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H.J. Heinz Company announced its largest-ever reorganization plan on March 14, 1997 during
a meeting before The Security Analysts of San Francisco. This reorganization and restructuring
program ("Project Millennia") is designed to strengthen the company's six core businesses
and improve Heinz's profitability and global growth.
Among the important elements in Project Millennia are brand building, increasing media spending by 30% over two years, overseas expansion, efficient consumer response (ECR), value-added manufacturing, price-based costing and working capital savings. The company will close or divest approximately 25 plants throughout the world, while investing heavily to upgrade and build plants to add capacity in fast-growing markets. Excluding the sale of plants and businesses, the global workforce will be reduced by approximately 2,500. In the fourth quarter of Fiscal 1997, the company's Board of Directors approved the initiatives which comprise Project Millennia. These initiatives include:
The plan is expected to generate approximately $120 million in annual pretax savings in Fiscal 1998, increasing to approximately $200 million upon full implementation. A portion of the savings will be reinvested in marketing, pricing and quality improvements for the company's key brands. H.J. Heinz Company's financial results for Fiscal 1997 were significantly impacted by Project Millennia. Restructuring charges and related costs recorded in Fiscal 1997 for Project Millennia totaled $647.2 million pretax ($1.09 per share). During Fiscal 1997, the company recognized gains on the sale of non-strategic assets. Gains were recognized on the sale of the New Zealand ice cream business, $72.1 million pretax ($0.12 per share) and real estate in the United Kingdom, $13.2 million pretax ($0.02 per share). Excluding the restructuring charges and related costs ($1.09 per share) and the gains on the sale of non-strategic assets ($0.14 per share), Fiscal 1997 earnings would have been $1.76 per share. As an integral part of Project Millennia, the company implemented a program to eliminate inefficient end-of-quarter trade promotion practices. This change in trade promotion practices reduced Fiscal 1997 earnings by an estimated $102.7 million pretax ($0.17 per share). Excluding the restructuring charges and related costs, gains on the sale of non-strategic assets and adjusting for the change in trade promotion practices, Fiscal 1997 earnings would have been $1.93 per share, an increase of 10.3% over last year. |
Results of Operations |
1997 versus 1996: Sales for 1997 increased $244.7 million, or 2.7%, to $9.36 billion from $9.11
billion in 1996. The sales increase was primarily due to acquisitions (net of divestitures) and
increased prices in a number of product lines. Sales volume was reduced by the company's
program to eliminate inefficient end-of-quarter trade promotion practices, primarily in north
America. Domestic operations contributed approximately 55% of consolidated sales in 1997,
compared to approximately 57% in 1996.
Acquisitions (net of divestitures) contributed $225.5 million, or 2.5%, to the sales increase. Fiscal 1997 acquisitions impacting the year-to-year sales dollar comparison included: Southern Country Foods Limited in Australia, one of the world's largest producers of canned corned beef and meals; substantially all of the pet food businesses of Martin Feed Mills Limited in Canada, which produces and markets cat and dog food throughout Canada; the canned beans and pasta business of Nestle´ Canada Inc.; and other smaller acquisitions. Also contributing to the sales dollar increase were the following 1996 acquisitions: Nature's Recipe Pet Food in the U.S., which markets a brand of premium specialty pet foods; Alimentos Pilar S.A. of Argentina, a leading producer of pet and animal feed; Fattoria Scaldasole S.p.A. in Italy, a processor of organic foods; Earth's Best, Inc. in the U.S., which produces a leading brand of premium organic baby foods; Britwest Ltd. in the United Kingdom, which markets single-serve condiments, beverages and sauces in Britain and France; the Craig's brand of jams and dressings in new Zealand; Indian Ocean Tuna Ltd. in the Seychelles; and the Mareblu brand of canned tuna in Italy. Sales were reduced by the divestitures of the following non-strategic businesses: an overseas mushroom business; Weight Watchers Magazine; two