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Kraft Heinz Reports Third Quarter 2016 Results

  • Q3 GAAP net sales increased 2.4% due to the merger of Kraft and Heinz; Organic Net Sales (1) declined 1.0%
  • Q3 GAAP operating income increased 254% and net income attributable to common shareholders increased to $842 million
  • Q3 Adjusted EBITDA (1) increased to $1.8 billion from $1.5 billion in the year-ago period
  • Q3 GAAP diluted EPS increased to $0.69; Adjusted EPS (1) increased to $0.83

Category:

Thursday, November 3, 2016 4:10 pm EDT

Dateline:

PITTSBURGH & CHICAGO

Public Company Information:

NASDAQ:
KHC

PITTSBURGH & CHICAGO--(BUSINESS WIRE)--The Kraft Heinz Company (NASDAQ: KHC) (“Kraft Heinz” or the “Company”) today reported third quarter 2016 financial results that reflected a combination of significant gains from cost savings and the redemption of preferred stock, as well as lower taxes versus the prior year period.

“Overall, our third quarter results are a good representation of where we are as a company,” said Kraft Heinz CEO Bernardo Hees. “While our financial performance is respectable, we continue to have the opportunity to improve our offerings and retail execution in several key markets and take our brands to places they don’t currently compete. Our focus now is to finish 2016 strong and set the stage for another year of strong, profitable growth in 2017.”

Q3 2016 Financial Summary

  For the Three Months Ended   Year-over-year Change
October 2,   September 27,      
2016   2015 Actual Currency Divestitures Organic
(in millions, except per share data)
GAAP net sales $ 6,267 $ 6,120 2.4 %
GAAP operating income 1,413 399 254.1 %
GAAP net income/(loss) attributable to common shareholders 842 (303 ) nm
GAAP diluted EPS $ 0.69 $ (0.27 ) nm
 
Pro forma net sales(2) $ 6,267 $ 6,363 (1.5 )% (0.5 ) pp (1.0 )%
Adjusted EBITDA(1,2) 1,803 1,482 21.7 %
Adjusted EPS(1,2) $ 0.83 $ 0.44 88.6 %
 

Net sales were $6.3 billion, down 1.5 percent versus pro forma net sales for the year-ago period, including a negative 0.5 percentage point impact from currency. Organic Net Sales decreased 1.0 percent versus the year-ago period. Pricing decreased 0.7 percentage points driven by key commodity(3) deflation in the United States, primarily in meats and coffee, and coffee in Canada, as well as higher promotional expenses in Europe. Volume/mix decreased 0.3 percentage points primarily due to lower shipments across several categories, particularly cold cuts, foodservice and nuts in the United States. This was partially offset by growth driven by innovation in Lunchables and the macaroni and cheese portfolio, as well as gains in coffee in the United States and growth in condiments and sauces globally.

Net income attributable to common shareholders increased to $842 million and GAAP diluted EPS increased to $0.69. Adjusted EBITDA increased 21.7 percent versus the year-ago period to $1.8 billion, including a negative 0.8 percentage point impact from currency, driven by gains from cost savings initiatives(4) and favorable pricing net of key commodity costs. Adjusted EPS increased 88.6 percent versus the year-ago period to $0.83, mainly reflecting growth in Adjusted EBITDA, the refinancing of Series A Preferred Stock and lower taxes.

Q3 2016 Business Segment Highlights

United States

  For the Three Months Ended   Year-over-year Change
October 2,   September 27,      
2016   2015 Actual Currency Divestitures Organic
(in millions)
Pro forma net sales(2,5) $ 4,395 $ 4,449 (1.2 )% (1.2 )%
Segment Adjusted EBITDA(1,2,5) 1,349 1,033 30.6 %
 

United States net sales were $4.4 billion, down 1.2 percent versus pro forma net sales for the year-ago period. Pricing decreased 0.7 percentage points driven by deflation in key commodities, primarily in meats and coffee. Volume/mix was 0.5 percentage points lower reflecting growth from innovation in Lunchables and the macaroni and cheese portfolio, as well as gains from coffee, that were more than offset by declines in cold cuts, foodservice and nuts.

United States Segment Adjusted EBITDA increased 30.6 percent versus the year-ago period to $1.3 billion. Gains from cost savings initiatives and, to a lesser extent, favorable pricing net of key commodity costs were partially offset by lower volume/mix.

Canada

  For the Three Months Ended   Year-over-year Change
October 2,   September 27,      
2016   2015 Actual Currency Divestitures Organic
(in millions)
Pro forma net sales(2) $ 550 $ 539 2.0 % 2.0 %
Segment Adjusted EBITDA(1,2) 148 110 34.5 %
 

Canada net sales and Organic Net Sales were $550 million, up 2.0 percent versus pro forma net sales for the year-ago period. Pricing decreased 1.4 percentage points primarily due to commodity-driven pricing actions in coffee. Volume/mix increased 3.4 percentage points driven by gains in foodservice as well as shipment timing in macaroni & cheese and coffee.

