The Kraft Heinz Company (Nasdaq: KHC) (“Kraft Heinz” or the “Company”) today reported first-quarter 2020 financial results that reflected higher net sales and Organic Net Sales(1) growth due to strong demand for its leading brands, as well as the impact of divestitures, unfavorable currency, and higher costs versus the prior year.
“Our first-quarter results reflect how strongly our employees have responded to the global COVID-19 challenge and the exceptional level of service our teams have demonstrated during this critical time; and for that, it is an incredible privilege to be part of the Kraft Heinz Company,” said Kraft Heinz CEO Miguel Patricio. “The transformation work we kicked off last year, together with the flexibility, agility, and creativity of our people, and the tremendous collaboration with our retail customers, are all coming together. Going forward, we have a singular focus: to meet the demand for our products and ensure consumers have the food and nourishment they need during these uncertain times.”
Q1 2020 Financial Summary
Net sales were $6.2 billion, up 3.3 percent versus the year-ago period, despite a negative 1.8 percentage point impact from divestitures and an unfavorable 1.1 percentage point impact from currency. Organic Net Sales increased 6.2 percent versus the year-ago period, due to approximately 6 to 7 percentage points of growth as a result of increased consumer demand related to the COVID-19 pandemic. Pricing increased 1.6 percent versus the prior-year period, as higher pricing in the United States(2) and International(2) segments more than offset lower pricing in Canada. Volume/mix grew 4.6 percentage points compared to the prior-year period, as growth in at-home consumption more than offset an unfavorable impact from retail inventory reductions and lower foodservice shipments versus the prior-year period.
Net income attributable to common shareholders decreased to $378 million and diluted EPS decreased to $0.31 mainly due to an unfavorable comparison with again on the sale of the India nutritional beverages business in the prior-year period and an unrealized loss on commodity hedges in the current period that were partially offset by the favorable impact of lower non-cash impairment charges in the current period. Adjusted EBITDA decreased 1.1 percent versus the year-ago period to $1.4 billion, including a negative 1.8 percentage point impact from divestitures and a 0.8 percentage point impact from unfavorable currency. Excluding the impacts of divestiture and currency, Adjusted EBITDA growth was primarily driven by an approximate 9 to 10 percentage point contribution from additional demand related to the COVID-19 pandemic as increases in the United States and International segments more than offset declines in Canada and higher general corporate expenses. Adjusted EPS decreased 12.1 percent to $0.58, primarily reflecting lower other income and unfavorable changes in non-cash equity award compensation expenses versus the year-ago period, as well as higher taxes on adjusted earnings in the current period.
Q1 2020 Business Segment Highlights
United States
United States net sales were $4.5 billion, increasing 6.4 percent versus the year-ago period, including an approximate 6 to 7 percentage point contribution due to increased consumer demand related to the COVID-19 pandemic, as retail consumption accelerated across all categories in March. Pricing increased 2.4 percentage points, driven by a combination of higher list prices, price increases to offset key commodity(3) cost inflation in dairy, as well as a reduced promotional activity. Volume/mix increased 4.0 percentage points due to strong growth across several categories, including macaroni & cheese, condiments, and sauces, ready to drink beverages, and nuts. This growth was partially offset by lower natural cheese, cold cuts, and domestic foodservice shipments.
United States Segment Adjusted EBITDA increased by 6.2 percent versus the year-ago period to $1.2 billion. This increase included an approximate 8 to 9 percentage point contribution from greater demand related to the COVID-19 pandemic, as pricing growth and volume leverage more than offset key commodity cost inflation, unfavorable mix versus the prior year, and higher supply chain costs incurred, in part, to support greater demand.
International
International net sales were $1.3 billion, increasing 1.3 percent versus the year-ago period, despite a negative 4.5 percentage point impact from currency and a negative 1.1 percentage point impact from the India nutritional beverage divestiture. Organic Net Sales grew 6.9 percent versus the year-ago period, including an approximate 5 to 6 percentage point contribution due to increased consumer demand related to the COVID-19 pandemic, primarily in developed markets. Pricing was up 1.7 percentage points due to higher pricing in Latin America, including in highly inflationary markets, as well as category-specific price increases in Australia and the UK, which was partially offset by lower pricing in other regions. Volume/mix increased 5.2 percentage points due to retail consumption growth across both developed and emerging markets but concentrated in the UK, Australia, New Zealand, and Russia. This growth more than offset lower shipments in Asia and foodservice.
International Segment Adjusted EBITDA increased 2.5 percent versus the year-ago period to $245 million, including a negative 4.8 percentage point impact from currency. Excluding currency, Segment Adjusted EBITDA increased 7.3 percent, due to an approximate 8 to 9 percentage point contribution from additional demand related to the COVID-19 pandemic, as Organic Net Sales growth more than offset higher supply chain costs versus the year-ago period, including incremental costs to service increased demand.
Canada
Canada net sales were $361 million, 19.8 percent lower than the year-ago period, including a negative 20.7 percentage point impact from the Canadian natural cheese divestiture and a 1.3 percentage point unfavorable impact from currency. Organic Net Sales increased 2.2 percent versus the year-ago period, including an approximate 10 to 11 percentage point contribution due to increased consumer demand related to the COVID-19 pandemic. Pricing declined 6.4 percentage points, reflecting unfavorable trade expense versus the prior year and lower prices in foodservice. Volume/mix increased 8.6 percent due to greater demand, primarily in Kraft Dinner, Classico pasta sauce, and Kraft peanut butter, that more than offset declines in coffee mainly from the exit of the McCafé licensing agreement, as well as lower foodservice shipments.
Canada Segment Adjusted EBITDA decreased 54.0 percent versus the year-ago period to $55 million, including a negative 10.5 percentage point impact from divestiture and a 1.1 percentage point unfavorable impact from currency. Excluding the impact of these factors, the decrease reflected an approximate 12 to 13 percentage point favorable contribution from the greater demand related to the COVID-19 pandemic that was more than offset by a combination of lower pricing and higher supply chain costs.
Outlook
The impact of the COVID-19 pandemic on the Company’s full-year 2020 results remains uncertain. In each of the Company’s reporting segments, the Company’s second quarter 2020 outlook reflects, to varying degrees, incremental demand from retail customers due to an increase in at-home consumption, particularly in developed markets, as well as reduced demand in foodservice channels on a global basis. Currently, the Company believes low to mid-single-digit Organic Net Sales growth and mid-single-digit constant-currency Adjusted EBITDA growth versus the prior year period is a reasonable expectation for second-quarter performance.