regional dry pet food product lines; the New Zealand ice cream business; and other smaller divestitures. Worldwide prices increased $152.7 million, or 1.7%, in 1997. Domestic price increases occurred in Ore-Ida retail frozen potatoes, single-serve condiments and pet food. Overseas, prices increased in infant foods and soups. Worldwide volume decreased $104.5 million, or 1.2%, in 1997. Sales volume was reduced by the company's program to eliminate inefficient end-of-quarter trade promotion practices as discussed above, primarily in north America. Domestic sales volume decreased 3.4%, as volume declined in Ore-Ida retail frozen potatoes, ketchup and infant foods. Sales volume also declined in frozen entrees (including weight control) due primarily to a very competitive marketplace. Domestic sales volume increased in foodservice frozen potatoes, bakery products, condiments and pet food. Foreign sales volume increased 1.9%, driven by increased attendance overseas at the Weight Watchers meeting business. As noted above, domestic frozen entree volume (including weight control) was down in a very competitive marketplace. The company is implementing "price-based costing" for The Budget Gourmet brand of frozen entrees, using low manufacturing costs to include a larger selection at a more competitive price point. The company believes this strategy will offset recent volume trends and strengthen its competitive position in this category. The company is also refocusing on the "Smart Ones from Weight Watchers" line of frozen entrees, which involves improving the overall quality of the line, adding product varieties and introducing new packaging. Overall, attendance was up in the Weight Watchers meeting business due to a strong increase in attendance overseas, offset partially by lower attendance in the U.S. Domestically, the company plans to launch, in September 1997, the new Weight Watchers 1z2z3 Successe Plan, which has been very successful in Europe. In addition, to reduce costs in the Weight Watchers meeting business in the U.S., the company has exited the Personal Cuisine business in the centers which sold food and is closing 55 inefficient centers. Foreign currencies declined against the U.S. dollar, decreasing sales $29.0 million, or less than 1%. This decrease came primarily from sales in Japan, Central Europe and Zimbabwe, offset partially by sales in the United Kingdom. Gross profit decreased $365.0 million to $2.97 billion from $3.34 billion a year ago. The ratio of gross profit to sales decreased to 31.8% from 36.6%. Excluding the effects of the 1997 restructuring charges and related costs of $477.8 million, and the gains on the sale of the New Zealand ice cream business and real estate in the United Kingdom of $85.3 million, gross profit would have increased $27.5 million to $3.36 billion, however, the ratio of gross profit to sales would have decreased to 36.0%. The current year's adjusted gross profit ratio of 36.0% was impacted by the company's change in trade promotion practices and higher commodity prices, offset partially by favorable pricing. Selling, general and administrative (SG&A) expenses increased $166.3 million to $2.22 billion from $2.05 billion and increased as a percentage of sales to 23.7% from 22.5%. Excluding the effects of the 1997 restructuring charges and related costs of $169.4 million, SG&A expenses would have remained flat at $2.05 billion and would have decreased as a percentage of sales to 21.9%. Total marketing support (including trade and consumer promotions and media) increased 3.8% to $2.05 billion on a sales increase of 2.7%. Operating income decreased $531.3 million to $756.3 million from $1.29 billion. Excluding the effects of the 1997 restructuring charges and related costs, and gains recognized on the sale of certain non-strategic assets, operating income would have increased $30.6 million to $1.32 billion. The increase in operating income, excluding the impact of these non-recurring items, was primarily due to the increase in gross profit as SG&A expenses were relatively flat year-on-year. Domestic operations provided approximately 23% of operating income in 1997 compared to approximately 57% in 1996. Excluding the effects of the 1997 restructuring charges and related costs, and gains recognized on the sale of certain non-strategic assets, domestic operations would have provided approximately 53% of operating income. Non-operating expenses totaled $277.2 million in 1997 compared to $263.9 million in 1996. Net interest expense increased 1.2% to $235.4 million from $232.6 million. The effective tax rate was 37.0% in 1997 and 35.6% in 1996. The lower effective tax rate in 1996 reflects the recognition of operating losses overseas. (See Notes 5 and 13 to the Consolidated Financial Statements.) Net income decreased $357.4 million to $301.9 million from $659.3 million in the prior year and earnings per share decreased to $0.81 from $1.75. After-tax restructuring charges and related costs, net of gains recognized on the sale of certain non-strategic assets, totaled $356.0 million, or $0.95 per share. Excluding the impact of these non-recurring items, net income would have decreased slightly to $657.9 million and earnings per share would have increased to $1.76. Earnings per share benefited slightly from a reduction in the average number of shares used for the calculation of earnings per share, which was due primarily to the company's share repurchase program. The impact of fluctuating exchange rates for 1997 remained relatively consistent on a line-by-line basis throughout the Consolidated Statement of Income. 1996 versus 1995: Sales for 1996 increased $1.03 billion, or 13%, to $9.11 billion from $8.09 billion in 1995. The increase was primarily due to acquisitions (net of divestitures) as well as volume and price. Domestic operations contributed approximately 57% of consolidated sales in both 1996 and 1995. Fiscal 1996 comprised 52 weeks compared to 53 weeks in 1995. Acquisitions (net of divestitures) contributed $617.3 million, or 8%, to the sales increase. Sales benefited from the following Fiscal 1996 acquisitions: PMV/Zabreh, which sells infant formula through pharmacies under the Sunar and Feminar brand names in both the Czech and Slovak Republics; Kecskeme´ ti Konzervgya´ r RT, which produces jarred baby foods and canned vegetable products in Kecskemet, Hungary; Britwest Ltd.; Fattoria Scaldasole S.p.A.; Craig's; Indian Ocean Tuna Ltd.; Earth's Best, Inc.; and Nature's Recipe. Fiscal 1995 acquisitions impacting the year-to- year sales dollar comparison included: the North American pet food business of the Quaker Oats Company ("the Pet Food Business"); The All American Gourmet Company, maker of The Budget Gourmet brand of frozen meals and side dishes; the Farley's infant foods and adult nutrition business; and the Family Products Division of Glaxo India, Ltd. Divestitures impacting the sales comparison included a domestic bulk oil business and an overseas sweetener business. Volume increased $313.5 million, or 4%, in 1996. Foreign volume increases occurred in seafood, pasta, Heinz beans, sauces/pastes and infant foods. Domestic volume increased in StarKist tuna, Ore-Ida foodservice frozen potatoes, pasta, coated products, Bagel Bites and Heinz ketchup, offset by decreases in Weight Watchers brand dairy products and single-serve condiments. Prices increased $85.8 million, or 1%, in 1996. Overseas, prices increased in infant foods, Heinz beans and edible oil. Domestic price increases occurred in Heinz ketchup, single-serve condiments and Ore-Ida retail frozen potatoes while decreases occurred in StarKist tuna, frozen entrees (including weight control) and pet food. The strengthening of overseas currencies, particularly in new Zealand and Western Europe, against the U.S. dollar increased sales $60.4 million, or less than 1%. Gross profit increased $369.7 million to $3.34 billion in 1996 from $2.97 billion in 1995. The ratio of gross profit to sales decreased slightly to 36.6% in 1996 from 36.7% in 1995. The gross profit ratio in 1996 was impacted by repositioning the business portfolio through acquisitions and divestitures, cost reductions, profit mix and the effect of increased goodwill amortization associated with acquisitions. In the fourth quarter of 1996, gross profit was also impacted by gains relating to the sale of the Weight Watchers Magazine ($0.02 per share) and the sale of two regional dry pet food product lines ($0.02 per share). (See Note 13 to the Consolidated Financial Statements.) The gains were offset in the fourth quarter of 1996 in SG&A expenses by restructuring charges at certain overseas affiliates ($0.01 per share) and an increase in marketing expenses of $27.5 million, or 12%. SG&A expenses increased $237.9 million to $2.05 billion in 1996 from $1.81 billion in 1995 and increased slightly as a percentage of sales