KHC - Kraft Heinz Co.

[petec]

Isn't a big part of the story here that KHC got rid of experienced employees and replaced them with 20 somethings with minimal relevant experience? Take, for example, the following quote from several years ago:

 

"When you compare this company to other companies in the industry, I don't think there are many places where you could see 24-year-olds managing hundreds of millions of dollars of brands three years out of college."

 

https://www.chicagotribune.com/business/ct-kraft-heinz-culture-0528-biz-20170527-story.html

 

There's a reason for that, right? Even a very bright and motivated 24 year old is poorly equipped to grow a huge CPG brand if they lack relevant knowledge and experience. I feel like the 3G dominated C-suite has lacked respect for domain specific expertise because (1) it felt that the 3G management model could be applied to nearly any industry and (2) it, itself, lacked a CPG background (3) a belief that the company's products were annuity-like.

 

This dynamic explains why so many KHC Glassdoor reviews expound at length about long hours, inexperienced coworkers, and inefficiency. Employees are spending their time reinventing the wheel instead of relying on best practices, etc.

 

I believe the incoming CEO was recently quoted as saying that KHC's brands need to be "rejuvenated." So at the very least he recognizes the problem that needs to be solved.

 

It's cool explanation, but really it's yet another post-factum rationalization of what happened.

 

If they were successful, everyone would say "Look, they replaced dinosaurs with McKinsey kids and succeeded. Everyone should do that".

Now you say "Look, they replaced experienced people with kids with no experience and failed. Nobody should do that"

 

There are CPG companies staffed with dinosaurs experienced people that are not doing great either.

 

Although you are right that what they did did not succeed in this particular situation.  ;)

 

Agreed. 3G have been genuinely successful building businesses for 40 years and this is straight out of their playbook. It's worked for them more often than not.

[Spekulatius]

Agreed. 3G have been genuinely successful building businesses for 40 years and this is straight out of their playbook. It's worked for them more often than not.

 

One typical problem though - they made high returns with relatively small sums of capital and lousy returns with large sums. BUD and KHC are both turds.

[petec]

Agreed. 3G have been genuinely successful building businesses for 40 years and this is straight out of their playbook. It's worked for them more often than not.

 

One typical problem though - they made high returns with relatively small sums of capital and lousy returns with large sums. BUD and KHC are both turds.

 

Depends what you call small sums. They've built big businesses in banking, beer, retail, and possibly some others before running into issues. Ambev, for example, is neither small nor a turd. The fundamental mistake they made, as Lehman has said, is that they assumed brands that have lasted forever would last forever. That error wasn't forced by size. Unlike fund managers who grow AUM, they didn't have to deploy that capital - they borrowed most of it, which is what compounded the error.

[Foreign Tuffett]

Isn't a big part of the story here that KHC got rid of experienced employees and replaced them with 20 somethings with minimal relevant experience? Take, for example, the following quote from several years ago:

 

"When you compare this company to other companies in the industry, I don't think there are many places where you could see 24-year-olds managing hundreds of millions of dollars of brands three years out of college."

 

https://www.chicagotribune.com/business/ct-kraft-heinz-culture-0528-biz-20170527-story.html

 

There's a reason for that, right? Even a very bright and motivated 24 year old is poorly equipped to grow a huge CPG brand if they lack relevant knowledge and experience. I feel like the 3G dominated C-suite has lacked respect for domain specific expertise because (1) it felt that the 3G management model could be applied to nearly any industry and (2) it, itself, lacked a CPG background (3) a belief that the company's products were annuity-like.

 

This dynamic explains why so many KHC Glassdoor reviews expound at length about long hours, inexperienced coworkers, and inefficiency. Employees are spending their time reinventing the wheel instead of relying on best practices, etc.

 

I believe the incoming CEO was recently quoted as saying that KHC's brands need to be "rejuvenated." So at the very least he recognizes the problem that needs to be solved.

 

This is very similar to what I wrote yesterday, albeit it is referring to KHC's accounting issues and not its brand issues:

 

"When a company loses institutional knowledge in highly complex areas of the business, the consequences can be severe," writes the CS analyst team."

