Kraft Heinz Reports Second Quarter 2018 Results
Aug. 03, 2018
PITTSBURGH & CHICAGO--(BUSINESS WIRE)--Aug 3, 2018--The Kraft Heinz Company (NASDAQ: KHC) (“Kraft Heinz” or the “Company”) today reported second quarter 2018 financial results that reflected favorable impacts from acquisitions net of divestitures and currency, as well as higher input costs and increased investments to enhance capabilities.
“Our results through the first half were stronger than the expectations we put forward as recently as three months ago, and we have been even more encouraged by our recent performance in the marketplace,” said Kraft Heinz CEO Bernardo Hees. “We believe we are now in a position to drive sustainable top-line growth from a strong pipeline of new product, marketing and whitespace initiatives that are backed by investments in capabilities for brand and category advantage. And while cost inflation on many fronts has been holding back our bottom line, we expect our profitability to improve by year-end, with further momentum into 2019.”
Q2 2018 Financial Summary
Net sales were $6.7 billion, up 0.7 percent versus the year-ago period, including a favorable 0.3 percentage point impact from currency and a net 0.8 percentage point benefit from acquisitions and divestitures. Organic Net Sales decreased 0.4 percent versus the year-ago period. Pricing increased 1.3 percentage points, driven by pricing to offset local input costs in Rest of World markets and higher pricing in North America that more than offset increased in-store and new product activity in EMEA. Volume/mix decreased 1.7 percentage points, as lower shipments in North America more than offset growth in EMEA and gains from condiments and sauces in Rest of World markets.
Net income attributable to common shareholders decreased to $756 million and diluted EPS decreased to $0.62, primarily due to non-cash impairment charges in the current period, versus non-cash curtailment gains recognized in the prior year period related to the Integration Program. Adjusted EBITDA decreased 4.4 percent versus the year-ago period to $2.0 billion, including a favorable 0.4 percentage point impact from currency. Excluding the impact of currency, Adjusted EBITDA declined primarily due to higher input costs, lower volume/mix and investments in strategic initiatives. Adjusted EPS increased 2.0 percent to $1.00, primarily driven by lower taxes on adjusted earnings in the current period.
Q2 2018 Business Segment Highlights
United States net sales were $4.5 billion, down 1.9 percent versus the year-ago period. Pricing increased 0.4 percentage points, as higher pricing in select categories was partially offset by the timing of trade spend, as well as lower pricing to reflect declines in certain key commodity (2) costs, particularly bacon. Volume/mix decreased 2.3 percentage points driven by lower shipments in cheese, frozen and nuts, which was partially offset by growth in ready-to-drink beverages.
United States Segment Adjusted EBITDA decreased 8.0 percent versus the year-ago period to $1.4 billion, primarily reflecting non-key commodity cost inflation, lower volume/mix, and capability investments that were partially offset by gains from productivity and higher pricing.
Canada net sales were $564 million, 4.5 percent lower than the year-ago period, reflecting a favorable 3.7 percentage point impact from currency and an 8.2 percent decline in Organic Net Sales. Pricing increased 0.6 percentage points, primarily driven by higher pricing in condiments and sauces. Volume/mix decreased 8.8 percentage points due to prior year promotional activity that was not repeated, primarily in condiments and sauces, as well as trade inventory adjustments and select product discontinuations.
Canada Segment Adjusted EBITDA decreased 8.9 percent versus the year-ago period to $172 million, including a favorable 3.4 percentage point impact from currency. Excluding currency, Segment Adjusted EBITDA decreased primarily due to lower volume/mix.
EMEA net sales were $703 million, up 8.7 percent versus the year-ago period, including a 5.4 percentage point benefit from currency and a negative 0.7 percentage point impact from the divestiture of a joint venture in South Africa. Organic Net Sales increased 4.0 percent versus the year-ago period. Pricing declined 1.0 percentage points to support in-store and new product activity in condiments and sauces, as well as infant nutrition that more than offset higher pricing in meals. Volume/mix increased 5.0 percentage points, driven by growth in condiments and sauces, including the addition of Kraft products in certain regions within the segment, as well as strong foodservice gains in every region.
