Branded food giant H. J. Heinz has announced Q3 earnings, ended 30 January 2002, of US$201.7m, 57 cents/diluted share, a drop from US$270.5m, 77 cents/diluted share, year on year.

Excluding special items in last year's third quarter of 12 cents per diluted share, Heinz said it earned US$227.4m, 65 cents/diluted share, in that quarter.

The figure was in line with market expectations, and the Pittsburgh company confirmed that it is on track to deliver profits for fiscal 2002 (ending 1 May 2002) in line with market expectations and its revised outlook from 8 November 2001.

Heinz revealed that its innovation and acquisitions strategy is working, pushing Q3 sales up 12.4% and marketing up 23%. The strong sales growth was driven primarily by the excellent performance of recent acquisitions in the company's key core businesses of ketchup, condiments and sauces, convenience meals, frozen foods, and infant and nutritional foods.

These core businesses, which comprise powerful brand franchises worldwide, now represent nearly 75% of Heinz's total sales and continue to grow in importance. As anticipated, selling, general and administrative expenses also increased, largely due to the impact of the acquisitions. These expenses, together with changes in product mix, accounted for the lower operating income of US$395.4m in the quarter, down 4.4% from the Q3 last year, excluding special items in the prior-year period.

The company plans to continue driving sales growth through innovation and creative marketing, while improving bottom-line performance through new initiatives to grow margins and improve cash flow, and a target to reduce total costs by 1-2% per year.

These initiatives include:

*An increased marketing focus on high-margin products;
*20% reduction goal in total SKUs to phase-out lower-margin, underperforming products and focus resources on faster-growing, higher-profit varieties;
*Continuing progress in e-procurement;
*A stronger focus on value-added product engineering and waste reduction.

William R. Johnson, Heinz's chairman, president and CEO, commented: "Heinz continues to be one of the leaders in innovation, particularly in ketchup, condiments and sauces, foodservice, frozen meals and snacks, and convenience meals. We are on track to meet expectations for the fiscal year and look forward to improved top- and bottom-line performance as our big brands continue to grow and as we execute our supply chain and cash flow initiatives."

Q3 segment highlights

Q3 sales increased 12.4% to US$2.55bn from US$2.27bn last year, driven primarily by acquisitions (net of divestitures). Key acquisitions included Classico® pasta sauces, Honig® and HAK® products in the Netherlands, Delimex® Mexican foods, and Poppers® and T.G.I. Friday's® frozen snacks. Price and volume increases also helped to boost sales. Unfavorable foreign exchange continued to adversely affect sales 1.7% and operating income by 1.9%.

Heinz North America

Sales of the Heinz North America segment increased 11.1%, primarily due to acquisitions of strong performers such as Classico® premium sauces, which gives Heinz a leading position in this high-margin segment.

Sales volume and pricing were equal with the prior-year quarter. Heinz's US ketchup sustained its market share growth, with the latest 4-week dollar share exceeding 63%, up 4 points over the prior-year period. Excluding Fiscal 2001 special items, operating income decreased 17.6% as the positive impact of acquisitions was offset by the increase in promotions and marketing, increased selling and distribution costs and continued softness in the company's large foodservice business as a result of the economic slowdown.

US Frozen

US Frozen's sales increased 40.5% reflecting several key strategic acquisitions to strengthen Heinz's fast-growing frozen portfolio, including TGI Friday's® and Poppers® frozen snacks and the popular Delimex® line of frozen Mexican foods. Sales volume rose 3%, as Boston Market® HomeStyle Meals and Smart Ones® frozen entrees continued their strong performance, with Boston Market® consumption 28% higher than a year ago and Smart Ones® market share up 2.4 points in the latest 4-week period. The sale of Budget Gourmet® adversely affected sales by 5.8%.

Excluding Fiscal 2001 special items, operating income increased 34.6% as the favorable impact of acquisitions was partially offset by the Budget Gourmet® divestiture.

US Pet Products and Seafood

Sales of the US Pet Products and Seafood segment decreased 4.4%. Sales volume decreased 5.6%, primarily in pet food. Favorable pricing in StarKist® tuna and pet snacks partially offset the volume decline. Market share for the higher-margin StarKist® pouch tuna reached a record 4-week share of 8%, and the US pouch segment has more than doubled since December. Excluding Fiscal 2001 special items, operating income decreased 14.4%, mostly due to volume decreases in pet food, and adverse sales mix.

Heinz Europe

Sales in Europe - representing nearly one-third of Heinz's global sales - increased 16%, reflecting acquisitions of leading brands such as Honig® and HAK® in the Netherlands, and increased volume of 3.5%, driven by the strong performances of Heinz® Ketchup, frozen foods and Heinz® beans. Heinz® Ketchup's market shares continued a seven-month climb to exceed 65% in the UK, with shares also up in Germany, France and Holland. The restaged Heinz® Salad Cream extended its growth, with volume more than 11.9% above that for the year-ago period. Higher pricing increased sales 1.4%, across most products. Unfavorable foreign exchange translation rates partially offset the sales increase by 1.9%.

Excluding Fiscal 2001 special items, operating income rose 7.2% (up 10.8% in constant currency) as the favorable impact of acquisitions and increased pricing was offset in part by the strategic decision to increase marketing to support key brands across Europe, along with integration costs associated with recent acquisitions.

Asia/Pacific

Sales in Asia/Pacific decreased 3.4% as unfavorable exchange rates more than offset volume increases and higher pricing. Sales volume rose 0.9% due primarily to frozen foods, poultry, cooking oils and infant feeding. Higher pricing in sauces, infant feeding and juices increased sales 3.7%. Excluding Fiscal 2001 special items, operating income decreased US$15.2m. As previously indicated, this decrease is largely attributable to supply chain issues in New Zealand and Australia and declining sales in Japan reflecting that nation's continued economic slowdown. The company expects improvement in these markets by late FY03.

Recent innovations

Heinz stressed its continuing commitment to product and packaging innovation as a key to top-line growth. Several recent innovations include:

*Introduction of EZ Squirt® in "mystery" colors, which will further increase sales of the very successful EZ Squirt® range of kids' condiments in the US. Very strong demand by the retail trade caused the new EZ Squirt® product to sell out its limited one-million bottle run in just one week;
*New Eazy Squirt® Wicked Orange Sauce in the UK to complement the global innovation in condiments for children;
*Ketchup Kick'rs®, a trio of flavored ketchups developed specifically for adult ketchup lovers. First-month retail orders for the new ketchup variety were very strong, reflecting extremely high retail customer acceptance;
*New Boston Market® Pot Pies;
*New Smart Ones® Pizza and hand-held foods;
*StarKist Tuna Creations(TM) offering flavored recipes in a convenient pouch;
*The debut of Ore-Ida Funky Fries®, a range of flavored and colored French fries.

Nine-month results

In the nine-month period, Heinz reported net income of US$610.4m, US$1.73/diluted share versus US$648.5m, US$1.85/diluted share in the year-earlier period. Excluding special items in both years and the cumulative effect of an accounting change in fiscal 2001, diluted earnings per share decreased to US$1.77 from US$2.03. The nine-month sales rose 8.4% to US$7.3bn from US$6.74bn last year.