 

https://seekingalpha.com/news/3467910-credit-suisse-warns-kraft-heinz

[ander]

Is there any price level where this becomes a no-brainer buy or just cannot touch it - as in it's a melting ice cube with too much debt? If there is a price level to buy, I'd be curious to your math behind it.

[Peregrino]

Lot of the old-school value crowd (First Eagle, Tweedy Browne, etc) get excited when a business trades for about 10x EBIT. 

 

Currently KHC is at about 13x forward EBIT estimates.

 

Getting close, but still about 25% too expensive to start to tempt them to take a harder look at the business.

[Contra123]

I may be wrong, but this still appears to be a better short than a long.

[plato1976]

same question

any residual value or it's just a zero (in which case I would imagine Buffett will try to rescue it in some way if it can help capture some residue value, something like huge dilution and reorg presided by Berkshire)?

 

 

Is there any price level where this becomes a no-brainer buy or just cannot touch it - as in it's a melting ice cube with too much debt? If there is a price level to buy, I'd be curious to your math behind it.

[Foreign Tuffett]

same question

any residual value or it's just a zero (in which case I would imagine Buffett will try to rescue it in some way if it can help capture some residue value, something like huge dilution and reorg presided by Berkshire)?

 

 

Is there any price level where this becomes a no-brainer buy or just cannot touch it - as in it's a melting ice cube with too much debt? If there is a price level to buy, I'd be curious to your math behind it.

 

I actually think this is a good business that has been poorly managed by clueless Brazilians and twenty-somethings, none of whom had much CPG experience. Dumping Hees and CMO Luz are good first steps, but other members of management probably need to go too. 

 

I mean WTF is this marketing? How is this good for the Planters brand?

 

 

And why'd they give Mr Peanut a peanut-mobile? Did someone in marketing just copy-and-paste the Oscar Mayer Wienermobile into another brand? Dumb, dumb, dumb, dumb, dumb.

 

 

I would add that some of KHC's brands are actually doing fine. Heinz ketchup is fine. Philadelphia Cream Cheese is fine. One issue is that many of their brands are in out-of-favor categories (Jell-O, Miracle Whip) or are poorly differentiated from the competition (Kraft, Oscar Mayer).

 

 

[Viking]

Lot of the old-school value crowd (First Eagle, Tweedy Browne, etc) get excited when a business trades for about 10x EBIT. 

 

Currently KHC is at about 13x forward EBIT estimates.

 

Getting close, but still about 25% too expensive to start to tempt them to take a harder look at the business.

 

And this was a +$90 stock a little over 2 years ago... ouch!

[coc]

Lot of the old-school value crowd (First Eagle, Tweedy Browne, etc) get excited when a business trades for about 10x EBIT. 

 

Currently KHC is at about 13x forward EBIT estimates.

 

Getting close, but still about 25% too expensive to start to tempt them to take a harder look at the business.

 

And this was a +$90 stock a little over 2 years ago... ouch!

 

Tells you a lot about how high stocks can go when they are seen as “roller uppers” issuing high priced equity. And how bad the fall is when that reverses.

 

[aws]

Berkshire has a loss on their Kraft holdings now, which is pretty crazy considering they had a $20b gain two years ago.  Likely the largest evaporation of value they've ever had, even bigger of a loss than Apple from peak to the 140s.

[mwtorock]

Berkshire has a loss on their Kraft holdings now, which is pretty crazy considering they had a $20b gain two years ago.  Likely the largest evaporation of value they've ever had, even bigger of a loss than Apple from peak to the 140s.

 

I think they will hold onto it right. they are not going to sell here or any price points lower. after another 10 years, it would be a ok investment. Like Charlie said, they done two deals with 3G - one worked out fantastically and one did not, but overall it is not a disaster.

[doughishere]

Berkshire has a loss on their Kraft holdings now, which is pretty crazy considering they had a $20b gain two years ago.  Likely the largest evaporation of value they've ever had, even bigger of a loss than Apple from peak to the 140s.

