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The global financial crisis has done little damage to earnings at Heinz

Published: 03:26 10 Jul 2009 AEST

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The fallout of the global financial crisis has done significant damage to most companies’ earnings. Not so for dinner table favourite Heinz (HNZ) though. Not only has Heinz’s business proved resilient to the storm, the company’s sales and earnings hit record highs in the year to April 2009. But let’s not forget, this is a company that has been through the Great Depression, two world wars and seen the Red Sox win both their first and most recent World Series!

History
Like all famous brands, Heinz has a rich history going back to the 1800s. As a six year old, Henry John Heinz spent his spare time with his mother tending their small garden. Henry soon began selling the garden’s produce around the local neighborhood. Through this he saw an opportunity to expand his product offering, and began producing and selling his own brand of horseradish. By the time the young entrepreneur had reached 10 years of age he was managing his own three-quarter acre plot. By the age of 17 his business had grown nicely, with annual sales of $2,400.

In 1869, Henry and his friend of the time founded Heinz Noble & Company, which marketed his horseradish. The Heinz brand could have been lost forever when the company subsequently went bankrupt in 1875. Not to be put off though, Henry tried again with F & J Heinz, his brother and cousin as partners. The company produced a range of condiments, one of which was of course tomato ketchup.

 
Henry bought out his two partners in 1888 and renamed the company to its present day title of H. J. Heinz Company. Like all good brands, Heinz has a famous slogan that Henry stumbled across while gazing from the window of his train. He saw a shoe store advertising that it carried 21 varieties of shoe and although his company had many more than this, he thought the number 57 would work well for him. And so it did with the famous "57 varieties" sill evident on Heinz products today.

Heinz today is still the same company fundamentally as it was back in the early days. It just now operates on a considerably larger scale. The company’s product range is currently grouped into three core categories: ketchup and sauces meals and snacks, and infant/nutrition. The first two categories each contributes around 40% of group sales, while infant/nutrition delivers a more modest 11%. Other products outside of these core categories accounted for 4% of 2009 sales.

Heinz is of course truly global and the company claims to have the top two selling brands across five continents and fifty countries. These are not just under the Heinz label, but also include independent brands such as Watties, TGI Fridays and recent acquisition, Golden Circle. Some 70% of the company’s sales are derived from a portfolio of just 15 core brands.

Results

For the year to April 2009, the company delivered record sales of $10.1 billion, representing a 0.8% growth on the prior year. As a predominantly consumer staples provider, demand for the company’s products is relatively non-cyclical. The global recession did have some impact though, with an overall volume decrease of 1.5% for the year. This was driven by weakness in the US, Australia and New Zealand markets.

Given that more than half of Heinz’s sales revenue is generated from foreign markets, currency movements can have a significant impact on its US dollar denominated reporting. For the year to April, the strengthening US dollar delivered an overall negative 6.6% effect on group sales revenue. Given our longer term negative view on the US dollar, however, Heinz’s global earnings diversification is likely to prove positive in future periods.

Offsetting these negative factors was the company’s price increases across their product range. Management increased prices in order to pass on the impact of higher commodity costs. In doing so, management protected bottom line earnings, which lifted an impressive 9.2% to $923 million.

The low interest rate environment was a significant factor in Heinz’s bottom line earnings growth, outstripping the more modest sales expansion. As is often the case for major brands with consistently strong operating cash flows ($2.7 billion in operating free cash flow over the last three years), Heinz carries a significant level of debt on the balance sheet. The lower interest rates for the year led to a material saving of $25 million for the group’s interest expense.

Net debt to equity has averaged 234% in the last decade and currently sits at 391%. Interest coverage is currently above its longer term average, with operating earnings covering the interest expense 5.4 times.

The company’s strong cash generative capabilities facilitate a large dividend payout ratio, typically in excess of 50% of earnings. Expectations are for this to continue. Indeed, consensus estimates are for a dividend yield of 4.6% in the current year, rising to 4.9% in 2011. This is a particularly attractive yield relative to US interest rates of effectively zero, backed by one of the world’s leading companies.

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