Letter from the Chairman and CEO
Double-Digit Earnings Growth into the Next Century
Dear Shareholders: Fiscal 1997 was a watershed for the H.J. Heinz Company-
a point of departure for a new millennium. With exceptional speed and
careful deliberation, we undertook an ambitious global
reorganization to sharpen our focus, streamline our
production, and generate significant savings to
improve margins and support our brands. We
call this initiative Project Millennia, the largest
reorganization in our 128-year history.
Specifically, we have taken a reduction in pretax
earnings for Fiscal 1997 of approximately $665
million, net of a capital gain of approximately
$85 million for the sale of non-strategic assets in
New Zealand and the U.K. We also completed
the sale of Ore-Ida's foodservice business to
McCain Foods for about $500 million in June
1997. We announced closure or sale of 19 plants
worldwide, with another half dozen to come.
Such major initiatives were reflected in our
results: sales reached $9.36 billion, while
earnings per share were $0.81. Reflecting the
impact of Project Millennia, operating income
was $756.3 million (versus $1.29 billion the
prior year), and net income was $301.9 million
(compared to $659.3 million for Fiscal 1996).
Excluding the reorganization effects and adjusting for
changes in trade promotion practices, operating income would have increased 10.4%, and net income would have risen 9.6%.
These actions, though dramatic, merely touch the surface of a much deeper program to produce double-digit growth into the next century. This includes investments to add manufacturing capacity in dynamic markets. Among these are facilities in the Seychelles and Ghana for European tuna; in American Samoa for StarKist; in Dundalk, Ireland, for European frozen food; in Ozzano Taro in Italy for baby food in Europe; in Aligarh for India's enormous market; in Jacksonville, Florida, for American foodservice; and in New Zealand's Hastings and Tomoana plants, particularly for exports to Asia/Pacific.
Another aspect is acquisition to strengthen our global markets. In June 1997, Heinz U.K. acquired John West Foods Limited, the U.K.'s leading brand of canned tuna and fish. The purchase adds brand strength and production synergies to our thriving European tuna business.
The sale of Tip Top ice cream in New Zealand was part of our plan to exit businesses that do not meet performance goals or fit our core categories
of foodservice, infant feeding, ketchup and condiments, pet food, tuna and weight control.
We are applying "value-added manufacturing," whereby we focus on those products where we have a distinct low-cost competitive advantage, such as ketchup and tuna. We turn to other manufacturers for products that are commodity-oriented or for which we are not the low-cost producers. An example is Weight Watchers dry grocery products, now licensed to Hain Foods.
We are dramatically reducing the costs of our Weight Watchers system in the U.S. by discontinuing our Personal Cuisine business and holding meetings in community facilities. We will replicate the popular 1 23 SuccessTM Plan from the U.K. and Europe, and launch it in America in September.
Project Millennia is expected to generate approximately $120 million in pretax savings in Fiscal 1998, increasing to about $200 million upon full implementation. We also expect improved profit margins, higher return on invested capital and greater asset productivity. We will support marketing plans with a 30% increase in media spending over the next two years. During the next five years, we anticipate generating free cash flow of over $2 billion to apply toward debt reduction, acquisitions and share repurchase. We are introducing management performance criteria to encourage these improvements.
Due to increased shareholder interest in corporate governance, the directors have published their views and guidelines on the subject in a statement contained in the 1997 proxy. The directors' commitment to Heinz shareholders is reflected by the annualized total return of 21.8% over the past 20 years, compared to 15.6% for the Standard & Poor's 500.
I want to pay tribute to Heinz employees worldwide who have made Project Millennia a success. The leadership of Bill Johnson as president and COO has been critical to its implementation. Another architect of Project Millennia is Paul F. Renne, executive vice president and chief financial officer. I am delighted to welcome Paul to the Heinz board, which will greatly value his counsel.
I also welcome Dan O'Neill as executive vice president. He will, from September 15, be responsible for Heinz Pet Products and StarKist Seafood. Dan has an outstanding management record at S.C. Johnson and, most recently, as presidentU.S. soup and prepared foods for Campbell's.
When I became CEO in 1979, Heinz's market capitalization was $900
million; today it is $17 billion, with fewer shares in issue. How was it done?
By emphasis on big brands, by expansion into new global markets, by product innovation, by low-cost operations, by excellent management and by focusing on shareholders, consumers and customers. We will continue with this winning
formula to generate double-digit earnings growth into the next century.
I am proud to lead one of the world's premier food companies-a global enterprise dedicated to generating exceptional shareholder value.
