H. J. Heinz Management Discusses Q1 2013 Results - Earnings Call Transcript

H. J. Heinz (HNZ)

Q1 2013 Earnings Call

August 29, 2012 8:30 am ET

Executives

Margaret Roach Nollen - Senior Vice President of Investor Relations and Global Program Management Officer

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

Edward J. McMenamin - Principal Accounting Officer and Senior Vice President of Finance

Analysts

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

David Palmer - UBS Investment Bank, Research Division

Jason English - Goldman Sachs Group Inc., Research Division

David Driscoll - Citigroup Inc, Research Division

Jonathan P. Feeney - Janney Montgomery Scott LLC, Research Division

Brian Cullinane - Jefferies & Company, Inc., Research Division

Kenneth Goldman - JP Morgan Chase & Co, Research Division

Matthew C. Grainger - Morgan Stanley, Research Division

Robert Dickerson - Consumer Edge Research, LLC

Andrew Lazar - Barclays Capital, Research Division

Robert Moskow - Crédit Suisse AG, Research Division

Ann H. Gurkin - Davenport & Company, LLC, Research Division

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 2013 First Quarter Earnings Release Conference Call. This call is being recorded at the request of the H.J. Heinz Company. [Operator Instructions] I would 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, Chanel, and good morning. I'd like to welcome everyone to our conference call and webcast. Copies of the slides used in today's presentation are 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 statement currently displayed. This 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 29, 2012 Form 10-K and today's press release, which 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 measures are available in the company's earnings release today and on our website at heinz.com. Our complete financial highlights pages or stat pages are now available on the Investor Relations section of heinz.com towards the bottom of the page. Please note, we plan to file our first quarter 10-Q later today.

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

Now 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, we're pleased to take you through our first quarter performance, which marks a great start to fiscal 2013.

In the quarter, we delivered robust organic sales growth, again, driven by our trio of growth engines: Emerging Markets, Global Ketchup and our Top 15 brands; year-over-year gross margin improvement for the first time in 5 quarters despite the tough economic environment and higher commodity costs; continued investment in the business including marketing, Project Keystone and more boots on the ground in Emerging Markets and strong constant currency profit growth driven by higher operating income and a lower tax rate. On a reported basis, results were unfavorably impacted by foreign exchange. So overall, we're off to a very good start for the new year.

On a constant currency basis, net sales grew by more than 4%, operating income increased 5% and EPS rose more than 15% on a like-for-like basis, which excludes the impact of last year's charges for productivity initiatives. In short, strong results in a very challenging environment.

Importantly, Q1 marked our 29th consecutive quarter of organic sales growth at nearly 5%. I think this is an important indicator of our focus on growth, the strength of our portfolio, the effectiveness of our commercial programs and consistency of performance. Our trio of growth engines, Emerging Markets, Global Ketchup and our Top 15 brands, once again drove our organic sales growth. I want to briefly hit some highlights in each of these areas.

Our Emerging Markets posted organic sales growth of almost 20%. The growth was led by Quero in Brazil, Foodstar in China and Heinz in Russia. Importantly, in Russia, Heinz is now the #1 brand in both ketchup and total condiments. We also had strong organic sales growth in Indonesia and India. Overall, Emerging Markets represented a record 26% of Heinz sales in Q1, which is our high watermark in the year for Emerging Market mix given the timing of Ramadan.

Of note this quarter in Brazil, enhancement of business processes and the implementation of SAP allowed us to eliminate the 1 month lag in closing the books there, so our results include an extra month in Brazil which was partially offset by the planned sales reduction in Long Fong related to the significant streamlining we executed in that business last quarter.

And turning to Global Ketchup, we posted 3.7% organic growth, overlapping more than 8% organic growth last year. Our Emerging Markets of Brazil, Russia and China delivered strong double-digit growth, driven by both the retail and Foodservice channels. U.K. led our developed markets in ketchup growth, aided by innovative line extensions like ketchup with balsamic vinegar and now Indian spices.

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