H.J. Heinz Profit Falls on Hain Write-Down

CHICAGO – Ketchup maker H.J. Heinz Co. (HNZ) posted sharply lower third-quarter profits Monday, as the ketchup-maker said strong business in North America couldn't make up for rising fuel costs, soaring commodity prices and a large write-down.

Earns for the quarter ending Jan. 26 was $152.4 million, or 43 cents per share. During the same period last year, the company earned $202.2 million, or 57 cents per share.

The company reported $73.8 million in impairment charges during the third quarter, largely due to a write-off of an investment in the Hain Celestial Group Inc (HAIN).

Excluding impairment charges and 4 cents per share from discontinued operations, Heinz would have reported income of $212.4 million, or 60 cents per diluted share.

Analysts polled by Thomson First Call were looking for profits of 59 cents per share.

Heinz shares rose 25 cents to close at $37.64 in Monday trading on the New York Stock Exchange. The stock has been trading at a 52-week range of $34.53 to $40.61.

Heinz reported revenues of $2.26 billion, compared with $2.09 billion during the same period last year.

Commodity costs soared by $62 million on the quarter, an amount greater than the cost of interest payments, pensions, medical benefits and fuel combined, Heinz reported. The pain of commodity price increases was offset somewhat by favorable tax rates, the company said.

Business was strong in North America, but operating income in Europe was off by more than 20 percent.

The sales figures were a surprise, but so was the exceptionally favorable tax rate, said John McMillin, an analyst with Prudential Equity Group.

"Earnings from operations of (60 cents) per share look good on the surface, but lower-than-expected tax rate added (7 cents), which leaves us less than impressed," McMillin said.

The tax rate of 22.7 percent added nearly $26 million in profits, McMillin said, allowing Heinz to "pull a rabbit out of its hat."

Heinz' performance in Europe was "unsatisfactory," and the company is reviewing all its options, including the sale or spin-off of some noncore businesses, said William Johnson, president and chief executive officer.

Heinz is evaluating its European tuna business, just three years after the Pittsburgh company spun off its underperforming Star-Kist brand in North America. It is looking at "whether or not it's future is the kind of future we would want in our company," Johnson said.

Yet Heinz is looking to expand on other parts of the world, namely developing markets in Russia, India, China and Indonesia, Johnson said.

Sales in the company's North America retail business — which includes products like Ore-Ida (search) frozen potatoes, Bagel Bites (search), TGI Friday's (search) frozen snacks and, of course, ketchup — increased at a double-digit rate. Operating income was up 11 percent to $148.4 million in North America.

"This growth reaffirms our decision to realign and simplify our North American portfolio as part of our current three-year plan," Johnson said. "We are exploring similar strategic options for our businesses outside of North America."

Even in Europe and Asia, where operating income was down, ketchup stood out. The company reported record ketchup market share in the United Kingdom of 81 percent.

"Ketchup is doing well literally in every country of the world," Johnson said.

Heinz would fall within its predicted earns-per-share target range of $2.32 to $2.42 for the year, albeit on the lower end, Johnson said.