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Kraft Heinz (KHC) Tops Q1 Earnings and Sales; Stock Gains

The Kraft Heinz Company KHC gained almost 6% in after-hours trading in response to the better-than-expected first-quarter 2016 results.

Kraft Heinz was formed by the merger between packaged food company, Kraft Foods, and ketchup maker, H.J. Heinz Company. The deal was backed by Brazilian private equity firm, 3G Capital, and billionaire investor, Warren Buffet.

Previously known as H.J. Heinz Holding Corporation, the Pittsburgh-based company changed its name to Kraft Heinz post merger on Jul 2, 2015. The packaged food giant started trading last year on Jul 6.

Earnings and Sales Beat

Adjusted earnings per share of 73 cents beat the Zacks Consensus Estimate of 61 cents by 19.7%. Moreover, earnings surged 37.7% year over year on improved sales trends and growth in adjusted EBITDA.

 

Reported sales of $6.57 billion beat the Zacks Consensus Estimate of $6.54 billion by 0.5% and soared 165.1% year over year supported by the Kraft–Heinz merger.

However, pro-forma (adjusted) sales were down 3.8% owing to the negative impact of currency headwinds of 4.5%. A stronger dollar hurt the value of international sales though management mentioned that Fx was less of a drag in the quarter under review than in the third and fourth quarters of 2015. Divestures had a negative impact of 0.4% on sales.

Organically (excluding currency and divestures), sales inched up 1.1%, better than a decline of 3.1% in the previous quarter, driven by improved volume/mix.

Volume/mix rose 0.8% in the quarter, better than 3.8% in the previous quarter.

Volumes mix improved in all the segments – Europe, the U.S., Canada and Rest of World segment.

Kraft Heinz witnessed solid growth in condiments and sauces category, globally. The company also noted decent improvement of Lunchables and P3 brands as well as foodservice expansion in the U.S. All these positives offset weakness in categories such as U.K. soups, U.S. mac & cheese, ready-to-drink beverage, and frozen nutritional meals.

However, consumption trends remained weak in the quarter. Kraft Heinz, like other U.S. food producers – Mondelez International, Inc. MDLZ, General Mills, Inc. GIS and Campbell Soup Company CPB – has been witnessing weak volumes because of the shift in consumer preference toward natural and organic ingredients over packaged and processed food.

Pricing inched up 0.3% despite deflationary commodities driven by price hikes in all the segments except Europe.

Adjusted EBITDA rose 21.3% to $2.0 billion backed by cost savings from restructuring activities and pricing gains and improved volume/mix. On a constant currency basis, adjusted EBITDA grew 27.3%.

The Zacks Rank #3 (Hold) company has implemented many cost-saving initiatives including the integration of Kraft Foods and Heinz. The company plans to save $1.5 billion in annual costs by the end of 2017, primarily through work-force reductions, factory closures and consolidations.

Other productivity improvement initiatives include programs such as zero-based budgeting; modernization and capability building within the manufacturing footprint and building a performance driven culture in the company.

Higher profits in the U.S. and Europe were offset by declines in Canada and Rest of World.

Segment Discussion

U.S.: Adjusted net sales of $4.72 billion rose 0.2% (reported and organic) year over year on improved volumes. Volume/mix inched up 0.1% in the quarter, better than 4.6% in the last quarter.

Gains from innovation in Lunchables and P3, whitespace expansion in foodservice and improvement in coffee were offset by weak consumption trends in ready-to-drink beverages, bacon and frozen nutritional meals.

Pricing increased 0.1% as price hikes were offset by lower net pricing related to reduced costs of some commodities like dairy and coffee.

Canada: Adjusted net sales of $504 million declined 8.5% year over year due to currency headwinds. Organically, sales decreased 1.5% as pricing gains were offset by volume/mix declines. Volume/mix dipped 2.2% as growth in condiments and sauces was more than offset by a decline in cheese due to reduced promotional activity than prior year as well as lower coffee and foodservice shipments. However, the volume/mix decline was better than a shortfall of 7.1% in the previous quarter.

Pricing increased 3.7%, thereby reflecting pricing actions across most categories related to higher input costs in local currency.

Europe: Adjusted net sales of $553 million declined 11.7% year over year due to currency headwinds and impact of divestures. Organically, sales fell 3.7% amid a challenging consumer and retail environment. However, organic sales growth was better than 5.9% decline in the previous quarter.

Volume/mix slipped 0.8% as lower U.K. soup volumes and ongoing consumption declines in the U.K and Italy infant nutrition offset solid growth in U.K. beans volume from increased promotional activity as well as ongoing growth in condiments and sauces across Europe. However, the volume/mix decline was better than a shortfall of 6.3% in the previous quarter.

Pricing declined 2.9% due to increased promotional activity in soup and beans in the U.K.

Rest of World: Adjusted net sales of $798 million declined 15.6% year over year due to currency headwinds. Organically, sales grew 10.4% on higher volume/mix and pricing. While pricing increased 2.1%, volume/mix rose 8.3%. Strong growth in condiments and sauces in all regions as well as strong beverage growth in Indonesia due to earlier Ramadan shipments boosted volume/mix growth.

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