The Kraft Heinz Company Reports Second Quarter 2015 Results for Kraft Foods Group, Inc. and H.J. Heinz Holding Corporation
"The company is focused on the difficult and challenging process of
integrating our two businesses," said
The company remains confident in its ability to deliver against its
initial financial expectations for the merger of Kraft and Heinz,
including its expectation to generate aggressive, run-rate cost savings
of
Kraft Q2 2015 Results
- Kraft Q2 net revenues decreased 4.9% and Kraft Organic Net Revenues1 decreased 3.3%
-
Kraft Q2 diluted EPS of
$0.92 included higher spending on cost savings initiatives and costs related to the merger with Heinz that were partly offset by gains on an asset sale and unrealized gains from hedging activities
Three Months Ended | Year-over-year Change | ||||||||||||||||||||||||
($ in millions, ex. per share data) |
|
|
Actual | FX | Other |
Organic |
|||||||||||||||||||
Net Revenues | $ | 4,515 | $ | 4,747 | (4.9 | %) | (1.4 | %) | (0.2 | %) | (3.3 | %) | |||||||||||||
Operating Income | $ | 923 | $ | 874 | 5.6 | % | |||||||||||||||||||
Diluted EPS | $ | 0.92 | $ | 0.80 | 15.0 | % | |||||||||||||||||||
Kraft's net revenues decreased 4.9 percent including a negative 1.4 percent impact from currency. Kraft Organic Net Revenues decreased 3.3 percent driven by a 2.6 percent decline from volume/mix and a 0.7 percent decline from lower net pricing. Volume/mix included an approximate one percentage point negative impact from the timing of Easter-related shipments and an approximate one percentage point negative impact from lower ready-to-drink beverage sales resulting from decreased promotional activity versus the prior year quarter as well as retail inventory shifts this year. Lower net pricing reflected pricing actions in the Cheese and Foodservice businesses related to lower dairy costs that were partially offset by the carryover impact of price increases taken in prior quarters.
Operating income of
Excluding the impact of these factors in both years, operating income grew at a mid-single-digit rate and EPS grew at a double-digit rate. This growth was primarily driven by a combination of favorable commodity costs (mainly in the dairy and meat categories) net of pricing; lower selling, general and administrative ("SG&A") expenses driven by reductions in less effective advertising spending; and lower manufacturing costs driven by net productivity. EPS growth was further enhanced by a lower effective tax rate and lower net interest expense versus the prior year quarter.
Free Cash Flow2 through the first six months of 2015 was
Further discussion of Kraft's second quarter results can be found in
Kraft Heinz's Form 8-K filed with the
Heinz Q2 2015 Results
- Heinz net sales decreased 4.1%; Heinz Organic Net Sales3 grew 5.9%, driven by higher pricing across all segments and comparisons with SAP implementation in the prior year
- Organic Adjusted EBITDA4 grew 16.3% driven by increased sales and lower SG&A
Three Months Ended | Year-over-year Change | ||||||||||||||||||||||||
($ in millions) |
|
|
Actual | FX | Disposals | Organic | |||||||||||||||||||
Net Sales | $ | 2,616 | $ | 2,729 | (4.1 | %) | (9.4 | %) | (0.6 | %) | 5.9 | % | |||||||||||||
Adjusted EBITDA | $ | 739 | $ | 693 | 6.7 | % | (9.1 | %) | (0.5 | %) | 16.3 | % | |||||||||||||
Heinz's sales declined 4.1 percent due to a negative 9.4 percent impact
from foreign exchange translation and a 0.6 percent reduction from the
divestiture of a frozen food business in the
Net pricing increased by 4.2 percent driven by higher pricing across all
segments, primarily due to
Adjusted EBITDA increased
Further discussion of Heinz's second quarter results can be found in
Kraft Heinz's Form 10-Q filed with the
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Conference
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1 Kraft Organic Net Revenues is a non-GAAP financial measure
and differs from Heinz Organic Net Sales presented in this release.
Please see the discussion of non-GAAP measures and the reconciliation to
GAAP at the end of this press release.
2 Kraft Free Cash
Flow is a non-GAAP financial measure. Please see the discussion of
non-GAAP measures and the reconciliation to GAAP at the end of this
press release.
3 Heinz Organic Net Sales is a non-GAAP
financial measure and differs from Kraft Organic Net Revenues presented
in this release. Please see the discussion of non-GAAP measures and the
reconciliation to GAAP at the end of this press release.
4
Heinz Adjusted EBITDA and Organic Adjusted EBITDA are non-GAAP financial
measures. Please see the discussion of non-GAAP measures and the
reconciliation to GAAP at the end of this press release.