Canada Segment Adjusted EBITDA increased 34.5 percent versus the year-ago period to $148 million, including a 1.8 percentage point favorable impact from currency. Excluding currency, gains were driven by cost savings initiatives and volume/mix growth.

Europe

  For the Three Months Ended   Year-over-year Change
October 2,   September 27,      
2016   2015 Actual Currency Divestitures Organic
(in millions)
Pro forma net sales(2,5) $ 513 $ 600 (14.5 )% (6.7 ) pp (7.8 )%
Segment Adjusted EBITDA(1,2,5) 183 223 (17.9 )%
 

Europe net sales were $513 million, down 14.5 percent versus pro forma net sales for the year-ago period, including a negative 6.7 percentage point impact from currency. Organic Net Sales were 7.8 percent lower than the year-ago period. Pricing was down 2.9 percentage points primarily due to the timing of promotional expenses versus the prior year. Volume/mix decreased 4.9 percentage points reflecting a combination of shipment timing versus the prior year as well as ongoing consumption weakness across several categories, primarily in the UK and the Netherlands.

Europe Segment Adjusted EBITDA decreased 17.9 percent versus the year-ago period to $183 million, including a negative 8.5 percentage point impact from currency, as manufacturing savings were more than offset by a combination of unfavorable volume/mix, lower pricing and increased marketing investments.

Rest of World (6)

  For the Three Months Ended   Year-over-year Change
October 2,   September 27,      
2016   2015 Actual Currency Divestitures Organic
(in millions)
Pro forma net sales(2,5) $ 809 $ 775 4.4 % 0.8 pp 3.6 %
Segment Adjusted EBITDA(1,2,5) 150 152 (1.3 )%
 

Rest of World net sales were $809 million, up 4.4 percent versus pro forma net sales in the year-ago period, including a favorable currency impact of 0.8 percentage points. Organic Net Sales increased 3.6 percent versus the year-ago period. Pricing increased 1.9 percentage points as pricing actions to offset higher input costs in local currency, particularly in Latin America, were partially offset by higher promotional spending to support new product initiatives. Volume/mix increased 1.7 percentage points driven by strong growth in condiments and sauces across all regions.

Rest of World Segment Adjusted EBITDA decreased 1.3 percent versus the year-ago period to $150 million, despite a positive 2.6 percentage point impact from currency. Excluding the impact from currency, Segment Adjusted EBITDA declined as organic sales growth was more than offset by a combination of higher input costs in local currency and investments behind new product initiatives.

End Notes

(1)

  Organic Net Sales, 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)

Pro forma net sales, Adjusted EBITDA and Adjusted EPS for the three months ended September 27, 2015 include the operating results of Kraft on a pro forma basis, as if Kraft had been acquired as of December 30, 2013. There are no pro forma adjustments for the three months ended October 2, 2016 as Kraft and Heinz were a combined company for the entire period. Please see discussion of the unaudited pro forma condensed combined financial information at the end of this press release for more information.
 

(3)

The Company's key commodities in the United States and Canada are dairy, meat, coffee and nuts.
 

(4)

Cost savings initiatives include the Company's integration, restructuring and ongoing productivity efforts.
 

(5)

In the first quarter of 2016, the Company moved certain of the historical Kraft export businesses from the Company's United States segment to its Rest of World and Europe segments to align with its long-term go-to-market strategies. For the three months ended September 27, 2015, this change resulted in the reclassification of $92 million of pro forma net sales from the United States segment to the Rest of World segment ($91 million) and Europe segment ($1 million), as well as $28 million of Segment Adjusted EBITDA from the United States segment to the Rest of World segment ($27 million) and Europe ($1 million).
 

(6)

Rest of World is comprised of three operating segments: Asia Pacific; Latin America; and, Russia, India, the Middle East and Africa (“RIMEA”).
 

Webcast and Conference Call Information

A webcast of The Kraft Heinz Company's third quarter 2016 earnings conference call will be available at ir.kraftheinzcompany.com . The call begins today at 5:00 p.m. Eastern time.

ABOUT THE KRAFT HEINZ COMPANY

The Kraft Heinz Company (NASDAQ: KHC) is the fifth-largest food and beverage company in the world. A globally trusted producer of delicious foods, The Kraft Heinz Company provides high quality, great taste and nutrition for all eating occasions whether at home, in restaurants or on the go. The Company’s iconic brands include Kraft, Heinz, ABC, Capri Sun, ClassicoJell-OKool-Aid, Lunchables, Maxwell House, Ore-Ida, Oscar Mayer, Philadelphia, Planters, Plasmon, Quero, Weight Watchers Smart Ones and Velveeta. The Kraft Heinz Company is dedicated to the sustainable health of our people, our planet and our Company. For more information, visit www.kraftheinzcompany.com .

