Kraft Heinz Reports Fourth Quarter and Full Year 2018 Results

  • Q4 net sales increased 0.7%; Organic Net Sales(1)
    increased 2.4%
  • Q4 diluted earnings per share were $(10.34); Adjusted EPS(1)
    was $0.84

PITTSBURGH & CHICAGO–(BUSINESS WIRE)–The Kraft Heinz Company (NASDAQ: KHC) (“Kraft Heinz” or the “Company”)
today reported fourth quarter and full year 2018 financial results
reflecting solid organic net sales growth in all segments that was more
than offset by higher operating costs, as well as non-cash impairment
charges related to goodwill and intangible assets.

“Our fourth quarter and full year 2018 results reflect our commitment to
re-establish commercial growth of our iconic brands, turn around
consumption trends in several key categories, and expand into new
category and geographic whitespaces,” said Kraft Heinz CEO Bernardo
Hees. “We are pleased with those actions, the returns on our
investments, and the momentum built for 2019. However, profitability
fell short of our expectations due to a combination of unanticipated
cost inflation and lower-than-planned savings. Going forward, our global
focus will remain on leveraging our in-house capabilities, developing
our talented people, and delivering top-tier growth at industry-leading
margins.”

Q4 2018 Financial Summary

For the Three Months Ended   Year-over-year Change

December 29,
2018

 

December 30,
2017

Actual   Currency  

Acquisitions
and
Divestitures

  Organic
(in millions, except per share data)
Net sales $ 6,891 $ 6,844 0.7% (2.2) pp 0.5 pp 2.4%
Operating income/(loss) (14,073) 1,522 (1,024.2)%
Net income/(loss) attributable to common shareholders (12,608) 8,003 (257.6)%
Diluted EPS $ (10.34) $ 6.52 (258.6)%
Adjusted EBITDA(1) 1,699 1,973 (13.9)% (2.4) pp
Adjusted EPS(1) $ 0.84 $ 0.90 (6.7)%

Net sales were $6.9 billion, up 0.7 percent versus the year-ago period,
including an unfavorable 2.2 percentage point impact from currency and a
net 0.5 percentage point benefit from acquisitions and divestitures.
Organic Net Sales(1) increased 2.4 percent versus the
year-ago period. Pricing was down 1.6 percentage points, as increased
promotional activity and pricing to reflect lower key commodity(2) costs
in North America, particularly the United States, more than offset
higher pricing in EMEA and Rest of World markets. Volume/mix increased
4.0 percentage points, driven by a combination of strong consumption
gains in North America and condiments and sauces growth across Latin
America, North America, and EMEA.

During the fourth quarter, as part of the Company’s normal quarterly
reporting procedures and planning processes, the Company concluded that,
based on several factors that developed during the fourth quarter, the
fair values of certain goodwill and intangible assets were below their
carrying amounts. As a result, the Company recorded non-cash impairment
charges of $15.4 billion to lower the carrying amount of goodwill in
certain reporting units, primarily U.S. Refrigerated and Canada Retail,
and certain intangible assets, primarily the Kraft and Oscar
Mayer
trademarks. These charges resulted in a net loss
attributable to common shareholders of $12.6 billion and diluted loss
per share of $10.34.

Adjusted EBITDA decreased 13.9 percent versus the year-ago period to
$1.7 billion, including a negative 2.4 percentage point impact from
currency. Excluding the impact of currency, lower Adjusted EBITDA
reflected a decline in the United States that more than offset Constant
Currency Adjusted EBITDA(1) growth in all other business
segments. Adjusted EPS decreased 6.7 percent to $0.84, as lower Adjusted
EBITDA, higher depreciation and amortization expenses, as well as higher
interest expense more than offset lower taxes on adjusted earnings in
the current period.

Q4 2018 Business Segment Highlights

United States

For the Three Months Ended   Year-over-year Change
December 29,
2018
  December 30,
2017
Actual   Currency  

Acquisitions
and
Divestitures

  Organic
(in millions)
Net sales $ 4,810 $ 4,760 1.1% 0.0 pp 0.0 pp 1.1%
Segment Adjusted EBITDA 1,264 1,510 (16.3)% 0.0 pp

United States net sales were $4.8 billion, up 1.1 percent versus the
year-ago period. Pricing was 2.8 percentage points lower, driven by a
combination of commodity-driven pricing actions in dairy and coffee,
increased promotional activity in ready-to-drink beverages and natural
cheese, as well as timing of promotional activity versus the prior year
in Lunchables. Volume/mix increased 3.9 percentage points due to
gains across a majority of categories including nuts, meats,
refrigerated meal combinations, cream cheese, and frozen potatoes.

