    2001 Second Quarter |
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| TO OUR SHAREHOLDERS:
Heinz continues to generate exciting new product and packaging ideas to spur growth around the world, as demonstrated in this Quarterly. The second quarter of Fiscal 2001 has seen very good initial results from some of our most dramatic innovations, as well as the launch of other new product and packaging concepts that address major consumer trends. Specifically: • Heinz EZ Squirt hit the shelves in October and sold its entire first year's sales forecast in just 90 days. In its first eight weeks, EZ Squirt captured more than 7% of the ketchup market, helping drive double-digit growth for our North American ketchup, condiments and sauces business. In late November, we launched a British version of EZ Squirt, called Sq-Easy. • StarKist Pouch Tuna began shipments in mid-September, generating very positive consumer response in early markets. The StarKist pouch signals a major initiative to shift the U.S. tuna business away from its historical commodity orientation toward value-added, higher-margin products. This is imperative for the U.S. tuna category, which has seen some volatility as a result of the lowest raw tuna prices in 30 years. • Boston Market HomeStyle Meals* is on track to achieve our first-year goal of $100 million in net sales. Our new Boston Market line is helping drive growth in the single-serve entrée category as well, with category sales up 14% since the brand's national introduction. Complementing these early successes are innovations introduced since September, including: • Smart Ones Main Street Bistro microwaveable bowls; • Fridge Door Soup, in the U.K., positioning our popular soups in the number-one snacking destination; • Heinz microwaveable, on-the-go "two-minute" meals in the U.K.; • Organic ketchup, beans, pasta and baby food in Europe (where the organic market is projected to grow at a 40% rate for the next five years), as well as a line of frozen organic meals under the Linda McCartney "Kitchen Garden" name; and • Chef Francisco single-serve pouch frozen soup for foodservice customers, along with Jif and Jif Smooth Sensations single-serve peanut butter, through a licensing agreement with Procter & Gamble. These and other nascent innovations are a result of Heinz's increasingly consumer-driven culture, where our focus has become one of ideas, not assets. Simply put, we have recognized that growth in the food industry requires the ability to discern and act upon customer and consumer trends regardless of existing capabilities, assets or businesses. Consequently, we have begun to look at ourselves through consumers' eyes. Consumers see Heinz as a collection of four dynamic, on-trend businesses that provide solutions to their needs: 1. Flavor/Taste Solutions to "personalize" food. In ketchup, condiments and sauces, overall net sales have grown at a compound annual rate of approximately 7% since Fiscal 1998. Our flagship product is having a great year, with U.S. market share in ketchup exceeding 50%, versus 43% two years ago. 2. Foodservice Solutions for restaurants, distributors, and chains. Heinz's foodservice business now represents more than 17% of overall sales and has been growing nearly 10% per year. We will further expand our foodservice capabilities with the recently announced acquisition of Alden Merrell Corporation, a leader in premium frozen desserts. 3. Meal and Snack Solutions for convenient, good-tasting meals and snacks—whether shelf-stable, frozen, or chilled. The combined growth rate for our frozen and quick-serve meals businesses has been nearly 5% per year since Fiscal 1998 and is expected to accelerate even more this year. 4. Organic and Nutrition Solutions, a fast-growing sector, with organic growing about 20% annually. Our infant feeding business and relationship with Hain provide expertise that is transferable to the organic and nutritional needs of children and adults, and to our mainstream products. We have also restructured pet food into three distinct businesses: pet snacks (growing at a 7% rate); traditional canned and dry (now representing less than 7% of Heinz's operating income); and specialty (very small but well positioned for future growth). We are managing the profit issues on pet food, with double-digit operating income growth projected this year, as we work to improve net sales and share trends on our traditional canned business. Such renewed focus on consumer trends and innovation helped us generate strong second quarter results. Heinz's core diluted earnings per share (EPS) for the quarter (excluding special items and the divested Weight Watchers classroom business) increased 9.5% to $0.69 from $0.63 last year. Sales grew 6.4% on a constant currency basis, excluding the impact of the Weight Watchers classroom business. And the great success of Operation Excel helped increase core operating margins to a record 20.2% through the first six months of Fiscal 2001. Second quarter sales in our North American Frozen business grew a robust 13.1%, driven by strong volume increases in Boston Market HomeStyle Meals and Smart Ones frozen entrées. North American Grocery and Foodservice total sales increased 1%, but showed 10% growth excluding tuna and pet food. Our European market shares continued to grow, as sales increased 16.4% on a constant currency basis, or 2.9% after the impact of currency. Unfavorable foreign exchange rates also had a major impact on our results in Asia/Pacific, where, despite strong performances in Indonesia and China, our second quarter sales decreased by 11.3%.
In sum, our aggressive marketing, new product initiatives, targeted acquisitions and continuing cost reductions are helping us generate sales and earnings growth. Heinz's stronger consumer focus, alignment of its businesses against key consumer trends and commitment to innovation make us confident in our ability to produce continued growth, performance and, above all, shareholder value.
*Boston Market is a registered trademark of Boston Market Corporation.
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