Forward-Looking Statements

This press release contains a number of forward-looking statements. Words such as “expect,” “continue,” “improve,” “believe,” “will,” "focus," and variations of such words and similar 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, investments, execution, growth and integration. 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, increased competition; the Company's ability to maintain, extend and expand its reputation and brand image; the Company's ability to differentiate its products from other brands; the consolidation of retail customers; the Company's ability to predict, identify and interpret changes in consumer preferences and demand; the Company's ability to drive revenue growth in its key product categories, increase its market share or add products; an impairment of the carrying value of goodwill or other indefinite-lived intangible assets; volatility in commodity, energy and other input costs; changes in the Company's management team or other key personnel; the Company's inability to realize the anticipated benefits from the Company's cost savings initiatives; changes in relationships with significant customers and suppliers; execution of the Company's international expansion strategy; changes in laws and regulations; legal claims or other regulatory enforcement actions; product recalls or product liability claims; unanticipated business disruptions; failure to successfully integrate the business and operations of the Company in the expected time frame; the Company's ability to complete or realize the benefits from potential and completed acquisitions, alliances, divestitures or joint ventures; economic and political conditions in the nations in which the Company operates; the volatility of capital markets; increased pension, labor and people-related expenses; volatility in the market value of all or a portion of the derivatives that the Company uses; exchange rate fluctuations; disruptions in information technology networks and systems; the Company's inability to protect intellectual property rights; impacts of natural events in the locations in which the Company or its customers, suppliers or regulators operate; the Company's indebtedness and ability to pay such indebtedness; tax law changes or interpretations; 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 “SEC”). 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.

Unaudited Pro Forma Condensed Combined Financial Information

The unaudited pro forma condensed combined financial information (the “pro forma financial information”) presented in this release illustrates the estimated effects of the merger (the “2015 Merger”) consummated on July 2, 2015 (the “2015 Merger Date”) of Kraft Foods Group, Inc. (“Kraft”) with and into a wholly-owned subsidiary of H.J. Heinz Holding Corporation (“Heinz”), the related equity investments and common stock conversion, the application of the acquisition method of accounting, and conformance of accounting policies. The pro forma financial information is presented as if the 2015 Merger had been consummated on December 30, 2013, the first business day of the Company’s 2014 fiscal year, and combines the historical results of Kraft and Heinz. For additional information on the 2015 Merger, please refer to the Company’s filings with the SEC.

The pro forma financial information was prepared using the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed in a business combination be recognized at their fair values as of the completion of the acquisition. The Company utilized estimated fair values at the 2015 Merger Date to allocate the total consideration exchanged to the net tangible and intangible assets acquired and liabilities assumed. Such allocation was final as of July 3, 2016.

The historical consolidated financial statements have been adjusted in the accompanying pro forma financial information to give effect to unaudited pro forma events that are (1) directly attributable to the 2015 Merger, (2) factually supportable and (3) expected to have a continuing impact on the results of operations of the combined company.

This pro forma financial information is not necessarily indicative of what the Company’s results of operations actually would have been had the 2015 Merger been completed as of December 30, 2013. In addition, the pro forma financial information is not indicative of future results or current financial conditions and does not reflect any additional anticipated synergies, operating efficiencies, cost savings or any integration costs that may result from the 2015 Merger.

This pro forma financial information should be read in conjunction with historical financial statements and accompanying notes filed with the SEC. Certain reclassifications have been made to the historical Kraft and Heinz results to align accounting policies and eliminate intercompany sales in all periods presented.

Non-GAAP Financial Measures

To supplement the financial information, the Company has presented Organic Net Sales, Adjusted EBITDA, and Adjusted EPS, which are considered non-GAAP financial measures. The non-GAAP financial measures provided should be viewed in addition to, and not as an alternative for, financial measures prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) that are presented in this press release. 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 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 acquisitions, currency, 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 following the Company's June 28, 2015 currency devaluation, for which the Company calculates the previous year's results using the current year's exchange rate. Organic Net Sales for any period prior to the 2015 Merger Date includes the operating results of Kraft on a pro forma basis, as if Kraft had been acquired as of December 30, 2013. 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; in addition to these adjustments, the Company excludes, when they occur, the impacts of depreciation and amortization (excluding integration and restructuring expenses) (including amortization of postretirement benefit plans prior service credits), integration and restructuring expenses, merger costs, unrealized losses/(gains) on commodity hedges, impairment losses, losses/(gains) on the sale of a business, nonmonetary currency devaluation, and equity award compensation expense (excluding integration and restructuring expenses). Adjusted EBITDA for any period prior to the 2015 Merger Date includes the operating results of Kraft on a pro forma basis, as if Kraft had been acquired as of December 30, 2013. 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 following the Company's June 28, 2015 devaluation of the Venezuelan bolivar and remeasurement of assets and liabilities of its Venezuelan subsidiary, for which it calculates the previous year's results using the current year's exchange rate. Adjusted EBITDA 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 EPS is defined as diluted earnings per share excluding, when they occur, the impacts of integration and restructuring expenses, merger costs, unrealized losses/(gains) on commodity hedges, impairment losses, losses/(gains) on the sale of a business, and nonmonetary currency devaluation, and including when they occur, adjustments to reflect preferred stock dividend payments on an accrual basis. Adjusted EPS for any period prior to the 2015 Merger Date includes the operating results of Kraft on a pro forma basis, as if Kraft had been acquired as of December 30, 2013. 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 for the relevant periods.