United States Segment Adjusted EBITDA decreased 16.3 percent versus the
year-ago period to $1.3 billion, as the benefits from favorable key
commodity costs and volume/mix growth were more than offset by a
combination of lower pricing, higher costs net of savings, and
investments to build strategic capabilities.

Canada

For the Three Months Ended   Year-over-year Change
December 29,
2018
  December 30,
2017
Actual   Currency   Acquisitions and Divestitures   Organic
(in millions)
Net sales $ 600 $ 589 1.8 % (4.2) pp 0.0 pp 6.0%
Segment Adjusted EBITDA 163 161 1.1 % (4.4) pp

Canada net sales were $600 million, increasing 1.8 percent versus the
year-ago period, despite a negative 4.2 percentage point impact from
currency. Organic Net Sales were up 6.0 percent versus the year-ago
period. Pricing declined 1.7 percentage points as increased in-store
activity behind cheese, as well as macaroni and cheese, was partially
offset by higher foodservice pricing. Volume/mix increased 7.7
percentage points, driven by a combination of consumption-led growth
across several categories, including cheese, as well as favorable
comparisons with retailer inventory de-stocking that occurred in the
prior year period.

Canada Segment Adjusted EBITDA increased 1.1 percent versus the year-ago
period to $163 million, despite a negative 4.4 percentage point impact
from currency, as volume/mix gains and lower input costs were partially
offset by lower pricing and higher overhead costs.

EMEA(3)

For the Three Months Ended   Year-over-year Change
December 29,
2018
  December 30,
2017
Actual   Currency   Acquisitions and Divestitures   Organic
(in millions)
Net sales $ 692 $ 699 (1.1)% (4.3) pp (1.9) pp 5.1%
Segment Adjusted EBITDA 171 175 (2.6)% (4.3) pp

EMEA net sales were $692 million, down 1.1 percent versus the year-ago
period, including a negative 4.3 percentage point impact from currency
and a negative 1.9 percentage point impact from the divestiture of a
joint venture in South Africa. Organic Net Sales increased 5.1 percent
versus the year-ago period. Pricing was up 2.6 percentage points,
primarily due to favorable timing of promotional activity versus the
prior year in the UK as well as in the Middle East and Africa that was
partially offset by lower pricing in Eastern Europe. Volume/mix
increased 2.5 percentage points as growth from condiments and sauces, as
well as foodservice gains across a majority of regions, more than offset
lower shipments in the Middle East and Africa.

EMEA Segment Adjusted EBITDA decreased 2.6 percent versus the year-ago
period to $171 million, including a negative 4.3 percentage point impact
from currency. Excluding the impact of currency, Segment Adjusted EBITDA
increased 1.7 percentage points, primarily reflecting gains from Organic
Net Sales growth that were partially offset by higher overhead costs.

Rest of World(3)(4)

For the Three Months Ended   Year-over-year Change
December 29,
2018
  December 30,
2017
Actual   Currency  

Acquisitions
and
Divestitures

  Organic
(in millions)
Net sales $ 789 $ 796 (0.8)% (12.6) pp 6.5 pp 5.3%
Segment Adjusted EBITDA 134 142 (6.0)% (31.8) pp

Rest of World net sales of $789 million decreased 0.8 percent versus the
year-ago period, reflecting a negative 12.6 percentage point impact from
currency that more than offset a 6.5 percentage point contribution from
the Cerebos acquisition and Organic Net Sales growth of 5.3 percent
versus the year-ago period. Pricing increased 1.8 percentage points,
primarily driven by highly inflationary environments in certain markets
within Latin America that more than offset lower pricing in China.
Volume/mix increased 3.5 percentage points, driven by growth in
condiments and sauces in Latin America that more than offset lower
shipments in Asia Pacific.

Rest of World Segment Adjusted EBITDA decreased 6.0 percent versus the
year-ago period to $134 million due to a negative 31.8 percentage point
impact from currency. Excluding the impact of currency, Segment Adjusted
EBITDA increased 25.8 percentage points, reflecting gains from Organic
Net Sales growth that were partially offset by higher input costs in
local currency.

