KHC - Kraft Heinz Co.

[Gregmal]

Further evidence that Warren isn't a .400 hitter anymore.

[Foreign Tuffett]

The sad thing is that even with the haircut implied by AH quote, this stock looks at best fairly priced,, but most likely overvalued, given the business trends. This is now truly a major turnaround situation.

 

I agree. Assuming this sells down to $40 tomorrow, it's still @ ~13.75X EV/OP, which isn't exactly "stupid cheap" for a low to no growth business that cash flows well.

 

They need to dump their 30 year old CFO, forget about acquisitions, and renew their focus on the basic blocking-and-tackling at the heart of the CPG space (fighting for shelf space, optimizing promotions and marketing, etc).

[sarganaga]

if this happens in a relatively straightforward, uncomplicated business, how much more is there floating around  in financially adventurous ones with lots of moving parts? This is pretty scary.

[Viking]

Food is a commodity. It is very hard to build up mega brands I guess. Or possibly , the Standard Generic products they make needs more differentiation and organic/bio/healthy alternatives. Sometimes starting with an experimental no-name brands (like craft beer) might create more consumer excitement. tough business indeed, who would have thought?

 

I think what we are better understanding is the importance of distribution for national food brands. For decades they controlled distribution. Retailers typically carry at most three brands per category: national brand, perhaps strong regional brand and private label. The national brand could afford to pay an enormous amount of $ to the retailer to secure the preferred listing and to get product promoted (end aisles and flyer). The national brand could also go direct to the consumer with advertising and coupons (and pull the product through the retailers). Prices could be increased each year and this then allowed more $ for national brands to spend at retailer and consumer. Bottom line, sales and profits grew and national brands, and retailers (for the most part) flourished.

 

The national brand model is in the process of changing dramatically (for the past 20 years). National brands do not have the power they once had, due to:

- creation of national retailers, like Walmart and Kroger, who are exceptionally well run and ruthless in executing their own business model. They want to own the consumer.

- advent of high quality retail private label brands (shifted the balance of power from national brand to retailer); consumers actually preferred some retail private labels over the national brands.

- establishment of retailers like Costco and discounters who carry only one brand which may not even be a national brand

- Amazon effect: offers much more choice; consumers are no longer captive to the choices offered by the retailer

 

Kraft Heinz is in an industry where the national brands are used to dictating terms. That is no longer the case. As a result, success in the future will also require a strategic and cultural shift. I am not optomostic they can pull it off.

[CorpRaider]

Drink your ovaltine.

[RadMan24]

The sad thing is that even with the haircut implied by AH quote, this stock looks at best fairly priced,, but most likely overvalued, given the business trends. This is now truly a major turnaround situation.

 

I agree. Assuming this sells down to $40 tomorrow, it's still @ ~13.75X EV/OP, which isn't exactly "stupid cheap" for a low to no growth business that cash flows well.

 

They need to dump their 30 year old CFO, forget about acquisitions, and renew their focus on the basic blocking-and-tackling at the heart of the CPG space (fighting for shelf space, optimizing promotions and marketing, etc).

 

 

There's no reason for Buffett to sell for over a decade. It won't be a home run, but probably a single rather than a strike out like you're implying.

[Spekulatius]

The sad thing is that even with the haircut implied by AH quote, this stock looks at best fairly priced,, but most likely overvalued, given the business trends. This is now truly a major turnaround situation.

 

I agree. Assuming this sells down to $40 tomorrow, it's still @ ~13.75X EV/OP, which isn't exactly "stupid cheap" for a low to no growth business that cash flows well.

 

They need to dump their 30 year old CFO, forget about acquisitions, and renew their focus on the basic blocking-and-tackling at the heart of the CPG space (fighting for shelf space, optimizing promotions and marketing, etc).

 

 

There's no reason for Buffett to sell for over a decade. It won't be a home run, but probably a single rather than a strike out like you're implying.

 

BRk will be Ok with their KHC investment. if things really turn sour, they will get first dips on any recap (preferred, capital raise ) to straighten things out. A private investor is probably better off looking elsewhere.