 

Schedule 1

The Kraft Heinz Company
Condensed Consolidated Statements of Income
(in millions, except per share data)
(Unaudited)
 
For the Three Months   For the Nine Months
Ended Ended
October 2,   September October 2,   September
2016 27, 2015 2016 27, 2015
Net sales $ 6,267 $ 6,120 $ 19,630 $ 11,214
Cost of products sold 4,049   4,492   12,503   7,857  
Gross profit 2,218 1,628 7,127 3,357
Selling, general and administrative expenses 805   1,229   2,565   2,005  
Operating income 1,413 399 4,562 1,352
Interest expense 311 460 824 1,055
Other expense/(income), net (3 ) 108   (5 ) 314  
Income/(loss) before income taxes 1,105 (169 ) 3,743 (17 )
Provision for/(benefit from) income taxes 262   (49 ) 1,045   (16 )
Net income/(loss) 843 (120 ) 2,698 (1 )
Net income/(loss) attributable to noncontrolling interest 1   3   10   10  
Net income/(loss) attributable to Kraft Heinz 842 (123 ) 2,688 (11 )
Preferred dividends(a)   180   180   540  
Net income/(loss) attributable to common shareholders $ 842   $ (303 ) $ 2,508   $ (551 )
 
Basic shares outstanding 1,218 1,142 1,216 633
Diluted shares outstanding 1,228 1,142 1,226 633
 
Per share data applicable to common shareholders:
Basic earnings/(loss) per share $ 0.69 $ (0.27 ) $ 2.06 $ (0.87 )
Diluted earnings/(loss) per share 0.69 (0.27 ) 2.05 (0.87 )
 
*   The consolidated statements of income for the three and nine months ended September 27, 2015 reflect the results for Heinz and the results of Kraft Heinz for the period after the 2015 Merger occurred on July 2, 2015.
 

(a)

In connection with the December 8, 2015 Common Stock dividend declaration, the Company was required to accelerate payment of the Series A Preferred Stock dividend from March 7, 2016 to December 8, 2015. Accordingly, there were no cash distributions related to the Company's Series A Preferred Stock in the first quarter of 2016. Additionally, as the Series A Preferred Stock was redeemed on June 7, 2016, there were no cash distributions in the third quarter of 2016, resulting in cash distributions of $180 million in the nine months ended October 2, 2016 compared to $540 million in the nine months ended September 27, 2015.
 
 

Schedule 2

The Kraft Heinz Company

Pro Forma Condensed Combined Statements of Income(a)

(in millions, except per share data)
(Unaudited)
 
For the Three Months For the Nine Months
Ended Ended
October 2,   September October 2,   September
2016 27, 2015 2016 27, 2015
Net sales $ 6,267 $ 6,363 $ 19,630 $ 20,323
Cost of products sold(b) 4,049   4,314   12,503   13,579
Gross profit 2,218 2,049 7,127 6,744
Selling, general and administrative expenses(c) 805   1,397   2,565   3,496
Operating income 1,413 652 4,562 3,248
Interest expense 311 460 824 1,262
Other expense/(income), net (3 ) 108   (5 ) 298
Income/(loss) before income taxes 1,105 84 3,743 1,688
Provision for/(benefit from) income taxes 262   69   1,045   562
Net income/(loss) 843 15 2,698 1,126
Net income/(loss) attributable to noncontrolling interest 1   3   10   10
Net income/(loss) attributable to Kraft Heinz 842 12 2,688 1,116
Preferred dividends(d)   180   180   540
Net income/(loss) attributable to common shareholders $ 842   $ (168 ) $ 2,508   $ 576
 
Basic common shares outstanding 1,218 1,213 1,216 1,198
Diluted common shares outstanding 1,228 1,213 1,226 1,222
 
Per share data applicable to common shareholders:
Basic earnings per share $ 0.69 $ (0.14 ) $ 2.06 $ 0.48
Diluted earnings per share 0.69 (0.14 ) 2.05 0.47
 
(a)   There are no pro forma adjustments in the three and nine months ended October 2, 2016 as Kraft and Heinz were a combined company for the entire period. Refer to Schedules 10 and 11 for additional information on the pro forma adjustments for the three and nine months ended September 27, 2015.
 
(b) Integration and restructuring expenses in cost of products sold were as follows: $152 million in the three months ended October 2, 2016 ($102 million after-tax), $161 million in the three months ended September 27, 2015 ($104 million after-tax), $532 million in the nine months ended October 2, 2016 ($361 million after-tax), and $301 million in the nine months ended September 27, 2015 ($203 million after-tax).
 
(c) Integration and restructuring expenses in selling, general and administrative expenses were as follows: $85 million in the three months ended October 2, 2016 ($57 million after-tax), $321 million in the three months ended September 27, 2015 ($214 million after-tax), $249 million in the nine months ended October 2, 2016 ($169 million after-tax), and $380 million in the nine months ended September 27, 2015 ($256 million after-tax).
 