ABOUT
Forward-Looking Statements
This press release contains a number of forward-looking statements. Words such as "expect," "focus," "continue," "integrate," "deliver," "generate," "remain," "will," and variations of such words and similar expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding Kraft Heinz's performance, financial expectations, and cost savings. 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 Kraft Heinz's control.
Important factors that affect Kraft Heinz'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; Kraft Heinz's ability to maintain, extend and expand its
reputation and brand image; Kraft Heinz's ability to differentiate its
products from other brands; the consolidation of retail customers;
changes in relationships with significant customers and suppliers; Kraft
Heinz's ability to predict, identify and interpret changes in consumer
preferences and demand; Kraft Heinz'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 Kraft Heinz's management team or other key
personnel; execution of its 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 businesses
of Kraft and Heinz and achieve the anticipated cost savings and other
benefits; Kraft Heinz's ability to complete or realize the benefits from
potential acquisitions, alliances, divestitures or joint ventures;
economic and political conditions in the nations in which
Non-GAAP Measures
To supplement the financial statements presented in accordance with
generally accepted accounting principles in
The company currently defines Kraft Organic Net Revenues as net revenues excluding the impact of transactions with Mondelēz International, acquisitions, divestitures (including the termination of a full line of business due to the loss of a licensing or distribution arrangement, and the complete exit of business out of a foreign country), currency and the 53rd week of shipments when it occurs. The company currently defines Heinz Organic Net Sales as total sales growth/(decline) excluding the impact of foreign exchange and acquisitions and divestitures.
Management believes that presenting Kraft Organic Net Revenues and Heinz Organic Net Sales are useful to investors because they (i) provide investors with meaningful supplemental information regarding financial performance by excluding certain items, (ii) permit investors to view performance using the same tools that the respective management teams used to budget, make operating and strategic decisions, and evaluate historical performance, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating these results.
Free Cash Flow for Kraft is defined as cash flow from operations less capital expenditures. Free Cash Flow has historically been a tool for Kraft's management to evaluate cash available for uses including investments in growth and product development and Kraft's ability to generate cash while maintaining its fixed assets.
The company also presents EBITDA, Adjusted EBITDA, and Organic Adjusted EBITDA for Heinz. In this presentation, EBITDA is defined as net income/(loss) from continuing operations before net interest expense, provision for/(benefit from) income tax, depreciation (including accelerated depreciation for restructuring) and amortization. In this presentation, Adjusted EBITDA excludes the impact of share-based compensation and non-cash compensation expense, other operating (income) expenses, net, and all other specifically identified costs associated with projects, transaction costs, restructuring and related professional fees. Adjusted EBITDA has historically been a tool intended to assist Heinz's management in comparing Heinz'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 Heinz's core operations. In this presentation, Organic Adjusted EBITDA growth/(decline) excludes the impact of foreign exchange and acquisitions and divestitures. This measure can provide investors with a more complete understanding of underlying Adjusted EBITDA trends. The definitions of EBITDA, Adjusted EBITDA, and Organic Adjusted EBITDA may not be comparable to similarly titled measures used by other companies.
See the attached schedules for supplemental financial data and corresponding reconciliations of Kraft Organic Net Revenues, Heinz Organic Net Sales, Kraft Free Cash Flow, and Heinz Adjusted EBITDA for the relevant periods.
Schedule 1 |
||||||||||||||||
Kraft | ||||||||||||||||
Condensed Consolidated Statements of Earnings |
||||||||||||||||
For the Three Months Ended |
||||||||||||||||
(in millions of dollars, except per share data) (Unaudited) | ||||||||||||||||
|
|
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Net revenues | $ | 4,515 | $ | 4,747 | ||||||||||||
Cost of sales1 | 2,972 | 3,226 | ||||||||||||||
Gross profit | 1,543 | 1,521 | ||||||||||||||
