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Heinz profit dips as sales outside U.S. climb

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By Thomas Olson
Wednesday, Aug. 24, 2011

Despite a jump in sales, ketchup-maker H.J. Heinz Co. said on Tuesday its quarterly profit declined 5.8 percent because of spending to close plants and increase productivity.

Sales in emerging markets like China, India, Russia and Brazil drove most of the Downtown company's increase in sales, which rose 14.9 percent to almost $2.85 billion for the three months ended July 27.

Emerging market sales ballooned 45 percent, said Chief Financial Officer Art Winkleblack during a conference call. Emerging markets represented a record 23 percent of sales, up from 18 percent a year ago and 17 percent in the fiscal fourth quarter.

Net income for the period was $226.1 million, or 70 cents a share, compared with $240.4 million, or 75 cents, a year earlier. Profit excluding costs related to factories and other productivity expenses totaled 78 cents, beating the 76 cents projected by analysts.

"Heinz exceeded our expectations in terms of sales in Europe and in emerging markets," said Ann Gurkin, an analyst at Davenport & Co., Richmond, Va. Sales in Europe grew more than 17 percent.

"We think that's sustaintable (because) they have made solid investments in those markets," said Gurkin.

CEO William Johnson is seeking to boost sales abroad to counter slowing growth in the United States as Heinz faces higher commodity costs. The company said it will raise prices in the coming months to help offset food inflation, which was about 8 percent in the first quarter.

Heinz also is looking to draw U.S. consumers who "are living paycheck to paycheck" with lower-priced, smaller packages of food, including Ore-Ida potatoes, Edward McMenamin, senior vice president of finance, told analysts.

Heinz made two acquisitions in emerging markets in the past 12 months. It bought a majority stake in the Brazilian food maker of the Quero brand of ketchup and other condiments whose distribution network Heinz is now using. It also acquired Foodstar, a soy sauce maker in China, where Heinz is launching new products.

Excluding the one-time charges, Heinz operating earnings grew 5.9 percent to $255 million in the first fiscal quarter. The company booked a pre-tax charge of $41 million related to closing a factory and other productivity initiatives. Heinz plans to eliminate up to 1,000 jobs globally in fiscal 2012.

Heinz also benefitted from higher currency values relative to the U.S. dollar "in almost all the markets we operate in," McMenamin said.

Heinz shares fell 60 cents, or 1.15 percent, to close at $51.44.

"Our strategy to accelerate growth in emerging markets and through acquisitions in countries with fast-growing populations helped Heinz deliver (sales) growth and solid operating results despite the economic downturn in developed markets," Johnson said in a statement.

Johnson said the company was on track to hit an operating earnings target of $3.24 to $3.32 a year in the fiscal year ending in April, excluding special charges of 35 cents a share to account for more investments in productivity.

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