Kraft Heinz Co. — Form 10-Q Summary
Business context and reporting period
The Kraft Heinz Company manufactures and markets food and beverage products globally, including condiments and sauces, cheese and dairy, meals, meats, beverages, coffee, and grocery products. Results are reported through North America and International segments. The filing covers the three months ended April 1, 2023, compared with the three months ended March 26, 2022. The interim financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $6.489 billion | $6.045 billion | 7.3% |
| Gross profit | $2.113 billion | $1.931 billion | 9.4% |
| Gross margin | 32.6% | 31.9% | +70 bps |
| Operating income | $1.243 billion | $1.115 billion | 11.4% |
| Operating margin | 19.2% | 18.4% | +70 bps |
| Net income attributable to common shareholders | $836 million | $776 million | 7.7% |
| Diluted EPS | $0.68 | $0.63 | 7.9% |
| Adjusted EBITDA | $1.480 billion | $1.342 billion | 10.3% |
| Adjusted EBITDA margin | 22.8% | 22.2% | +60 bps |
| Operating cash flow | $486 million | $486 million | Flat |
Organic net sales increased 9.4% to $6.567 billion. Pricing contributed 14.7 percentage points, while volume/mix reduced growth by 5.3 percentage points. Foreign currency reduced reported sales growth by 2.1 percentage points.
Segments and material changes
- North America: Net sales increased 6.2% to $4.885 billion, organic sales rose 6.7%, and Segment Adjusted EBITDA increased 13.7% to $1.333 billion. Pricing growth of 13.2 percentage points more than offset a 6.5-point unfavorable volume/mix impact.
- International: Net sales increased 11.1% to $1.604 billion, organic sales rose 18.1%, and Segment Adjusted EBITDA increased 5.3% to $255 million. Pricing contributed 19.3 percentage points, partly offset by unfavorable volume/mix, foreign exchange, and the impact of Cyclone Gabrielle in New Zealand.
- Operating income benefited from higher pricing, efficiency gains, and the absence of prior-year impairment losses. These benefits more than offset inflationary supply-chain and commodity costs, unfavorable volume/mix, higher corporate expenses, commodity-hedge losses, foreign exchange, and weather-related impacts.
- Interest expense declined to $227 million from $242 million, primarily reflecting 2022 senior-note repurchases and repayments that reduced aggregate senior-note principal by approximately $1.5 billion.
- Other income declined to $35 million from $98 million, mainly because Q1 2023 included a $6 million foreign-exchange loss versus a $32 million gain in the prior year, and lower non-cash pension and postretirement benefits.
- The effective tax rate increased to 20.3% from 19.6%, primarily due to changes in uncertain tax-position reserves.
Cash flow, liquidity, debt, and capital allocation
- Operating cash flow was $486 million. Capital expenditures were $266 million, compared with $214 million in the prior-year period.
- Cash used in investing activities was $264 million, versus $469 million in Q1 2022, when the company paid approximately $243 million for the Just Spices acquisition.
- Cash used in financing activities was $439 million, including $491 million of dividends paid.
- Cash and cash equivalents were $826 million at April 1, 2023, compared with $1.040 billion at December 31, 2022. Total cash, cash equivalents, and restricted cash were $828 million.
- Long-term debt, including the current portion, was $20.1 billion. The company had $2 million of commercial paper and other short-term debt, no commercial paper outstanding under its commercial paper programs, and no borrowings under its $4.0 billion revolving credit facility.
- The company was in compliance with all financial covenants. Approximately €750 million of senior notes mature in June 2023.
- Credit ratings were BBB from S&P and Fitch and Baa2 from Moody’s, with stable outlooks. Fitch and S&P upgraded the company to BBB, and Moody’s upgraded it to Baa2.
- Management believes operating cash flow, cash on hand, commercial paper capacity, the revolving credit facility, and potential capital-market access will provide sufficient liquidity for the next 12 months.
- Management expects approximately $1.1 billion of capital expenditures in 2023, versus $916 million in 2022.
Guidance, outlook, risks, contingencies, and unusual items
- Management expects inflation to remain elevated in 2023 but moderate during the second half of the year. Pricing actions and efficiency gains are intended to mitigate higher procurement, manufacturing, commodity, and supply-chain costs.
- Pricing actions have negatively affected, and may continue to negatively affect, market share and volume/mix.
- Restructuring activities generated $8 million of income in Q1 2023, compared with $19 million of expense in the prior-year period. Approximately 335 positions were eliminated during the quarter, with approximately 100 additional positions expected to be eliminated during the remainder of 2023.
- Goodwill and intangible assets totaled approximately $73.6 billion. No impairment indicators were identified during the quarter, but reporting units and brands with limited excess fair value remain exposed to future impairment if growth, margins, discount rates, inflation, foreign exchange, or other assumptions deteriorate.
- The IRS is examining the company’s 2018 and 2019 tax years and is expected to propose an adjustment related to transfer pricing. Kraft Heinz disputes the position and believes its reserves are appropriate, but additional taxes, interest, and penalties could materially affect results and cash flows if the company does not prevail.
- A preliminary settlement was reached in February 2023 in a consolidated securities class action. The company recorded a $210 million net expense in Q4 2022 and believes any difference from the accrued amount will not materially affect its financial condition, results, or cash flows. Court approval remains required.
- Additional stockholder derivative actions remain pending, including matters for which the potential loss cannot reasonably be estimated because of their early stage.
- The company identifies risks from competition, consumer demand, retail and customer concentration, commodity and energy volatility, inflation, foreign exchange, geopolitical conflict, cyber and information-technology disruptions, indebtedness, regulatory matters, product liability, climate-related developments, and potential impairment charges.
- Approximately 1% of consolidated sales, net income, and Adjusted EBITDA was generated from Russia. Management stated that the Russia-Ukraine conflict had not materially affected financial condition, results, or cash flows through Q1 2023.
Important facts for investors to verify
- Whether pricing-driven sales growth can continue without further volume/mix deterioration or market-share losses.
- The sustainability of gross-margin and Adjusted EBITDA improvement as commodity, energy, labor, and supply-chain costs evolve.
- Liquidity and refinancing needs associated with the approximately €750 million of senior notes maturing in June 2023.
- Progress toward the approximately $1.1 billion 2023 capital-expenditure plan and its effect on free cash flow.
- The ultimate outcome and cash impact of the IRS transfer-pricing examination and pending legal proceedings.
- Potential goodwill and brand impairments, particularly for reporting units and brands with 20% or less excess fair value.
- The extent to which supplier-finance and accounts-receivable-factoring programs affect working capital and reported cash flows; supplier-program obligations were estimated at $866 million and receivables sold under the factoring program totaled approximately $100 million during the quarter.
- The filing states that disclosure controls were effective as of April 1, 2023 and that there were no material changes in internal control over financial reporting.