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

Category:

Thursday, August 4, 2016 4:02 pm EDT

Dateline:

PITTSBURGH & CHICAGO

Public Company Information:

NASDAQ:
KHC

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
 
*There are no pro forma adjustments in the three and six months ended July 3, 2016 as Kraft and Heinz were a combined company for the entire period. Refer to Schedules 10 and 11 for additional information on the pro forma adjustments for the three and six months ended June 28, 2015.
 
(a) Integration and restructuring expenses in cost of products sold were as follows: $199 million in the three months ended July 3, 2016 ($137 million after-tax), $74 million in the three months ended June 28, 2015 ($52 million after-tax), $380 million in the six months ended July 3, 2016 ($259 million after-tax), and $140 million in the six months ended June 28, 2015 ($99 million after-tax).
 
(b) Integration and restructuring expenses in selling, general and administrative expenses were as follows: $85 million in the three months ended July 3, 2016 ($59 million after-tax), $44 million in the three months ended June 28, 2015 ($31 million after-tax), $164 million in the six months ended July 3, 2016 ($112 million after-tax), and $59 million in the six months ended June 28, 2015 ($42 million after-tax).
 
(c) 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 3

The Kraft Heinz Company
Reconciliation of Pro Forma Net Sales to Organic Net Sales
For the Three Months Ended
(dollars in millions)
(Unaudited)
 
 

Pro Forma

Net Sales

 

Impact of
Currency

 

Impact of
Divestitures

 

Organic Net
Sales

  Price   Volume/Mix
July 3, 2016*
United States $ 4,692 $ $ $ 4,692
Canada 638 (34 )

 

672
Europe 578 (13 )

 

591
Rest of World 885   (54 )

 

  939  
$ 6,793   $ (101 ) $   $ 6,894  
 
June 28, 2015
United States(a) $ 4,783 $ $ $ 4,783
Canada 664

 

664
Europe(a) 621

 

16

605
Rest of World(a) 1,062   185  

 

  877  
$ 7,130   $ 185   $ 16   $ 6,929  
Year-over-year growth rates
United States(a) (1.9 )% (1.9 )% 1.2 pp (3.1) pp
Canada (3.9 )%

(5.1

) pp

1.2

 %

3.1 pp (1.9) pp
Europe(a) (6.9 )%

(2.1

) pp

(2.5

) pp

(2.3 )% (2.4) pp 0.1 pp
Rest of World(a)   (16.7 )%  

(23.8

) pp

    7.1

 %

5.0 pp 2.1 pp
  (4.7 )%  

(4.0

) pp

 

(0.2

) pp

(0.5 )% 1.6 pp (2.1) pp
 
*There are no pro forma adjustments in the three months ended July 3, 2016 as Kraft and Heinz were a combined company for the entire period.
 
(a) 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. This change resulted in the reclassification of $88 million of pro forma net sales for the three months ended June 28, 2015 from the United States segment to the Rest of World segment ($87 million) and Europe segment ($1 million).
 

Schedule 4

The Kraft Heinz Company
Reconciliation of Pro Forma Net Sales to Organic Net Sales
For the Six Months Ended
(dollars in millions)
(Unaudited)
 
 

Pro Forma
Net Sales

 

Impact of
Currency

 

Impact of
Divestitures

 

Organic Net
Sales

  Price   Volume/Mix
 
July 3, 2016*
United States $ 9,407 $ $ $ 9,407
Canada 1,142 (89 ) 1,231
Europe 1,131 (37 ) 1,168
Rest of World 1,683   (125 )   1,808  
$ 13,363   $ (251 ) $   $ 13,614  
 
June 28, 2015
United States(a) $ 9,490 $ $ $ 9,490
Canada 1,215 1,215
Europe(a,b) 1,247 43 1,204
Rest of World(a) 2,008   344     1,664  
$ 13,960   $ 344   $ 43   $ 13,573  
Year-over-year growth rates
United States(a) (0.9 )% (0.9 )% 0.6 pp (1.5) pp
Canada (6.0 )%

(7.3

) pp

1.3

 %

3.4 pp (2.1) pp
Europe(a,b) (9.3 )%

(3.0

) pp

(3.3

) pp

(3.0 )% (3.4) pp 0.4 pp
Rest of World(a)   (16.2 )%  

(24.9

) pp

    8.7

 %

4.3 pp 4.4 pp
  (4.3 )%  

(4.3

) pp

 

(0.3

) pp

0.3

 %

1.0 pp (0.7) pp
 
*There are no pro forma adjustments in the six months ended July 3, 2016 as Kraft and Heinz were a combined company for the entire period.
 
(a) 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. This change resulted in the reclassification of $171 million of pro forma net sales for the six months ended June 28, 2015 from the United States segment to the Rest of World segment ($170 million) and Europe segment ($1 million).
 
