Nov. 22 (Bloomberg) -- H.J. Heinz Co., the world's largest ketchup maker, said second-quarter profit rose 2.4 percent on a tax gain and the acquisition of the Lea & Perrins sauce business.

Net income rose to $203.8 million, or 60 cents a share, from $199 million, or 56 cents, a year earlier, Pittsburgh-based Heinz said today in a statement. Sales in the quarter ended Oct. 26 increased 6.3 percent to $2.34 billion.

The purchase of four companies including HP Foods Group and Nancy's Specialty Foods Inc. helped increase sales. Heinz boosted revenue in North America by 10 percent, the third time in the last four quarters sales in North America rose at least 10 percent, helped by sales of Smart Ones frozen foods and Classico pasta sauce businesses. A tax gain added $32 million to earnings.

``It appears that North America is doing better than expectations,'' said Amy Bonkoski, an analyst at Cleveland-based National City Corp.'s private-client group, with $33 billion in assets, including Heinz shares. ``The North American numbers looked good. That had been the part that has been causing concern.''

Heinz benefited from a 24.8 percent tax rate in the quarter compared with 32 percent a year earlier. That added as much as 7 cents per share, the company said on a conference call.

Estimates

JPMorgan analyst Pablo Zuanic forecast earnings, excluding expenses, of 54 cents a share. He is top-ranked by StarMine Professional.

Excluding the lower tax rate and expenses, Heinz would have earned 55 cents. On that basis, which doesn't conform to generally accepted accounting principles, the company was expected to earn 54 cents, the average estimate of 11 analysts surveyed by Thomson Financial. Thomson did not return a call seeking the parameters for the estimates.

Shares of Heinz, which sells products in 200 countries, rose 62 cents, or 1.8 percent, to $35.68 at 4:02 p.m. in New York Stock Exchange composite trading. They have dropped 8.5 percent this year.

Sales in Europe, where Heinz got about 40 percent of revenue last year, advanced 5.4 percent in the quarter to $858 million as volume, or units sold, dropped 2 percent. Sales were hurt by the performance of frozen foods, the HAK vegetable line and a decline in the European seafood business.

Heinz said retail sales also rose in North America because of strong gains in TGI Friday's and Delimex brands of frozen snacks. Sales to restaurants and institutions in the region gained 1.5 percent, helped by the purchase of AAI. Without the purchase, sales would have dropped 2.5 percent, hurt by reduced traffic at some of its fast-food customers.

`Cool Period'

``There is no doubt we are going through a bit of a cool period as traffic is affected by gasoline prices,'' Johnson said on a conference call with analysts and investors.

Gross margin, or the percentage of sales left after subtracting the cost of goods sold, narrowed to 36 percent from 36.5 percent a year earlier. Selling, general and administrative expenses increased to 22.7 percent of sales from 20.8 percent.

In September, Heinz said it hired UBS AG and JPMorgan Chase & Co., to sell its seafood and frozen-foods brands in Europe to focus on faster-growing businesses such as sauces. After the sale of the European operations, Heinz will generate about $2.5 billion, or 30 percent of global sales, from Europe. Chief Executive William Johnson, 56, has struggled to increase profit in Europe, where operating income fell.

``We achieved these results despite significant cost headwinds and during a period of extensive efforts to reshape the portfolio and streamline our core businesses,'' said Johnson in the statement. ``We are making good progress on our potential divestitures.''

Losing In Europe

Heinz is still losing market share to Nestle SA, the world's largest food company, and exclusive-label brands in Europe, its biggest region. The company, which in August bought Lea & Perrins Worcestershire and HP sauces for $820 million, is trying to sell European brands valued at about $1.4 billion, including John West tuna and Linda McCartney vegetarian meals in the U.K.

Heinz is also divesting Aunt Bessie's frozen foods in Europe and the Tegel poultry operation in New Zealand. The businesses up for sale employ 7,100 at 10 manufacturing plants. The company expects the sales to reduce earnings by 25 cents to 29 cents.

``The biggest concern is how much they are going to get from these businesses,'' Marvin Roffman, president of Roffman Miller Associates in Philadelphia, which manages about $330 million, including Heinz, said in an interview. ``It's a very smart move and it's about time the company did it.''

Unilever

Heinz is in ``advanced discussions'' with a number of interested parties for its Tegel poultry business, Johnson said on the conference call. The company is also seeing ``strong'' interest in its European frozen food and seafood businesses.

Unilever NV, one of Heinz's biggest competitors, in September said it's considering ``all options'' for its frozen- food business in Western Europe, including expanding or selling the unit, whose brands include Birds Eye.

Heinz purchased the Lea & Perrins Worcestershire and HP sauces from Groupe Danone SA in August, the company's biggest purchase ever, as it tried to boost profit in Europe and focus on its main ketchup and sauces business.

``Underlying earnings were down when excluding the tax benefit and this is mostly due to cost pressure, an inability to raise prices, and higher promotional expenditures,'' A.G. Edwards & Sons Inc. analyst Christopher Growe in St. Louis wrote today. ``The weak earnings growth will continue through the fiscal year due to the weight of input cost inflation and weak business conditions in the businesses slated for sale.''

Facing Headwinds

The company will continue to see ``headwinds'' in the second half of the year from higher commodity and transportation costs because of increased gasoline and expenses for packaging, the ketchup maker said on the conference call.

Heinz reiterated its forecast that fiscal 2006 earnings will be at the low end of its range of $2.35 to $2.45 a share, with sales gaining 4 percent to 6 percent. The company earned $2.13 last year.

Heinz met or exceeded analysts' estimates in three of the four prior quarters. Of 14 analysts tracked by Bloomberg, five rate Heinz a ``buy,'' seven have ``hold'' ratings and two say ``sell.''

Heinz's profit dropped at least 19 percent in two of the past four quarters.

To contact the reporter on this story: Josh Fineman in New York at jfineman@bloomberg.net.

Last Updated: November 22, 2005 16:20 EST