[mwtorock]

well, it does smell like a kitchen sink quarter. if the expectations get even lower tomorrow, might be worth a look.

[Contra123]

Poor results today.  Still unsure what more they can do to turn this around (and yes, they are trying).  The dividend here is unsustainable and should be cut 80% (or ideally, eliminated), in my view.  BUD/ABI last month should eventually crystallize this for the KHC holder base.

 

Some sweet vindication.

As long as the thing has this much debt and unlevered free cash flows are going in the wrong direction, if you care about eliminating the chance of permanent capital loss over time, this thing is uninvestable. Might even be a short, still.  If you are in for a quick trade, could be interesting once the street resets expectations downwards; the leverage there could provide a kicker. But secularly, hard to see a path where either they are not screwed or we do not see a (dilutive) equity raise coming.

[LC]

The move here is to consider everything worthless except US sales of Heinz ketchup and maybe Philadelphia cream cheese. Rest of the brands suck.

[Guest cherzeca]

isn't this a smart use of BRK's cash?  take private, fix (new strategies, not just lower costs), then relaunch

[tooskinneejs]

After listening to the earnings call, I don't get a warm and fuzzy (i.e., good) feeling from listening to management.  The call was full of jargon and corporate double-speak with very few direct/clear answers to analyst questions.  Listening to their version of events, everything is going just great.  Its really disturbing when management won't own the terrible quarter and won't speak truthfully about their situation.

[brycepeterson]

I couldn't believe Buffett was invested in this.  I own BRK-B and have been hoping they'd sell.  You look at FCF to EV and it's incredibly low. 

 

Plus, both the Kraft and Heinz biz's are in decline.  They remind me of old beer brands during the early craft beer days - you could see the dominant light beer brands losing everyday in my market - same today with many Kraft cheese and Oscar M. brands (I'd exclude Philly Cream Cheese), and definitely Heinz.  Heinz, like the beer brands, will stay around and hold a good size market share in the backyard BBQ / cafeteria-type markets, but they're shrinking and pricing power is low.

[LC]

isn't this a smart use of BRK's cash?  take private, fix (new strategies, not just lower costs), then relaunch

I disagree. Wasn’t the point a few years ago for Brk to bring in 3G and do exactly what you are suggesting? It failed then and it will fail again- because the majority of their brands are relics.

[petec]

You look at FCF to EV and it's incredibly low. 

 

Plus, both the Kraft and Heinz biz's are in decline.

 

I’m deliberately staying (mostly) out of this and sleeping on it before I reassess my thesis. But

A) make sure you’re adjusting OCF correctly when you calculate FCF (see my posts above), and

B) they’re growing volumes at 4% and revenues about a percentage point lower when you adjust for pricing pass through. It’s not in decline. It’s just not as profitable as it was.

[rolling]

Read the transcript and decided to go in at ~35.

What I liked:

- goodwill and intangibles impairment has zero impact on the business

- dividend cut strengthens the business

- 1.85B assets sold impact EBITDA in 70M (26.5 multiple)

- they are holding talks for further divestitures and hold those two asset sales as a rule

-they intend to reduce debt to 3x in medium term through dividend reduction plus asset sales.

- I like asset sales and I like debt reductions

- they expect the new dividend to be sustainable and growable

- they sound just like the book they follow and I liked the book a lot. Double your profits in 6months or less is as much about cost cutting as it is about investing where profits come from

- they say they identified those businesses where they do and don't have an edge. They also say they are positioning for further consolidation. If they consolidate further they'll do a repeat with the added experience in the business and might be quicker and more effective in that process.

 

So, they are not fire selling distressed assets, they are selling assets in which KHC has no edge to those who have that edge and who expect to improve margins on those businesses.

[meiroy]

 

This blood tastes like ketchup.  Yumm.

 

I would wait until they would actually start doing something to adjust, though of course, it might miss the dead cat bounce.

 

 

 

 

 

 

 

[Guest cherzeca]

isn't this a smart use of BRK's cash?  take private, fix (new strategies, not just lower costs), then relaunch

I disagree. Wasn’t the point a few years ago for Brk to bring in 3G and do exactly what you are suggesting? It failed then and it will fail again- because the majority of their brands are relics.