(b) The Company increased Europe Organic Net Sales by $2 million from the amount previously published for the six months ended June 28, 2015 to reflect a correction to the Impact of Divestitures.
 

Schedule 5

The Kraft Heinz Company
Reconciliation of Pro Forma Net Income to Adjusted EBITDA
(in millions)
(Unaudited)
 
 

For the Three Months
Ended

 

For the Six Months
Ended

July 3,
2016*

 

June 28,
2015

July 3,
2016*

 

June 28,
2015

Pro forma net income/(loss) $ 955 $ 370 $ 1,855 $ 1,111
Interest expense 264 497 513 802
Other expense/(income), net 6 246 (2 ) 190
Provision for/(benefit from) income taxes 411   201   783   493  
Operating income 1,636

1,314

3,149 2,596
Depreciation and amortization (excluding integration and restructuring expenses) 124 210 285 426
Integration and restructuring expenses 284 118 544 199
Merger costs 14 41 29 54
Unrealized losses/(gains) on commodity hedges (37 ) (21 ) (45 ) (23 )
Impairment losses 53 58 53 58
Losses/(gains) on sale of business (21 ) (21 )
Nonmonetary currency devaluation 2 49 3 49
Equity award compensation expense (excluding integration and restructuring expenses) 11   25   20   44  
Adjusted EBITDA $ 2,087   $ 1,773   $ 4,038   $ 3,382  
 
Segment Adjusted EBITDA:
United States(a) $ 1,518 $ 1,208 $ 3,011 $ 2,331
Canada 192 151 343 264
Europe(a) 212 225 389 439
Rest of World(a) 208 228 375 418
General corporate expenses (43 ) (39 ) (80 ) (70 )
Adjusted EBITDA $ 2,087   $ 1,773   $ 4,038   $ 3,382  
 
*There are no pro forma adjustments in the three and six months ended July 3, 2016 as Kraft and Heinz were a combined company for the entire period.
 
(a) In the first quarter of 2016, the Company moved certain 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 $23 million of Segment Adjusted EBITDA from the United States segment to the Rest of World segment. For the six months ended June 28, 2015, this change resulted in the reclassification of $45 million of Segment Adjusted EBITDA from the United States segment to the Rest of World segment.
 

Schedule 6

The Kraft Heinz Company
Reconciliation of Adjusted EBITDA to Constant Currency Adjusted EBITDA
For the Three Months Ended
(dollars in millions)
(Unaudited)
 
  Adjusted EBITDA   Impact of Currency  

Constant Currency
Adjusted EBITDA

July 3, 2016*

United States $ 1,518 $ $ 1,518
Canada 192 (11 ) 203
Europe 212 (7 ) 219
Rest of World 208 (12 ) 220
General corporate expenses (43 )   (43 )
$ 2,087   $ (30 ) $ 2,117  
 

June 28, 2015

United States(a) $ 1,208 $ $ 1,208
Canada 151 151
Europe(a) 225 225
Rest of World(a) 228 53 175
General corporate expenses (39 )   (39 )
$ 1,773   $ 53   $ 1,720  

Year-over-year growth rates

United States(a) 25.7

 %

25.7

 %

Canada 27.2

 %

(7.2

) pp

34.4

 %

Europe(a) (5.8 )%

(3.1

) pp

(2.7 )%
Rest of World(a) (8.8 )%

(34.5

) pp

25.7

 %

General corporate expenses 10.3

 %

  10.3

 %

17.7

 %

(5.4

) pp

23.1

 %

 
*There are no pro forma adjustments in the three months ended July 3, 2016 as Kraft and Heinz were a combined company for the entire period.
 
(a) In the first quarter of 2016, the Company moved certain 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 $23 million of Segment Adjusted EBITDA from the United States segment to the Rest of World segment.
 

Schedule 7

The Kraft Heinz Company
Reconciliation of Adjusted EBITDA to Constant Currency Adjusted EBITDA
For the Six Months Ended
(dollars in millions)
(Unaudited)
 
  Adjusted EBITDA   Impact of Currency  

Constant Currency
Adjusted EBITDA

July 3, 2016*

United States $ 3,011 $ $ 3,011
Canada 343 (27 ) 370
Europe 389 (15 ) 404
Rest of World 375 (24 ) 399
General corporate expenses (80 )   (80 )
$ 4,038   $ (66 ) $ 4,104  
 

June 28, 2015

United States(a) $ 2,331 $ $ 2,331
Canada 264 264
Europe(a) 439 439
Rest of World(a) 418 101 317
General corporate expenses (70 )   (70 )
$ 3,382   $ 101   $ 3,281  

Year-over-year growth rates

United States(a) 29.2

 %

29.2

 %

Canada 29.9

 %

(10.3 ) pp 40.2

 %

Europe(a) (11.4 )% (3.4 ) pp (8.0 )%
Rest of World(a) (10.3 )% (36.2 ) pp 25.9

 %

General corporate expenses 14.3

 %

  14.3

 %

19.4

 %

(5.7 ) pp 25.1

 %

 
*There are no pro forma adjustments in the six months ended July 3, 2016 as Kraft and Heinz were a combined company for the entire period.
 