Supplemental Information

The Company received a subpoena in October 2018 from the U.S. Securities
and Exchange Commission (the “SEC”) associated with an investigation
into the Company’s procurement area, more specifically the Company’s
accounting policies, procedures, and internal controls related to its
procurement function, including, but not limited to, agreements, side
agreements, and changes or modifications to its agreements with its
vendors.

Following this initial SEC document request, the Company together with
external counsel launched an investigation into the procurement area. In
the fourth quarter of 2018, as a result of findings from the
investigation, the Company recorded a $25 million increase to costs of
products sold as an out of period correction as the Company determined
the amounts were immaterial to the fourth quarter of 2018 and its
previously reported 2018 and 2017 interim and year to date periods.
Additionally, the Company is in the process of implementing certain
improvements to its internal controls to mitigate the likelihood of this
occurring in the future and has taken other remedial measures. The
Company continues to cooperate fully with the U.S. Securities and
Exchange Commission.

At this time, the Company does not expect the matters subject to the
investigation to be material to its current period or any prior period
financial statements.

End Notes

 
(1)   Organic Net Sales, Adjusted EBITDA, Constant Currency 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) The Company’s key commodities in the United States and Canada are
dairy, meat, coffee and nuts.
 
(3) In the first quarter of the Company’s fiscal year 2018, the Company
reorganized certain of its international businesses to better align
the Company’s global geographies. As a result, Middle East and
Africa businesses were moved from the historical Asia Pacific,
Middle East, and Africa (“AMEA”) operating segment into the
historical Europe reportable segment, forming the new Europe, Middle
East, and Africa (“EMEA”) reportable segment. The remaining
businesses from the AMEA operating segment became the Asia Pacific
(“APAC”) operating segment. This change has been reflected in all
historical periods presented.
 
(4) Rest of World comprises two operating segments: Latin America and
APAC.

Webcast and Conference Call Information

 
Date: Thursday, February 21, 2019
 
Time: 5:30 pm – 6:30 pm Eastern Standard Time
 
Webcast:

Live audio webcast is available at ir.kraftheinzcompany.com

 
Dial-in: (844) 347-3924 in the U.S.
(918) 398-4553 outside the U.S.
Conference ID # 3399483

ABOUT THE KRAFT HEINZ COMPANY

For 150 years, we have produced some of the world’s most beloved
products at The Kraft Heinz Company (NASDAQ: KHC). Our Vision is To
Be the Best Food Company, Growing a Better World
. We are one of the
largest global food and beverage companies, with 2018 net sales of
approximately $26 billion. Our portfolio is a diverse mix of iconic and
emerging brands. As the guardians of these brands and the creators of
innovative new products, we are dedicated to the sustainable health of
our people and our planet. To learn more, visit www.kraftheinzcompany.com
or follow us on LinkedIn and Twitter.

Forward-Looking Statements

This press release contains a number of forward-looking statements.
Words such as “commit,” “plan,” “pleased,” “believe,” “anticipate,”
“reflect,” “invest,” “make,” “expect,” “deliver,” “develop,” “drive,”
“assess,” “evaluate,” “establish,” “re-establish,” “focus,” “build,”
“turn,” “expand,” “leverage,” “grow,” “remain,” “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, costs and cost savings, legal matters, taxes,
expectations, investments, innovations, opportunities, capabilities,
execution, initiatives, pipeline, 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; the Company’s ability to predict,
identify, and interpret changes in consumer preferences and demand, to
offer new products to meet those changes, and to respond to competitive
innovation; changes in the retail landscape or the loss of key retail
customers; changes in relationships with significant customers or
suppliers; the Company’s ability to maintain, extend, and expand its
reputation and brand image; the Company’s ability to leverage its brand
value to compete against private label products; the Company’s ability
to drive revenue growth in its key product categories, increase its
market share, or add products that are in faster-growing and more
profitable categories; product recalls or product liability claims;
unanticipated business disruptions; the Company’s ability to identify,
complete or realize the benefits from strategic acquisitions, alliances,
divestitures, joint ventures or other investments; the Company’s ability
to realize the anticipated benefits from prior or future streamlining
actions to reduce fixed costs, simplify or improve processes, and
improve its competitiveness; the execution of the Company’s
international strategic initiatives; the impacts of the Company’s
international operations; economic and political conditions in the
United States and in various other nations in which the Company does
business; changes in the Company’s management team or other key
personnel and the Company’s ability to hire or retain key personnel or a
highly skilled and diverse global workforce; risks associated with
information technology and systems, including service interruptions,
misappropriation of data or breaches of security; impacts of natural
events in the locations in which we or the Company’s customers,
suppliers, distributors, or regulators operate; the Company’s ownership
structure; the Company’s indebtedness and ability to pay such
indebtedness; an impairment of the carrying value of goodwill or other
indefinite-lived intangible assets; exchange rate fluctuations;
volatility in commodity, energy, and other input costs; volatility in
the market value of all or a portion of the derivatives we use;
increased pension, labor and people-related expenses; compliance with
laws, regulations, and related interpretations and related legal claims
or other regulatory enforcement actions; the Company’s ability to
protect intellectual property rights; tax law changes or
interpretations; 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 and the amounts of any such dividends; volatility of
capital markets and other macroeconomic factors; 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

