Kraft Heinz Reports Second Quarter 2016 Results

  • Q2 GAAP net sales increased 160% due to the merger of Kraft and
    Heinz; Organic Net Sales
    (1) declined 0.5%
  • Q2 GAAP operating income increased 268%; Adjusted EBITDA(1)
    increased 23.1%
    on a constant currency basis
  • Q2 GAAP diluted EPS was $0.63; Adjusted EPS(1)
    increased 39.3%
    to $0.85

PITTSBURGH & CHICAGO–(BUSINESS WIRE)–The Kraft Heinz Company (NASDAQ: KHC) (“Kraft Heinz” or the “Company”)
today reported second quarter 2016 financial results that reflected
significant gains from the ongoing integration of Kraft and Heinz,
partially offset by currency translation and a higher tax rate versus
the prior year period.

“By implementing our integration program and improving our performance
in the marketplace, we continued to drive results in the second
quarter,” said Kraft Heinz CEO Bernardo Hees. “However, to sustain our
momentum, we must remain focused on profitable growth, innovations to
meet consumer needs in a challenging environment, and improving our
operations. We’re off to a good start, but there is still much work to
be done.”

Q2 2016 Financial Summary

  For the Three Months Ended   Year-over-year Change
July 3, 2016   June 28, 2015 Actual   Currency   Divestitures   Organic
(in millions, except per share data)
GAAP net sales $ 6,793   $ 2,616 159.7 %
GAAP operating income 1,636 444 268.5 %
GAAP diluted EPS $ 0.63 $ (0.91 ) nm
 
Pro forma net sales(2) $ 6,793 $ 7,130 (4.7 )% (4.0 ) pp (0.2 ) pp (0.5 )%
Adjusted EBITDA(2) 2,087 1,773 17.7 %
Adjusted EPS(2) $ 0.85 $ 0.61 39.3 %
 

Net sales were $6.8 billion, down 4.7 percent versus pro forma net sales
for the year-ago period, due to a negative 4.0 percentage point impact
from currency and a negative 0.2 percentage point impact from
divestitures. Organic Net Sales decreased 0.5 percent versus the
year-ago period. Pricing increased 1.6 percentage points driven by the
United States, Rest of World and Canada, despite deflation in key
commodities in the United States and Canada(3), primarily in
dairy and coffee. Volume/mix decreased 2.1 percentage points primarily
due to lower shipments in several categories, particularly meats and
foodservice in the United States, that was partially offset by growth
from innovation in Lunchables and P3 in the United States
as well as gains in condiments and sauces globally.

Adjusted EBITDA increased 17.7 percent versus the year-ago period to
$2.1 billion, despite a negative 5.4 percentage point impact from
currency, driven by gains from cost savings initiatives(4)
and favorable pricing net of key commodity costs. Adjusted EPS increased
39.3 percent versus the year-ago period to $0.85, mainly reflecting
growth in Adjusted EBITDA that was partially offset by a higher tax rate
versus the prior year period.

Q2 2016 Business Segment Highlights

United States

  For the Three Months Ended   Year-over-year Change
July 3, 2016   June 28, 2015 Actual   Currency   Divestitures   Organic
(in millions)
Pro forma net sales(2,5) $ 4,692   $ 4,783 (1.9 )% (1.9 )%
Segment Adjusted EBITDA(2,5) 1,518 1,208 25.7 %
 

United States net sales were $4.7 billion, down 1.9 percent versus pro
forma net sales for the year-ago period. Pricing increased 1.2
percentage points despite deflation in key commodities, primarily in
dairy and coffee. Volume/mix decreased 3.1 percentage points, primarily
driven by gains from innovation in Lunchables and P3 as
well as macaroni & cheese that were more than offset by lower shipments
versus the prior year, particularly in foodservice, bacon and cold cuts.

United States Segment Adjusted EBITDA increased 25.7 percent versus the
year-ago period to $1.5 billion. Gains from cost savings initiatives and
favorable pricing net of key commodity costs were partially offset by
volume/mix declines in meats and foodservice.

Canada

  For the Three Months Ended   Year-over-year Change
July 3, 2016   June 28, 2015 Actual   Currency   Divestitures   Organic
(in millions)
Pro forma net sales(2) $ 638   $ 664 (3.9 )% (5.1 ) pp 1.2 %
Segment Adjusted EBITDA(2) 192 151 27.2 %
 

Canada net sales were $638 million, down 3.9 percent versus pro forma
net sales for the year-ago period due to a negative 5.1 percentage point
impact from currency. Organic Net Sales increased 1.2 percent versus the
year-ago period. Pricing increased 3.1 percentage points largely due to
significant pricing to offset higher input costs in local currency.
Volume/mix decreased 1.9 percentage points driven by a decline in cheese
due to reduced promotional activity versus the prior year, as well as
lower shipments of coffee and ready-to-drink beverages.