(a) In the first quarter of 2016, the Company moved certain 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 six months ended June 28, 2015, this change resulted in the reclassification of $45 million of Segment Adjusted EBITDA from the United States segment to the Rest of World segment.
 

Schedule 8

The Kraft Heinz Company
Reconciliation of Pro Forma Diluted EPS to Adjusted EPS
(Unaudited)
 
 

For the Three Months
Ended

 

For the Six Months
Ended

July 3,
2016*

 

June 28,
2015

July 3,
2016*

 

June 28,
2015

Pro forma diluted EPS $ 0.63 $ 0.15 $ 1.36 $ 0.61
Integration and restructuring expenses(a) 0.16 0.07 0.30 0.12
Merger costs(b) 0.01 0.15 0.02 0.17
Unrealized losses/(gains) on commodity hedges(a) (0.02 ) (0.01 ) (0.03 ) (0.01 )
Impairment losses(a) 0.03 0.03 0.03 0.03
Losses/(gains) on sale of business(a) (0.01 ) (0.01 )
Nonmonetary currency devaluation(c) 0.23 0.01 0.23
Preferred dividend adjustment(d) 0.04     (0.11 )  
Adjusted EPS $ 0.85   $ 0.61   $ 1.58   $ 1.14  
 
*There are no pro forma adjustments in the three and six months ended July 3, 2016 as Kraft and Heinz were a combined company for the entire period.
(a) Refer to the reconciliation of pro forma net income to Adjusted EBITDA for the related gross expenses.
(b) Merger costs include the following gross expenses:
     

Expenses recorded in cost of products sold of $1 million for the three and six months ended July 3, 2016;

Expenses recorded in selling, general and administrative expenses of $13 million for the three months and $28 million for the six months ended July 3, 2016 and $41 million for the three months and $54 million for the six months ended June 28, 2015;

Expenses recorded in interest expense of $227 million for the three months and $259 million for the six months ended June 28, 2015; and,

Expenses recorded in other expense/(income), net of $26 million for the three and six months ended June 28, 2015.
 

(c)

Nonmonetary currency devaluation includes the following gross expenses:

     

Expenses recorded in cost of products sold of $2 million for the three months and $3 million for the six months ended July 3, 2016 and $49 million for the three and six months ended June 28, 2015; and,

Expenses recorded in other expense/(income), net of $7 million for the three and six months ended July 3, 2016 and $234 million for the three and six months ended June 28, 2015.
 
(d) For Adjusted EPS, we present the impact of the Series A Preferred Stock dividend payments on an accrual basis. Accordingly, we include adjustments to EPS to include $180 million of Series A Preferred Stock dividends during the first quarter of 2016 (to reflect the March 7, 2016 Series A Preferred Stock dividend that was paid in December 2015) and to exclude $51 million of Series A Preferred Stock dividends during the three months ended July 3, 2016 (to reflect that it was redeemed on June 7, 2016).
 

Schedule 9

The Kraft Heinz Company
Condensed Consolidated Balance Sheets
(in millions)
(Unaudited)

 
  July 3, 2016   January 3, 2016
ASSETS
Cash and cash equivalents $ 4,237 $ 4,837
Trade receivables 1,114 871
Sold receivables 146 583
Inventories 2,881 2,618
Other current assets 969   871  
Total current assets 9,347 9,780
Property, plant and equipment, net 6,423 6,524
Goodwill 44,641 43,051
Intangible assets, net 59,762 62,120
Other assets 1,511   1,498  
TOTAL ASSETS $ 121,684   $ 122,973  
 
LIABILITIES AND EQUITY
Commercial paper and other short-term debt $ 645 $ 4
Current portion of long-term debt 2,106 79
Trade payables 2,960 2,844
Accrued marketing 867 856
Accrued postemployment costs 164 328
Income taxes payable 368 417
Interest payable 393 401
Dividends payable 827 762
Other current liabilities 1,263   1,241  
Total current liabilities 9,593 6,932
Long-term debt 30,002 25,151
Deferred income taxes 20,900 21,497
Accrued postemployment costs 2,341 2,405
Other liabilities 801   752  
TOTAL LIABILITIES 63,637 56,737
 
Redeemable noncontrolling interest 23
9.00% Series A cumulative compounding redeemable preferred stock 8,320
 