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.

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 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 (i.e., Organic Net Sales, Adjusted EBITDA, Constant Currency
Adjusted EBITDA, and Adjusted EPS) 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, other losses/(gains) related
to acquisitions and divestitures (e.g., tax and hedging impacts),
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, other losses/(gains) related
to acquisitions and divestitures (e.g., tax and hedging impacts),
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.

 
   

Schedule 1

The Kraft Heinz Company
Consolidated Statements of Income
(in millions, except per share data)
(Unaudited)
For the Three Months Ended For the Year Ended
December 29,
2018
December 30,
2017
December 29,
2018
  December 30,
2017
Net sales $ 6,891 $ 6,844 $ 26,259 $ 26,085
Cost of products sold 4,658   4,542   17,309   16,948  
Gross profit 2,233 2,302 8,950 9,137
Selling, general and administrative expenses, excluding impairment
losses
866 780 3,204 2,951
Goodwill impairment losses 7,108 7,272
Intangible asset impairment losses 8,332     8,667   49  
Selling, general and administrative expenses 16,306   780   19,143   3,000  
Operating income/(loss) (14,073 ) 1,522 (10,193 ) 6,137
Interest expense 326 308 1,288 1,234
Other expense/(income), net 13   (117 ) (183 ) (627 )
Income/(loss) before income taxes (14,412 ) 1,331 (11,298 ) 5,530
Provision for/(benefit from) income taxes (1,744 ) (6,665 ) (1,006 ) (5,460 )
Net income/(loss) (12,668 ) 7,996 (10,292 ) 10,990
Net income/(loss) attributable to noncontrolling interest (60 ) (7 ) (63 ) (9 )
Net income/(loss) attributable to common shareholders $ (12,608 ) $ 8,003   $ (10,229 ) $ 10,999  
 
Basic shares outstanding 1,220 1,219 1,219 1,218
Diluted shares outstanding 1,220 1,228 1,219 1,228
 
Per share data applicable to common shareholders:
Basic earnings/(loss) per share $ (10.34 ) $ 6.57 $ (8.39 ) $ 9.03
Diluted earnings/(loss) per share (10.34 ) 6.52 (8.39 ) 8.95
     
 

Schedule 2

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

Acquisitions
and
Divestitures

Organic Net
Sales

Price   Volume/Mix
December 29, 2018
United States $ 4,810 $ $ $ 4,810
Canada 600 (24) 624
EMEA 692 (31) 723
Rest of World 789 (42) 48 783
$ 6,891 $ (97) $ 48 $ 6,940
 
December 30, 2017
United States $ 4,760 $ $ $ 4,760
Canada 589 589
EMEA 699 13 686
Rest of World 796 53 743
$ 6,844 $ 53 $ 13 $ 6,778
Year-over-year growth rates
United States 1.1% 0.0 pp 0.0 pp 1.1% (2.8) pp 3.9 pp
Canada 1.8% (4.2) pp 0.0 pp 6.0% (1.7) pp 7.7 pp
EMEA (1.1)% (4.3) pp (1.9) pp 5.1% 2.6 pp 2.5 pp
Rest of World (0.8)% (12.6) pp 6.5 pp 5.3% 1.8 pp 3.5 pp
Kraft Heinz 0.7% (2.2) pp 0.5 pp 2.4% (1.6) pp 4.0 pp

Contacts

Michael Mullen (media)
[email protected]

Christopher Jakubik, CFA (investors)
[email protected]

Read full story here

error: Content is protected !!