H. J. Heinz Management Discusses 2013 Transition Period Results (Transcript)

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H.J. Heinz Company (HNZ) 2013 Transition Period Results March 20, 2014 8:30 AM ET

Executives

Marcos Romaneiro - SVP, Global Finance

Paulo Basilio - CFO

Analyst

Operator

Good morning. My name is Brent and I will be your conference operator today. At this time I would like to welcome everyone to the H. J. Heinz Company 2013 Transition Period Earnings Conference Call. This call is being recorded at the request of the H. J. Heinz Company. Today’s presentation includes forward-looking statements as defined in the U.S. Securities Laws which are based on current expectations subject to uncertainties and changes in circumstances and which are not a guaranty of future performance.

Actual results may differ materially due to variety factors including the risk factor section of Heinz’s latest form 10-K which is filed on March 7th. Heinz undertakes no obligation to publically update any forward-looking statement except as required by law. Today’s remarks will also include non-GAAP financial measures which are reconciled to GAAP in Heinz’s 10-K filing. SEC filings are available on Heinz’s website at the investor relations page.

I would now like to turn the call over to Marcos Romaneiro, Senior Vice President, Global Finance. Mr. Romaneiro, you may begin your conference.

Marcos Romaneiro

Good morning and welcome to Heinz earnings conference call to discuss the eight months transition period ended December 29th, 2013. I’m Marcos Romaneiro and I’m here with Paulo Basilio, Chief Financial Officer. On today’s call, Paulo and I will be discussing the combined predecessor and successful results from February 8 to December 29, 2013 which includes 8 months or 35 weeks of operating results.

In our comments today, we’ll be comparing it to the same period a year ago which contains one fewer [indiscernible]. This shortened fiscal year reflects the plan change in our fiscal year, yearend from the Sunday closest to April 30, to the Sunday closest to the December 31. From this point forward, our quarter end aligned with the calendar quarters where our first quarter is scheduled to end in 10 days’ time on Sunday March 30.

Now, I’d like to turn the call over to Paulo.

Paulo Basilio

Good morning everyone. Thank you for joining us as we take you through Heinz performance over this 8-month transition period. As you’ll see in our results, our organic sales trends are improving and the actions we have taken all over the world improve profitability are having a positive impact.

The company sales were $7.4 billion or 1.2% decrease versus prior year. This reflects unfavorable foreign currency impact of 1.8%, divestures of 0.4% partially offset by favorable volume of 0.8% and favorable pricing of 0.3%.

Operating income was impacted by three groups of one-time cost and purchase account impact which totaled $1.1 billion. We incurred about $416 million in productivity initiatives to simplify the organization. Drive efficiency and provide resources to reinvest in growing the business. About $275 million of this was severance and benefit cost to reduce our global work force by about 3,400 positions or about 10%.

The remaining $141 million included professional fees and cost to terminate contracts along with charges to close several [indiscernible] in corporate office. Second, we required purchase account adjustments totally $414 million. These include $383 million of leased (Ph) out opening inventory and a step up of intangible asset of motivation of $34 million. And finally, we incurred $270 million in larger transaction related cost including advisory fees and professional costs. Below trade income, net interest expense increased by $260 million reflecting higher debt balances on the merger.

Other expense increased by $133 million the cost of early retired of merger related debt. These costs were partially offset by $118 million gain on interest rates swaps agreements entered into prior to the merger to mitigate exposure to variable debt.

Setting aside these items, gross margin was comparable to prior year operating income increased by low single digits despite the impact of comparable foreign exchange and our adjusted EBITDA was flat versus prior year. Demonstrating continued improvement throughout the year to offset our lower first quarter.

We expect this favorable trend to continue in future quarters.

Now, I’d like to turn the call over to Marcos to provide an overview of our results by geography segments and our casual Teflon (Ph) performance.

Marcos Romaneiro

Thank you Paulo. Turning to North America consumer products sales decreased by $70 million or 3.4%, this include our net volume decrease of 1.8% as the additional rate (Ph) of sales was more than offset by category softness and [indiscernible] and further nutritional [indiscernible]. It also reflects reduced time for ketchup promotions as we shifted some of our spending to working media including our recent Super Bowl commercial. Decrease pricing 0.7% was driven by higher promotional activity in our frozen portfolio and foreign exchange unfavorable impact of sales by 0.8%.