 

One of the bigger risks that a lot of BRK shareholders dont talk about (i dunno maybe they do, I dont pay a whole lot of attention to BRK) but one of the bigger risks is precisely this....I think its difficult for Buffett to get out of any large position even if he wanted to. Say for instance he can time the market.... even beginning to sell the stock would look bad and immediately drive down the price. I dunno. KHZ is a bit different as they own ~20% os so its probably a lesser problem for some other companies.....AXP 18%, USG 31%, Moodys 13%. Maybe he just brought too much firepower for this elephant.

 

I guess a lot of people dismiss it as "our favorite holding period is forever" and who knows there may be some future where it eventually works out. Either way hes suck now.

 

 

[DanielGMask]

Berkshire has a loss on their Kraft holdings now, which is pretty crazy considering they had a $20b gain two years ago.  Likely the largest evaporation of value they've ever had, even bigger of a loss than Apple from peak to the 140s.

 

One of the bigger risks that a lot of BRK shareholders dont talk about (i dunno maybe they do, I dont pay a whole lot of attention to BRK) but one of the bigger risks is precisely this....I think its difficult for Buffett to get out of any large position even if he wanted to. Say for instance he can time the market.... even beginning to sell the stock would look bad and immediately drive down the price. I dunno. KHZ is a bit different as they own ~20% os so its probably a lesser problem for some other companies.....AXP 18%, USG 31%, Moodys 13%. Maybe he just brought too much firepower for this elephant.

 

I guess a lot of people dismiss it as "our favorite holding period is forever" and who knows there may be some future where it eventually works out. Either way hes suck now.

 

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

 

I’m buying. I think it's terrible that a company this size and with so many elements of respectability is late on its fillings, but I don't think this is going to be a zero nor anything close to that. The leverage is higher than it should but the interest rate is benign and the terms not bad at all. Some of the brands are powerful and the company sells a lot of products, I think time will change the perception and ergo the share price.

[Jurgis]

If they can produce ~2B+ FCF, this is somewhat attractive. However debt is an issue, especially if there's no growth or even decline. Cause then you're taking ~15 years to even pay off the debt.

 

It gets more attractive if either FCF gets towards 3-4B or there's growth or both. Not sure how easy to evaluate and predict this with confidence though.

[petec]

If they can produce ~2B+ FCF, this is somewhat attractive. However debt is an issue, especially if there's no growth or even decline. Cause then you're taking ~15 years to even pay off the debt.

 

It gets more attractive if either FCF gets towards 3-4B or there's growth or both. Not sure how easy to evaluate and predict this with confidence though.

 

Not sure whether this means much but consensus ranges between $3.7bn and $4bn for the next 3 years. I find it highly unlikely that this company can’t generate cash if it needs to.

[John Hjorth]

Lots of posts recently about KHC here on CoBF,

 

-Have any of you even studied the filings from KHC at SEC - say, just for 2019? - Or are you posting based on "just" "reading the news" about KHC? [Hint: Please try to read and study in depth the posts here in the KHC topic by Kaegi2011 ... and the KHC filings at SEC! - It may serve your well.]

 

- - - o 0 o - - -

 

A belated welcome to CoBF, Kaegi2011!

[aws]

The 10-k is finally out.  I had not followed the preannouncment of the changes too closely, so I was somewhat surprised to see the changes are so large.  The restated operating income for 2016 was reduced by 541mm and for 2017 it was reduced by 716mm.  I guess in light of those, the 2018 the operating income after adding back the impairment charge doesn't look so horrible, as it in between the real figures for 2016 and 2017.  Hopefully the decline in earnings for 2019 isn't too much, because even with the massive share price haircut it's not overly cheap at 35b market value plus 31b of debt.

 

I wonder what the final tally of costs related to the roughly 1.3b in fake income will end up being to the company between fines, lawsuits, and whatever internal investigation costs the company spent.  Quite the value destruction overall.

 

Edit: Looks like there were adjustments further down in the other income section that reduced the overall amount pretty substantially, so maybe it's not as bad as I originally thought.  Most of what I was originally seeing was just an accounting rule change that affected where income was presented and not a net change.  However that just makes the pain shareholders endured that much greater in relation to the size of the misstatements.  Less than 10 cents a share in total restatements from what I am seeing now compared to who knows how much in costs.

