Heinz Earnings Will Show International Impact And Margin Trend

H. J. Heinz & Company (NYSE:HNZ) is scheduled to report its earnings for the first quarter of fiscal 2013 on August 29. Sales grew 8.8% in the previous year, driven by its primary growth engines, emerging markets, top 15 brands and Global Ketchup. The company is known for its ability to adapt to shifting demographics and consumer spending trends through product and packaging innovations and alternative sales channels. We expect this strength to sustain the company’s growth during the current global economic conditions.

We currently have a Trefis price estimate of $57 for Heinz, which is in line with the market price.

Emerging Markets to Drive Growth in Revenues and Margins

Revenues from emerging markets were around 21% of total sales last fiscal year and management expects this to grow to around 25% in FY 2013. This is primarily due to the rapid growth of the company’s operations in countries such as China, India, Brazil and Mexico, in combination with declining revenue growth in the developed regions (North America and Europe).

Margins from emerging markets are currently around 100 basis points lower than those from developed markets. The company intends to bridge this gap through increased pricing and productivity measures.

One concern, however, is the slowing growth in a number of these countries, such as China, Brazil and India. This may temporarily reduce demand for the company’s products in these regions.

Company to Maintain Focus on Ketchups & Sauces

The company continues to focus on its flagship Heinz brand through its Ketchups and Sauces business. The company is the global market leader in ketchups and #2 in sauces. The division has seen an annual revenue growth rate of 6.4% since 2008, while total revenues have grown at a rate of 4.2%. The division currently makes up almost 50% of total revenues, compared to around 25% in 2002.

The Ketchups and Sauces division has performed especially well in China where the business more than doubled in fiscal 2012. Management expects strong growth in Brazil as well, following the company’s recent acquisition of Brazilian ketchup manufacturer Quero. We expect emerging markets to continue to drive the growth of this division looking forward.

India to Drive Growth of Infant/Nutrition Division

Revenues from the Infant/Nutrition division delivered 16% organic growth in emerging markets driven by the Complan and Glucon D brands, which are experiencing rapid growth in India. Complan has strong brand value in the country, and the company is looking to capitalize on this through marketing and innovations such as Complan Memory and Nutri-Gro.

Margins to Recover in FY 2013

EBITDA margins have experienced a considerable decline over the past few years from a level of 19.1% in 2010 to around 17.7% in 2012. We expect it to recover to around 18% over the next few quarters, primarily due to increasing margins from emerging market operations. This estimate could be affected by rising commodity costs and currency losses due to a strengthening dollar.

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