave Woodward Fernando Pocaterra - Area Director of Latin America & Caribbean Analysts Jason English - Goldman Sachs Group Inc., Research Division Kenneth Goldman - JP Morgan Chase & Co, Research Division Alexia Howard - Sanford C. Bernstein & Co., LLC., Research Division Bryan D. Spillane - BofA Merrill Lynch, Research Division Eric R. Katzman - Deutsche Bank AG, Research Division Christopher Growe - Stifel, Nicolaus & Co., Inc., Research Division Matthew C. Grainger - Morgan Stanley, Research Division Thilo Wrede - Jefferies & Company, Inc., Research Division Edward Aaron - RBC Capital Markets, LLC, Research Division Bill Dempsey Andrew Lazar - Barclays Capital, Research Division Presentation Margaret Roach Nollen
We have a great afternoon planned for you with presentations scheduled, as you can see, until about 4. And we've devoted a full hour to answer your questions. We've got a 15-minute break. It should be right after 2:00, 2:15 time frame. And as a reminder, questions will only be taken from those of you who are attending our presentation today here in New York. So I'd like to ask those who are in attendance, though, let's please turn off our cellphones, BlackBerrys, not just muting. That helps avoid interference for those that are listening in on the webcast.Now before we begin, let me refer you to the forward-looking statement that's about to be displayed. To summarize, during our presentation, we may make predictive statements about our business that are intended to clarify results for your understanding. We ask you to refer to our April 27, 2011, Form 10-K, as well as our press release today, which lists some of the factors that could cause actual results to differ materially from those in our predictions. 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. Now 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 earnings release and at the back of the presentation and posted on the website. And now, our analyst day begins. I'd like to turn it over to Bill Johnson, Chairman, President and CEO of the H.J. Heinz Company. Bill? William R. Johnson I know one of the questions is going to be about $120 million in incremental investments, well $119 million of them went to those folders and those pens. So the rest we'll spend in marketing the best we can, but Meg's trinkets and trash are really getting to me. So thanks, Meg, and good afternoon, everyone, and welcome to our 2012 Analyst Day. Before I share my perspective on Heinz and the key elements of our growth strategy, I want to briefly review our fiscal 2012 fourth quarter and our full year results.
As we reported this morning, Heinz delivered strong fourth quarter results. On a constant currency basis, we grew sales by 7%, operating income by 9% excluding the charges for the productivity initiatives and earnings per share by more than 20% excluding those charges. Additionally, we increased marketing investment by around 10% including a more than 20% increase in consumer products. Our trio of growth engines: Emerging Markets, Global Ketchup and Heinz's Top 15 brands delivered particularly good results. Emerging Markets once again led the way with sales growth of more than 17% organically, while Global Ketchup delivered organic growth of more than 8% and our Top 15 brands grew 5% organically.It's now 28 consecutive quarters of organic sales growth reflecting the strength of our core brands and our accelerating growth in Emerging Markets. For the full year, we delivered solid results in a difficult environment while achieving our targets for sales, EPS and cash flow. Reported sales grew almost 9% to a record $11.6 billion fueled by Emerging Markets and Global Ketchup. Heinz posted record operating and net income excluding productivity charges, and operating free cash flow was more than $1 billion for the fourth consecutive year -- third consecutive year. Returning a high percentage of earnings to shareholders is a priority at the company. And today, I'm pleased to announce an increase in our annualized common stock dividend of more than 7% to $2.06 per share. The $0.14 increase reflects the company's strong performance in fiscal 2012, our consistently solid results over the past 7 years and our continued confidence in our proven long-term plan. This increase marks the company's ninth consecutive year of dividend growth during which time, we will have returned more than $5 billion to shareholders in the form of dividends. So with fiscal 2012 behind us, I'll now focus the remainder of my remarks on 4 topics: The consumer and the economic environment, which continues to change; the key elements of our strategy to sustain top and bottom line momentum; the full year outlook for fiscal 2013; and our longer-term expectations.
