The Kraft Heinz Company (KHC - Free Report) posted third-quarter 2018 results, wherein earnings missed the Zacks Consensus Estimate and declined year on year. This was majorly due to weak adjusted EBITDA, mainly stemming from higher costs. This, combined with negative currency impacts that weighed on performance across few regions, seems to have lowered investors’ optimism, as shares declined 7.3% in the post-market trading session on Nov 1.
We note that higher input costs has been a persistent headwind for Kraft Heinz, with the stock depreciating 25.1% over the past year compared with the industry’s decline of 2.8%.
Nevertheless, sales surpassed estimates and improved year over year, in the reported quarter. This marked the company’s second consecutive sales beat.
Q3 in Detail
Adjusted earnings per share of 78 cents came below the consensus mark of 81 cents. Also, the bottom line decreased 6% year over year, as gains from lower taxes were more than offset by lower adjusted EBITDA.
Net sales came in at $6,378 million, depicting a 1.6% rise from $6,280 million reported in the prior prior-year quarter. Net sales growth includes 0.6 percentage point gain from buyouts and divestitures, as well as a negative impact of 1.6 percentage points from currency. Organic sales increased 2.6%.
Pricing depicted a decline of 0.9 percentage points, owing to increased promotional support and pricing actions across certain key commodities in the United States. These more than offset higher pricing in Rest of World markets. Volume/mix increased 3.5 percentage points due to growth in almost all the segments and consumption growth in the United States.
The Kraft Heinz Company Price, Consensus and EPS Surprise
Gross profit of $2,107 million decreased almost 4.4% year over year.
Adjusted EBITDA was down 14.4% to $1,616 million in the quarter, including a 0.9 percentage point negative impact from currency. Excluding currency, softness in adjusted EBITDA was mainly driven by investments in strategic capabilities, as well as escalated overhead and input costs. These headwinds more than offset growth in organic sales.
United States: Net sales of $4,431 million advanced 1.8% year over year. During the reported quarter, pricing declined 2 percentage points, due to commodity-driven pricing actions in bacon and higher in-store activity. Volume/mix advanced 3.8 percentage points buoyed by consumption led growth across certain categories.
Segment adjusted EBITDA dropped 16.2% to $1,201 million, as benefits from favorable key commodity costs and volume/mix growth were completely offset by lower pricing, non-key commodity cost inflation, strategic investments, and enhanced overhead costs.
Canada: Net sales of $525 million went down 5.6% year over year, owing to a 4.2 percentage point negative impact from currency and a 1.4% reduction in organic sales. Pricing went down 1.5 percentage points as favorable foodservices pricing was more than mitigated by elevated promotional expenses. Volume/mix remained flat, since benefits from macaroni & cheese and coffee were offset by certain product discontinuations.
Segment adjusted EBITDA declined 10.3% to $144 million, including an adverse 4 percentage point impact from currency. Excluding currency, adjusted EBITDA declined owing to lower pricing combined with higher input and overhead costs.
EMEA: Net sales of $629 million was down 3.3%, including adverse currency impacts of 1.9 percentage point and 2.0 percentage point negative impact from the divestiture of a South African joint venture. Organic sales inched up 0.6%. Pricing declined 0.7 percentage points, as favorable pricing in The Netherlands, Italy and the U.K. were countered by reduced prices in Africa and the Middle East. Volume/mix advanced 1.3 percentage points on robust gains across most regions and gains from sauces and condiments, partially offset by reduced shipment in soup and infant nutrition products.
Adjusted EBITDA declined 11.7% to $161 million, including an adverse 1.3 percentage point impact from currency. Excluding currency, adjusted EBITDA declined owing to higher supply chain costs in Africa and Middle East, as well as higher investments.
Rest of World (comprising Latin America and APAC): Net sales of $793 million rose 9.9%, with a 9.4 percentage point adverse impact from currency and a 6.8 percentage point positive impact from the Cerebos’ buyout. Organic sales were up 12.5%. Volume/mix improved 6.3 percentage points, fueled by solid growth in condiments and sauces in Latin America. This was countered by reduced shipments in Indonesia. Pricing jumped 6.2 percentage points, mainly owing to inflationary trends in certain markets in Latin America.
Adjusted EBITDA improved 5.9% to $148 million, despite a 7.1 percentage point adverse currency impact. Growth was aided by strong organic sales, partially offset by elevated input costs and investments.
Kraft Heinz ended the third quarter with cash and cash investments of $1,366 million, long-term debt of $ 30,998 million and total shareholders’ equity of $65,385 million.
In a separate press release, Kraft Heinz announced a quarterly dividend of 62.5 cents per share, which is payable on Dec 14, 2018, to shareholders of record as on Nov 16.
Management is impressed with Kraft Heinz’s top-line performance in the third quarter. This indicates that the company’s marketing initiatives have been yielding. Further, the company is working toward enhancing its profitability in the forthcoming periods.
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