H.J. Heinz Co.'s forecast for the second quarter shows that higher commodity costs and slow sales in markets like the United States will put pressure on profits, sending its shares down more than 3 percent.
Margins fell more than some analysts expected in the just completed first quarter as price increases and cost-cutting moves such as closing factories had yet to have much impact.
Like most food companies, Heinz is trying to cut expenses as it faces higher costs for raw materials such as resins, sweeteners and oils.
"The fact that the developed markets are still weak and aren't expected to improve is a challenge," said Morningstar analyst Erin Lash.
Heinz, which makes its namesake ketchup, Ore-Ida frozen potatoes and other packaged foods has tried to make up for weak growth in developed markets by focusing on emerging markets, with recent acquisitions in China and Brazil.
The company got 23 percent of its sales in emerging markets in the quarter, giving it one of the highest concentrations in emerging markets of any U.S.-based packaged food company.
Heinz forecast earnings in the second quarter to be in line with or slightly higher than last year's net income of 78 cents a share. Analysts on average forecast 85 cents a share, according to Thomson Reuters I/B/E/S, though that analyst consensus excludes one-time items.
Heinz shares fell 3.3 percent, or $1.72, to $50.32 in morning trading on the New York Stock Exchange.
Excluding acquisitions, divestitures and the effect of foreign currency fluctuations, sales rose 13 percent in emerging markets. In North America such sales were flat, as price increases because of rising commodity costs pressured demand.
Gross margin fell to 35.7 percent from 36.6 percent a year earlier because of higher commodity costs. That decline was steeper than expected, said J.P.Morgan analyst Terry Bivens, who only expected a 0.1 percentage point decline.
The company expects price increases and cost savings to help offset rising costs, but mostly in the second half of the year.
Heinz said net income attributable to its shareholders was $226.1 million, or 70 cents a share, in its first quarter that ended July 27, compared with $240.4 million, or 75 cents a share, in the year-earlier period.
Heinz said in May that it planned to close five factories, cutting 800 to 1,000 jobs, and set up a European supply chain hub in the Netherlands.
Excluding the costs for closing factories and other one-time items, earnings were 78 cents a share. Analysts on average had forecast 76 cents a share.
Revenue rose 15 percent to $2.85 billion, fueled by price increases and a weaker dollar. Analysts on average forecast $2.79 billion.
Heinz said it still expects fiscal 2012 earnings of $3.24 to $3.32 a share, excluding one-time items and the effects of foreign currency fluctuations.
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