Canada Segment Adjusted EBITDA increased 27.2 percent versus the
year-ago period to $192 million, despite a negative 7.2 percentage point
impact from currency, as gains from cost savings initiatives and
favorable pricing net of higher input costs in local currency were
partially offset by unfavorable volume/mix.

Europe

  For the Three Months Ended   Year-over-year Change
July 3, 2016   June 28, 2015 Actual   Currency   Divestitures   Organic
(in millions)
Pro forma net sales(2,5) $ 578   $ 621 (6.9 )% (2.1 ) pp (2.5 ) pp (2.3 )%
Segment Adjusted EBITDA(2,5) 212 225 (5.8 )%
 

Europe net sales were $578 million, down 6.9 percent versus pro forma
net sales for the year-ago period, primarily due to a negative 2.5
percentage point impact from divestitures and a negative 2.1 percentage
point impact from currency. Organic Net Sales decreased 2.3 percent
versus the year-ago period. Pricing decreased 2.4 percentage points
primarily due to an increased level of promotional activity in UK
condiments and sauces versus the prior year period. Positive volume/mix
of 0.1 percentage points reflected gains from condiments and sauces in
most countries offset by lower shipments in the UK across most
categories versus the prior year.

Europe Segment Adjusted EBITDA decreased 5.8 percent versus the year-ago
period to $212 million, reflecting manufacturing savings that were more
than offset by a combination of lower pricing, a negative 3.1 percentage
point impact from currency and increased marketing investments.

Rest of World(6)

  For the Three Months Ended   Year-over-year Change
July 3, 2016   June 28, 2015 Actual   Currency   Divestitures   Organic
(in millions)
Pro forma net sales(2,5) $ 885   $ 1,062 (16.7 )% (23.8 ) pp 7.1 %
Segment Adjusted EBITDA(2,5) 208 228 (8.8 )%
 

Rest of World net sales were $885 million, down 16.7 percent versus pro
forma net sales for the year-ago period, due to a negative 23.8
percentage point impact from currency that included a negative 17.5
percentage point impact from the devaluation of the Venezuelan bolivar.
Organic Net Sales increased 7.1 percent versus the year-ago period.
Pricing increased 5.0 percentage points, primarily driven by pricing to
offset higher input costs in local currency in Latin America. Volume/mix
increased 2.1 percentage points due to strong growth in condiments and
sauces across all regions.

Rest of World Segment Adjusted EBITDA decreased 8.8 percent versus the
year-ago period to $208 million due to a negative 34.5 percentage point
impact from currency that included a negative 27.5 percentage point
impact from the devaluation of the Venezuelan bolivar. Excluding the
impact from currency, Segment Adjusted EBITDA growth was primarily
driven by organic sales growth.

End Notes

(1)   Organic Net Sales, Adjusted EBITDA and Adjusted EPS are non-GAAP
financial measures. Please see discussion of non-GAAP financial
measures and the reconciliations at the end of this press release
for more information.
 
(2) Pro forma net sales, Adjusted EBITDA and Adjusted EPS for the three
months ended June 28, 2015 include the operating results of Kraft on
a pro forma basis, as if Kraft had been acquired as of December 30,
2013. There are no pro forma adjustments for the three months ended
July 3, 2016 as Kraft and Heinz were a combined company for the
entire period. Please see discussion of the unaudited pro forma
condensed combined financial information at the end of this press
release for more information.
 
(3) The Company’s key commodities in the United States and Canada are
dairy, meat, coffee and nuts.
 
(4) Cost savings initiatives include the Company’s integration,
restructuring and ongoing productivity efforts.
 
(5) In the first quarter of 2016, the Company moved certain of the
historical Kraft export businesses from the Company’s United States
segment to its Rest of World and Europe segments to align with its
long-term go-to-market strategies. For the three months ended June
28, 2015, this change resulted in the reclassification of $88
million of pro forma net sales from the United States segment to the
Rest of World segment ($87 million) and Europe segment ($1 million),
as well as $23 million of Segment Adjusted EBITDA from the United
States segment to the Rest of World segment.
 
(6) Rest of World is comprised of three operating segments: Asia
Pacific; Latin America; and, Russia, India, the Middle East and
Africa (“RIMEA”).
 

Webcast and Conference Call Information

A webcast of The Kraft Heinz Company’s second quarter 2016 earnings
conference call will be available at ir.kraftheinzcompany.com.
The call begins today at 4:30 p.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
, ClassicoJell-OKool-Aid, Lunchables, Maxwell
House, Ore-Ida, Oscar Mayer, Philadelphia, Planters, Plasmon
, Quero,
Weight Watchers
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.

