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03-25-04, 01:15 PM
Annual Report
Heinz is a premier international food company, with number-one and number-two brands in more than 50 countries. Approximately 60% of Heinz's total sales now come from outside the United States, making it the most international U.S.-based food company.
DEAR FELLOW SHAREHOLDERS
Fiscal 2003 was a generally positive and productive year for Heinz, during which we improved our global portfolio of brands and better positioned our company against our goals of sustainable growth and
shareholder value. We had many significant achievements during the year, as well as a few disappointments that we are working to correct. Overall, the net result was a transition to a more focused, attractive and internationally based company with a powerful portfolio of brands and what we believe will be an effective growth strategy for Heinz in Fiscal 2004 and beyond.
We accomplished most of our key goals for Fiscal 2003, starting with the successful spin-off and merger of our North American pet food and tuna businesses and our U.S. retail soup and baby food businesses with Del Monte Corporation. This transaction, which was outlined in last year's Annual Report and completed just five months later, greatly reduced our debt, resulted in improved margins and generally repositioned Heinz to capitalize on its stronger core global brands. Our performance is best exemplified by the achievement of Fiscal 2003 earnings within the range we outlined last year, and by the achievement of other key financial goals first articulated in our outlook for Fiscal 2003. These include:
Increasing operating free cash flow (cash provided by operations less captial expenditures) by 45%, or $232 million, to a record $752 million; excluding $224 million in pension fund contributions, our total operating free cash flow would have exceeded $900 million;
Increasing net sales from continuing operations by 8.2% to $8.24 billion;
Reducing net debt by $1.3 billion;
Reducing our year-end cash conversion cycle by 16 days to a record 66 days;
Reducing Quick Operating Working Capital to a record 16.8% of sales;
Managing capital expenditures to just under 2% of net sales; and
Accomplishing these goals while also increasing our investment in trade and consumer marketing against our leading brands by almost $200 million.
Our Fiscal 2003 net sales increase benefited greatly from the impact of foreign exchange translations following nearly six years of negative impact. We also benefited from pricing—especially in hyperinflationary countries—and strong performance across the globe from key brands like Heinz® Ketchup, Heinz® soups and sauces, Smart Ones® frozen entrees, T.G.I. Friday's® frozen snacks and Heinz® and Plasmon® baby foods. Overall unit volume declined, however, as our efforts to simplify our supply chain by reducing the number of SKUs (Stock Keeping Units) reduced sales by more than $100 million. We expect considerable and lasting benefit from our SKU-reduction initiative. We also experienced sub-par performance in our U.S. foodservice business, as a function of the poor economy, and in our Ore-Ida®, Boston Market® and Bagel Bites® frozen brands after four straight years of growth. We are seeing a turnaround in foodservice and addressing the issues in our frozen business (as noted on page 4).
Finally, as first announced in June 2002, we adjusted our dividend in April 2003 to an annual indicated rate of $1.08 per share to reflect our new size following the spin-off and to provide greater financial flexibility. Heinz's dividend still offers an attractive yield above 3%—better than the industry average and in the top 20% of the S&P 500. It is our stated intent to pay out 45%–50% of earnings to shareholders in the form of dividends.
As the second half of Fiscal 2003 began on October 31, 2002, it became clear that the Del Monte transaction would be completed on schedule without significant change from our original plan. Total Heinz shareholder return has increased approximately 17% from that point to early July 2003, when this Annual Report was prepared. This return surpassed the S&P 500's increase of nearly 13% for the same period and was far above the approximately 6% increase for our peer S&P Food Group. Heinz's stock performance during this time reflects the market's recognition not only of the strategic benefit of the Del Monte transaction but also of Heinz's ability to execute successfully against its strategy of strengthening its core brands and businesses worldwide.
Going forward, Heinz's growth strategy is based on Four Imperatives, which were introduced to strong employee acceptance in January 2003, shortly after the completion of the Del Monte transaction:
DRIVE PROFITABLE GROWTH through superior products and packaging, everyday price/value, accelerated innovation and creative marketing. A perfect example is the great success of our new Heinz® Easy Squeeze!™ "upside-down" Ketchup bottle, which promises to be the most successful new ketchup product since the introduction of the plastic bottle.
REMOVE THE CLUTTER through simplified business structure, improved accountability and greater focus in our portfolio through continued reduction of marginal SKUs and non-core businesses and assets.
SQUEEZE OUT COSTS through reduced fixed costs, a more productive supply chain, improved cash management and greater efficiency in working capital and capital expenditures.
MEASURE AND RECOGNIZE PERFORMANCE through a balanced scorecard that aligns management compensation to key financial and non-financial indicators based on the ultimate goal of building sustainable earnings growth.
These Imperatives share a common purpose: to focus greater human and financial resources toward supporting the growth of our top brands around the world.
