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Heinz net rises as sales offset costs

The Wall Street Journal
12/03/2007

H.J. Heinz Co. reported a 19% rise in fiscal second-quarter profit despite higher costs for corn syrup and tomatoes, helped by strength in Europe and emerging markets and productivity improvements.

For the quarter ended Oct. 31, global ketchup sales rose 5%, driven by strong results in Europe. Soup sales climbed 18%.

The Pittsburgh food maker's brand lineup also includes Ore-Ida French fries, Weight Watchers Smart Ones meals, Bagel Bites and Lea & Perrins Worcestershire Sauce.

Heinz posted a 24% sales gain in emerging markets, driven by new products and packaging improvements. In China, sales of Long Fong frozen dumplings, rice balls, appetizers and hot pot soups increased more than 25%, and sales of infant-nutrition products rose more than 40%.

The results continue a string of successes at Heinz since the company initiated a plan to boost innovation and marketing and cut costs, changes that were pushed by activist investor Nelson Peltz. Mr. Peltz secured board seats for himself and an ally after a lengthy proxy battle last year.

Heinz raised the top end of its fiscal-year forecast to $2.62 a share, projecting per-share earnings growth of about 9% to 10%.

With its momentum, the company could play a role in future industry consolidation. It could keep reinvesting its profits in the business and also use cash it's building up to acquire other brands. If other companies that are looking to slim down their portfolios, such as Kraft Foods Inc, continue to sell brands, Heinz could be in a position to benefit.

Heinz signaled it is willing to ditch unprofitable products amid rising costs for energy and raw materials. The rising price of high-fructose corn syrup has been particularly troubling for the company, as the ingredient accounts for 10% of the cost of producing a bottle of ketchup. Prices continue to surge amid the ethanol industry's consumption of corn and rising global demand for meat, as corn is a key ingredient of animal feed.

The price of tomatoes, which accounts for a third of the cost of making a bottle of ketchup, has jumped as a result of the increased cost of farmland in California, where Heinz gets the tomatoes.

Heinz is developing sweeter tomatoes that could cut its need for corn syrup. But changing the tomatoes in its ketchup is a risk as it could affect the balance of flavors customers are used to.