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Heinz hits it big in emerging markets

| Thursday, Sept. 2, 2010

H.J. Heinz Co. is investing where the returns are -- in emerging markets -- CEO Bill Johnson told analysts Wednesday after the world's largest ketchup maker reported a 13.1 percent jump in first quarter profit.

The Pittsburgh-based company is targeting its resources, such as new product introductions, investment in plants, and even possible acquisitions, where Heinz can realize the quickest return on investment, Johnson said.

"It may not be the greatest thing for the U.S. and Western Europe, but it's what's best for our shareholders," Johnson said on a conference call yesterday while discussing Heinz's results for the three-month period ended July 28.

Heinz said net income increased to $240.4 million, or 75 cents a share, from $212.6 million, or 67 cents a share, in the comparable period a year ago. Sales grew by 1.6 percent, to nearly $2.5 billion, from $2.4 billion one year ago.

Most of the sales growth came from emerging markets.

Johnson recently has talked about the possibilities and opportunities in countries such as China, India, Indonesia and Russia. Heinz is pushing for 20 percent of its worldwide sales to come from such countries by 2013. For the quarter, these markets were responsible for nearly 18 percent of Heinz's revenue.

Despite a difficult economic environment worldwide, sales growth include an 8 percent jump in ketchup and nearly 6 percent growth in Heinz's top 15 brands, Johnson said.

Ketchup sales were driven by higher volume in the United States and Russia, which has become one of the world's largest ketchup markets. Total ketchup and sauces sales increased to nearly $1.1 billion from $1.07 billion a year ago.

"You have to be competitive in developed markets, but it absolutely makes sense for Heinz to be shifting a lot of its investment to different countries," said Christopher Growe, a St. Louis-based analyst who follows Heinz for Stifel Nicolaus & Co. Inc. Growe has a "buy" rating on Heinz's stock.

Sales in the Asia-Pacific region increased 19 percent, fueled by growth in India and Indonesia, the company said. In Europe, sales fell 7.7 percent, primarily because of unfavorable foreign-exchange rates. During the quarter, Heinz became ketchup supplier for McDonald's Corp. restaurants in Asia, South Africa and India.

In June, the company agreed to buy soy-sauce manufacturer Foodstar from Transpac Industrial Holdings Ltd. for $165 million, to expand in China.

Heinz's emerging-market strategy also includes introducing infant formula in China and Russia, and may entail buying an Asian baby-food maker, according to Alexia Howard, a New York- based analyst at Sanford C. Bernstein who recommends holding the shares.

Johnson said that the number of acquisition targets in emerging markets "is at a five-year high."

North America remains Heinz's largest market, and sales of products as ketchup, Smart Ones frozen entrees and Classico pasta sauces, increased 4.8 percent, to $761.8 million from $727.2 million in the quarter.

Explaining the emphasis on emerging markets, Johnson told analysts that the food industry has been slow to react to the fact that product promotions aren't working as they have during other economic slowdowns. During the most recent quarter, retail giant Wal-Mart was selling Heinz ketchup in the 40-ounce size for $1.

"The industry is not seeing the lifts it previously received from the use of promotions," Johnson said. "Our consumer research is showing that shoppers are going into stores with coupons and a shopping list, and they aren't deviating from that list, regardless of the promotion."

Heinz has resisted heavy promotions, what Johnson refers to as "chasing customers out the door," trying to entice them to buy. Even so, Heinz increased spending on marketing, up 9.4 percent in the quarter to $103 million from $94 million one year ago.

"The industry must manage its capital better, we need to put our resources where the opportunities are -- not where the opportunities were," Johnson said.

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