(d) In connection with the December 8, 2015 Common Stock dividend declaration, the Company was required to accelerate payment of the Series A Preferred Stock dividend from March 7, 2016 to December 8, 2015. Accordingly, there were no cash distributions related to the Company's Series A Preferred Stock in the first quarter of 2016. Additionally, as the Series A Preferred Stock was redeemed on June 7, 2016, there were no cash distributions in the third quarter of 2016, resulting in cash distributions of $180 million in the nine months ended October 2, 2016 compared to $540 million in the nine months ended September 27, 2015.
 
         

Schedule 3

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

Pro Forma

Impact of Impact of Organic

Net Sales (a)

Currency Divestitures Net Sales Price Volume/Mix
October 2, 2016
United States $ 4,395 $ $ $ 4,395
Canada 550 550
Europe 513 (40 ) 553
Rest of World 809   8     801  
$ 6,267   $ (32 )   $   $ 6,299  
 
September 27, 2015
United States(b) $ 4,449 $ $ $ 4,449
Canada 539 539
Europe(b) 600 600
Rest of World(b) 775   2     773  
$ 6,363   $ 2   $   $ 6,361  
 
Year-over-year growth rates
United States(b) (1.2 )% (1.2 )% (0.7 ) pp (0.5 ) pp
Canada 2.0 % 2.0 % (1.4 ) pp

3.4

pp

Europe(b) (14.5 )% (6.7 ) pp (7.8 )% (2.9 ) pp (4.9 ) pp
Rest of World(b) 4.4 %

0.8

pp

3.6 %

1.9

pp

1.7

pp

Kraft Heinz (1.5 )% (0.5 ) pp (1.0 )% (0.7 ) pp (0.3 ) pp
 
(a)   There are no pro forma adjustments in the three and nine months ended October 2, 2016 as Kraft and Heinz were a combined company for the entire period.
 
(b) In the first quarter of 2016, the Company moved certain of the historical Kraft export businesses from the Company's United States segment to its Rest of World and Europe segments to align with its long-term go-to-market strategies. This change resulted in the reclassification of $92 million of pro forma net sales for the three months ended September 27, 2015 from the United States segment to the Rest of World segment ($91 million) and Europe segment ($1 million).
 
         

Schedule 4

The Kraft Heinz Company
Reconciliation of Pro Forma Net Sales to Organic Net Sales
For the Nine Months Ended
(dollars in millions)
(Unaudited)
 
Pro Forma Impact of Impact of Organic

Net Sales (a)

Currency Divestitures Net Sales Price Volume/Mix
October 2, 2016
United States $ 13,802 $ $ $ 13,802
Canada 1,692 (89 ) 1,781
Europe 1,644 (77 ) 1,721
Rest of World 2,492   (117 )     2,609  
$ 19,630   $ (283 )   $   $ 19,913  
 
September 27, 2015
United States(b) $ 13,939 $ $ $ 13,939
Canada 1,754 1,754
Europe(b,c) 1,847 43 1,804
Rest of World(b) 2,783   346     2,437  
$ 20,323   $ 346   $ 43   $ 19,934  
 
Year-over-year growth rates
United States(b) (1.0 )% (1.0 )%

0.2

pp

(1.2 ) pp
Canada (3.5 )% (5.0 ) pp 1.5 %

1.9

pp

(0.4 ) pp
Europe(b,c) (11.0 )% (4.2 ) pp (2.2 ) pp (4.6 )% (2.7

) pp

(1.9 ) pp
Rest of World(b) (10.5 )% (17.6 ) pp 7.1 %

3.1

pp

4.0

pp

Kraft Heinz (3.4 )% (3.1 ) pp (0.2 ) pp (0.1 )%

0.5

pp

(0.6 ) pp
 
(a)   There are no pro forma adjustments in the nine months ended October 2, 2016 as Kraft and Heinz were a combined company for the entire period.
 
(b) In the first quarter of 2016, the Company moved certain of the historical Kraft export businesses from the Company's United States segment to its Rest of World and Europe segments to align with its long-term go-to-market strategies. This change resulted in the reclassification of $263 million of pro forma net sales for the nine months ended September 27, 2015 from the United States segment to the Rest of World segment ($261 million) and Europe segment ($2 million).
 
(c) The Company increased Europe Organic Net Sales by $2 million from the amount previously published for the nine months ended September 27, 2015 to reflect a correction to the Impact of Divestitures.
 
