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November 22, 2011

On the money: Heinz upbeat on Europe despite volume drop

HJ Heinz chief executive Bill Johnson has said he feels "pretty good" about the US food maker's prospects in Europe despite volumes falling in recent months.

By Dean Best

HJ Heinz chief executive Bill Johnson has said he feels “pretty good” about the US food maker’s prospects in Europe despite volumes falling in recent months.

Like many food manufacturers, Heinz’s sales volumes have been under pressure as European consumers, anxious over the economy, become more cautious with their spending.

In the second quarter of the Heinz’s financial year, which encompassed the three months to 26 October, the company’s European sales increased 5.8% but volumes fell 2.1%.

Speaking to analysts on Friday (18 November) after Heinz announced its second-quarter results, chairman, president and CEO Johnson said lower volumes in the UK and Italy had weighed on total European volumes.

Citigroup analyst David Driscoll said investors were “focused like a laser” on economic conditions in Europe and asked Johnson how Heinz was likely to perform on the continent in the coming months. The Heinz chief said the company was introducing smaller products at cheaper prices in Europe and insisted “a lot of innovation, a lot of targeted promotion” would mean its organic sales would be “considerably stronger” in the second half of its financial year.

Johnson also pointed to a decision to consolidate Heinz’s supply chain in Europe, which he said would make the company more efficient and free up cash to support its business.

Reflecting on consumer confidence in Europe, he said: “For most Europeans, it’s not going to be any worse from a consumer standpoint than they already perceive things to be because the things we hear back in focus groups in our research in Europe is that Europeans don’t believe they ever came out of recession.”

However, while Johnson described Heinz’s performance in developed markets in the second quarter as “mixed”, he pointed to the company’s operations in emerging markets as a driver of the company’s increased sales and higher underlying earnings.

Johnson said emerging markets were Heinz’s “most powerful growth engine”, with organic sales up 16%. The company’s recent acquisitions, Brazilian tomato products maker Quero and Chinese soy sauce firm Foodstar, “continued to exceed our expectations”, he added.

“In Quero, you will see a substantial increase in second half sales as a function of the marketing investment and a lot of the new items we’re putting in place,” he said.

The Heinz chief insisted his concern with Foodstar was how to keep up with the growth the business was generating. Sales of Foodstar’s flagship brand Master grew 30% in the first half of the year, he said. “October sales were up 69%. November sales are running at about that level, north of 50%. The Shanghai factory has come online, but it is nowhere near ready yet to handle the kind of growth we are seeing in Foodstar,” Johnson said. However, he added: “[In] Foodstar, we have a tiger by the tail.”

Notably, the Heinz chief said the company was evaluating numerous M&A opportunities in emerging markets “to build on our already strong momentum”.

Johnson said: “The developed world is going to get increasingly difficult in which to operate just because of the concentration of retailers in all these markets, the difficulty in categories, the pressure consumers are feeling, the ethnic and demographic shifts occurring in all these markets. And so you’re going to see us push more aggressively and with greater alacrity into these emerging markets because we have to. In the developed world, those who are not pushing aggressively into emerging markets are going to wake up one day and find out that the world left them behind.”

For more of the transcript of Heinz’s conference call with analysts, visit Seeking Alpha.

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