The Kraft Heinz Company reported second quarter results for Kraft Foods Group, Inc. and H.J. Heinz Holding Corporation for the periods ended June 27, 2015, and June 28, 2015, respectively.
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Kraft’s net revenues decreased 4.9 percent including a negative 1.4 percent impact from currency. Kraft Organic Net Revenues decreased 3.3 percent driven by a 2.6 percent decline from volume/mix and a 0.7 percent decline from lower net pricing.
Volume/mix included an approximate one percentage point negative impact from the timing of Easter-related shipments and an approximate one percentage point negative impact from lower ready-to-drink beverage sales resulting from decreased promotional activity versus the prior year quarter as well as retail inventory shifts this year.
Lower net pricing reflected pricing actions in the Cheese and Foodservice businesses related to lower dairy costs that were partially offset by the carryover impact of price increases taken in prior quarters.
Operating income of $923 million and diluted EPS of $0.92 included $56 million ($0.06 per diluted share) in spending on cost savings initiatives, $37 million ($0.04 per diluted share) in merger-related costs, a $21 million ($0.02 per diluted share) gain on the sale of assets, and $20 million ($0.02 per diluted share) in unrealized gains from hedging activities.
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 (mainly in the dairy and meat categories) net of pricing; lower selling, general and administrative (SG&A) expenses driven by reductions in less effective advertising spending; and lower manufacturing costs driven by 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 through the first six months of 2015 was $802 million, up from $454 million for the same period during the prior year, reflecting working capital improvements that more than offset an increase in capital expenditures.
Heinz’s sales declined 4.1 percent due to a negative 9.4 percent impact from foreign exchange translation and a 0.6 percent reduction from the divestiture of a frozen food business in the U.K.
Net pricing increased by 4.2 percent driven by higher pricing across all segments, primarily due to Latin America. Volume increased 1.7 percent driven by higher inventory stock at U.S. 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 the Ramadan festive season in Indonesia, volume declines due to reduced trade promotions in Russia, product rationalization in Europe, and category declines in Italy.
Adjusted EBITDA increased $46 million, or 6.7 percent, to $739 million, primarily driven by gross profit as a result of increased sales in North America and Venezuela, cost of goods sold (COGS) 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. ■