 

brk seems to like brands and moats, which khc has.  also likes buying on discount. I think it would be easy enough to tweak all of these brands to make them more "relevant" or "cool". except ketchup, leave that alone. just as KO is buying up new competitive products, seems to me so can khc. 

[Read the Footnotes]

isn't this a smart use of BRK's cash?  take private, fix (new strategies, not just lower costs), then relaunch

I disagree. Wasn’t the point a few years ago for Brk to bring in 3G and do exactly what you are suggesting? It failed then and it will fail again- because the majority of their brands are relics.

 

brk seems to like brands and moats, which khc has.  also likes buying on discount. I think it would be easy enough to tweak all of these brands to make them more "relevant" or "cool". except ketchup, leave that alone. just as KO is buying up new competitive products, seems to me so can khc.

 

I agree. I have high hopes for the new Kraft canned avocado toast product launch.

[meiroy]

isn't this a smart use of BRK's cash?  take private, fix (new strategies, not just lower costs), then relaunch

I disagree. Wasn’t the point a few years ago for Brk to bring in 3G and do exactly what you are suggesting? It failed then and it will fail again- because the majority of their brands are relics.

 

brk seems to like brands and moats, which khc has.  also likes buying on discount. I think it would be easy enough to tweak all of these brands to make them more "relevant" or "cool". except ketchup, leave that alone. just as KO is buying up new competitive products, seems to me so can khc.

 

I agree. I have high hopes for the new Kraft canned avocado toast product launch.

 

Dump the toast and you got a winner. Do you know how many avocadoes I have to dispose of each year because I can never get the timing right? Canned avocado is the future.

 

 

[Gregmal]

isn't this a smart use of BRK's cash?  take private, fix (new strategies, not just lower costs), then relaunch

I disagree. Wasn’t the point a few years ago for Brk to bring in 3G and do exactly what you are suggesting? It failed then and it will fail again- because the majority of their brands are relics.

 

brk seems to like brands and moats, which khc has.  also likes buying on discount. I think it would be easy enough to tweak all of these brands to make them more "relevant" or "cool". except ketchup, leave that alone. just as KO is buying up new competitive products, seems to me so can khc.

 

I agree. I have high hopes for the new Kraft canned avocado toast product launch.

 

Dump the toast and you got a winner. Do you know how many avocadoes I have to dispose of each year because I can never get the timing right? Canned avocado is the future.

 

LOL so true.

[BG2008]

isn't this a smart use of BRK's cash?  take private, fix (new strategies, not just lower costs), then relaunch

I disagree. Wasn’t the point a few years ago for Brk to bring in 3G and do exactly what you are suggesting? It failed then and it will fail again- because the majority of their brands are relics.

 

brk seems to like brands and moats, which khc has.  also likes buying on discount. I think it would be easy enough to tweak all of these brands to make them more "relevant" or "cool". except ketchup, leave that alone. just as KO is buying up new competitive products, seems to me so can khc.

 

I agree. I have high hopes for the new Kraft canned avocado toast product launch.

 

Dump the toast and you got a winner. Do you know how many avocadoes I have to dispose of each year because I can never get the timing right? Canned avocado is the future.

 

There was this cute redhead that I knew in college.  I would wait around all week for her to call me to hang out.  She only drunk text me at 2:30AM on the weekends.  If I missed the text, she was gone after 10 minutes.  This sums up my experience with avocados.   

 

 

[LC]

Drunk redheads withstanding, there is no saving kraft singles and Oscar Meyer. It’s done - these guys need to move on and keep their relevant brands relevant.

[Foreign Tuffett]

 

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.)

 

Contra123, you were way ahead of the curve on this one. You deserve credit for diagnosing, before nearly all others, the issue that seems to be at the core of KHC's problems: the management team doesn't understand how to retain and build brand equity.

[LC]

Again I disagree. You could get the ghost of Steve Jobs to run KHC and Oscar Meyer is STILL going to suck.