EMEA Segment Adjusted EBITDA increased 8.9 percent versus the year-ago period to $201 million, including a positive 6.0 percentage point impact from currency. Excluding the impact of currency, Segment Adjusted EBITDA increased 2.9 percent, as gains from productivity were partially offset by higher overhead costs and lower pricing.
Rest of World (3)(4)
Rest of World net sales were $906 million, increasing 13.5 percent versus the year-ago period, including a negative 5.4 percentage point impact from currency and an 8.1 percentage point contribution from the Cerebos acquisition. Organic Net Sales increased 10.8 percent versus the year-ago period. Pricing was up 9.2 percentage points, primarily due to actions to offset input cost inflation in local currency, particularly in Latin America. Volume/mix increased 1.6 percentage points, as strong growth in condiments and sauces across a majority of regions was partially offset by lower shipments in Southeast Asia and negative impacts from a truck drivers' strike in Brazil.
Rest of World Segment Adjusted EBITDA increased 24.6 percent versus the year-ago period to $213 million, despite a negative 7.1 percentage point impact from currency. Excluding the impact of currency, Segment Adjusted EBITDA increased 31.7 percent driven by Organic Net Sales gains that were partially offset by higher input costs in local currency.
Webcast and Conference Call Information
A webcast of The Kraft Heinz Company's second quarter 2018 earnings conference call will be available at ir.kraftheinzcompany.com. The call begins today at 8:30 a.m. Eastern Time.
ABOUT THE KRAFT HEINZ COMPANY
The Kraft Heinz Company (NASDAQ: KHC) is the fifth-largest food and beverage company in the world. A globally trusted producer of delicious foods, The Kraft Heinz Company provides high quality, great taste and nutrition for all eating occasions whether at home, in restaurants, or on the go. The Company’s iconic brands include Kraft, Heinz, ABC, Capri Sun, Classico, Jell-O, Kool-Aid, Lunchables, Maxwell House, Ore-Ida, Oscar Mayer, Philadelphia, Planters, Plasmon, Quero, Smart Ones and Velveeta. The Kraft Heinz Company is dedicated to the sustainable health of our people, our planet and our Company. For more information, visit www.kraftheinzcompany.com.
This press release contains a number of forward-looking statements. Words such as "enhance," "encouraged," "believe," "position," "anticipate," "reflect," "invest," "see," "make," "expect," "deliver," "drive," "improve," "assess," "evaluate," "grow," "will," and variations of such words and similar future or conditional expressions are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements regarding the Company's plans, segment changes, cost savings, expectations, investments, innovations, opportunities, capabilities, execution, initiatives, and growth. These forward-looking statements are not guarantees of future performance and are subject to a number of risks and uncertainties, many of which are difficult to predict and beyond the Company's control.
Important factors that may affect the Company's business and operations and that may cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, operating in a highly competitive industry; changes in the retail landscape or the loss of key retail customers; the Company’s ability to maintain, extend and expand its reputation and brand image; the impacts of the Company’s international operations; the Company’s ability to leverage its brand value to compete against retailer brands and other economy brands; the Company’s ability to predict, identify and interpret changes in consumer preferences and demand; the Company’s ability to drive revenue growth in its key product categories, increase its market share, or add products; an impairment of the carrying value of goodwill or other indefinite-lived intangible assets; volatility in commodity, energy and other input costs; changes in the Company’s management team or other key personnel; the Company’s ability to realize the anticipated benefits from its cost savings initiatives; changes in relationships with significant customers and suppliers; the execution of the Company’s international expansion strategy; tax law changes or interpretations; legal claims or other regulatory enforcement actions; product recalls or product liability claims; unanticipated business disruptions; the Company’s ability to complete or realize the benefits from potential and completed acquisitions, alliances, divestitures or joint ventures; economic and political conditions in the United States and in various other nations in which we operate; volatility of capital markets and other macroeconomic factors; increased pension, labor and people-related expenses; volatility in the market value of all or a portion of the derivatives we use; exchange rate fluctuations; risks associated with information technology and systems, including service interruptions, misappropriation of data or breaches of security; the Company’s ability to protect intellectual property rights; impacts of natural events in the locations in which we or the Company’s customers, suppliers or regulators operate; the Company’s indebtedness and ability to pay such indebtedness; the Company’s ownership structure; the impact of future sales of the Company's common stock in the public markets; the Company’s ability to continue to pay a regular dividend; restatements of the Company’s consolidated financial statements; and other factors. For additional information on these and other factors that could affect the Company's forward-looking statements, see the Company's risk factors, as they may be amended from time to time, set forth in its filings with the Securities and Exchange Commission. The Company disclaims and does not undertake any obligation to update or revise any forward-looking statement in this press release, except as required by applicable law or regulation.