to 22.5% from 22.4%. As a percentage of sales, increased general and administrative expenses (due mainly to acquisitions) and increased marketing expenses were offset by lower selling and distribution expenses. Total marketing support (including trade and consumer promotions and media) increased 15% to $1.97 billion on a sales increase of 13%. Operating income increased $131.8 million, or 11%, to $1.29 billion from $1.16 billion for 1995. The increase in operating income was primarily due to the increase in gross profit, partially offset by increased marketing expenses; higher selling and distribution expenses related to increased volume; and higher general and administrative expenses associated with acquisitions. Domestic operations provided approximately 57% of operating income in both 1996 and 1995. Attendance at the Weight Watchers meeting business in the U.S. was adversely affected by the severe winter weather and an industry-wide decrease in attendance in 1996. Although the entire domestic weight-loss industry continued to show weakness, the Weight Watchers meetings market share exceeded 50%. Frozen entree volume (including weight control) was flat in a very competitive marketplace, where downward pricing pressures in the U.S. affected profitability. Heinz U.K.'s results improved significantly over 1995, primarily as a result of improved sales volumes and prices. The company's New Zealand affiliate, Wattie's Ltd., experienced operational difficulties as new poultry production facilities were brought on-line during 1996. Poor poultry market conditions also impacted the New Zealand operations, as well as higher commodity prices in the frozen food business and more competitive markets in the frozen food and ice cream businesses. The company continued to invest in Eastern Europe. In general, the Eastern European operations have progressed, but have not yet contributed margins comparable to the company's traditional product lines. As expected, cost synergies resulting from the combination of acquired businesses with existing company operations were realized in 1996. In connection with the acquisition of the Pet Food Business, the closure of the cannery at the Topeka, Kansas factory (dedicating that facility to the production of dry pet food) and the combination of selling, distribution and administrative functions with existing company operations produced efficiencies that met or exceeded expectations. Also during 1996, the Weight Watchers Gourmet Food Company announced the closure of The All American Gourmet plant in Atlanta, Georgia, where operations were phased out in January 1996. Production was consolidated with other company facilities. Non-operating expenses totaled $263.9 million in 1996 compared to $217.8 million in 1995. Net interest expense increased 34% to $232.6 million from $174.0 million, due mainly to higher average borrowings resulting from 1995 acquisitions and from repurchases of company stock under the stock repurchase program. The effective tax rate was 35.6% in 1996 and 37.0% in 1995. The 1996 tax rate was favorably affected by the recognition of operating losses overseas and higher profits from operations in lower tax jurisdictions. (See Notes 5 and 13 to the Consolidated Financial Statements.) Net income increased $68.3 million, or 12%, to $659.3 million in 1996 from $591.0 million in 1995. Earnings per share increased to $1.75 in 1996 from $1.59 in 1995. The average number of shares used for the calculation of earnings per share increased to 377.2 million in 1996 from 372.8 million in 1995, due mainly to increased shares outstanding resulting from stock options exercised, and higher common stock equivalents due to a higher average share price. The increase in the average number of shares caused 1996 earnings per share to decrease $0.02 per share compared to 1995. The impact of fluctuating exchange rates for 1996 remained relatively consistent on a line-by-line basis throughout the Consolidated Statement of Income. |
Liquidity And Financial Position |
Return on average shareholders' equity (ROE) was 11.7% in 1997 (23.9% excluding the
restructuring charges and related costs recorded in Fiscal 1997 for Project Millennia, net of
gains recognized on the sale of certain non-strategic assets), 25.5% in 1996 and 24.6% in 1995.
Pretax return on average invested capital (ROIC) was 12.6% in 1997 (21.4% excluding the items
mentioned above), 21.8% in 1996 and 22.1% in 1995.