Selling, general and administrative expenses1 |
620 | 647 | ||||||||||||||
Operating income | 923 | 874 | ||||||||||||||
Interest and other expense, net | 124 | 133 | ||||||||||||||
Earnings before income taxes | 799 | 741 | ||||||||||||||
Provision for income taxes | 248 | 259 | ||||||||||||||
Effective tax rate | 31.0 | % | 35.0 | % | ||||||||||||
Net earnings | $ | 551 | $ | 482 | ||||||||||||
Per share data: | ||||||||||||||||
Basic earnings per share | $ | 0.93 | $ | 0.81 | ||||||||||||
Diluted earnings per share | $ | 0.92 | $ | 0.80 | ||||||||||||
Weighted average shares of common stock outstanding: | ||||||||||||||||
Basic | 592 | 595 | ||||||||||||||
Diluted | 597 | 600 | ||||||||||||||
1 |
In the second quarter of 2015, Kraft recorded expenses of |
|
Schedule 2 |
|||||||||||||||
Kraft | |||||||||||||||
Reconciliation of GAAP to Non-GAAP Information | |||||||||||||||
Free Cash Flow |
|||||||||||||||
For the Six Months Ended |
|||||||||||||||
(in millions of dollars) (Unaudited) | |||||||||||||||
|
|
||||||||||||||
Net earnings | $ | 980 | $ | 995 | |||||||||||
Depreciation and amortization | 188 | 191 | |||||||||||||
Receivables, net | (142 | ) | (151 | ) | |||||||||||
Inventories | (8 | ) | (349 | ) | |||||||||||
Accounts payable | (90 | ) | 44 | ||||||||||||
Other | 130 | (90 | ) | ||||||||||||
Operating cash flow | 1,058 | 640 | |||||||||||||
Capital expenditures | (256 | ) | (186 | ) | |||||||||||
Free cash flow | $ | 802 | $ | 454 | |||||||||||
Schedule 3 |
||||||||||||||||
Heinz | ||||||||||||||||
Condensed Consolidated Statements of Income | ||||||||||||||||
For the Three Months Ended |
||||||||||||||||
(in millions of dollars) (Unaudited) | ||||||||||||||||
|
|
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Sales | $ | 2,616 | $ | 2,729 | ||||||||||||
Cost of products sold | 1,665 | 1,844 | ||||||||||||||
Gross profit | 951 | 885 | ||||||||||||||
Selling, general and administrative expenses | 473 | 511 | ||||||||||||||
Merger related costs | 34 | ‒ | ||||||||||||||
Operating income | 444 | 374 | ||||||||||||||
Interest income | 10 | 6 | ||||||||||||||
Interest expense1 |
394 | 168 | ||||||||||||||
Other expense, net2 |
(255 | ) | (43 | ) | ||||||||||||
(Loss)/income before income taxes | (195 | ) | 169 | |||||||||||||
(Benefit from)/provision for income taxes | (35 | ) | 34 | |||||||||||||
Net (loss)/income | (160 | ) | 135 | |||||||||||||
Less: Net income attributable to the noncontrolling interest | 4 | 8 | ||||||||||||||
Net (loss)/income attributable to Heinz | $ | (164 | ) | $ | 127 | |||||||||||
Net (loss)/income attributable to Heinz | $ | (164 | ) | $ | 127 | |||||||||||
Less: Preferred dividends | 180 | 180 | ||||||||||||||
Net loss attributable to common shareholders | $ | (344 | ) | $ | (53 | ) | ||||||||||
Basic and diluted loss per common share: | ||||||||||||||||
Net loss attributable to common shareholders | $ | (0.91 | ) | $ | (0.14 | ) | ||||||||||
Average common shares outstanding - basic and diluted | 380 | 377 | ||||||||||||||
1 |
On |
|
2 |
Includes a |
|
Schedule 4 |
|||||||||||||||
Heinz |
|||||||||||||||
Reconciliation of GAAP to Non-GAAP Information | |||||||||||||||
Adjusted EBITDA | |||||||||||||||
For the Three Months Ended | |||||||||||||||
(in millions of dollars) (Unaudited) | |||||||||||||||
|
|
||||||||||||||
Net (loss)/income | $ | (160 | ) | $ | 135 | ||||||||||
Interest expense, net | 384 | 161 | |||||||||||||
(Benefit from)/provision for income taxes | (35 | ) | 34 | ||||||||||||
Depreciation, including accelerated depreciation for restructuring1 |
66 | 137 | |||||||||||||
Amortization | 23 | 26 | |||||||||||||
EBITDA | $ | 278 | $ | 493 | |||||||||||
Restructuring: | |||||||||||||||
Severance related costs | 8 | 30 | |||||||||||||
Other restructuring costs2 |
2 | 25 | |||||||||||||
Asset write-offs | 25 | 3 | |||||||||||||
Other special items3 | 27 | 37 | |||||||||||||
|
49 | ‒ | |||||||||||||
Merger related costs4 | 34 | ‒ | |||||||||||||
Stock based compensation | 3 | 1 | |||||||||||||
Other expense, net5 | 255 | 42 | |||||||||||||
Impairment loss on indefinite-lived trademarks | 58 | 62 | |||||||||||||
Adjusted EBITDA | $ | 739 | $ | 693 | |||||||||||
1 |
Depreciation declined in Q2 2015 primarily due to accelerated depreciation related to factory closures recognized in the prior year. | |
2 |
Other restructuring costs primarily represent professional fees as well as contract and lease termination costs. | |
3 |
Includes project implementation costs and charges that Heinz
management believes do not directly reflect Heinz's core operations.
The quarter ended |
|
4 |
Represents legal and professional fees associated with the merger with Kraft. | |
5 |
Q2 2015 includes a |
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