Our profit outlook for Fiscal 2004 is for full-year EPS in the range of $2.15–$2.25. This range would represent excellent performance given the anticipated impact on earnings from rapidly escalating pension and healthcare costs, as well as several non-core-business divestitures. Our outlook also reflects the positive impact that we expect from continued strength in the Euro and British Pound, which represent more than 35% of our sales.
A key growth factor for Fiscal 2004 will be continued innovation, such as the summer launch of our convenient and flavorful EZ Marinader™ in the U.S., along with a European "top-down" version of Heinz® Easy Squeeze!™ Ketchup, which has quickly attracted great media and consumer interest. As in Fiscal 2003, we plan to increase marketing spending against our leading brands worldwide.
We will continue to focus and simplify our portfolio, targeting a further reduction in SKUs by fiscal year's end and the sale of several non-core underperforming assets. We also see significant opportunities to further increase operating free cash flow, improve our cash conversion cycle, and reduce fixed costs, working capital and net debt. All of this will leave us with a stronger balance sheet.
We are aggressively addressing the challenges we referenced earlier and are starting to see a turnaround in North American Foodservice in response to improved performance from our key customers. We are also working to correct many of the issues that affected our frozen brands by repricing and restaging several businesses. We have successfully employed this two-pronged approach in other categories to heighten the differentiation of our brands while attaining more competitive price premiums so critical in today's low-price environment.
Brand growth, innovation, more competitive pricing and product differentiation will be key for Heinz's performance in Fiscal 2004. Our focus is on our top 15 brands, which globally account for approximately 60% of our total sales and nearly 70% of our profits. The power of retail brands, like Heinz®, Ore-Ida®, Smart Ones®, Plasmon®, John West®, ABC® and Wattie's®, along with foodservice brands such as Heinz®, Chef Francisco®, Escalon® and Dessert Inspirations®, gives us number-one and number-two positions in growing categories with exceptional market shares around the world. Brands are our heritage and our future. Their growth and success will determine the value of our company.
Heinz is now the most internationally focused of U.S.-based food companies, with more than 60% of our sales derived from outside the United States. Our global strategy is driven by the opportunity to help feed a world with more than 5.5 billion people beyond our home borders—many of whom have strong brand loyalty and live in rapidly growing economies. Henry J. Heinz himself recognized this, once commenting that "the world is our field." In 1886 he ventured to the U.K. to open a thriving new market, and his legacy is our encouragement. Heinz is successfully building excellent businesses in Indonesia, China, the Philippines, The Netherlands, Germany, the U.K., Italy and New Zealand that demonstrate the potential of these markets. It is an exciting and distinctive element of the Heinz portfolio that we believe will yield significant rewards.
Heinz is a premier international food company, with number-one and number-two brands in more than 50 countries. Approximately 60% of Heinz's total sales now come from outside the United States, making it the most international U.S.-based food company.
DEAR FELLOW SHAREHOLDERS
Fiscal 2003 was a generally positive and productive year for Heinz, during which we improved our global portfolio of brands and better positioned our company against our goals of sustainable growth and
shareholder value. We had many significant achievements during the year, as well as a few disappointments that we are working to correct. Overall, the net result was a transition to a more focused, attractive and internationally based company with a powerful portfolio of brands and what we believe will be an effective growth strategy for Heinz in Fiscal 2004 and beyond.
We accomplished most of our key goals for Fiscal 2003, starting with the successful spin-off and merger of our North American pet food and tuna businesses and our U.S. retail soup and baby food businesses with Del Monte Corporation. This transaction, which was outlined in last year's Annual Report and completed just five months later, greatly reduced our debt, resulted in improved margins and generally repositioned Heinz to capitalize on its stronger core global brands. Our performance is best exemplified by the achievement of Fiscal 2003 earnings within the range we outlined last year, and by the achievement of other key financial goals first articulated in our outlook for Fiscal 2003. These include:
Increasing operating free cash flow (cash provided by operations less captial expenditures) by 45%, or $232 million, to a record $752 million; excluding $224 million in pension fund contributions, our total operating free cash flow would have exceeded $900 million;
Increasing net sales from continuing operations by 8.2% to $8.24 billion;
Reducing net debt by $1.3 billion;
Reducing our year-end cash conversion cycle by 16 days to a record 66 days;
Reducing Quick Operating Working Capital to a record 16.8% of sales;
Managing capital expenditures to just under 2% of net sales; and
Accomplishing these goals while also increasing our investment in trade and consumer marketing against our leading brands by almost $200 million.
Our Fiscal 2003 net sales increase benefited greatly from the impact of foreign exchange translations following nearly six years of negative impact. We also benefited from pricing—especially in hyperinflationary countries—and strong performance across the globe from key brands like Heinz® Ketchup, Heinz® soups and sauces, Smart Ones® frozen entrees, T.G.I. Friday's® frozen snacks and Heinz® and Plasmon® baby foods. Overall unit volume declined, however, as our efforts to simplify our supply chain by reducing the number of SKUs (Stock Keeping Units) reduced sales by more than $100 million. We expect considerable and lasting benefit from our SKU-reduction initiative. We also experienced sub-par performance in our U.S. foodservice business, as a function of the poor economy, and in our Ore-Ida®, Boston Market® and Bagel Bites® frozen brands after four straight years of growth. We are seeing a turnaround in foodservice and addressing the issues in our frozen business (as noted on page 4).
