Heinz Q1 Earnings Show Big Emerging Markets Growth And Negative Currency Impacts

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H.J. Heinz

H. J. Heinz & Co. (NYSE:HNZ) reported its earnings for the first quarter of FY 2013 on Wednesday, August 29. The food products manufacturer reported 19% y-o-y organic sales growth from emerging markets, while foreign currency headwinds dealt a huge blow to the top-line, with net sales declining 1.5%. The company reported sales declines across divisions with the exception of Ketchups & Sauces which remained essentially flat.

We currently have a price estimate of $57 for Heinz, which is in-line with the market price.

Emerging Markets Continue Strong Growth Trend

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The company’s emerging market operations continued to thrive, with growth for the quarter driven by ketchups and sauces in Brazil and Russia and the Foodstar brand in China. The company reported exceptional organic sales growth of 45% y-o-y in Brazil. Since the acquisition of the Quero brand, this region’s prospects are looking promising. In Russia, Heinz established itself as the #1 brand in both ketchups and condiments for the quarter.

Exchange Rates Impact Top-Line Growth

Foreign exchange movements ravaged Heinz’s top-line growth across its operating segments during the quarter, with an overall impact of almost 6% on net sales. This was primarily due to the strengthening Dollar with operations in Europe, Africa, Latin America and the Middle East all taking a hit.

Excluding the impact of exchange rates, the company had modest sales growth in most operating segments, driven primarily by price increases and strong volume growth in emerging markets. We believe this is primarily reflective of the difficult economic environment and does not pose a long-term concern.

Margins Continue Flat Trend

Gross margins remained essentially flat, excluding last year’s productivity initiative related charges, primarily due to higher pricing and productivity improvements offsetting commodity cost increases. Margins reached a peak in 2010 and have now declined to much lower levels. We believe that this is primarily due to commodity price inflation, which have not been offset in spite of consistent price increases. However, looking forward, we anticipate a gradual increase in these figures due to productivity improvements such as restructuring and Project Keystone, assuming constant commodity costs.

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