Kraft Heinz Company (KHC) — Q1 2015 Earnings Call Transcript

Thank you, Amanda, and welcome to the Q2 2015 Business Update for Kraft Heinz Company bondholders. With me is our Chief Financial Officer, Paulo Basilio. During our remarks, we will make some forward-looking statements. These statements are based on how we see things today. Actual results may differ due to risks and uncertainties. These are discussed in our earnings release, which can be found in the Investor section of kraftheinzcompany.com. We'll also be discussing some non-GAAP financial measures during the call. You can find the GAAP to non-GAAP reconciliations in our earnings release. Before we get started, please note that the merger between Kraft Foods Group and H.J. Heinz Holdings Corporation to form the Kraft Heinz Company was completed on July 2nd, 2015, which was after the close of the second quarters for each respective company. So in keeping with Heinz’s practice prior to the merger, this call will be a review of the pre-merger standalone financial results for both companies in Q2 2015, as outlined in the press release we issued on August 10. With that, I will hand it over to Paulo.

Thank you, Chris. Turning first to Kraft, net revenue decreased 4.9%, including a negative 1.4% impact from currency. Kraft Organic net revenues decreased 3.3%, of course keeping up a 2.6% decline from volume mix and a 0.7% decline from lower net pricing. The volume mix decline included an approximate one percentage point negative impact from the timing of Easter-related shipments and an approximately one percentage point negative impact from lower ready-to-drink beverage sales, resulting from decreased promotional activities compared to the prior year quarter, as well as retail inventory shifts this year. Lower net pricing reflected pricing actions in the Cheese and Food Services businesses, related to lower dairy costs. These were partially offset by the carry-over impact of price increases taken in prior quarters. Operating income was $923 million and diluted EPS was $0.92 inclusive of one-off factors in the quarter. Excluding the impact of these factors in both years, operating income grew at a mid-single digit rate and EPS grew at a double-digit rate. This growth was primarily driven by a combination of favorable commodity costs net of pricing, mainly in the dairy and meat categories, and lower SG&A expenses driven by a reduction in advertising spending and lower manufacturing costs from net productivity. EPS growth was further enhanced by a lower effective tax rate and lower net interest expense versus the prior year quarter. Free cash flow in the first six months of 2015 was $802 million, up from $454 million from the same period during the prior year. This year’s quarterly working capital improvement has more than offset an increase in capital expenditures. Now turning to Heinz; sales declined 4.1% due to a negative 9.4% impact from foreign exchange translation and a 0.6% reduction from the divestiture of a frozen food business in the UK. Heinz organic net sales grew 5.9%. Net pricing increased by 4.2%, driven by higher pricing across all segments, primarily in Latin America. Volume increased 1.7%, driven by higher inventory stock at US retailers in the first quarter of 2014 prior to the implementation of SAP, as well as raw material and packaging supply constraints in Venezuela. These volume gains were partially offset by volume declines due to the timing of Ramadan festive season in Indonesia, reduced trade promotions in Russia, product rationalization in Europe, and category declines in Italy. Adjusted EBITDA increased by $46 million or 6.7% to $739 million, primarily driven by gross profit as a result of increased sales in North America and Venezuela, cost of goods sold productivity initiatives, and an overall reduction in SG&A. These gains were partially offset by unfavorable foreign exchange translation rates in all segments, and increased marketing spending in North America. Organic adjusted EBITDA grew by 16.3%, driven by increased sales and lower SG&A. I will now turn the call back to Chris Jakubik for closing remarks.

Thanks, Paulo, and thank you for listening to our call. For any investors or analysts who have follow-up questions, I will be available at your convenience. And for anybody in the media who has further questions, Michael Mullen will be available to take your calls as well. Thank you and have a good day.