Company Overview: The Kraft Heinz Company is a food and beverage company. The Company is engaged in the manufacturing and marketing of food and beverage products, including condiments and sauces, cheese and dairy, meals, meats, refreshment beverages, coffee and other grocery products. The Company's segments include the United States, Canada and Europe. The Company's remaining businesses are combined as Rest of World. The Rest of World consists of Latin America and Asia, Middle East and Africa (AMEA). The Company provides products for various occasions whether at home, in restaurants or on the go. The Company's brands include Heinz, Kraft, Oscar Mayer, Philadelphia, Planters, Velveeta, Lunchables, Maxwell House, Capri Sun, and Ore-Ida. The Company's products are sold through its own sales organizations and through independent brokers, agents and distributors to chain, wholesale, cooperative and independent grocery accounts, convenience stores, drug stores, value stores, bakeries and pharmacies.

 

KHC Details
 
While retail environment seems to be building up challenges with each passing day, Kraft Heinz Co (NASDAQ: KHC) relies on its data-driven capabilities to have a competitive edge coupled with the cost cutting efforts that have been implemented by the group lately. The group has lately demonstrated good organic revenue growth in regions including Europe with slight improvement in the U.S. The group also has a good dividend stream with potential margin growth at the back of deal synergies. Further, a boost is expected from the industry trend given the performance in line with broad market benchmark. Leveraging any merger and acquisition opportunity might add value for the group.
 
Sold South African joint venture stake: Kraft Heinz is selling its stake in its South African joint venture, Heinz Foods SA, to Pioneer Food Group Ltd. This means that Pioneer Food Group Limited will control all of Heinz Foods South Africa. As part of the deal, Pioneer Foods is entering into a 2-year agreement with Kraft Heinz to manufacture and distribute Heinz tomato ketchup products. Kraft Heinz’s subsidiary Heinz Foods South Africa Pty Ltd. now holds 50.1 percent of the joint venture. The transaction is expected to close in the first quarter if the regulators approve. Financials were not disclosed. Moreover, Pioneer Food will continue to make and sell Heinz ketchup and to distribute HP and Lea & Perrins sauces, as well as some other Kraft Heinz products. As per Felipe Guimaraes, managing director of Kraft Heinz Middle East and Africa, the deal is an excellent opportunity for the business and the employees to leverage Pioneer Foods’ existing scale and platform in South Africa to grow the business further.
 
Third Quarter financial performance: KHC third quarter of 2017 reflected significant cost savings and improved net sales performance. But the group had to pay a higher tax rate versus the prior year period. KHC’s quarterly revenue grew 0.7% to $6.31 billion, which was slightly below the expectations. Moreover, there was a 0.4% decline in revenue in the U.S. The organic revenue expansion of 0.3% from a year earlier also missed expectations slightly. However, the revenues rose for the first time since 2015 for the merger created company (the company was created through a merger engineered by billionaire Warren Buffett and private equity firm 3G Capital). Further, the pricing had increased 0.5 percentage points, driven by higher pricing in the United States. On the other hand, the group’s volume/mix has fallen 0.2 percentage points, as growth in condiments and sauces globally was offset by overall shipments in the United States. Nonetheless, diluted earnings per share grew during the third quarter of 2017 and were better than consensus expectations while adjusted earnings remained flat. Overall, it is worth noting that a wave of optimism about food companies is prevailing after both Mondelez International Inc. and Kellogg Co. reported sales growth for the first time in years.

 
Third quarter performance (Source: Company reports)
 
Strong Europe performance: The group’s Europe net sales rose 7.3% year on year (yoy) to $599 million, for the third quarter of 2017 while organic net sales enhanced 3.4% on a yoy basis. The Pricing also fell 0.7 percentage points, driven by better promotional activity in infant nutrition in Italy. Volume/mix increased 4.1 percentage points, driven by condiments and sauces across the region and gains in foodservice, while there was ongoing weakness in Italy. Europe Segment adjusted EBITDA enhanced 7.9% on a yoy basis. Rest of World net sales rose 1.6% yoy to $776 million, despite a negative 2.0 percentage point impact from currency. Rest of World net sales Organic net sales rose 3.6% on a yoy basis. Rest of World adjusted EBITDA surged 2.7 percent to $149 million during the period, despite an unfavorable 3.7 percentage point impact from currency driven by better pricing and lower overhead costs.