Turning first to the consumer and the economic climate. I see another year of evolving consumer behavior amid a still-challenging environment, particularly in the developed markets. Although we are seeing anecdotal signs of improving consumer confidence, more than half of the global consumers surveyed believe we are still in recession. Consequently, consumers are aggressively reducing debt and increasing savings. A recent study from Kantar Retail provides insight on now these trends are manifesting themselves in the U.S. where consumers are consciously limiting their grocery purchases. Most strikingly, this behavior is being exhibited across the economic spectrum and across all classes. There's no doubt the consumers have become more disciplined, more frugal, more focused on price and value.But interestingly enough, both Kantar and Nielsen confirmed that at least in the U.S., the volumes are not shifting to private label. Rather, volume is shifting at the perimeter of the store or being eliminated entirely. While this behavior has affected unit sales across the store, it has been particularly unfavorable and challenging for frozen food volumes. Retailers have adapted to, or in some cases, helped foster these shopping habits through changes in store layouts designed to emphasize the perimeter, a trend that has clearly impacting center of store. I'm directing our team to better understand and address the implications of this trend, which I suspect will continue. Nielsen and Kantar also highlight emerging new demographic trends in developed markets like the growing divide between struggling and affluent households and a decline in the middle class in the U.S. These trends, combined with aging populations, smaller households and an increase in ethnic and immigrant households are affecting package sizes, price points and innovation. One outcome is an economic trifurcation, which is manifesting itself in the growth of alternate or non-measured channels, especially club, dollar and drugstores.
E-commerce, club, dollar and supercenters are expected to deliver higher relative growth than more traditional food outlets in the U.S. over the next few years. And consequently, our success is going to increasingly depend on our ability to win in these growing channels. Our U.S. team is responding in a disciplined and measured manner to these evolving demographics. For example, we are testing a limited array of smaller packages with more affordable price points for smaller households and struggling consumers. At the same time, we recognize the need to address the changing face of America. And consequently, our U.S. ketchup team has developed a new campaign aimed at Hispanic consumers to determine if we can efficiently and effectively penetrate this rapidly growing target where we are significantly underdeveloped.Conversely, while the bottom tier is growing and the middle class is shrinking in developed markets, it is expanding in Emerging Markets. These markets are much more advanced than developed markets in tiering products to different audiences, and I've encouraged our team to share this critical learning and best practices with each other so that we can leverage this knowledge appropriately. Emerging market development is imperative to long-term growth, and you can see why we are so intent on accelerating our presence in these markets. These fast-growing, highly populated markets are generating significantly stronger economic growth than developed markets and are the future of our business, as well as the future of economies around the world. China, for example, has now overtaken the U.S. as the world's biggest grocery market. And 4 of the top 5 packaged goods spending markets will soon be in Emerging Markets. We have a strong position in each of these markets. Now that I've shared my view of the consumer and economic environment, let's talk more about the key strategic elements that help make us a global leader in the packaged foods industry.
First, we are highly focused against only a few core categories with particular emphasis on an increasingly large and advantaged Ketchup and Sauces business. Second, we have a well-balanced geographic portfolio with accelerating growth in Emerging Markets and a solid foundation in the developed world. Third, we're building and increasingly leveraging unique global capabilities and infrastructures to support continued growth and improved productivity.So looking first at our core business, we have radically transformed our portfolio over the last 10 years to become much more focused and competitive. In 2002, prior to the spinoff of our North American Seafood, Pet food and Soup businesses, we had 6 core categories. Today, we have 3. Ketchup and Sauces, which has grown from roughly 1/4 of our business in 2002 to nearly half the business in 2012. We also have global Infant/Nutrition and Meals and Snacks which operates almost exclusively in the developed world. It's no accident that Ketchup and Sauces now dominates the portfolio. It is our crown jewel, our founder's legacy and our fastest growing core business, with sales of more than $5 billion in the recently completed year. Led by the iconic Heinz brand, Ketchup and Sauces delivered organic growth of almost 7% last year. And importantly, 25% of our sales are now in Emerging Markets in this category where we are growing in soy and chili sauces, as well as ketchup. This category represents the future of Heinz and we possess numerous competitive advantages. We have very high margins and return on invested capital, we are seeing rapid growth in Emerging Markets, we have leading market shares around the world while still having upside development opportunities. There's substantial upside in under-penetrated developed markets, particularly in Europe and the Pacific. We have lower private label penetration. We have flexible and competitively advantaged manufacturing capabilities and we have the unique advantage of Heinz seed, which is our natural hybrid seed that delivers superior, great-tasting tomatoes exclusively for use in Heinz Ketchup and Sauces.