Operating income decreased to $170 million reflecting unfavorable purchase accounting impact of $140 million and lower volume which was partially offset by favorable SG&A. looking back at the U.S. food service segment, sales increased by $36 million or 4.2%. These results were driven by increased volume of 2.1%, reflecting the impact of the additional lead (Ph) and ketchup and sauces growth partially offset by decreases in further sales. Pricing increased sales by 2%. Operating income was roughly flat to last year despite a $34 million unfavorable purchase accounting adjustment reflecting benefits from the current year restructuring initiatives.

Turning to Europe; Sales decreased $10 million or 0.5%. Volume was roughly flat despite the extra week and strong performance in Russia and Germany due to category softness in the UK, Italy and Netherland. A 1.1% benefit from foreign exchange was more than offset by divestitures of 1.4% and unfavorable pricing at 0.4%. Operating income decreased by $146 million including $110 million in unfavorable purchase accounting adjustments. The balance of the decrease reflects the higher product cost and increased marketing spend in Russia and Italy.

Moving to the Asia-Pacific region, sales decreased $47 million or 2.8%. Unfavorable foreign exchange translation rates drove more than all of this decrease at 6.3%. Volume increased by 3.1% reflecting the extra week and strong performance in China, Japan and Indonesia partially offset by decreases in India. Pricing increased by 0.4%. Operating income decreased to $120 million reflecting $90 million of unfavorable purchase accounting adjustments. The balance reflects unfavorable foreign exchange translation rates partially offset by lower SG&A expenses.

Finally, in our rest of the world segment, sales increased by $5 million or 0.6% driven by volume growth of 3.3% from the extra week and volume gains across the segment. Pricing increased sales by 2.6% driven by Brazil, and partially offset by Venezuela. Foreign exchange translation rates decreased sales by 5.3%. Operating income increased by $3 million overcoming $10 million of unfavorable impacts from purchase accounting adjustment and the impact of unfavorable foreign exchange. This favorable result reflects the benefit from the current year restructuring initiatives.

Next, let’s take a look at cash flow for the transition period. Cash from operating activities was negative $337 million compared to a positive $350 million a year ago. This $687 million decrease reflects the one-time merger and restructuring cost charges incurred on early extinguishment of debt and higher interest payments. Cash used for investing activities totaled $21.8 billion reflecting the merger consideration net of cash on hand of $21.5 billion. Capital spending net of proceeds from disposals was $360 million which was slightly higher than the prior year as a percent of sales at 4.3%. This was primarily driven by an $88 million lease buyout under the change of control provision.

Cash provided by financing activity totaled $24.1 billion. The merger was funded by equity contributions totaling $16.5 billion approximately $9.5 billion of proceeds drawn under the senior credit facilities and $3.1 billion from the issuance of notes. This was partially offset by $4.3 billion in debt repayments and $321 million in debt issuance cost. We also made two preferred stock dividend payments totaling $360 million. On December 29, 2013 the company had total debt of $14.9 billion in cash and cash equivalents of $2.5 billion. We expect these cash and cash equivalent will be utilized to liquidate accrued obligation at the end of the merger agreement pay preferred stock dividends, meet seasonal working capital requirements and fund future restructuring expenditures.

Now I’d like to turn the call back to Paulo for a few closing remarks.

Paulo Basilio

Thank you, Marcos. Our results demonstrate that Heinz is an organization that can deliver improving top line results while increasing profitability. This will continue to be the foundation for our 2014 plan. We have demonstrated our commitment to the consumer in our brand with the first Super Bowl commercial in 60 years along with a renewed focus on innovation. We are creating an efficient platform to drive growth through the implementation of DVD another leading edge processes that will create a sustainable competitive advantage for Heinz.

We are continuing to uphold the company’s unwavering dedication to good product quality, food safety and employee safety in line with our founder solution. Marcus and I look forward to talking to you again in a short two months to discuss the first quarter of our new year. Thank you and have a great day.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

Question-and-Answer Session

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