PITTSBURGH & CHICAGO--(BUSINESS WIRE)--The Kraft Heinz Company (Nasdaq: KHC) today reported financial results for the third quarter of 2020 that reflected net sales growth across all six Consumer Platforms due to sustained at-home consumption momentum.
“The continuation of our strong growth into the third quarter is a reflection of the agility we are creating as an organization and because of that, we are raising our outlook for the full year,” said Kraft Heinz CEO Miguel Patricio. “We are building momentum, and we are confidently optimistic about our near-term performance. We are heading into 2021 with our new operating model fully implemented, our platform strategy coming to life in the marketplace, and our growth investments ramping up. And although there are multiple future scenarios we must plan for and manage against, we are in a strong position to both accelerate and exceed the strategic plan we finalized earlier this year.”
Q3 2020 Financial Summary
- Net sales increased 6.0 percent versus the year-ago period to $6.4 billion, including an unfavorable 0.3 percentage point impact from currency. Organic Net Sales increased 6.3 percent despite a negative 1.2 percentage point impact from exiting the McCafé licensing agreement. Pricing was up 3.7 percentage points versus the prior year period, with positive pricing in each business segment. Higher pricing primarily resulted from reduced promotional activity compared to the year-ago period, with gains also reflecting planned pricing actions in select categories and markets and pricing to offset dairy inflation. Volume/mix was up 2.6 percentage points versus the year-ago period, driven by strong growth in retail, e-commerce, and club channels supported by continued growth of at-home consumption due, in part, to the COVID-19 pandemic. This growth more than offset lower but improving foodservice sales, and the negative impact from exiting the McCafé licensing agreement.
- Net income attributable to common shareholders decreased 33.7 percent versus the year-ago period to $597 million and Diluted EPS decreased to $0.49, down 33.8 percent versus the prior year driven by charges related to the pending Cheese Transaction(2) in the current period and a gain on sale of the Canadian natural cheese business in the year-ago period.
- Adjusted EPS increased to $0.70, up 1.4 percent versus the prior year as Adjusted EBITDA growth more than offset a higher effective tax rate, unfavorable changes in other income, and higher non-cash equity award compensation expenses versus the year-ago period.
- Adjusted EBITDA increased 13.5 percent versus the year-ago period to $1.7 billion, including an unfavorable 0.1 percentage point impact from currency. Excluding the impact of currency, Adjusted EBITDA growth was driven by pricing gains, volume growth, and favorable mix versus the year-ago period, as well as procurement savings in the United States. This growth more than offset higher variable compensation, unfavorable key commodity(5) costs, specifically in dairy, as well as increased marketing investment in the United States and incremental COVID-19-related operating expenses globally.
- Year-to-date net cash provided by operating activities increased to $3.3 billion, up 67.0% versus the comparable prior year period, primarily driven by Adjusted EBITDA growth, reduced cash outflows resulting from lower payments related to the timing of promotional activity, and favorable changes in inventory, primarily due to reduced inventory levels from COVID-19-related demand. Free Cash Flow(1) for the first nine months of 2020 increased to $2.9 billion, up 107.8% versus the comparable prior year period, from a combination of the previously mentioned items and lower capital expenditures versus the prior year period.
Outlook
Based on performance to date, the Company believes mid-single-digit Organic Net Sales(3) growth and high-single-digit Constant Currency Adjusted EBITDA(3) growth versus the prior year period are reasonable expectations for fourth-quarter performance. This would result in mid-single-digit Organic Net Sales(3) growth and high-single-digit Constant Currency Adjusted EBITDA(3) growth for the full year.
End Notes
| (1) | Organic Net Sales, Adjusted EBITDA, Constant Currency Adjusted EBITDA, Adjusted EPS, and Free Cash Flow 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 September 2020, the Company entered into a definitive agreement to sell certain assets in the Company’s global cheese businesses, as well as to license certain trademarks, for total consideration of approximately $3.3 billion, including $3.2 billion of cash consideration (the “Cheese Transaction”). The Company has allocated $1.5 billion of the total consideration to perpetual licenses that will be granted to the buyer for the Kraft and Velveeta brands. The Company has allocated the remainder of the total consideration, currently $1.8 billion, to the net assets to be transferred (the “Disposal Group”). The Company determined that the Disposal Group, which included allocated goodwill, had an aggregate carrying amount above its $1.8 billion estimated fair value. Accordingly, a non-cash impairment loss of $300 million was recorded in the third quarter of 2020. Upon closing of the Cheese Transaction, we may recognize a gain or loss, depending on a number of factors, including changes in the fair values of certain assets in the Disposal Group. Additionally, the license income related to the Kraft and Velveeta brands will be recognized in the future as a reduction to SG&A. |
| (3) | Fourth quarter and 2020 full year guidance for Organic Net Sales and Constant Currency Adjusted EBITDA are provided on a non-GAAP basis only because certain information necessary to calculate the most comparable GAAP measure is unavailable due to the uncertainty and inherent difficulty of predicting the occurrence and the future financial statement impact of such items impacting comparability, including, but not limited to, the impact of currency, acquisitions and divestitures, integration and restructuring expenses, deal costs, unrealized losses/(gains) on commodity hedges, impairment losses, and equity award compensation expense, among other items. Therefore, as a result of the uncertainty and variability of the nature and amount of future adjustments, which could be significant, the Company is unable to provide a reconciliation of these measures without unreasonable effort. |
| (4) | 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. |
| (5) | The Company's key commodities in the United States and Canada are dairy, meat, coffee and nuts. |
ABOUT THE KRAFT HEINZ COMPANY
We are driving transformation at The Kraft Heinz Company (Nasdaq: KHC), inspired by our Purpose, Let’s Make Life Delicious. Consumers are at the center of everything we do. With 2019 net sales of approximately $25 billion, we are committed to growing our iconic and emerging food and beverage brands on a global scale. We leverage our scale and agility to unleash the full power of Kraft Heinz across a portfolio of six consumer-driven product platforms. As global citizens, we’re dedicated to making a sustainable, ethical impact while helping feed the world in healthy, responsible ways. Learn more about our journey by visiting www.kraftheinzcompany.com or following us on LinkedIn and Twitter.