We are winning where we choose to compete, and we have only scratched the surface of this $110 billion global category. Given our strong brands, market leadership and global scale, we're well positioned in the world where the demand for Ketchup and Sauces is growing in both emerging and developed markets. It is clear, however, like most other businesses, that an even greater opportunity resides in Emerging Markets where sales will likely double to $80 billion by 2018.We are #1 globally in ketchup and #2 in sauces. As [indiscernible] recognizes that no one remembers who finished second, so we have ambitions to become #1 overall. We are focused on what we see as the 4 largest opportunities in global sauces: Ketchup, soy, pasta, and chili sauces. Importantly, we are already well positioned in virtually all of the top growth markets for Ketchup and Sauces led by China, Venezuela and Brazil. Emerging Markets account for 7 of the top 10 and it's no surprise that the biggest opportunity is China where our Ketchup and Sauces business, and including Foodstar, more than doubled in fiscal 2012. Focusing more narrowly on ketchup, our flagship Heinz brand is far from mature after 136 years in the market. And in fiscal '12, we delivered excellent organic growth at more than 8% globally. This growth was driven by innovation, pricing, distribution gains and expansion into new geographies. These results are a good indicator of what we believe is achievable in this category overall. We are now #1 in 7 of the top 10 Global Ketchup markets and are aggressively building share in 2 of the other 3, specifically Brazil and Mexico. Meanwhile, led by growth in the U.K. and across the continent, Europe delivered strong organic ketchup growth of more than 7% last year, an impressive achievement given the uncertain economic environment we're operating in on the continent.
We continue to build on this momentum by taking our iconic brand to new geographies like Brazil, where the acquisition of Quero provides a very strong base and platform for future growth. Many Brazilian consumers use ketchup as a cooking ingredient or as a sauce on pasta not just as a condiment. Importantly, we will begin manufacturing Heinz Ketchup in Brazil later this year to help expand our availability in supermarkets and across the country.The Brazilian plan is modeled after our very successful strategy in Russia, where Heinz is now #1 in the world's third largest ketchup market and where the brand grew more than 20% organically in fiscal 2012. Similarly, our acquisition of Foodstar in fiscal 2011 expanded our presence in China's rapidly growing $4 billion-plus soy sauce market, while providing also a strong growth platform for Ketchup and Sauces across that country. We are growing Foodstar's Master brand soy sauce to increase trial and penetration and expansion to contiguous provinces around our stronghold in Southeast China. At the same time, we are leveraging our increased capabilities to drive growth of Heinz Ketchup in both retail and Foodservice where we see enormous upside. Hein Schumacher, President of Heinz China, will discuss Foodstar and Master soy sauce later in this meeting. Our strength in sauces extends to Indonesia where ABC soy and chili sauces are #1 and growing. Indonesia is the world's fourth most populous nation and it's an important market for soy and chili sauces. We've delivered growth there on a compounded basis of more than 22% over the last 2 years, powered by marketing and new product innovation. Without question, packaging innovation is one of the keys to growth in Ketchup and Sauces. Consequently, we have a number of initiatives in progress, including the launch of our fully recyclable PlantBottle packaging in partnership with the Coca-Cola Company, which pioneered this technology and which we're now taking to Canada. Expansion of Heinz Dip & Squeeze, our innovative dual function Single-Serve Foodservice package, which has now sold more than 1 billion packets in the U.S. and is growing rapidly. Dip & Squeeze is fast becoming a global priority for the company. And finally, Doy Pack, our economical and flexible pouch which we're using for products ranging from Heinz ketchup and mayonnaise to ABC Soy Sauce and cheese sauce in Russia. Doy Pack has been introduced successfully in numerous Heinz Emerging Markets. And in my view, not yet shared by several of our developed market teams, it represents a significant growth opportunity for them as well.
