PITTSBURGH & CHICAGO--(BUSINESS WIRE)--The Kraft Heinz Company (Nasdaq:KHC) today reported financial results for the second quarter of 2020 that reflected solid net sales growth of 3.8 percent and Organic Net Sales(1) growth of 7.4 percent versus the year-ago period due to strong retail performance across all business segments. Results also included non-cash impairment charges(2) related to goodwill and intangible assets.
“Our response to the ongoing COVID-19 pandemic reflects the hard work and dedication of our remarkable employees around the world,” said Kraft Heinz CEO Miguel Patricio. "We are now starting to realize the benefits of agility and scale, while implementing changes across the Company to further drive agility, both internally and how we go to market. We believe this will be the key to returning the Company to sustainable long-term growth and profitability, and we look forward to providing greater details on these initiatives during our Investor Day in September.”
Net sales increased 3.8 percent versus the year-ago period to $6.6 billion, despite a negative 2.1 percentage point impact from divestitures and an unfavorable 1.5 percentage point impact from currency. Organic Net Sales increased 7.4 percent, driven by increased retail demand that more than offset lower foodservice-related sales, each stimulated by the COVID-19 pandemic. Pricing increased 2.2 percentage points versus the prior year period, primarily reflecting a lower level of promotional activity versus the prior year period. Volume/mix grew 5.2 percentage points compared to the prior year period, as strong consumer demand in retail, together with a partial recovery in retail inventory levels from the end of the first quarter, more than offset significant declines in foodservice-related sales.
During the second quarter, the Company performed its 2020 annual impairment test, which reflected the completion of the Company's enterprise strategy and five-year operating plan. While the Company’s overall estimated value for the business enterprise has not changed substantially, the recalibration of future investments to align with opportunities for which the Company sees greater potential for return has resulted in increases in fair value estimates for certain reporting units and intangible assets, and decreases in others. For those reporting units and intangible assets seeing reductions in fair value estimates to levels less than their carrying amounts, the Company recorded non-cash goodwill impairment losses(2) of approximately $1.8 billion in certain reporting units and non-cash intangible asset impairment losses(2) of approximately $1.1 billion in certain intangible assets. These impairment charges caused the Company to report a net loss attributable to common shareholders of $1.7 billion and a diluted loss per share of $1.35.
Adjusted EBITDA in the second quarter increased 12.4 percent versus the year-ago period to $1.8 billion, despite a negative 2.3 percentage point impact from divestitures and an unfavorable 1.2 percentage point impact from currency. Excluding these factors, the increase in Adjusted EBITDA reflected positive contributions from all business segments, driven by Organic Net Sales growth that more than offset higher variable compensation and increased marketing investments versus the comparable period in the prior year. Adjusted EPS increased 2.6 percent to $0.80, mainly reflecting growth in Adjusted EBITDA that was partially offset by lower other income versus the prior year period, higher taxes on adjusted earnings, and higher equity award compensation versus the year-ago period.
Q2 2020 Business Segment Highlights
United States net sales were $4.9 billion, an increase of 8.5 percent versus the year-ago period. Pricing contributed 2.3 percentage points of growth, primarily reflecting reduced promotional activity versus the prior year, particularly in supply constrained categories. This was partially offset by unfavorable trade expense timing versus the prior year period and lower pricing to reflect key commodity(4) costs declines in bacon. Volume/mix increased 6.2 percentage points from a combination of consumption growth across nearly all retail categories and a partial restoration of retailer inventory levels versus the end of the first quarter of this year. This was partially offset by lower foodservice sales and lower shipments for Lunchables and ready-to-drink beverages.
United States Segment Adjusted EBITDA increased 17.6 percent versus the year-ago period to $1.5 billion, reflecting volume leverage and favorable product and channel mix, pricing gains, and, to a lesser extent, lower packaging costs versus the year-ago period. These gains were partially offset by increased variable compensation expenses, investments in marketing, and higher COVID-19-related operating costs.
International(3)
International net sales decreased 0.7 percent versus the year-ago period to $1.3 billion, as a negative 6.2 percentage point impact from currency more than offset Organic Net Sales growth of 5.5 percent. Pricing was up 2.6 percentage points, reflecting the combination of a lower level of promotional activity versus the year-ago period, carryover pricing actions in select markets, and higher pricing to offset inflationary input costs in Brazil. Volume/mix increased 2.9 percentage points, driven by a combination of consumption-led growth in condiments and sauces and meal-oriented categories, as well as favorable changes in retail inventory levels. This more than offset a significant decline in foodservice-related sales and, to a lesser extent, infant nutrition shipments.
International Segment Adjusted EBITDA increased 3.2 percent versus the year-ago period to $275 million, despite a negative 5.7 percentage point impact from currency. Excluding currency, Segment Adjusted EBITDA increased 8.9 percent as Organic Net Sales growth more than offset unfavorable overhead costs and higher supply chain costs, including incremental costs to service demand, compared to the prior year period.
Canada
Canada net sales decreased 23.9 percent compared to the year-ago period to $426 million, due to a negative 23.1 percentage point impact from the Canadian natural cheese divestiture and a 2.8 percentage point unfavorable impact from currency. Organic Net Sales increased 2.0 percent versus the year-ago period despite a negative 4.4 percentage point impact from exiting the McCafé licensing agreement. Pricing increased 1.3 percentage points due to prior year promotional activities that were not repeated, primarily in macaroni and cheese, and higher list price in select categories, including cream cheese. Volume/mix was slightly higher as consumption gains across all retail categories offset lower foodservice-related sales and the negative impact from exiting the McCafé licensing agreement.
Canada Segment Adjusted EBITDA decreased 23.2 percent versus the year-ago period to $110 million, due to a negative 22.7 percentage point impact from divestiture and an unfavorable 2.9 percentage point impact from currency. Excluding the impact of these factors, the increase versus the prior year was driven by Organic Net Sales growth that more than offset higher supply chain costs.
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) | In the second quarter of 2020, the Company recorded non-cash goodwill impairment charges of approximately $1.8 billion and non-cash intangible asset impairment charges of approximately $1.1 billion to lower the carrying amount of certain reporting units and certain intangible assets. These charges included goodwill impairment losses on four of the Company’s reporting units: $815 million in Canada Retail, $655 million in U.S. Foodservice, $205 million in Canada Foodservice, and $142 million in EMEA East. Additionally, the Company recorded intangible asset impairment losses of $626 million related to the Oscar Mayer brand, $140 million related to the Maxwell House brand, and $290 million related to seven other brands. After these non-cash impairment charges, the Company maintains a goodwill balance of $33.3 billion and an indefinite-lived intangible asset balance of $42.1 billion as of June 27, 2020. |
| (3) | In the first quarter of 2020, the Company’s internal reporting and reportable segments changed. The Puerto Rico business was moved from the Latin America zone to the United States zone to consolidate and streamline the management of the Company's product categories and supply chain. The Company also combined its Europe, Middle East, and Africa (“EMEA”), Latin America, and Asia Pacific (“APAC”) zones to form the International zone. Therefore, effective in the first quarter of 2020, the Company manages and reports its operating results through three reportable segments defined by geographic region: United States, International, and Canada. The Company has reflected these changes in all historical periods presented. |
| (4) | The Company's key commodities in the United States and Canada are dairy, meat, coffee and nuts. |
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). We are one of the largest global food and beverage companies, with 2019 net sales of approximately $25 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.
