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

Organic growth yet to show improvement: Kraft Heinz Co.’s (NASDAQ: KHC) organic net sales fell 1.5 percentage points during the first quarter of 2018 but pricing has been positive for the third consecutive quarter, which is a rise of 1 percentage point. Improving pricing in the United States and Rest of World markets drove the pricing performance. On the other hand, volume mix was 2.5 percentage points lower during the quarter hurt by United States and Rest of World markets pressure. But retail growth in EMEA and Canada offset these markets pressure on the back of a solid Easter programming in the United States and foodservice growth in both the U.S. and EMEA. As per the segment performance, Ore-Ida had a negative 1.5% impact, and trade spend timing led to a 1.2% pressure for the first quarter net sales.


First quarter of 2018 performance (Source: Company reports)

Canada Update: Canada growth was impacted by retail inventory reductions by a major retailer, as compared to the end of 2017. Moreover, Canada has recently retaliated against tariffs set by the U.S. Canada also imposed their own tariffs on $12.6 billion worth of American-made products. This includes ketchup which can hurt the group’s profitability.

Regional performance: EMEA delivered a decent performance for the first quarter of 2018 boosted by soups and meals growth in the UK, coupled with condiments and sauces rise across the zone, including southeast and central Europe. In UK, the group’s newly announced product, chocolate flavored mayo during Easter season generated 3.5 billion impressions for Heinz Seriously Good Mayo. Their Mayochup delivered >1 billion impressions within 48 hours. They just launched Heinz Real Mayonnaise in United States and Canada. As per the Rest of World segment, top line growth was driven by pricing, while vol mix was held back by distribution-related issues, primarily re-alignment in Mexico and ongoing disruption in Puerto Rico. Moreover, a seafood shortage in Southeast Asia has been hurting their canned business in Indonesia. The group implemented SAP in Brazil on the other hand.

Improving earnings: Despite Organic net sales pressure, the group delivered a sequential improvement of EBITDA during the first quarter of 2018. The group generated strong gains from productivity savings and net pricing, which were offset by inflationary pressures, mainly from higher freight and resin costs, and the group’s related aggressive commercial investment agenda. Accordingly, the adjusted EPS, rose $0.05 as compared to the prior corresponding period boosted by a roughly 730 basis point fall in the adjusted effective tax rate against pcp. The group delivered over $500 million of further cash during the quarter against pcp. The group forecasts an incremental $40 million of depreciation and amortization for 2018 as compared to $70 million of their earlier forecast. The group continues to forecast a major cash generation from a combination of lower capital expenditures, lower cash taxes and lower working capital.


Region-wise Performance (Source: Company reports)

Growth revamping efforts in US: The group sees more potential for growth in the effectiveness of their promotional activities in the US. They forecast a major summer and winter reset windows to boost SKU adoption, distribution and velocity through their assortment management and planogram tools. In U.S. foodservice, the group started to streamline their product catalog, stressing high-velocity SKUs, which also cut supply chain complexity. They continue to take actions for go-to-market capabilities, which would enhance their ability to get the right product at the right place, at the right time for the consumers. In-house in-store sales teams in the United States are currently 80% larger than this time last year, while the group is seeing the incremental returns from this new model. In foodservice, the group is targeting whitespace opportunity in some of their most developed markets, the United States and Europe - a good indication that there is more untapped potential in this channel. In e-commerce, they are developing in-house data science and consumer analytics expertise with a focus on building consumer baskets that together with single-item purchase could leverage the breadth of The Kraft Heinz portfolio and make it a better partner to their retail customers.

Focus on innovation:  The group has been focusing on required renovation of their portfolio since last two years. They have been focusing on marketing spend efficiency and product renovation. They are making higher commercial investments especially behind incremental innovation. The group continues to develop proprietary in-house tools to better measure quality impressions across new mediums like mobile, and to understand the effect of their digital initiatives on net sales, all at a faster real-time pace. Their Super Bowl ad kicking off the Kraft Maxwell brand campaign generated more than 2 billion impressions during the first quarter. The group executed a data-driven target digital campaign in UK soups enabling them to gain more than a point of share during strong soup season in gross sales 10%. The group’s focus on innovation, is driving them into new categories, new segments, new occasions, in many cases to premium positioning while they are doing this with a focus on incremental growth, not just gross sales from new items. In the United States, the group’s innovation funnel has got wider every single year. Accordingly, they designed more launches which would be incremental to their current base, like breakthrough innovation in new dayparts. For instance, they are doing with Just Crack an Egg for breakfast, a refrigerated product that's currently selling very fast.


Focus Areas (Source: Company reports)

Positive Outlook: The group sees an ongoing improving consumption trend in most countries and in most of the major categories. Accordingly, they expect a better top as well as bottom-line for the second half of the year. This outlook is mainly on the back of the ongoing improving performance in categories like ready-to-drink beverage in United States; soups and meals in the UK; natural cheese, meals and desserts; cheese and coffee in Canada; condiments and sauces across Europe; and baby food in Russia; condiments and pasta sauce in Latin America; as well as soy sauce in Indonesia. The group’s investments and efforts to build capability for sustainable advantage to their iconic brands is mainly driving the performance.

Stock performance: The shares of Kraft Heinz lost over 25.8% in one year owing to weakness in organic sales and tariff pressure from Trump administration. On the other hand, the stock has been recovering since the last four weeks, which rose over 7%. Speculation over a potential takeover of Campbell Soup (NYSE:CPB) who is making internal strategic review of options also contributed to the rally to a certain extent. However, there is no official confirmation from the group while the acquisition can be a stepping stone for further milestones. On the other side, in 2018, the group intends to launch roughly 60% more innovation-driven projects than they did in 2016.They are focusing on disruptive innovation like Heinz Premium Mayonnaise while also strengthening their presence in snacking by complementing P3 with Oscar Mayer Natural Meat & Cheese Plates, Philadelphia Bagel Chips and Cream Cheese Dips, and Planters Signature nuts. The group also partnered with growing equities to bring specialty items to market with their new Springboard platform and through joint ventures. The returns on equity and capital invested have been steady over the past few periods and the generous dividend payouts have led to a yield above 4%. We believe that the stock would trend higher given the improving drivers on both organic and inorganic fronts, and pay off from growth efforts being undertaken by the group. Accordingly, we recommend a “Buy” on KHC at the current price of $ 62.64.
 

KHC Daily Chart (Source: Thomson Reuters)

 
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