A unique attribute of Ketchup and Sauces is the relevance to both grocery and Foodservice customers, which allows us to leverage assets across channels thereby producing superior returns. Additionally, Foodservice operates symbiotically with grocery to drive trial, penetration and awareness of Heinz Ketchup. The good news is that the global Foodservice market is projected to grow more than 40% from 2010 to 2015, and we are leveraging our strong relationships with quick serve restaurant partners to drive growth in Emerging Markets. I see this as a huge opportunity to build trial and brand equity outside the U.S.Consistent with the increased focus on Ketchup and Sauces, we are repositioning our U.S. Foodservice business around its core strength, branded front of house Ketchup and Sauces. In the past 3 years, we have significantly streamlined the U.S. Foodservice portfolio, to exit non-core product lines and SKUs, while selling or closing 5 non-core factories. We're getting back to what we do best by focusing on front of house Ketchup and Sauces and Foodservice. With the recently announced sale of our Foodservice Frozen Desserts business, we have further transformed and extended the business back towards its evolution as a channel play for Ketchup and Sauces. Our success in innovating Ketchup and Sauces will yield excellent returns when restaurant traffic improves. Beyond Ketchup and Sauces, we also continue to look for opportunities to extend our very profitable and growing Infant/Nutrition business. Infant/Nutrition delivered more than $1.2 billion in sales in fiscal '12, a 16% organic growth in Emerging Markets. This growth was led by Heinz branded baby food in multiple markets and Complan in India. We view this category in 3 distinct segments: Baby food, which is our primary focus and the core of our Infant/Nutrition business, which generates about 65% of our sales in this category; Nutritional Beverages for children; and Infant Formula.
Infant/Nutrition is one of the world's fastest growing categories with nearly all of its growth in Emerging Markets. Infant/Nutrition in Emerging Markets, as I've said repeatedly, are the intersection of 2 high growth opportunities that I think we're well positioned to capitalize on. Overall, more than 40% of our Infant/Nutrition sales are now in Emerging Markets and I expect that to increase in years to come, reflecting their very high birth rates and our capabilities in baby food.Our baby food business in Emerging Markets are leveraging best practices and innovation developed by our Global Center of Innovation and Center of Excellence in Italy where we have more than a century of Infant/Nutrition expertise. To support our dynamic growth, we are in the process of building a new 80,000 square-foot baby cereal factory in Guandong province that will begin production in fiscal 2014. Heinz ranks third globally in prepared baby food and fifth if you include infant formula. Our goal is to be #1 in prepared baby food in the Emerging Markets, leveraging strong brands and our solid and growing shares in Emerging Markets, new penetration opportunities, our pipeline of innovation and our long history of nutritional expertise in markets ranging from Italy to China. We still see opportunity in developed markets as well, most particularly in Europe and the Pacific. Europe generated almost half of our global Infant/Nutrition sales in fiscal 2012. And to drive growth, we have launched a unique aseptic wet baby food line in Italy. This product, which is packaged in convenient, resealable plastic pouch requires less heat to process, and consequently, the end result is superior taste, nutrition, color and texture. Early results are highly encouraging in the 2 categories we've introduced it to. While we see enormous opportunities for baby food, we are being very selective in formula. I'll preempt some of your questions and plan to only target markets like China and India where the birth rate is high and we have solid infrastructure and capabilities.
But the fastest-growing and most notable packaging innovation in infant food is pouch, a unique, more affordable, convenient and efficient alternative to glass. We have successfully launched pouched baby food in Canada, China, Mexico and other Latin American markets with outstanding early results.Meals and Snacks is our third core category. It's primarily a developed market business focused in the U.S., U.K., Australia and New Zealand. This category consists of 2 distinct segments: a $2.5 billion frozen portfolio predominantly in the U.S. that had, to stay it kindly, mixed results over the last year; and a strong and growing $1.9 billion ambient portfolio anchored by the Heinz brands in outstanding businesses in the U.K. and New Zealand. The frozen segment includes 3 large U.S. brands, Ore-Ida, Smart Ones and T.G.I. Friday's. These brands are highly profitable but they are feeling the effects of poor consumer and category dynamics and obviously increase price elasticity in the category. We remain committed to these brands and consequently are working to address the challenges and price value, while also upgrading our marketing and sales execution, which has been less than stellar. Getting Ore-Ida back on track is particularly important. We had a difficult fiscal 2012, and frankly, we're still wrestling with weak consumer metrics and shares. Our first priority is to address the value gap, which resulted from aggressive pricing actions last year, designed to offset increased costs. We are making progress, but in my view, still have a ways to go. Starting in late Q4, we escalated working media investments behind the brand with new messaging that highlights the nutritional profile of our frozen potatoes. This will continue through fiscal 2013. And combined with new initiatives to improve the price value perception of the brand, I hope for some improvement by the second half of this fiscal year. Read the rest of this transcript for free on seekingalpha.com