H.J. Heinz Company (HNZ)

*Reconciliation of non-GAAP sales and cash flow numbers are set forth in the attached financial tables. Organic sales is defined as volume plus price or total sales growth excluding the impact of foreign exchange and acquisitions and divestitures.

Heinz reported a 25% increase in operating free cash flow to $233 million in the third quarter, reflecting effective working capital management and tight control over capital spending.

Excluding the impact of foreign exchange, sales grew 3.9% with organic sales growth of approximately 2%, driven by ketchup, infant nutrition and soup in the UK. Overall third-quarter sales of $2.41 billion declined 7.5% from the prior year due to the impact of foreign exchange. Lower volume for the quarter reflected the timing impact of overlapping price increases, a weak economic environment and the Company’s strategic decision not to match deep discounts in certain categories.

Heinz Chairman, President and CEO William R. Johnson said, “Heinz delivered solid third-quarter net income and strong cash flow in a challenging economic climate.”

In the U.S., the successful launch of Ore-Ida® Steam n’ Mash™ potatoes helped offset some of the unfavorable volume impact related to the timing of price increases. Classico pasta sauce organic sales gained a solid 9%, and globally, Heinz branded products grew organically by 8%, aided by higher retail ketchup volume.

Overall, net pricing in the quarter improved 8%, and acquisitions net of divestitures increased sales by 2%. Sales were offset by a 6% decline in volume and an 11% negative impact of foreign exchange translation rates.

Organic sales in Europe grew 5% and 9% in Emerging Markets as both segments benefited from cost-justified pricing actions. Organic sales declined in the U.S. Consumer Products, U.S. Foodservice and Asia/Pacific segments largely reflecting the timing impact of overlapping price increases, the recessionary environment, and competitive promotional pricing in a number of categories.

Third-quarter operating income of $382 million was down 6% from $406 million in the prior quarter due to currency. Excluding the unfavorable impact from foreign exchange translation rates and UK transaction rates, operating income would have increased almost 9%.

For the third quarter, market prices for the Heinz commodity basket were up 11% from a year ago, led by packaging, potatoes, and tomatoes. Gross margin declined 40 basis points, as commodity inflation, including the impact of the Euro/Pound transaction cross rate, was only partially offset by net price gains, procurement savings and other productivity initiatives.

Net profit before tax included an incremental $17 million mark-to-market gain resulting from translation hedges on key currencies for the remainder of FY2009. In addition, net profit before tax was aided by $14 million in mark-to-market gains on a total rate of return swap, which was entered into in conjunction with the remarketing of Company debt securities on December 1, 2008, reducing the overall cost to the Company.

The tax rate for the third quarter was 26%, down from 31.6% in the third quarter last year. The lower rate reflected lower repatriation costs, increased foreign tax planning and a deferred tax charge in the prior year resulting from an Italian tax law change. As a result, we now expect a current year annual effective tax rate of approximately 29%.

Heinz today reaffirmed its FY2009 guidance for EPS and organic sales. The Company anticipates EPS in the target range of $2.87 to $2.91 for FY2009, with full-year organic sales growth of around 6%.

“Our business remains fundamentally sound with strong cash flow and a balanced portfolio of leading brands that deliver good value to consumers,” Mr. Johnson said.

*Reconciliation of non-GAAP sales and cash flow numbers are set forth in the attached financial tables. Organic sales is defined as volume plus price or total sales growth excluding the impact of foreign exchange and acquisitions and divestitures.

All segments generated year-over-year organic sales growth for the quarter, except U.S. Foodservice. The organic growth was led by a 34% increase in the Rest of World segment, 11% growth in North American Consumer Products, 4% growth in Europe and a 2% organic increase in Asia/Pacific despite the timing impact of the Ramadan holiday. Emerging markets posted organic sales growth of 11.5%. Overall, net pricing in the quarter, which ended on October 29, improved by 7.1%, and acquisitions net of divestitures increased sales by 1%. Sales were partially offset by a 1.3% decline in volume and a 3.3% negative impact from changes in foreign exchange rates.

For the quarter, market prices for the Heinz commodity basket increased almost 15%, led by increased costs for packaging, potatoes, tomatoes, edible oils and meats. Commodity inflation and unfavorable foreign exchange rates, including the impact of the Euro/Pound cross rate on European product costs, were only partially offset by net price gains, procurement savings and other productivity initiatives, resulting in a gross margin decline of 170 basis points. Due to effective forward purchasing, the net impact of commodity cost increases was limited to 10%. While some commodity prices have begun to decline since crude oil hit its all-time high closing price of $146 on July 11, 2008, there is a time lag in recognizing potential cost reductions due to the mix of commodities, dynamics in the commodity supply market, duration of forward supply contracts and movement through the Heinz value chain.

Net profit before tax increased 20.6% reflecting lower net interest costs and a $92 million pre-tax currency benefit from the Company’s decision to establish translation hedges on key currencies. The currency gains resulted primarily from forward contracts that were put in place to help mitigate the unfavorable impact of translation associated with key foreign currencies for all of FY2009. $23 million of the currency gains relate to contracts that covered second-quarter earnings, and $69 million relates to the balance of FY2009.

SG&A increased by 5% in the quarter, largely reflecting higher fuel costs and strategic investments in global task forces and R&D. Heinz reported operating income for the quarter of $386 million versus $421 million in the year-earlier period. The decline reflects the recent dramatic change in foreign currency translation rates, the Euro/Pound cross rate impact on cost of goods sold in the UK, investments in global task forces, and the continuation of high commodity costs.

The tax rate for the quarter was 29.0% versus 29.8% in Q2 last year reflecting tax planning initiatives and one-time settlement benefits. Net income increased 21.9% and operating free cash flow (cash flow from operations less capital expenditures net of proceeds from disposal of PP&E), was $145 million, up 9%.

Heinz reaffirms its FY2009 guidance for organic sales and for EPS. The Company anticipates that it will deliver full-year organic sales growth of at least 6% and EPS in the target range of $2.87 to $2.91 for the Fiscal Year, which ends April 29, 2009.

“Our first-half results demonstrate that the Company’s growth strategy is working. Heinz will accelerate its focus on boosting productivity and margins in light of the current economic climate. We will also shift investments in marketing and R&D toward value-oriented innovation, which is more important than ever to consumers. As we look beyond FY2009, we remain confident in our business fundamentals, but in light of the volatile economic conditions, we will closely watch currency and commodity movements before we advise investors of our financial outlook for FY2010,” Johnson said.