Forward-Looking Statements

This press release contains a number of forward-looking statements.
Words such as “remain,” “expect,” “implement,” “continue,” “sustain,”
“believe,” “will,” and variations of such words and similar 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, investments, execution, growth and
integration. 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, increased
competition; the Company’s ability to maintain, extend and expand its
reputation and brand image; the Company’s ability to differentiate its
products from other brands; the consolidation of retail customers; 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 inability to realize the anticipated benefits
from the Company’s cost savings initiatives; changes in relationships
with significant customers and suppliers; execution of the Company’s
international expansion strategy; changes in laws and regulations; legal
claims or other regulatory enforcement actions; product recalls or
product liability claims; unanticipated business disruptions; failure to
successfully integrate the business and operations of the Company in the
expected time frame; 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
nations in which the Company operates; the volatility of capital
markets; increased pension, labor and people-related expenses;
volatility in the market value of all or a portion of the derivatives
that the Company uses; exchange rate fluctuations; disruptions in
information technology networks and systems; the Company’s inability to
protect intellectual property rights; impacts of natural events in the
locations in which the Company or its customers, suppliers or regulators
operate; the Company’s indebtedness and ability to pay such
indebtedness; tax law changes or interpretations; 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 “SEC”). 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.

Unaudited Pro Forma Condensed Combined Financial Information

The unaudited pro forma condensed combined financial information (the
“pro forma financial information”) presented in this release illustrates
the estimated effects of the merger (the “2015 Merger”) consummated on
July 2, 2015 (the “2015 Merger Date”) of Kraft Foods Group, Inc.
(“Kraft”) with and into a wholly-owned subsidiary of H.J. Heinz Holding
Corporation (“Heinz”), the related equity investments and common stock
conversion, the application of the acquisition method of accounting, and
conformance of accounting policies. The pro forma financial information
is presented as if the 2015 Merger had been consummated on December 30,
2013, the first business day of the Company’s 2014 fiscal year, and
combines the historical results of Kraft and Heinz. For additional
information on the 2015 Merger, please refer to the Company’s filings
with the SEC.

The pro forma financial information was prepared using the acquisition
method of accounting, which requires, among other things, that assets
acquired and liabilities assumed in a business combination be recognized
at their fair values as of the completion of the acquisition. The
Company utilized estimated fair values at the 2015 Merger Date to
allocate the total consideration exchanged to the net tangible and
intangible assets acquired and liabilities assumed. Such allocation was
final as of the issuance date of this report.

The historical consolidated financial statements have been adjusted in
the accompanying pro forma financial information to give effect to
unaudited pro forma events that are (1) directly attributable to the
2015 Merger, (2) factually supportable and (3) expected to have a
continuing impact on the results of operations of the combined company.

The pro forma financial information has been prepared based upon
currently available information and assumptions deemed appropriate by
management. This pro forma financial information is not necessarily
indicative of what the Company’s results of operations actually would
have been had the 2015 Merger been completed as of December 30, 2013. In
addition, the pro forma financial information is not indicative of
future results or current financial conditions and does not reflect any
additional anticipated synergies, operating efficiencies, cost savings
or any integration costs that may result from the 2015 Merger.

This pro forma financial information should be read in conjunction with
historical financial statements and accompanying notes filed with the
SEC. Certain reclassifications have been made to the historical Kraft
and Heinz results to align accounting policies and eliminate
intercompany sales in all periods presented.

Non-GAAP Financial Measures

To supplement the financial information, the Company has presented
Organic Net Sales, 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,
financial measures 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, operating income, 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 core 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 acquisitions, currency, 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 following the Company’s June 28,
2015 currency devaluation, for which the Company calculates the previous
year’s results using the current year’s exchange rate. Organic Net Sales
for any period prior to the 2015 Merger Date includes the operating
results of Kraft on a pro forma basis, as if Kraft had been acquired as
of December 30, 2013. Organic Net Sales is a tool intended to assist
management 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 core 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; in addition to these
adjustments, we exclude, when they occur, the impacts of depreciation
and amortization (excluding integration and restructuring expenses)
(including amortization of postretirement benefit plans prior service
credits), integration and restructuring expenses, merger costs,
unrealized losses/(gains) on commodity hedges, impairment losses,
losses/(gains) on the sale of a business, nonmonetary currency
devaluation, and equity award compensation expense (excluding
integration and restructuring expenses). Adjusted EBITDA for any period
prior to the 2015 Merger Date includes the operating results of Kraft on
a pro forma basis, as if Kraft had been acquired as of December 30,
2013. 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 following the Company’s June 28, 2015
devaluation of the Venezuelan bolivar and remeasurement of assets and
liabilities of its Venezuelan subsidiary, for which it calculates the
previous year’s results using the current year’s exchange rate. Adjusted
EBITDA is a tool intended to assist management 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 core operations.