 

Schedule 5

The Kraft Heinz Company
Reconciliation of Pro Forma Net Income/(Loss) to Adjusted EBITDA
(in millions)
(Unaudited)
 
For the Three Months For the Nine Months
Ended Ended
October 2,   September October 2,   September
2016 27, 2015 2016 27, 2015
Pro forma net income/(loss)(a) $ 843 $ 15 $ 2,698 $ 1,126
Interest expense 311 460 824 1,262
Other expense/(income), net (3 ) 108 (5 ) 298
Provision for/(benefit from) income taxes 262   69   1,045   562  
Operating income 1,413 652 4,562 3,248
Depreciation and amortization (excluding integration and restructuring expenses) 116 193 401 619
Integration and restructuring expenses 237 482 781 681
Merger costs 4 139 33 193
Unrealized losses/(gains) on commodity hedges 22 (23 ) (23 )
Impairment losses 53 58
Losses/(gains) on sale of business (21 )
Nonmonetary currency devaluation 1 4 49
Equity award compensation expense (excluding integration and restructuring expenses) 10   16   30   60  
Adjusted EBITDA $ 1,803   $ 1,482   $ 5,841   $ 4,864  
 
Segment Adjusted EBITDA:
United States(b) $ 1,349 $ 1,033 $ 4,360 $ 3,364
Canada 148 110 491 374
Europe(b) 183 223 572 662
Rest of World(b) 150 152 525 570
General corporate expenses (27 ) (36 ) (107 ) (106 )
Adjusted EBITDA $ 1,803   $ 1,482   $ 5,841   $ 4,864  
 
(a)   There are no pro forma adjustments in the nine months ended October 2, 2016 as Kraft and Heinz were a combined company for the entire period.
 
(b) In the first quarter of 2016, the Company moved certain historical Kraft export businesses from the Company's United States segment to its Rest of World and Europe segments to align with its long-term go-to-market strategies. For the three months ended September 27, 2015, this change resulted in the reclassification of $28 million of Segment Adjusted EBITDA from the United States segment to the Rest of World segment ($27 million) and Europe segment ($1 million). For the nine months ended September 27, 2015, this change resulted in the reclassification of $73 million of Segment Adjusted EBITDA from the United States segment to the Rest of World segment ($72 million) and Europe segment ($1 million).
 
     

Schedule 6

The Kraft Heinz Company
Reconciliation of Adjusted EBITDA to Constant Currency Adjusted EBITDA
For the Three Months Ended
(dollars in millions)
(Unaudited)
 
Constant Currency

Adjusted EBITDA (a)

Impact of Currency Adjusted EBITDA
October 2, 2016
United States $ 1,349 $ $ 1,349
Canada 148 2 146
Europe 183 (19 ) 202
Rest of World 150 2 148
General corporate expenses (27 )   (27 )
$ 1,803   $ (15 )   $ 1,818  
 
September 27, 2015
United States(b) $ 1,033 $ $ 1,033
Canada 110 110
Europe(b) 223 223
Rest of World(b) 152 (2 ) 154
General corporate expenses (36 )   (36 )
$ 1,482   $ (2 )   $ 1,484  
 
Year-over-year growth rates
United States(b) 30.6 % 30.6 %
Canada 34.5 %

1.8

pp

32.7 %
Europe(b) (17.9 )%

(8.5

) pp (9.4 )%
Rest of World(b) (1.3 )%

2.6

pp

(3.9 )%
General corporate expenses (25.0 )% (25.0 )%
Kraft Heinz 21.7 % (0.8 ) pp 22.5 %
 
(a)   There are no pro forma adjustments in the three and nine months ended October 2, 2016 as Kraft and Heinz were a combined company for the entire period.
 
(b) In the first quarter of 2016, the Company moved certain historical Kraft export businesses from the Company's United States segment to its Rest of World and Europe segments to align with its long-term go-to-market strategies. For the three months ended September 27, 2015, this change resulted in the reclassification of $28 million of Segment Adjusted EBITDA from the United States segment to the Rest of World segment ($27 million) and Europe segment ($1 million).
 
     

Schedule 7

The Kraft Heinz Company
Reconciliation of Adjusted EBITDA to Constant Currency Adjusted EBITDA
For the Nine Months Ended
(dollars in millions)
(Unaudited)
 
Constant Currency

Adjusted EBITDA (a)

Impact of Currency Adjusted EBITDA
October 2, 2016
United States $ 4,360 $ $ 4,360
Canada 491 (25 ) 516
Europe 572 (34 ) 606
Rest of World 525 (22 ) 547
General corporate expenses (107 )   (107 )
$ 5,841   $ (81 )   $ 5,922  
 
September 27, 2015
United States(b) $ 3,364 $ $ 3,364
Canada 374 374
Europe(b) 662 662
Rest of World(b) 570 99 471
General corporate expenses (106 )   (106 )
$ 4,864   $ 99   $ 4,765  
 
Year-over-year growth rates
United States(b) 29.6 % 29.6 %
Canada 31.3 % (6.7 ) pp 38.0 %
Europe(b) (13.6 )% (5.1 ) pp (8.5 )%
Rest of World(b) (7.9 )% (24.0 ) pp 16.1 %
General corporate expenses 0.9 % 0.9 %
Kraft Heinz 20.1 % (4.2 ) pp 24.3 %
 
(a)   There are no pro forma adjustments in the nine months ended October 2, 2016 as Kraft and Heinz were a combined company for the entire period.
 