 

 

[John Hjorth]

Thanks for keeping an eye on this, aws,

 

I'll take a look at it tomorrow. One thing is brand erosion, - another thing is that the investor communication - at least this year - has been the ultimate disaster. I've seldom seen anything like it. I just hate being involved in such, however "here" it's "only" indirectly for my part, via Berkshire.

[Kaegi2011]

I actually think this is a good business that has been poorly managed by clueless Brazilians and twenty-somethings, none of whom had much CPG experience. Dumping Hees and CMO Luz are good first steps, but other members of management probably need to go too. 

 

I mean WTF is this marketing? How is this good for the Planters brand?

 

 

And why'd they give Mr Peanut a peanut-mobile? Did someone in marketing just copy-and-paste the Oscar Mayer Wienermobile into another brand? Dumb, dumb, dumb, dumb, dumb.

 

 

I would add that some of KHC's brands are actually doing fine. Heinz ketchup is fine. Philadelphia Cream Cheese is fine. One issue is that many of their brands are in out-of-favor categories (Jell-O, Miracle Whip) or are poorly differentiated from the competition (Kraft, Oscar Mayer).

 

You seem focused on nationality of the mgmt team and the age of the people there so let’s focus on other large cpgs run by Americans and “experienced” employees. How’s GIS, CPB, K, Post doing from a sales and market share perspective? Do they have significantly higher margins? How many of them are just buying growth via the likes of Annie’s or blue buffalo?

 

There was a reason kraft was spun off from mondelez. It’s a shitty group of brands That has been losing relevancy for years if not decades.

 

Also, if you look through the history of ABI you’ll see the Brazilians have been compounding initial investment in Brahma for three decades at some ridiculous rate. Their margins are 2x that of Heineken. Yeah... 2x. Stupid Brazilians and their twenty somethings indeed!

[Kaegi2011]

Thanks for keeping an eye on this, aws,

 

I'll take a look at it tomorrow. One thing is brand erosion, - another thing is that the investor communication - at least this year - has been the ultimate disaster. I've seldom seen anything like it. I just hate being involved in such, however "here" it's "only" indirectly for my part, via Berkshire.

 

It seems that their IR has been horrible for a while.  Absence from CAGNY for a while post kraft, absence of investor days, no guidance, etc. they either don’t care or don’t want to reveal anything more than necessary. Seems like their stock price is inversely correlated to their comms...

[Kaegi2011]

Berkshire has a loss on their Kraft holdings now, which is pretty crazy considering they had a $20b gain two years ago.  Likely the largest evaporation of value they've ever had, even bigger of a loss than Apple from peak to the 140s.

 

I haven’t done the math but remember brk had a pref in there that was redeemed. Not all that relevant as investing in an index would’ve produced far superior results, but still 9% on 8bn for a few years and getting taken out at a premium is nice (in addition to regular dividends since 2015).

[BG2008]

I actually think this is a good business that has been poorly managed by clueless Brazilians and twenty-somethings, none of whom had much CPG experience. Dumping Hees and CMO Luz are good first steps, but other members of management probably need to go too. 

 

I mean WTF is this marketing? How is this good for the Planters brand?

 

 

And why'd they give Mr Peanut a peanut-mobile? Did someone in marketing just copy-and-paste the Oscar Mayer Wienermobile into another brand? Dumb, dumb, dumb, dumb, dumb.

 

 

I would add that some of KHC's brands are actually doing fine. Heinz ketchup is fine. Philadelphia Cream Cheese is fine. One issue is that many of their brands are in out-of-favor categories (Jell-O, Miracle Whip) or are poorly differentiated from the competition (Kraft, Oscar Mayer).

 

You seem focused on nationality of the mgmt team and the age of the people there so let’s focus on other large cpgs run by Americans and “experienced” employees. How’s GIS, CPB, K, Post doing from a sales and market share perspective? Do they have significantly higher margins? How many of them are just buying growth via the likes of Annie’s or blue buffalo?

 

There was a reason kraft was spun off from mondelez. It’s a shitty group of brands That has been losing relevancy for years if not decades.

