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Kraft Heinz (KHC) Q3 Earnings Surpass Estimate, Sales Lag

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The Kraft Heinz Company (KHC - Free Report) reported third-quarter 2019 results, wherein the bottom line surpassed the Zacks Consensus Estimate while the top line lagged the same. However, both metrics declined year over year. This may be attributable to the weak demand in the United States, which serves as its biggest market, per sources. Having said that, improved pricing in the said region comes as a relief for the company.

Shares of the company were up more than 5% in the pre-market trading session on Oct 31.

The Kraft Heinz Company Price, Consensus and EPS Surprise

 

The Kraft Heinz Company Price, Consensus and EPS Surprise

The Kraft Heinz Company price-consensus-eps-surprise-chart | The Kraft Heinz Company Quote

Q3 in Detail

Adjusted earnings per share of 69 cents surpassed the consensus mark of 53 cents. However, the bottom line declined 9.2% year over year on higher taxes and soft adjusted EBITDA.

Net sales declined 4.8% to $6,076 million, which lagged the Zacks Consensus Estimate of $6,096 million. Net sales growth included 1.7% and 2% unfavorable impacts of currency and divestitures, respectively. Organic sales dipped 1.1%. Per sources, the company’s distribution strategy and weak assortment of products also hurt the top line to some extent.

Pricing was up 1%, driven by price improvements in the United States, Rest of World and EMEA markets, and North America. Volume/mix fell 2.1% due to lower shipment in the United States, which offset strength in condiments and sauces.

Operating Highlights

Gross profit of $1,947 million declined 7% year over year and gross margin contracted 80 basis points (bps) to 32% in the reported quarter.

Adjusted EBITDA was down 7.8% to $1,469 million in the quarter due to sluggishness in the United States and Canada along with rise in general corporate costs.

Segment Discussion

United States: Net sales of $4,361 million declined 1.6% year over year. During the quarter, pricing improved 1.5%, owing to better pricing in certain categories. Volume/mix fell 3.1% due to adverse changes in inventory levels and lower retail takeaway in a few categories. However, consumption growth in condiments, sauces and nuts provided some cushion.

The segment’s adjusted EBITDA declined 1.8% to $1,155 million, owing to reduced volume/mix, which more than offset the favorable impacts of positive pricing and the timing of marketing expenses.

Canada: Net sales of $415 million declined 21.1% year over year, owing to unfavorable impacts of currency and divestitures of 0.8% and 19.8%, respectively. Organic sales edged down 0.5%. Pricing dipped 2.6% due to increased promotional activities and higher cost of cheese. Volume/mix grew 2.1%, owing to growth in products such as cheese and pasta sauce, and improved inventory levels in certain categories. However, lower promotions of macaroni and reduced coffee shipment acted as deterrents.

Segment adjusted EBITDA declined 25.7% to $107 million due to unfavorable pricing and higher raw material costs.

EMEA: Net sales of $612 million declined 3.5% year over year, with a 3.9% unfavorable impact of currency. Organic sales inched up 0.4%. Volume/mix was up 0.2% on growth in food services across all regions and favorable timing of shipments in Russia. However, continued softness in infant nutrition remained a drag. Moreover, pricing grew 0.2%, owing to better pricing in the U.K. compared with other regions.

Adjusted EBITDA grew 0.3% to $165 million on reduced expenses related to supply chain. It also reflects 4.4% loss from unfavorable currency.

Rest of World (comprising Latin America and APAC): Net sales of $906 million declined 13.3%, with a 10.2% adverse impact of currency and a 3.3% negative impact of sale of an Indian nutritional beverage. Organic sales grew 0.2% on higher pricing of 0.9%, especially in Latin America. Volume/mix declined 0.7% due to softness in infant nutritional products.

Adjusted EBITDA dropped 32.7% to $100 million, owing to weak organic sales in the Asia Pacific, escalated supply-chain costs and currency headwinds.

Financials

Kraft Heinz ended the quarter with cash and cash investments of $2,315 million, long-term debt of $28,112 million, and total shareholders’ equity of $51,804 million.

In a separate press release, the company announced a quarterly dividend of 40 cents per share, which is payable Dec 13, 2019, to shareholders of record as of Nov 15.

Management remains optimistic about turnaround efforts and long-term growth post its improved performance in the third quarter. Going ahead, management intends to increase marketing expenses to boost sales while keeping costs in check, per media reports. This may lift investor sentiment to some extent.

Price Performance

We note that the Zacks Rank #4 (Sell) stock has lost 12.4% in the past three months compared with the industry’s decline of 1.6%.

 

 

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