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H.J. Heinz Co.

Posted On: 11/25/2002

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The H.J. Heinz Co. has published its fiscal 2002 annual report, which details the dramatic transformation anticipated from Heinz's historic merger agreement with Del Monte Foods Co. announced by the company earlier this year (see VT, June).

In the report, Heinz chairman, president and chief executive officer William R. Johnson summarized the highlights and challenges of fiscal 2002. Successes included a 7% increase in sales for the year, due primarily to successful acquisitions and innovations; an 11.6% increase in consumer and trade marketing spending; record market shares for "Heinz" ketchup in the U.S. (60%) and UK (66%); significantly improved cash flow from operations; and the launch of innovations such as purple and "mystery"-colored "EZ Squirt" kids' condiments, "Heinz Ketchup Kick'rs," "StarKist Lunch to Go," "Boston Market" frozen pot pies; and "Ore-Ida Funky Fries."

Johnson cited a number of challenges in fiscal 2002, including the impact of the economic slowdown on foodservice and weakness in the company's pet food business, as well as weakness in Australia/New Zealand business. These factors depressed earnings for the year. Diluted earnings per share were $2.39 for fiscal 2002 (excluding special items), 6.3% below the previous year.

"We are building on our achievements and addressing our challenges aggressively," Johnson said. He pointed to a trend toward more favorable currency exchange rates, new and highly motivated management in Australia/New Zealand, and indications that Heinz's foodservice business "appears to be recovering."

Heinz is strengthening its portfolio to improve performance through the transformative Heinz/Del Monte transaction. Heinz will spin off its U.S. and Canadian pet food and pet snacks business and its U.S. tuna, infant feeding, retail private label soup and gravy and "College Inn" broth businesses, which will merge with Del Monte Foods.

The transaction will also refocus the company's U.S. businesses in two highly profitable categories (Ketchup, Condiments & Sauces and Frozen Foods) and two strong channels (retail grocery and foodservice), where Heinz has a proven track record.

Heinz is expected to be more "transparent," with a sharper focus on two strategic food platforms: Meal Enhancers (ketchup, condiments and sauces around the world) and Meals & Snacks, both frozen and ambient temperature, for all ages.

A major element in Heinz's growth strategy is the investment of more than $100 million in incremental marketing spending during fiscal 2003. As part of its transformation initiative, Heinz will adjust its dividend beginning April 2003 to free up substantial cash flow to help underwrite additional marketing and/or pay down debt.

The transaction will reduce Heinz's debt by approximately $1.1 billion on the date of closing.

The annual report lists five key elements of the transformation strategy. First, Heinz expects to have a stronger growth platform focused on its Meal Enhancers and Meals & Snacks segments, each of which comprises a powerful array of number-one and number-two brands around the world.

Second, the report points to the strengthening of the company's winning portfolio, which will be concentrated on top-selling, high-margin, world-class brands, led by the iconic $2.5 billion "Heinz" brand, which will account for nearly one-third of total sales.

Third, Heinz will be able to focus more resources and expertise on a powerful pipeline of innovative products and packaging to drive growth. The report cites such new ideas as the "Heinz Easy Squeeze" upside-down ketchup bottle, the "Heinz SmartChoice Pump" dispenser for foodservice customers and the UK launch of microwaveable "Heinz Soup Cups."

Fourth, the Heinz/Del Monte transaction should have a strong bottom-line impact, as it is expected to significantly enhance Heinz's ability to deliver margin improvement and consistent earnings growth.

Fifth, Heinz's transformation includes initiatives to attract, develop, reward and retain the best people.

"The Heinz/Del Monte transaction furthers Heinz's vision of being the world's premier food company," Johnson concluded. "This is an exciting time for Heinz, and we look forward to delivering on the great promise and potential that we see before us in the coming years."