 

Also, if you look through the history of ABI you’ll see the Brazilians have been compounding initial investment in Brahma for three decades at some ridiculous rate. Their margins are 2x that of Heineken. Yeah... 2x. Stupid Brazilians and their twenty somethings indeed!

 

I think these comments about Brazilians and 20 something years are actually relevant.  As someone who has adopted a Keto diet recently, I now view 80% of their portfolio as "poison" from a dietary perspective.  There has been zero product innovation from Kraft from the 25 years that I have shopped at supermarkets. Jesus Fing Christ, how hard is it to make organic mac and cheese?  It's not that hard. What makes it hard is 3G's focus on cost cutting.  I suspect that a corporate culture that focus on needing permission to print in color (or some crazy cost control crap like that) probably stymies innovation.  The days of selling crap to consumers and thinking that the consumers will just keep buying them is OVER.  You can build a quality and loyal brand by using Facebook and Instagram.  This is the seismic shift that occurred in the last decade.  I have seen ZERO evidence of any initiatives from Kraft on attacking this issue.  The most innovative things that Kraft has done is advertising #foodporn on Pornhub

 

https://www.delish.com/food-news/a26098370/heinz-advertising-food-porn-pornhub/

[Kaegi2011]

I think these comments about Brazilians and 20 something years are actually relevant.  As someone who has adopted a Keto diet recently, I now view 80% of their portfolio as "poison" from a dietary perspective.  There has been zero product innovation from Kraft from the 25 years that I have shopped at supermarkets. Jesus Fing Christ, how hard is it to make organic mac and cheese?  It's not that hard. What makes it hard is 3G's focus on cost cutting.  I suspect that a corporate culture that focus on needing permission to print in color (or some crazy cost control crap like that) probably stymies innovation.  The days of selling crap to consumers and thinking that the consumers will just keep buying them is OVER.  You can build a quality and loyal brand by using Facebook and Instagram.  This is the seismic shift that occurred in the last decade.  I have seen ZERO evidence of any initiatives from Kraft on attacking this issue.  The most innovative things that Kraft has done is advertising #foodporn on Pornhub

 

https://www.delish.com/food-news/a26098370/heinz-advertising-food-porn-pornhub/

 

I'm sorry but you're contradicting yourself.  If Kraft has not produced meaningful innovation (btw I largely agree with that statement), then it's not the Brazilians that's part of the problem, as they've only been involved since 2015.  What happened for 21 years prior to that where cost wasn't an issue?  Also, as you pointed out, there has been a seismic shift in consumer taste and expectations and KHC has not delivered, but is that a cost cutting thing or are you just conflating the issues? 

 

Here's where I'm going - I don't think that the 3G mgmt team was equipped to handle the changes that's happened to consumer tastes and other competitive dynamics.  There is no getting around that.  Certainly with anchor brands like Kraft that have been irrelevant for a long time they made their own jobs harder.  Having said that and not excusing them for not being fantastic marketers, the rest of the industry has sucked too.  What meaningful innovations have come out of General Mills or Campbells or Kellogg?  Yeah, not much.  It took General Mills like 5 years and ceding a ton of their yogurt market share before they responded to the Greek yogurt trend, and they still haven't gotten back much of what they've lost in terms of share.  Do you think that's a great performance?  Yeah, me neither. 

 

So let's stop with the Brazilian bashing.  I doubt a bunch of French, Chinese, Mexicans, Indians, or Australians would have done any better.  Certainly plain ole Americans have not.  BTW, if you look on LinkedIn at marketers for KHC in the US, they're not Brazilians (in fact, KHC's US head of brand building was recruited to be the CMO of MillerCoors earlier this year)...  If you disagree, please use quantitative figures to show that revenues has declined faster for KHC post 3G/BRK involvement than before, and also relative to their peers.  I've looked into that, and KHC isn't worse off (again, not better off either on topline, but better with margins).

 

So the simple story is that a PE firm and BRK bought two large companies during a time of significant change, but did not recognize it at the time of purchase while paying high prices using leverage.  Almost the same story with Valeant and Altice, and others before them.  The Brazilians and cost cutting parts are just noise.