Heinz Q1 profit beats Street but sales disappoint

September 1, 2010 4:25 PM EDT

H.J. Heinz Co. (NYSE.HNZ), one of the world's largest food processing companies reported strong first quarter results, Wednesday, saying its growth was driven by demands in emerging markets.

Heinz, which makes ketchup, sauces, frozen food, snacks and beverages and owns brands such as Complan, Glucon D, Ore-Ida and Weight Watchers, said its net profit rose 13 percent to $240.4 million or $0.75 per share from $212.6 million or $0.67 per share in the year ago period. Market analysts expected Heinz to announce earnings of $0.73 per share.

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Operating income rose 9.9 percent to $406 million.

Sales rose 1.6 percent to $2.48 billion. Analysts were, however, disappointed as they expected, on average, Heinz to announce sales of $2.53 billion. Sales also fell nearly 9 percent sequentially.

Organic sales, which excludes the impact of exchange rate fluctuation, acquisitions and disposals, climbed 3.6 percent during the quarter. In June, Heinz agreed to acquire Chinese soy-sauce maker Foodstar for $165 million.

Heinz said strong sales in emerging markets helped offset high promotion costs in North America.

In North America, sales rose 4.8 percent to $762 million as consumers bought more ketchup, pasta sauces and frozen entrees. However, higher promotional spending eroded earnings in North America.

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In emerging markets, sales grew 17.8 percent and on an organic basis, it grew 21.9 percent. The company said it became a "strategic supplier" of ketchup to McDonald's Corp. in Asia, South Africa, and India during the quarter.

Especially in Asia-Pacific region, sales grew 19 percent to $558 million. Heinz has a strong presence in countries like India, China, Russia, Indonesia and New Zealand. In India, Complan and Glucon-D nutritional beverages are very popular.

Elsewhere, things were not so encouraging. The company said sales slipped in Europe by 7.7 percent to $713 million mainly on account of unfavorable foreign exchange fluctuations.

In other parts of the world too consumers scrimped on their spending amid a sluggish global economic recovery.

Looking ahead, the company maintained its full-year outlook, saying it expects sales to grow in the range of 3-4 percent and earnings to grow in the range of 7-10 percent.

According to Heinz CEO William Johnson emerging markets are expected to contribute at least 20 percent of the company's total sales by 2013 or double of what they accounted for five years ago. Currently, the emerging markets account for 18 percent of the company's total sales.

"Heinz is off to a good start in Fiscal 2011 and we remain confident about the company's business fundamentals, despite the difficult economic climate," Johnson said in a statement.

According to analysts, food and consumer product makers like Heinz will turn to emerging markets for growth in sales and earnings as developed markets are still under recessionary pressure.

And, Heinz will do better than its peers in the emerging markets as "One of the attractions of the company is that they have a diverse portfolio and higher than normal exposure to Asia," said Dan Popowics, fund manager at Cincinnati-based Fifth Third Asset Management.

At 12.24PM (EDT), shares of the Pittsburgh, Pennsylvania-based company were trading flat at $46.16.

This article is copyrighted by International Business Times, the business news leader