Non-GAAP Financial Measures
To supplement the financial information, the Company has presented Organic Net Sales, Adjusted EBITDA, Constant Currency Adjusted EBITDA, and Adjusted EPS, which are considered non-GAAP financial measures. The non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, results prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) that are presented in this press release. The non-GAAP financial measures presented may differ from similarly titled non-GAAP financial measures presented by other companies, and other companies may not define these non-GAAP financial measures in the same way. These measures are not substitutes for their comparable GAAP financial measures, such as net sales, net income/(loss), diluted earnings per share, or other measures prescribed by GAAP, and there are limitations to using non-GAAP financial measures.
Management uses these non-GAAP financial measures to assist in comparing the Company's performance on a consistent basis for purposes of business decision making by removing the impact of certain items that management believes do not directly reflect the Company's underlying operations. Management believes that presenting the Company's non-GAAP financial measures is useful to investors because it (i) provides investors with meaningful supplemental information regarding financial performance by excluding certain items, (ii) permits investors to view performance using the same tools that management uses to budget, make operating and strategic decisions, and evaluate historical performance, and (iii) otherwise provides supplemental information that may be useful to investors in evaluating the Company's results. The Company believes that the presentation of these non-GAAP financial measures, when considered together with the corresponding GAAP financial measures and the reconciliations to those measures, provides investors with additional understanding of the factors and trends affecting the Company's business than could be obtained absent these disclosures.
Organic Net Sales is defined as net sales excluding, when they occur, the impact of currency, acquisitions and divestitures, and a 53rd week of shipments. The Company calculates the impact of currency on net sales by holding exchange rates constant at the previous year's exchange rate, with the exception of Venezuela, for which the Company calculates the previous year's results using the current year's exchange rate. Organic Net Sales is a tool that can assist management and investors in comparing the Company's performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect the Company's underlying operations.
Adjusted EBITDA is defined as net income/(loss) from continuing operations before interest expense, other expense/(income), net, provision for/(benefit from) income taxes, and depreciation and amortization (excluding integration and restructuring expenses); in addition to these adjustments, the Company excludes, when they occur, the impacts of integration and restructuring expenses, deal costs, unrealized losses/(gains) on commodity hedges, impairment losses, losses/(gains) on the sale of a business, nonmonetary currency devaluation (e.g., remeasurement gains and losses), and equity award compensation expense (excluding integration and restructuring expenses). The Company also presents Adjusted EBITDA on a constant currency basis. The Company calculates the impact of currency on Adjusted EBITDA by holding exchange rates constant at the previous year's exchange rate, with the exception of Venezuela, for which it calculates the previous year's results using the current year's exchange rate. Adjusted EBITDA and Constant Currency Adjusted EBITDA are tools that can assist management and investors in comparing the Company's performance on a consistent basis by removing the impact of certain items that management believes do not directly reflect the Company's underlying operations.
Adjusted EPS is defined as diluted earnings per share excluding, when they occur, the impacts of integration and restructuring expenses, deal costs, unrealized losses/(gains) on commodity hedges, impairment losses, losses/(gains) on the sale of a business, nonmonetary currency devaluation (e.g., remeasurement gains and losses), and U.S. Tax Reform discrete income tax expense/(benefit), and including when they occur, adjustments to reflect preferred stock dividend payments on an accrual basis. The Company believes Adjusted EPS provides important comparability of underlying operating results, allowing investors and management to assess operating performance on a consistent basis.
See the attached schedules for supplemental financial data, which includes the financial information, the non-GAAP financial measures and corresponding reconciliations to the comparable GAAP financial measures for the relevant periods.
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