(b) In the first quarter of 2016, the Company moved certain historical Kraft export businesses from the Company's United States segment to its Rest of World and Europe segments to align with its long-term go-to-market strategies. For the nine months ended September 27, 2015, this change resulted in the reclassification of $73 million of Segment Adjusted EBITDA from the United States segment to the Rest of World segment ($72 million) and Europe segment ($1 million).
 
 

Schedule 8

The Kraft Heinz Company
Reconciliation of Pro Forma Diluted EPS to Adjusted EPS
(Unaudited)
 
For the Three Months For the Nine Months
Ended Ended

October 2,

  September

October 2,

  September

2016

27, 2015

2016

27, 2015
Pro forma diluted EPS(a) $ 0.69 $ (0.14 ) $ 2.05 $ 0.47
Integration and restructuring expenses(b)(c) 0.13 0.27 0.43 0.38
Merger costs(b)(d) 0.31 0.02 0.48
Unrealized losses/(gains) on commodity hedges(b)(e) 0.01 (0.02 ) (0.01 )
Impairment losses(b)(e) 0.03 0.03
Losses/(gains) on sale of business(b)(e) (0.01 )
Nonmonetary currency devaluation(b)(f) 0.23
Preferred dividend adjustment(g)     (0.10 )  
Adjusted EPS $ 0.83   $ 0.44   $ 2.41   $ 1.57  
 
(a)   There are no pro forma adjustments in the three and nine months ended October 2, 2016, as Kraft and Heinz were a combined company for the entire period.
 
(b) Income tax expense associated with these items is based on applicable jurisdictional tax rates and deductibility assessment of individual items.
 
(c) Integration and restructuring expenses include the following gross expenses:

Expenses recorded in cost of products sold were $152 million for the three months and $532 million for the nine months ended October 2, 2016 and $161 million for the three months and $301 million for the nine months ended September 27, 2015;

Expenses recorded in SG&A were $85 million for the three months and $249 million for the nine months ended October 2, 2016 and $321 million for the three months and $380 million for the nine months ended September 27, 2015

Expenses recorded in other expense/(income), net, were $2 million for the three and nine months ended October 2, 2016 (there were no such expenses for the three and nine months ended September 27, 2015).

 
(d) Merger costs include the following gross expenses:

 

Expenses recorded in cost of products sold were $1 million for the three months and $2 million for the nine months ended October 2, 2016, and $4 million for the three and nine months ended September 27, 2015;

Expenses recorded in SG&A were $3 million for the three months and $31 million for the nine months ended October 2, 2016 and $135 million for the three months and $189 million for the nine months ended September 27, 2015;

Expenses recorded in interest expense were $207 million for the three months and $466 million for the nine months ended September 27, 2015 (there were no such expenses for the three and nine months ended October 2, 2016); and,

Expenses recorded in other expense/(income), net, were $113 million for the three and $139 million for the nine months ended September 27, 2015 (there were no such expenses for the three and nine months ended October 2, 2016).

 
(e) Refer to the reconciliation of pro forma net income/(loss) to Adjusted EBITDA for the related gross expenses.
 
(f) Nonmonetary currency devaluation includes the following gross expenses/(income):

Expenses recorded in cost of products sold of $1 million for the three months and $4 million for the nine months ended October 2, 2016 and $49 million the nine months ended September 27, 2015 (there were no such expenses for the three months ended September 27, 2015); and,

Expenses/(income) recorded in other expense/(income), net, including income of $6 million for the three months and expense of $1 million for the nine months ended October 2, 2016 and expense of $234 million for the nine months ended September 27, 2015 (there were no such expenses for the three months ended September 27, 2015).

 
(g)

For Adjusted EPS, the Company presents the impact of the Series A Preferred Stock dividend payments on an accrual basis. Accordingly, the Company includes adjustments to EPS to include $180 million of Series A Preferred Stock dividends during the first quarter of 2016 (to reflect the March 7, 2016 Series A Preferred Stock dividend that was paid in December 2015) and to exclude $51 million of Series A Preferred Stock dividends during the second quarter of 2016 (to reflect that it was redeemed on June 7, 2016).

 
 

Schedule 9

The Kraft Heinz Company
Condensed Consolidated Balance Sheets
(in millions)
(Unaudited)
 
October 2, 2016 January 3, 2016
ASSETS
Cash and cash equivalents $ 3,920 $ 4,837
Trade receivables 855 871
Sold receivables 208 583
Inventories 3,108 2,618
Other current assets 852   871  
Total current assets 8,943 9,780
Property, plant and equipment, net 6,490 6,524
Goodwill 44,518 43,051
Intangible assets, net 59,620 62,120
Other assets 1,509   1,498  
TOTAL ASSETS $ 121,080   $ 122,973  
 
LIABILITIES AND EQUITY
Commercial paper and other short-term debt $ 653 $ 4
Current portion of long-term debt 2,047 79
Trade payables 3,456 2,844
Accrued marketing 708 856
Accrued postemployment costs 164 328
Income taxes payable 142 417
Interest payable 311 401
Dividends payable 769 762
Other current liabilities 1,164   1,241  
Total current liabilities 9,414 6,932
Long-term debt 29,980 25,151
Deferred income taxes 20,706 21,497
Accrued postemployment costs 2,367 2,405
Other liabilities 745   752  
TOTAL LIABILITIES 63,212 56,737
 