Finally, as first announced in June 2002, we adjusted our dividend in April 2003 to an annual indicated rate of $1.08 per share to reflect our new size following the spin-off and to provide greater financial flexibility. Heinz's dividend still offers an attractive yield above 3%—better than the industry average and in the top 20% of the S&P 500. It is our stated intent to pay out 45%–50% of earnings to shareholders in the form of dividends.
As the second half of Fiscal 2003 began on October 31, 2002, it became clear that the Del Monte transaction would be completed on schedule without significant change from our original plan. Total Heinz shareholder return has increased approximately 17% from that point to early July 2003, when this Annual Report was prepared. This return surpassed the S&P 500's increase of nearly 13% for the same period and was far above the approximately 6% increase for our peer S&P Food Group. Heinz's stock performance during this time reflects the market's recognition not only of the strategic benefit of the Del Monte transaction but also of Heinz's ability to execute successfully against its strategy of strengthening its core brands and businesses worldwide.
Going forward, Heinz's growth strategy is based on Four Imperatives, which were introduced to strong employee acceptance in January 2003, shortly after the completion of the Del Monte transaction:
DRIVE PROFITABLE GROWTH through superior products and packaging, everyday price/value, accelerated innovation and creative marketing. A perfect example is the great success of our new Heinz® Easy Squeeze!™ "upside-down" Ketchup bottle, which promises to be the most successful new ketchup product since the introduction of the plastic bottle.
REMOVE THE CLUTTER through simplified business structure, improved accountability and greater focus in our portfolio through continued reduction of marginal SKUs and non-core businesses and assets.
SQUEEZE OUT COSTS through reduced fixed costs, a more productive supply chain, improved cash management and greater efficiency in working capital and capital expenditures.
MEASURE AND RECOGNIZE PERFORMANCE through a balanced scorecard that aligns management compensation to key financial and non-financial indicators based on the ultimate goal of building sustainable earnings growth.
These Imperatives share a common purpose: to focus greater human and financial resources toward supporting the growth of our top brands around the world.
Our profit outlook for Fiscal 2004 is for full-year EPS in the range of $2.15–$2.25. This range would represent excellent performance given the anticipated impact on earnings from rapidly escalating pension and healthcare costs, as well as several non-core-business divestitures. Our outlook also reflects the positive impact that we expect from continued strength in the Euro and British Pound, which represent more than 35% of our sales.
A key growth factor for Fiscal 2004 will be continued innovation, such as the summer launch of our convenient and flavorful EZ Marinader™ in the U.S., along with a European "top-down" version of Heinz® Easy Squeeze!™ Ketchup, which has quickly attracted great media and consumer interest. As in Fiscal 2003, we plan to increase marketing spending against our leading brands worldwide.
We will continue to focus and simplify our portfolio, targeting a further reduction in SKUs by fiscal year's end and the sale of several non-core underperforming assets. We also see significant opportunities to further increase operating free cash flow, improve our cash conversion cycle, and reduce fixed costs, working capital and net debt. All of this will leave us with a stronger balance sheet.
We are aggressively addressing the challenges we referenced earlier and are starting to see a turnaround in North American Foodservice in response to improved performance from our key customers. We are also working to correct many of the issues that affected our frozen brands by repricing and restaging several businesses. We have successfully employed this two-pronged approach in other categories to heighten the differentiation of our brands while attaining more competitive price premiums so critical in today's low-price environment.
Brand growth, innovation, more competitive pricing and product differentiation will be key for Heinz's performance in Fiscal 2004. Our focus is on our top 15 brands, which globally account for approximately 60% of our total sales and nearly 70% of our profits. The power of retail brands, like Heinz®, Ore-Ida®, Smart Ones®, Plasmon®, John West®, ABC® and Wattie's®, along with foodservice brands such as Heinz®, Chef Francisco®, Escalon® and Dessert Inspirations®, gives us number-one and number-two positions in growing categories with exceptional market shares around the world. Brands are our heritage and our future. Their growth and success will determine the value of our company.
Heinz is now the most internationally focused of U.S.-based food companies, with more than 60% of our sales derived from outside the United States. Our global strategy is driven by the opportunity to help feed a world with more than 5.5 billion people beyond our home borders—many of whom have strong brand loyalty and live in rapidly growing economies. Henry J. Heinz himself recognized this, once commenting that "the world is our field." In 1886 he ventured to the U.K. to open a thriving new market, and his legacy is our encouragement. Heinz is successfully building excellent businesses in Indonesia, China, the Philippines, The Netherlands, Germany, the U.K., Italy and New Zealand that demonstrate the potential of these markets. It is an exciting and distinctive element of the Heinz portfolio that we believe will yield significant rewards.