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Kraft Heinz (KHC) Up on Q2 Earnings Beat, Raised Dividend

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The Kraft Heinz Company (KHC - Free Report) posted mixed second-quarter 2016 results wherein earnings beat the Zacks Consensus Estimate while revenues missed the same.

Notably, the company’s shares rallied nearly 4% in afterhours trading on Aug 4, in response to the solid bottom-line performance and raised dividend.

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 on Jul 6, 2015.

Earnings and Revenue Discussion

Adjusted earnings per share of 85 cents beat the Zacks Consensus Estimate of 71 cents by 19.7%. Moreover, earnings surged 39.3% year over year on improved sales trends and growth in adjusted EBITDA.

Kraft Foods Group Inc. (KHC - Free Report) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompany

Reported sales of $6.79 billion missed the Zacks Consensus Estimate of $6.83 billion by 0.5% and soared 159.7% year over year supported by the Kraft–Heinz merger.

However, pro-forma (adjusted) sales were down 4.7% owing to the negative impact of currency headwinds of 4.0% as a stronger dollar hurt the value of international sales. Meanwhile, divestures had a negative impact of 0.2% on sales.

Organically (excluding currency and divestures), sales dipped 0.5% because of lower volume/mix as against a 1.1% rise in the previous quarter.

Volume/mix declined 2.1% in the quarter in comparison to a 0.8% rise in the previous quarter as improvement in Europe and Rest of World were more than offset by declines in the U.S. and Canada.

Kraft Heinz witnessed growth in condiments and sauces category, globally. The company also noted decent improvement in Lunchables and P3 brands in the U.S. All these positives were however offset by weakness in categories such as coffee, ready-to-drink beverages and frozen nutritional meals.

Also, consumption trends remained weak in the quarter. Kraft Heinz, like other U.S. food producers Mondelez International, Inc. (MDLZ - Free Report) , General Mills, Inc. (GIS - Free Report) and Campbell Soup Company (CPB - Free Report) , 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 1.6% despite deflationary commodities, owing to price hikes in all the segments except Europe.

Adjusted EBITDA rose 17.7% to $2.1 billion backed by cost savings from restructuring activities and pricing gains. On a constant currency basis, adjusted EBITDA grew 23.1%.

The Zacks Rank #4 (Sell) 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.

KRAFT HEINZ CO Price, Consensus and EPS Surprise

KRAFT HEINZ CO Price, Consensus and EPS Surprise | KRAFT HEINZ CO Quote

Segment Discussion

U.S.: Adjusted net sales of $4.69 billion declined 1.9% (reported and organic) year over year on lower volumes. Volume/mix decreased 3.1% in the quarter in comparison to a 0.1% rise in the last quarter.

Gains from innovation in Lunchables and P3, as well as macaroni & cheese were more than offset by lower shipments in foodservice, bacon and cold cuts.

Pricing increased 1.2% despite deflation in key commodities like dairy and coffee.

Canada: Adjusted net sales of $638 million declined 3.9% year over year due to currency headwinds. Though sales increased 1.2% organically, pricing gains were offset by volume/mix declines. Volume/mix dipped 1.9% on the back of decline in cheese due to reduced promotional activity as well as lower coffee and ready-to-drink beverages shipments. However, the volume/mix decline was better than the 2.2% drop in the previous quarter.

Pricing increased 3.1%, thereby reflecting pricing actions across most categories to offset higher input costs in local currency.

Europe: Adjusted net sales of $578 million declined 6.9% year over year due to currency headwinds and divestures. Organically, sales fell 2.3% amid a challenging consumer and retail environment. However, organic sales growth was better than the 3.7% decline in the previous quarter.

Volume/mix inched up 0.1% as lower shipments in the U.K. were offset by gains from condiments and sauces across most categories. However, the volume/mix was better than the 0.8% decline in the previous quarter.

Pricing declined 2.4% due to increased promotional initiatives for condiments and sauces in the U.K.

Rest of World: Adjusted net sales of $885 million declined 16.7% year over year due to currency headwinds. Organically, sales grew 7.1% on higher volume/mix and pricing. While pricing increased 5%, volume/mix rose 2.1%. Strong growth in condiments and sauces across all regions boosted volume/mix growth.

Dividend Hike

The board of directors announced a 4.3% increase in the quarterly dividend from 57.5 cents to 60 cents per share, payable on Oct 7, 2016, to shareholders of record as of Aug 26, 2016. This adds up to an annual dividend of $2.40, representing a dividend yield of nearly 3%.

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