Adjusted EPS is defined as diluted earnings per share excluding, when
they occur, the impacts of integration and restructuring expenses,
merger costs, unrealized losses/(gains) on commodity hedges, impairment
losses, losses/(gains) on the sale of a business, and nonmonetary
currency devaluation, and including when they occur, adjustments to
reflect preferred stock dividend payments on an accrual basis. Adjusted
EPS for any period prior to the 2015 Merger Date includes the operating
results of Kraft on a pro forma basis, as if Kraft had been acquired as
of December 30, 2013. Management uses Adjusted EPS 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 for the relevant periods.

Schedule 1

The Kraft Heinz Company
Condensed Consolidated Statements of
Income
(in millions, except per share data)
(Unaudited)

 
 

For the Three Months
Ended

 

For the Six Months
Ended

July 3,
2016

 

June 28,
2015*

July 3,
2016

 

June 28,
2015*

Net sales $ 6,793 $ 2,616 $ 13,363 $ 5,094
Cost of products sold 4,262   1,734   8,454   3,365  
Gross profit 2,531 882 4,909 1,729
Selling, general and administrative expenses 895   438   1,760   776  
Operating income 1,636 444 3,149 953
Interest expense 264 394 513 595
Other expense/(income), net 6   245   (2 ) 206  
Income/(loss) before income taxes 1,366 (195 ) 2,638 152
Provision for/(benefit from) income taxes 411   (35 ) 783   33  
Net income/(loss) 955 (160 ) 1,855 119
Net income/(loss) attributable to noncontrolling interest 5   4   9   7  
Net income/(loss) attributable to Kraft Heinz 950 (164 ) 1,846 112
Preferred dividends(a) 180   180   180   360  
Net income/(loss) attributable to common shareholders $ 770   $ (344 ) $ 1,666   $ (248 )
 
Basic shares outstanding 1,217 380 1,216 379
Diluted shares outstanding 1,227 380 1,226 379
 
Per share data applicable to common shareholders:
Basic earnings/(loss) per share $ 0.63 $ (0.91 ) $ 1.37 $ (0.66 )
Diluted earnings/(loss) per share 0.63 (0.91 ) 1.36 (0.66 )
 
*The consolidated statements of income for the three and six months
ended June 28, 2015 reflect the results of Heinz only, as the 2015
Merger of Kraft and Heinz occurred on July 2, 2015.
 
(a) In connection with the December 8, 2015 Common Stock
dividend declaration, the Company was required to accelerate payment
of the Series A Preferred Stock dividend from March 7, 2016 to
December 8, 2015. Accordingly, there were no cash distributions
related to our Series A Preferred Stock in the first quarter of
2016, resulting in cash distributions of $180 million in the six
months ended July 3, 2016 compared to $360 million in the six months
ended June 28, 2015.
 

Schedule 2

The Kraft Heinz Company
Pro Forma Condensed Combined Statements
of Income
(in millions, except per share data)
(Unaudited)
 
 

For the Three Months
Ended

 

For the Six Months
Ended

July 3,
2016*

 

June 28,
2015

July 3,
2016*

 

June 28,
2015

Net sales $ 6,793 $ 7,130 $ 13,363 $ 13,960
Cost of products sold(a) 4,262   4,709   8,454   9,265
Gross profit 2,531 2,421 4,909 4,695
Selling, general and administrative expenses(b) 895   1,107   1,760   2,099
Operating income 1,636 1,314 3,149 2,596
Interest expense 264 497 513 802
Other expense/(income), net 6   246   (2 ) 190
Income/(loss) before income taxes 1,366 571 2,638 1,604
Provision for/(benefit from) income taxes 411   201   783   493
Net income/(loss) 955 370 1,855 1,111
Net income/(loss) attributable to noncontrolling interest 5   4   9   7
Net income/(loss) attributable to Kraft Heinz 950 366 1,846 1,104
Preferred dividends(c) 180   180   180   360
Net income/(loss) attributable to common shareholders $ 770   $ 186   $ 1,666   $ 744
 
Basic common shares outstanding 1,217 1,194 1,216 1,190
Diluted common shares outstanding 1,227 1,224 1,226 1,221
 
Per share data applicable to common shareholders:
Basic earnings per share $ 0.63 $ 0.16 $ 1.37 $ 0.63
Diluted earnings per share 0.63 0.15 1.36 0.61
 

Contacts

The Kraft Heinz Company
Michael Mullen (media)
Michael.Mullen@kraftheinzcompany.com
or
Christopher
Jakubik, CFA (investors)
ir@kraftheinzcompany.com

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