Canada net sales rose 1.6% yoy to $559 million, driven by a positive 4.0 percentage point impact from currency. On the other hand, Canada Organic net sales lost 2.4% on a yoy basis. Pricing lost 1.9 percentage points boosted by better promotional activity, primarily in cheese. Canada Volume/mix fell 0.5 percentage points, driven by rise in condiments and sauces that was more than offset by lower shipments of macaroni and cheese products. Canada Segment’s adjusted EBITDA surged 9.0% yoy to $162 million, driven by a favorable 4.2 percentage point impact from currency. There were gains from cost savings initiatives, lower overhead costs and improved product mix more than offsetting the impact of lower pricing. United States net sales fell 0.4% yoy to $4.4 billion. Volume/mix fell 0.8 percentage points, hurt by distribution losses in nuts and cheese as well as lower shipments in meat and coffee. United States Segment adjusted EBITDA enhanced 6.8% yoy to $1.4 billion, boosted by cost savings initiatives, falling overhead costs and favorable pricing that were partially offset by unfavorable key commodity costs, especially in meats and cheese.
 

Rest of world performance (Source: Company reports)
 
Strategy to boost sales: As a strategy to boost sales, KHC has pared back some of its low-selling products. The company has reformulated the recipes of others, in order to increase the sales and have demand. The company has also recently begun making pre-sliced, processed deli meat from animals which were never treated with antibiotics, and has removed the artificial yellow dye from its classic boxed Kraft macaroni and cheese. Moreover, KHC has tried to buy Unilever PLC earlier this year, and the analysts believe that KHC would keep looking to buy competitors and further streamline operations. Kraft Heinz would wait for good opportunities to buy brands that have the potential for higher sales abroad and online.
 
Restated its cash flow statements for two quarters: KHC has restated its cash flow statements for two quarters, after it found that it implemented a new accounting standard since the start of 2017, instead of from 2018. The company would file amended statements for the quarters ended April 1 and July 1 to correctly classify certain items on its cash flow statements. Kraft Heinz said that the misstatement did not have an impact on its income statements and balance sheets for the periods. Moreover, in the third quarter of 2017, KHC has announced the plans to reorganize certain of the international businesses for the better alignment in the global geographies. The plans consist of moving the Middle East and Africa businesses from the AMEA operating segment into the Europe reportable segment, formation of the Europe, Middle East, and Africa (EMEA) operating segment. Then the remaining AMEA businesses would be aligned into the Asia Pacific (PAC) operating segment. The company expects these changes to be effective from December 30, 2017.
 
Outlook: The group forecasts that their fourth quarter sales would face the impact of several U.S. consumers working through emergency hurricane stores of its tinned goods. The company said that the organic U.S. sales growth can take another 30-basis point hit on the back of the loading of pantries in southern states in the third quarter in advance of hurricanes Irma, Harvey and Maria. Meanwhile, the competitors from packaged food industry have experienced the recovery in North American sales in the September quarter as Mondelez has posted a 1.3 percent growth in revenue while Hershey has posted a 1.6 percent increase in sales. The group primarily expects $1.7 billion - $1.8 billion of cumulative cost savings net of inflation and Integration Program savings by the end of FY17. While US sales may get an impact, EBITDA growth is expected to continue with increased efforts in innovation, renovation, marketing, and go-to-market initiatives. Further improvement is expected in Europe while new go-to market agreements in Canada will help the group.
 
Stock Recommendation: KHC stock has fallen 9.9% in the last one year (as of November 08, 2017) impacted by consumer sentiment and hurricanes’ effect. On the other hand, the group’s stock is backed by billionaire-investor Warren Buffett and private equity firm 3G Capital. The third quarter has reflected upon major cost savings and delivered an improving net sales performance. At the start of this year, KHC had targeted for over a $1.7 billion cut in costs by the end of 2017. Kraft Heinz is nearing its cost-cutting target while growth is needed internally. The group has declared a regular quarterly dividend payable on December 15, 2017, to the shareholders and continues to provide value to investors. The stock also seems to be moving up with over 1.8% rise on November 08, 2017 giving the upward momentum in terms of performance. We give a “Buy” recommendation on this dividend yield stock at the current price of USD79.58


 
KHC Daily Chart (Source: Thomson Reuters)

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated websites are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.