Redeemable noncontrolling interest 23
9.00% cumulative compounding preferred stock, Series A 8,320
 
Equity:
Common stock, $0.01 par value 12 12
Additional paid-in capital 58,567 58,375
Retained earnings/(deficit) 374
Accumulated other comprehensive income/(losses) (1,229 ) (671 )
Treasury stock, at cost (82 ) (31 )
Total shareholders' equity 57,642 57,685
Noncontrolling interest 226   208  
TOTAL EQUITY 57,868   57,893  
TOTAL LIABILITIES AND EQUITY $ 121,080   $ 122,973  
 
     

Schedule 10

The Kraft Heinz Company
Pro Forma Condensed Combined Statement of Income
For the Three Months Ended September 27, 2015
(in millions, except per share data)
(Unaudited)
   
Historical Historical Pro Forma
Heinz Kraft Adjustments Pro Forma
Net sales $ 6,120 $ 243 $ $ 6,363
Cost of products sold 4,492   169   (347 ) (a) 4,314  
Gross profit 1,628 74 347 2,049
Selling, general and administrative expenses 1,229   264   (96 ) (b) 1,397  
Operating income 399 (190 ) 443 652
Interest expense 460 460
Other expense/(income), net 108       108  
Income/(loss) before income taxes (169 ) (190 ) 443 84
Provision for/(benefit from) income taxes (49 ) (52 ) 170   (c) 69  
Net income/(loss) (120 ) (138 ) 273 15
Net income/(loss) attributable to noncontrolling interest 3       3  
Net income/(loss) attributable to Kraft Heinz (123 ) (138 ) 273 12
Preferred dividends 180       180  
Net income/(loss) attributable to common shareholders $ (303 ) $ (138 ) $ 273   $ (168 )
 
Basic common shares outstanding 1,213
Diluted common shares outstanding 1,213
 
Per share data applicable to common shareholders:
Basic earnings per share $ (0.14 )
Diluted earnings per share (0.14 )
 
(a)   Represents the elimination of nonrecurring non-cash costs related to the fair value adjustment of Kraft’s inventory.
 
(b) Reflects 2015 Merger-related adjustments including certain deal costs related to the 2015 Merger.
 
(c) Represents the income tax effect of pro forma adjustments utilizing a 38.5% weighted average statutory tax rate.
 
     

Schedule 11

The Kraft Heinz Company
Pro Forma Condensed Combined Statement of Income
For the Nine Months Ended September 27, 2015
(in millions, except per share data)
(Unaudited)
   
Historical Historical Pro Forma
Heinz Kraft Adjustments Pro Forma
Net sales $ 11,214 $ 9,109 $ $ 20,323
Cost of products sold 7,857   6,103   (381 ) (a) 13,579
Gross profit 3,357 3,006 381 6,744
Selling, general and administrative expenses 2,005   1,532   (41 ) (b) 3,496
Operating income 1,352 1,474 422 3,248
Interest expense 1,055 247 (40 ) (c) 1,262
Other expense/(income), net 314   (16 )   298
Income/(loss) before income taxes (17 ) 1,243 462 1,688
Provision for/(benefit from) income taxes (16 ) 400   178   (d) 562
Net income/(loss) (1 ) 843 284 1,126
Net income/(loss) attributable to noncontrolling interest 10       10
Net income/(loss) attributable to Kraft Heinz (11 ) 843 284 1,116
Preferred dividends 540       540
Net income/(loss) attributable to common shareholders $ (551 ) $ 843   $ 284   $ 576
 
Basic common shares outstanding 1,198
Diluted common shares outstanding 1,222
 
Per share data applicable to common shareholders:
Basic earnings per share $ 0.48
Diluted earnings per share 0.47
 
(a)   Represents the change to align Kraft to Kraft Heinz's accounting policy for postemployment benefit plans and the elimination of nonrecurring non-cash costs related to the fair value adjustment of Kraft’s inventory.
 
(b) Reflects 2015 Merger-related adjustments including the change to align Kraft to Kraft Heinz's accounting policy for postemployment benefit plans; incremental amortization resulting from the fair value adjustment of Kraft's definite-lived intangible assets; incremental compensation expense due to the fair value remeasurement of certain Kraft's equity awards; and, certain deal costs related to the 2015 Merger.
 
(c) Represents the incremental change in interest expense resulting from the fair value adjustment of Kraft's long-term debt in connection with the 2015 Merger, including the elimination of the historical amortization of deferred financing fees and amortization of original issuance discount.
 
(d) Represents the income tax effect of pro forma adjustments utilizing a 38.5% weighted average statutory tax rate.

Contact:

The Kraft Heinz Company
Michael Mullen (media)
Michael.Mullen@kraftheinzcompany.com
or
Christopher Jakubik, CFA (investors)
ir@kraftheinzcompany.com