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KHC - Kraft Heinz Co.

Liberty

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Contra123 Newbie

Contra123

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I think they definitely will which would maybe help them use the stock as currency again.  However, I dont believe they absolutely have to use a significant amount of stock to do another acquisition.

Right. Depends on the size of the M&A target. Historically, 3G's pattern was to focus on larger targets, and stock was generally part of the consideration (Heinz for Kraft; ABI for SABMiller; InBev for Anheuser-Busch).

 

Last time I checked there was a certain individual with lots of ready cash laying around which gives them alternative ways to structure financing. 

If Berkshire puts in equity, that dilutes the KHC common shareholder. If Berkshire invests into a pref or a convertible, that too is dilutive to the KHC common. Same with any mezz and debt incurs interest expenses and must also be repaid. Financing generally does not come free (especially from Berkshire).

 

  First, there are many ways to create value, you do not need organic growth.  In fact, by not having organic growth possibly opens up the door for large repurchases at attractive prices.  If I had a position I would prefer organic growth (assuming it was profitable) but as an investor my best performing investment (in dollars and percentages) by a wide margin was in a business with no unit growth and the almost certainty of long, and steady shrinkage.

I agree in spirit. Everything at a price - the right price. With a $100 billion capital stack (debt +mcap), I'd personally want a lot more unlevered free cash flow to be coming out of this business than what it is currently spitting out (or what it was spitting out last year) before going long.

 

  Additionally, I see widespread negativity directed at businesses where acquisitions are relied upon to create value.

I am not a fan of generic blanket indiscriminate negativity with regards to anything, but CPG headwinds are (IMO) formidable. I also think roll-up / acquisition stories have a tendency to work better in the early stages. It becomes harder to move the needle later on and find willing targets at larger sizes.  In general, it is hilarious how the market swings back-and-forth between  "break things up" and "put them back together again", especially in CPG and chemicals.  There are people who think KHC should re-merge with MDLZ.  LOL.

 

I am surprised that people arent instead talking more about the opportunity here with this all star board, 3G management, Buffett's backing and the history of success of all these actors. 

I am a huge fan of Lemann, Telles, Sicupira, Brito and a lot of their crew (seriously).  I just suspect that sometimes in life certain strategies work particularly well in certain conditions and certain time periods, and that some (many?) things are cyclical.  E.g. it is great to be Glencore or Noble in the 2005-2011 commodities bull market; do I think Glencore or Noble are dumb? No.

 

I also think that when some investment opportunity is too hard, why bother acting on it.  And finally, just because something has Buffett's stamp of approval, I don't automatically consider it to be a great investment and above any critical discussion (over the past 3/5/10 years, has $KO been a great investment for a PA investor or a PM of any fund below say $10 billion AuM?). We'll see what happens.

 

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scorpioncapital Newbie

scorpioncapital

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Basically the question is do you see KHC as an IBM or a SHLD? A value trap of declining business while trying to extract as much value as possible with what remains? I would say KHC has some advantages. It's a more understandable and simple product, not as fast changing as service outsourcing. And it certainly is better than a failing retailer. Having said that I can see some echoes of similarities in terms of commoditized food products, changes to consumer preferences, proprietary brands, and difficulty to enter European markets where there are so many quality choices generically available for a long time,  although I do see KHC is also now making gluten free products and jumping on the bandwagon.

 

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DanielGMask Newbie

DanielGMask

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“Many shall be restored that now are fallen and many shall fall that now are in honor.“ Horace.

 

Good management always beats regular or bad management. Current market trends in this specific niche of the CPG category are complicating short term results, but I don’t think this is a bad company nor one declining long term.

 

Kraft has eight billion dollar brands, five 500M dollar brands and another 25 brands with sales between 100M-500M. Management is good with a track record to prove it, major shareholders are business savvy and friendly for shareholders and financing is well structured and of long term duration, with most of the debt maturing after 2023.

 

At current prices it’s not a steal, but I don’t think it’s expensive either.

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Contra123 Newbie

Contra123

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Good management always beats regular or bad management.

 

I like Bernardo Hees. The operational track record over the past 5 years is undeniably good (particularly if you focus on margins). But how do you define 'good management'? Do you not find it concerning that pretty much the entire senior management team of KHC has no CPG experience prior to being parachuted into KHC from 3G or the Brazilian rail/logistics company ALL? Many are relatively young people with classic finance backgrounds (IBD/PE/MBA). Can you achieve decent long-run EBITDA growth in a CPG business if that business is run by people with no long-term track record of rising up the ranks of CPG companies? (Of course, to be fair, these concerns re KHC/3G have been consistently floated for years now, and until recently, you would have done well by fading them and investing anyway.)

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DanielGMask Newbie

DanielGMask

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Good management always beats regular or bad management.

 

But how do you define 'good management'? 

1) Capable of running the business without risking long-term future, 2) Able to keep profitability at a level attractive relative to what was invested, and 3) Capable to reinvest either organically or via acquisitions without destroying capital while doing it.

 

I think they have it!

 

Do you not find it concerning that pretty much the entire senior management team of KHC has no CPG experience prior to being parachuted into KHC from 3G or the Brazilian rail/logistics company ALL?