Cash provided by operating activities was $875.0 million in 1997, compared to $737.1 million in 1996. The increase in 1997 versus 1996 was primarily the result of lower working capital requirements resulting from the company's program to eliminate inefficient end-of-quarter trade promotion practices, offset partially by expenditures related to the restructuring program. In 1996, cash provided by operating activities decreased slightly to $737.1 million, from $752.5 million in 1995. The decrease was the result of higher working capital needs, due mainly to higher sales levels. Cash used for investing activities was $386.3 million in 1997 versus $290.1 million in 1996. In 1997, the company spent $208.4 million on acquisitions compared to $156.0 million in 1996. (See Note 2 to the Consolidated Financial Statements.) Proceeds from divestitures totaled $165.6 million in 1997 versus $82.1 million in 1996. (See Note 3 to the Consolidated Financial Statements.) Capital expenditures totaled $377.5 million in 1997 and $334.8 million in 1996. Both years reflect expenditures for productivity improvements and plant expansions, principally at the company's United Kingdom, Heinz Pet Products, Ore-Ida, StarKist Seafood, Heinz U.S.A., Heinz Bakery Products, Weight Watchers Gourmet Food Company, Heinz Italia and Wattie's operations. Purchases and sales/maturities of short-term investments increased in 1997. The company periodically sells a portion of its short-term investment portfolio in order to reduce its borrowings. In 1995, increased activity provided liquidity to fund various acquisitions. Investments in tax benefits provided $62.1 million in 1996, due mainly to the company's sale of certain domestic investments. Financing activities used $429.8 million in 1997 compared to $470.8 million in 1996. The company borrowed funds totaling $82.0 million in 1997 versus making net repayments of $81.7 million in 1996. Cash used for dividends paid to shareholders increased by $35.0 million, while treasury stock purchases increased $121.8 million. Stock options exercised provided an additional $39.2 million in 1997 compared to 1996. The average amount of short-term debt outstanding (excluding the long-term portion of domestic commercial paper) during 1997, 1996 and 1995 was $520.5 million, $1.52 billion and $1.15 billion, respectively. Total short-term debt had a weighted-average interest rate during 1997 of 7.6% and at year-end of 6.1%. The weighted-average interest rate on short-term debt during 1996 was 6.5% and at year-end was 6.2%. Aggregate domestic commercial paper had a weighted-average interest rate during 1997 of 5.4% and at year-end of 5.6%. In 1996, the weighted-average rate was 5.8% and the rate at year-end was 5.4%. Based upon the amount of commercial paper recorded at April 30, 1997, a variance of 1/8% in the related interest rate would cause interest expense to change by approximately $1.8 million. The company continues to evaluate long-term financing vehicles in order to reduce short-term variable interest rate debt. On August 29, 1996, the company amended the line of credit agreements which support its domestic commercial paper programs, increasing availability and extending maturity dates. The amended terms provide for one agreement totaling $2.30 billion that expires in September 2001. The previous agreements provided for lines of credit totaling $2.00 billion, of which $1.20 billion was scheduled to expire in September 1996 and $800.0 million was scheduled to expire in September 2000. As of April 30, 1997, $1.35 billion of domestic commercial paper is classified as long-term debt due to the long-term nature of the supporting line of credit agreements. At May 1, 1996, $800.0 million of domestic commercial paper outstanding was classified as long-term. As of May 1, 1996, domestic commercial paper of $450.0 million was privately placed. As of April 30, 1997, there was no privately placed domestic commercial paper outstanding. On September 10, 1996, the Board of Directors raised the quarterly dividend on the company's common stock to $0.29 per share from $0.26 1 /2 per share, for an indicated annual rate of $1.16 per share. The company paid $417.0 million in dividends to both common and preferred shareholders, an increase of $35.0 million, or 9.2%, over 1996. The dividend rate in effect at the end of each year resulted in a payout ratio of 143.2% in 1997 (65.9% excluding the restructuring charges and related costs recorded in Fiscal 1997 for Project Millennia, net of gains recognized on the sale of certain non-strategic assets), 60.6% in 1996 and 60.5% in 1995. In 1997, the company repurchased 7.9 million shares of treasury stock, or 2% of the amount outstanding at the beginning of Fiscal 1997, at a cost of $277.0 million. As of April 30, 