PURE FOODS SINCE 1869 - Heinz

U.S. Foodservice
Sales of the U.S. Foodservice segment decreased $13.5 million, or 0.9%, to $1.56 billion, primarily
due to the impact of divestitures. Divestitures, net of acquisitions, reduced sales 2.1%. Pricing
increased 1.7%, largely due to Heinz» ketchup and tomato products, single serve condiments and
frozen desserts. Volume decreased 0.4%, as higher volume in Heinz» ketchup was offset by declines
resulting primarily from one less week in the fiscal year and a decision to exit certain low margin
accounts.
Gross profit increased $29.0 million, or 6.6%, to $465.3 million, and the gross profit margin
increased to 29.9% from 27.8%, due to $7.5 million of prior year reorganization costs discussed below
and a $21.5 million impairment charge in the prior year related to the sale of the Portion Pac Bulk
product line. In addition, increased pricing was offset by higher commodity costs. Operating income
increased $38.8 million, or 21.9%, to $216.1 million, largely due to the increase in gross profit and
reduced S&D expense as a percentage of sales resulting from productivity initiatives.
Europe
Heinz Europe’s sales increased $89.0 million, or 3.0%, to $3.08 billion. Pricing increased 1.7%,
driven primarily by value-added innovation and reduced promotions on Heinz» soup and pasta meals
in the U.K and in the Italian infant nutrition business. Volume declined 2.4% as improvements in
Heinz» ketchup, Heinz» beans, Weight Watchers» branded products and Pudliszki» ketchup and
ready meals in Poland were more than offset by market softness in non-Heinz» branded products in
Russia and the non-branded European frozen business and declines in U.K. ready-to-serve soups and
pasta convenience meals. Volume was also unfavorably impacted by one less week in the current
fiscal year. The acquisition of HP Foods and Petrosoyuz in Fiscal 2006 increased sales 1.9%, while
divestitures reduced sales 5.6%. Favorable exchange translation rates increased sales by 7.3%.
Gross profit increased $112.0 million, or 10.0%, to $1.24 billion, and the gross profit margin
increased to 40.2% from 37.6%. These improvements are due to higher pricing, favorable impact of
exchange translation rates and $36.3 million of prior year transformation costs discussed below.
These improvements were partially offset by reduced volume and increased commodity and manufacturing
costs. Operating income increased $152.2 million, or 36.7%, to $566.4 million, due to the
increase in gross profit, the $112.2 million of prior year transformation costs discussed below, and
reduced general and administrative expenses (“G&A”), partially offset by increased marketing
expense. The decrease in G&A is driven by the workforce reductions, including the elimination of
European headquarters.
Asia/Pacific
Sales in Asia/Pacific increased $85.1 million, or 7.6%, to $1.20 billion. Volume increased sales
4.2%, reflecting strong volume in Australia, New Zealand and China, largely due to increased
marketing and new product introductions. Higher pricing increased sales 2.1%, mainly due to
commodity-related price increases taken on Indonesian sauces and drinks. Divestitures reduced
sales 0.3%, and foreign exchange translation rates increased sales by 1.7%.
Gross profit increased $51.5 million, or 15.4%, to $386.8 million, and the gross profit margin
increased to 32.2% from 30.0%. These improvements were due to volume increases and higher
pricing, partially offset by increased commodity costs, most notably in Indonesia. The prior year also
included an $18.8 million asset impairment charge on an Indonesian noodle business. Operating
income increased $50.6 million, to $135.8 million, largely reflecting the increase in gross profit and
reduced G&A, partially offset by increased marketing. The reduction in G&A is a result of effective
cost control in our Chinese businesses, targeted workforce reductions, including the elimination of
Asian headquarters in the prior year, and $10.2 million of reorganization costs in the prior year
related to the workforce reductions discussed below.
16