Anthony J.F. O'Reilly
Chairman and Chief Executive Officer
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Letter from the President and COO
A More Focused, Productive and Profitable Company
Dear Shareholders: This is my first opportunity to address you in the Heinz annual report. During the past year, I have had the privilege, as president and chief operating officer, to work closely on Project Millennia with Tony O'Reilly and Heinz's dedicated management team. Together, we have fashioned initiatives for global growth, particularly in Heinz's six core categories.
Beginning with pet food, Project Millennia gives us the wherewithal to target a number of new opportunities. We will attack costs in production and distribution, while enhancing our efficient consumer response programs. In North America, we will expand pet treats and specialty products - two high-growth and high-margin businesses. Overseas, we will accelerate expansion into new markets in South America, Japan, Southern Africa and Europe.
As for ketchup and condiments, we are America's leading supplier - about half of all U.S. retail ketchup bears the Heinz brand. The closure of one of our ketchup plants will help maximize utilization of our four remaining major ketchup and condiment factories in North America. Our leading-edge customer support programs should reduce our North American inventory 10%, while improving customer service. The savings will support important marketing initiatives, including the return of TV commercials for Heinz ketchup.
Our efforts will include aggressive marketing in Europe, particularly Germany, which represents 30% of the continent's total ketchup sales. We aim to double our share of that market - to 35% - in the next five years.
Another major business is Ore-Ida, which, though not a global category, is part of a very large Heinz frozen foods presence that includes Ore-Ida potatoes, Bagel Bites snacks and Rosetto pasta. Ore-Ida is the world's most profitable branded potato processor, with a retail market share of 55%.
With the sale of its foodservice potato business, Ore-Ida now will
concentrate on retail branded potatoes and appetizers. We plan to use
Project Millennia savings to aggressively market the Ore-Ida and
Bagel Bites brands and make assaults on the frozen stuffed pasta
category, which we expect to be a $350-million market.
Looking at weight control, we have four million Weight Watchers
members worldwide. Last year, Weight Watchers attendances grew
3% to 39 million. Outside the U.S., Weight Watchers is profitable and
growing. Inside the U.S., profitability has suffered from substantially
higher costs and greater complexity. We are correcting that by getting
back to basics with meetings in community locations.
At Weight Watchers Gourmet Food Company,
we have reduced our factories from four to two.
Additionally, we are lowering production and
packaging costs, improving marketing efficiency and reducing administrative overhead.
Weight Watchers brand foods is a $100-million
business in Europe, growing at an annual rate of 6%.
To boost margins for frozen varieties, we are consolidating production from five locations to one expanded plant in Dundalk, Ireland. This is consistent with
our reorganization, which is converting more than 40
country-by-country units into six pan-European groups.
Our strategy in tuna is predicated on expansion of our
low-cost presence worldwide. Heinz is the world's largest
tuna processor, with nearly 20% of global branded sales
and about half of the U.S. market. In Europe, our advantage is low-cost, duty-free tuna plants in Ghana and the
Seychelles. We are a leader in France and are growing
rapidly in the U.K., Italy and parts of Eastern Europe.
StarKist will reduce costs and improve quality by
mechanizing the labor-intensive tuna cutting and
cleaning process. This will complement StarKist's unmatched efficiency in filling and shipping. We also are downsizing or closing production facilities that no longer fit within our global low-cost strategy.
Foodservice has grown to almost $1.7 billion, net of the divestiture of the Ore-Ida foodservice business. Our focus is on the high-value segments of this business, as well as expanding our presence in Europe and Asia/Pacific. We are very encouraged by the bakery segment, which successfully launched bagels in North America, in partnership with Dunkin' Donuts. Through Project Millennia, we are closing, selling or downsizing up to five of our ten bakery plants to further reduce costs and improve profitability.
Heinz's European foodservice business is expected to double over the next five years. Our precedent is foodservice tuna in the U.K., where the product has shown substantial growth in just two years. Meanwhile, we are realigning our foodservice efforts in the Asia/Pacific region to serve our customers and consumers more effectively.
Finally, in infant feeding, we look for geographic expansion throughout Central and Eastern Europe, India, Russia and China. We also are launching the newly acquired Earth's Best line of organic baby food in Canada and Australia.
We are consolidating infant feeding production in Italy and downsizing our Kendal plant in the U.K., while increasing capacity. We also see significant opportunities in Eastern Europe, where we expect sales of all our infant feeding products to grow at a 35% annual rate.
As you can see, Project Millennia will have a significant impact on every Heinz business around the world. It will produce a more focused, productive and profitable company, equipped to answer the challenges of the future.
William R. Johnson
President and Chief Operating Officer
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