1997, the company had repurchased 3.3 million shares as part of the current 15.0 million share repurchase program, which was authorized by the Board of Directors on July 10, 1996. The previous 15.0 million share repurchase program, which was authorized by the Board of Directors on September 13, 1994, was completed in October 1996. During 1996, 4.8 million shares were repurchased at a cost of $155.2 million. The company may reissue repurchased shares upon the exercise of stock options, conversion of preferred stock and for general corporate purposes. Components of the charge for Project Millennia requiring the utilization of cash total $304.0 million, against which $93.2 million was spent in Fiscal 1997. The company expects to spend a significant portion of the remainder during Fiscal 1998. In addition, the company expects to make capital expenditures totaling approximately $250 million over the life of the program, with a significant portion to be spent in Fiscal 1998. The company expects to finance the cash requirements of the program through operations, proceeds from the sale of non-strategic assets and with borrowings under the company's currently existing credit arrangements. The cash requirements of Project Millennia will not have a significant impact on the company's liquidity or financial position. During 1995, the company participated in the formation of a business (the "entity") which purchases a portion of the trade receivables generated by the company. The company sells receivables to Jameson, Inc., a wholly owned subsidiary, which then sells undivided interests in the receivables to the entity. Outside investors contributed $95.4 million in capital to the entity. The company consolidates the entity, and the capital contributed by the outside investors is classified as minority interest ("other long-term liabilities") on the Consolidated Balance Sheets. The company uses derivative financial instruments for the purpose of hedging currency, commodity price and interest rate exposures which exist as part of ongoing business operations. As a policy, the company does not engage in speculative or leveraged transactions, nor does the company hold or issue financial instruments for trading purposes. (See Notes 1 and 12 to the Consolidated Financial Statements.) The impact of inflation on both the company's financial position and results of operations has been minimal and is not expected to adversely affect 1998 results. The company's financial position continues to remain strong, enabling it to meet cash requirements for operations, capital expansion programs and dividends to shareholders. |
Recent Developments |
On June 30, 1997, the company completed the sale of its frozen foodservice foods business
to McCain Foods Limited of New Brunswick, Canada for approximately $500 million. The
transaction included the sale of Heinz's Ore-Ida appetizer, pasta and potato foodservice business
and the five Ore-Ida plants that manufacture the products. The Ore-Ida foodservice business
contributed approximately $525 million in net sales for Fiscal 1997. The sale is not expected to
have an adverse impact on the company's results of operations.
On June 30, 1997, the company acquired John West Foods Limited from Unilever. John West Foods Limited, with annual sales of more than $250 million, is the leading brand of canned tuna and fish in the United Kingdom. Based in Liverpool, John West Foods Limited sells its canned fish products throughout Continental Europe and in a number of other international markets. (John West operations in Australia, New Zealand and South Africa are not included in the transaction.) |
Stock Market Information |
H.J. Heinz Company common stock is traded principally on the New York Stock Exchange and
the Pacific Stock Exchange, under the symbol HNZ. The number of shareholders of record of
the company's common stock as of June 27, 1997 approximated 67,754. The closing price of the
common stock on the New York Stock Exchange composite listing on April 30, 1997 was $41 1/2.
Stock price information for common stock by quarter follows:
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Segment And Geographic Data |
The company is engaged principally in one line of business -processed food products - which
represents more than 90% of consolidated sales. The following table presents information about
the company by geographic area. There were no material amounts of sales or transfers among
geographic areas and no material amounts of United States export sales.
* Excludes domestic and foreign charges for restructuring and related costs of $530.6 million and $116.6 million, respectively. Also excludes gains on the sale of an ice cream business in new Zealand and real estate in the U.K. of $72.1 million and $13.2 million, respectively. |