The Kraft Heinz Company: Q2 2023 Form 10-Q Summary
Business context and reporting period
Kraft Heinz 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 quarter ended July 1, 2023, compared with the quarter ended June 25, 2022; the six-month period also ended July 1, 2023. The fiscal year is scheduled to end December 30, 2023.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $6.721 billion | $6.554 billion | $13.210 billion | $12.599 billion |
| Organic net sales | $6.777 billion | $6.518 billion | $13.344 billion | $12.522 billion |
| Operating income | $1.376 billion | $542 million | $2.619 billion | $1.657 billion |
| Net income attributable to common shareholders | $1.000 billion | $265 million | $1.836 billion | $1.041 billion |
| Diluted EPS | $0.81 | $0.21 | $1.49 | $0.84 |
| Adjusted EBITDA | $1.612 billion | $1.520 billion | $3.092 billion | $2.862 billion |
| Operating cash flow | Not separately provided | Not separately provided | $1.584 billion | $788 million |
Q2 gross profit was $2.261 billion, representing a 33.6% gross margin versus 30.3% in the prior-year quarter. Operating margin was 20.5% versus 8.3%, and net margin attributable to common shareholders was 14.9% versus 4.0%. Six-month gross, operating, and net margins were approximately 33.1%, 19.8%, and 13.9%, respectively, compared with 31.1%, 13.2%, and 8.3% in the prior-year period. Q2 Adjusted EBITDA margin was approximately 24.0% versus 23.2%.
- Q2 net sales increased 2.6%; organic net sales increased 4.0%, driven by 11.0 percentage points of pricing, partly offset by 7.0 percentage points of unfavorable volume/mix.
- North America Q2 sales increased 0.8% to $5.079 billion, while International sales increased 8.5% to $1.642 billion. Segment Adjusted EBITDA increased 2.7% in North America and 16.9% Internationally.
- Cash flow from operations increased to $1.584 billion for the first six months, aided by lower inventory-related cash outflows and lower cash taxes than in 2022.
- Cash and cash equivalents were $947 million at July 1, 2023; total cash, cash equivalents, and restricted cash were $949 million.
- Total debt was approximately $20.0 billion, including $629 million of current maturities and $19.367 billion of long-term debt. Approximate debt less cash was $19.1 billion. No commercial paper or revolving-credit borrowings were outstanding.
- The company had a $4.0 billion senior unsecured revolving credit facility, extended in July 2023 to mature July 8, 2028, and was in compliance with its financial covenants.
- Dividends paid during the first six months were $982 million. The board declared an additional $0.40-per-share dividend payable September 29, 2023.
Material changes versus the prior comparable period
- Operating income increased 154.4% in Q2 and 58.1% for the first six months, primarily because the 2022 periods included $630 million and $685 million, respectively, of impairment losses. Excluding the prior-year impairment effect, management attributed the improvement to pricing, efficiency gains, and lower commodity costs, partly offset by supply-chain inflation, unfavorable volume/mix, and marketing investment.
- Net income attributable to common shareholders increased 277.8% in Q2 and 76.4% for the first six months. Adjusted EPS increased 12.9% to $0.79 in Q2 and 13.8% to $1.48 for the first six months.
- Q2 pricing remained strong but reduced volume/mix. North America volume/mix was affected in part by pricing elasticity and the reduction of SNAP benefits. International results also reflected delivery delays in Brazil and the lapping of prior-year pantry loading in Eastern Europe.
- Interest expense declined to $228 million in Q2 and $455 million for the first six months. Other income declined substantially because 2023 included foreign-exchange losses rather than the large foreign-exchange gains recorded in 2022.
- The company issued €600 million of floating-rate senior notes due May 2025 and repaid €750 million of senior notes at maturity in June 2023.
Guidance, outlook, risks, and unusual items
- Management expects inflation to moderate during the second half of 2023 and to be lower than in 2022, while continuing to use pricing and efficiency gains to offset input-cost pressure. The filing does not provide clear full-year revenue or earnings guidance.
- Expected 2023 capital expenditures are approximately $1.1 billion, compared with $916 million in 2022. Management believes available liquidity will fund operating needs, debt maturities, dividends, capital expenditures, restructuring, and benefit-plan contributions for at least the next 12 months.
- Two International businesses are subject to potential sale. The filing estimates a combined pre-tax loss on sale of approximately $100 million, including approximately $50 million from releasing accumulated foreign-currency losses, although timing remains uncertain.
- The IRS proposed transfer-pricing adjustments that could increase U.S. federal tax liabilities by approximately $200 million for 2018 and $210 million for 2019, excluding interest and potential penalties. Kraft Heinz disagrees, has recorded no reserve, and intends to contest the matter.
- A securities class-action settlement received preliminary court approval. The company has accrued a $210 million estimated liability after insurance recoveries and contributions from other defendants, expected to be paid in the third quarter of 2023. The final hearing was scheduled for September 12, 2023.
- Restructuring programs eliminated approximately 410 positions during the first six months; approximately 180 additional positions were expected to be eliminated during the remainder of 2023. Restructuring generated an $18 million benefit for the first six months.
- The company entered into a synthetic lease for a distribution facility with estimated construction costs of approximately $400 million, expected to be completed in late 2025. The arrangement includes a residual-value guarantee of approximately 85% of construction cost.
- Key risks include consumer trade-down and pricing elasticity, market-share loss, commodity and energy volatility, foreign exchange, inflation, competition, supply-chain disruptions, geopolitical conditions, debt and refinancing needs, potential goodwill or brand impairments, litigation, tax disputes, and cybersecurity or operational disruptions.
Important facts for investors to verify
- Reconcile reported sales growth with pricing-driven organic growth and persistent unfavorable volume/mix.
- Assess recurring profitability separately from the substantial prior-year impairment comparison and other excluded non-GAAP items.
- Monitor the IRS transfer-pricing dispute, including potential interest and penalties and the absence of an accrued reserve.
- Evaluate approximately $20.0 billion of debt against cash generation, the €550 million of senior notes maturing in May 2024, and the May 2025 notes.
- Verify the timing and economics of the two potential divestitures and the estimated $100 million pre-tax loss.
- Track capital expenditures, restructuring execution, pricing elasticity, market share, and commodity-cost trends.
- Review the $210 million securities-settlement payment, the synthetic-lease obligations, supplier-finance balances of approximately $0.8 billion, and accounts-receivable factoring of $621 million during the first six months.