Equity:
Common stock, $.01 par value 12 12
Additional paid-in capital 58,525 58,375
Retained earnings/(deficit) 263
Accumulated other comprehensive income/(losses) (933 ) (671 )
Treasury stock, at cost (41 ) (31 )
Total shareholders' equity 57,826 57,685
Noncontrolling interest 221   208  
TOTAL EQUITY 58,047   57,893  
TOTAL LIABILITIES AND EQUITY $ 121,684   $ 122,973  
 

Schedule 10

The Kraft Heinz Company
Pro Forma Condensed Combined Statement of Income
For the Three Months Ended June 28, 2015
(in millions, except per share data)
(Unaudited)
 
 

Historical
Heinz

 

Historical
Kraft

 

Pro Forma
Adjustments

    Pro Forma
Net sales $ 2,616 $ 4,514 $ $ 7,130
Cost of products sold 1,734   2,945   30   (a) 4,709
Gross profit 882 1,569 (30 ) 2,421
Selling, general and administrative expenses 438   646   23   (b) 1,107
Operating income 444 923 (53 ) 1,314
Interest expense 394 123 (20 ) (c) 497
Other expense/(income), net 245   1     246
Income/(loss) before income taxes (195 ) 799 (33 ) 571
Provision for/(benefit from) income taxes (35 ) 248   (12 ) (d) 201
Net income/(loss) (160 ) 551 (21 ) 370
Net income/(loss) attributable to noncontrolling interest 4       4
Net income/(loss) attributable to Kraft Heinz (164 ) 551 (21 ) 366
Preferred dividends 180       180
Net income/(loss) attributable to common shareholders $ (344 ) $ 551   $ (21 ) $ 186
 
Basic common shares outstanding 1,194
Diluted common shares outstanding 1,224
 
Per share data applicable to common shareholders:
Basic earnings per share $ 0.16
Diluted earnings per share 0.15
 
(a) Represents the change to align Kraft to Kraft Heinz's accounting policy for postemployment benefit plans.
 
(b) Reflects 2015 Merger-related adjustments including the change to align Kraft to Kraft Heinz's accounting policy for postemployment benefit plans; incremental amortization resulting from the fair value adjustment of Kraft's definite-lived intangible assets; incremental compensation expense due to the fair value remeasurement of certain of Kraft's equity awards; and, certain deal costs related to the 2015 Merger.
 
(c) Represents the incremental change in interest expense resulting from the fair value adjustment of Kraft's long-term debt in connection with the 2015 Merger, including the elimination of the historical amortization of deferred financing fees and amortization of original issuance discount.
 
(d) Represents the income tax effect of pro forma adjustments utilizing a 38.5% weighted average statutory tax rate.
 

Schedule 11

The Kraft Heinz Company
Pro Forma Condensed Combined Statement of Income
For the Six Months Ended June 28, 2015
(in millions, except per share data)
(Unaudited)
         

Historical
Heinz

Historical
Kraft

Pro Forma
Adjustments

Pro Forma
Net sales $ 5,094 $ 8,866 $ $ 13,960
Cost of products sold 3,365   5,934   (34 ) (a) 9,265
Gross profit 1,729 2,932 34 4,695
Selling, general and administrative expenses 776   1,268   55   (b) 2,099
Operating income 953 1,664 (21 ) 2,596
Interest expense 595 247 (40 ) (c) 802
Other expense/(income), net 206   (16 )   190
Income/(loss) before income taxes 152 1,433 19 1,604
Provision for/(benefit from) income taxes 33   452   8   (d) 493
Net income/(loss) 119 981 11 1,111
Net income/(loss) attributable to noncontrolling interest 7       7
Net income/(loss) attributable to Kraft Heinz 112 981 11 1,104
Preferred dividends 360       360
Net income/(loss) attributable to common shareholders $ (248 ) $ 981   $ 11   $ 744
 
Basic common shares outstanding 1,190
Diluted common shares outstanding 1,221
 
Per share data applicable to common shareholders:
Basic earnings per share $ 0.63
Diluted earnings per share 0.61
 
(a) Represents the change to align Kraft to Kraft Heinz's accounting policy for postemployment benefit plans.
 
(b) Reflects 2015 Merger-related adjustments including the change to align Kraft to Kraft Heinz's accounting policy for postemployment benefit plans; incremental amortization resulting from the fair value adjustment of Kraft's definite-lived intangible assets; incremental compensation expense due to the fair value remeasurement of certain of Kraft's equity awards; and, certain deal costs related to the 2015 Merger.
 
(c) Represents the incremental change in interest expense resulting from the fair value adjustment of Kraft's long-term debt in connection with the 2015 Merger, including the elimination of the historical amortization of deferred financing fees and amortization of original issuance discount.
 
(d) Represents the income tax effect of pro forma adjustments utilizing a 38.5% weighted average statutory tax rate.

Contact:

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

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