No, I don’t. About 9 years ago I was a proven hotel developer and operator without any experience developing and selling apartments. I thought that they were logically related because of my experience building and obtaining permits, so I decided to give it a try. It took me 2 years to gather the backing necessary to start that new venture. Seven years later I consider myself a proven developer of hotels as well as apartment buildings, but at that moment a lot of people was scared to commit money to any fund managed by me that wasn’t hotel related.

 

I think that 1) when you get in an industry that makes money, 2) have experience managing companies (in this case big public companies), 3) have access to capital at competitive costs, and 4) are business savvy, you will learn what’s necessary to compete even though the road may not be as straightforward as you’ll like.

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gfp Newbie

gfp

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Thanks for both links gentlemen.  Have to love Jorge, he is very candid.  The last quote I found funny, "If any craft beer appears in Argentina or Brazil and it looks good, we will buy it right away."

 

KHC has their work cut out for them, since it looks like the 'reputation' is making it hard to do deals.  It won't make a dent as a new product, but I did order two varieties of Ssam sauce this morning form Amazon.  We'll see how it goes over at home.  We make a lot of stuff from David Chang's cookbooks so I assume it will be popular - at least in my house.

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CorpRaider Newbie

CorpRaider

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Moortgart (or whatever the name was) of Belgium, the one that brews Duvel bought Boulevard (big craft shop in Midwest) a few years back.  I was looking at Moortgart but it went private before that transaction.

 

Thanks for sharing the comments.  I wrote about these comments a little on my site, but was kind of waiting for Milken to post the videos (or to see if they were going to) to get into it for real.

 

Kind of disturbing, but I really think this on the horizon for a while (seemed more nascent in Europe on my last trip, but I didn't go everywhere, and they have those lock-ups agreements with the pubs....seemed weird and anticompetitive to me).  Craft brewing/distilling is showing up in US jobs data now though, so that's good. 

 

Seems maybe the big food brands need a good generic food adulteration scare to restore a bit of that brand signaling value.

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gfp Newbie

gfp

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I guess this is now the wrong thread to discuss craft beers... but - I have a friend who just sold his bar in New Orleans and is leaving town to take a job at Lagunitas.  Seems Heineken is pushing Lagunitas really hard, and has worldwide intentions for it.  I guess when things settle out a bit more, there really will only be one 'IPA' style beer on tap with huge distribution in a global sense - ubiquitous at big chains, airports, etc (places that pride themselves on beer selection will obviously maintain more options).  Come to think of it, my friend's band St. Paul and the Broken Bones just played New Orleans last week and the freaking band is sponsored by Lagunitas!  Whole tour bus was full of it and they can barely drink it because it's too strong and kicks their ass before a show.  Lil Sumpin or whatever it is called was the only one tame enough to drink at 'work.'  I like hoppy beers myself and drink a lot of sweetwater and founders stuff besides local producers.  Maybe a big guy should look to take out one of those two.  The 15-pack was a smart marketing decision...

 

 

When does KHC report?  I thought it was today

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petec Newbie

petec

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I'm not sure that's particularly accurate. Bloomberg is reporting that "unaffiliated co-investors" of 3G are selling. So the implication that 3G are backing off their stake might be wrong.

 

The Lehman quote is correct, but he said that some time ago in another context (which if IIRC was "we have to learn new skills" rather than "we made a mistake").

 

My sense is KHC are very confident they can turn the ship.

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spark411 Newbie

spark411

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Curious what others make of the Q2 earnings report.  Stock had an initial pop and then came back down.   

 

Revenue is turning around but has not turned around yet.    International revenues growth making up for slowdown in North America.  Earnings came down.  Debt has gone up a little.

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RadMan24 Newbie

RadMan24

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beginning to think this may be the valeant of food; without another big deal seams like they are in for some problems

 

https://www.bloomberg.com/view/articles/2018-08-03/kraft-heinz-khc-earnings-foodmaker-s-buffett-glow-may-fade

 

What? 

 

Listen to Kraft Heinz investor day presentation - they're investing for the long haul. You'd understand how and why they got stuck in the middle of a dumbbell market. Brands just have to adjust to consumer tastes, millennials and all will come back over time. And what problems are in store if there is no big deal? They'll just do smaller ones, won't be as effective, but consolidation is likely, and if it occurs, KHC would benefit.

 

Valeant just jacked up the prices of all niche medicines it bought and cleared out the entire R&D team. KHC trimmed the fat around the edges and took that extra cash to reinvest in key brands. I think people forget how long Buffett has owned Coke...

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petec Newbie

petec

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What? 

 

 

;D

 

I agree. The only similarity is that this has debt. Otherwise it's a different ball game. You've got a management team with a very long term view (study 3G) investing for the long term, with revenues declining partly due to tough environment and partly because they're stopping selling stuff that isn't profitable. Profits are fine and at some point if the investments work, revenues and volumes start inching up. And when they buy Campbells Soup or whoever is next you get a ton of synergies.

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spark411 Newbie

spark411

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I'm not concerned with KHC being like Valeant.  I'm concerned KHC could be similar to IBM.    IBM's story was that the "strategic business" growth will make up for loss in legacy business.    IBM's story is similar to where KHC is i.e. international growth and filling white shelf space will make up for the loss in North America sales.

 

I think KHC has a more entrenched market position than IBM did but I'm still concerned.    I was a bit upset about 3Gs recent sale.  3G was supposed to be long term investors. Selling is not a good sign.

 

https://www.cnbc.com/2018/08/08/kraft-heinz-shares-fall-after-3g-capital-trims-stake.html

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