Heinz Operations Excelling

By Dave Marino-Nachison (TMF Braden)
September 8, 1999

Ernie's friends were tired of waiting. It was a summer night, after all, and -- loaded up with fresh fast food -- they wanted to hit the town.

But there was Ernie, patiently waiting at the drive-thru window, a bottle of Heinz (NYSE: HNZ) ketchup inverted in his hand. Finally, his friends had seen enough. "We don't wait," they sneered, "for ketchup," and drove off.

Investors watching Heinz over the past few years probably feel like Ernie's friends -- as depicted in that classic 1980s television commercial -- as the shares haven't exactly been the hottest item in the fridge.

But there are recent signs of motion in the ketchup bottle. Today, the company reported fiscal Q1 EPS of $0.65, a penny below Wall Street estimates but a nickel above the year-ago mark.

And while sales, adjusted for divestitures and foreign exchange rates, were up just shy of 1% for the quarter year-over-year, gross margins were up 13 basis points to 40.7%.

And the company expects good results from its just-launched Boston Market Home Style Meals, a new line of frozen premium meals the company believes will be a high-margin revenue driver. The meals are expected to deliver sales of $200 million over the next two years; regional debuts are underway with a national rollout coming up later this year.

Funding for the unbudgeted Boston Market meal launch should come from the sale of the Weight Watchers weight control business (but not its core food businesses) to a European investment firm, which is expected to close at the end of the month and provide a pre-tax gain of $500 million -- most of which will be used to pay down debt. Boston Market launch costs will snipe $29 million of the Weight Watchers windfall.

Heinz appears to be at the early stages of a profitable turnaround. Investors might remember the company's announcement of "Operation Excel" in February.

The sweeping initiative called on Heinz to focus on the six food categories (ketchup/condiments/sauces, frozen foods, tuna, soups/beans/pasta meals, infant foods, and pet products) and six countries (the U.S., the U.K., Italy, Canada, Australia, and New Zealand) that drive most of its sales and operating income. Other keys included a restructuring of distribution and production and thousands of job cuts.

And Weight Watchers won't be the only division to hit the chopping block; the company plans to cut loose its Czech subsidiary in the coming months.

This refocusing, however, wasn't meant to hamstring the company from attempting other opportunities as it is still exploring opportunities in Europe, Asia, and the Pacific. "Our 6x6 platform," said CEO William Johnson in February, "will not limit our potential but rather provides a focused platform for growth." Heinz has certainly remained active, inking several strategic partnerships and acquiring various overseas brands in its key markets.

The company has strong brands in every category and believes the initiatives will, over four years, serve up $200 million in cost savings, a boost in gross margins to 42%, $2.5 billion in free cash flow, consistent double-digit earnings growth, and a return on invested capital of about 40%. Johnson said today the program is "on track," at least where cost savings are concerned.

If Heinz finally gets its bottle turned right-side-up again, much of the credit will need to go to Johnson, who replaced current Chairman Anthony O'Reilly as CEO in April of 1998. Other restructuring efforts started by O'Reilly didn't work as well as hoped and Johnson, sensing malaise, shook up upper management almost immediately upon taking the chief's chair and has delivered on many of the initiatives -- like the Weight Watchers sale and a European restructuring -- long anticipated by impatient Heinz watchers.

Anyone else remember what happened to Ernie at the end of the aforementioned TV spot? The ketchup poured, the fries were dressed, and a convertible packed with attractive coeds rolled up and offered the young man a ride. (He accepted with a grateful smile.)

Patience paid off for Ernie. It may be about to pay off for Heinz stockholders as well.

Related Links:

• Heinz Website
• Heinz Message Board

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