KHC - Kraft Heinz Co.

[TwoCitiesCapital]

BAML: "We note that investors in 3G Capital Global Food fund have been invested for approximately seven years and have limited windows of time to sell down their stakes in the fund. In 2018 the fund sold ~20m shares for its investors. Concurrent with this stock sale certain partners of 3G capital have acquired 6.993 million of the 25.068 million shares being sold in the offering. Of the 6.993 million shares being acquired by 3G partners’ director Jorge Paolo Lemann is acquiring 3.496m or ~$100m worth of shares. While the equity markets remain tepid on prospects for a KHC recovery, some 3G partners are adding to their positions."

 

At least they're eating their own cooking...

[Kaegi2011]

This is funny. Not every day you see the smartest guys in the room buying really high and selling low. Good for those assholes.

 

I think if you read through the proxy for the Kraft deal you'll see that their purchase price for Heinz was in the low 20s and for Kraft their purchase price was around 30.  By no means a great return, but I think your facts are just wrong.

[rkbabang]

I tried the new BK taco & it is terrible.

 

This & the fact that I've eaten at multiple newly remodeled locations in my area & the food quality in general is poor.

 

To make matters worse, the ketchup in every single location has been watered down (really?!?)

 

I sold ABEV because I have no faith in 3G's abilities.

 

 

Sorry for the late reply, but I'm just reading this today.  "BK taco?"  Just reading that turned my stomach a little.  I've referred to BK as "the Taco Bell of burger joints" before, so I guess it's fitting that they sell a taco.  I wouldn't eat at BK ever again if you paid me.  My dad was in the hospital for more than a week last summer after contracting salmonella poisoning from a BK, I guess salmonella is no joke at his age (almost 70).  He had no proof, but that was the only thing he had eaten in the last 30 hours when he got sick and he mentioned to my mother while they were eating that his burger tasted off.  The last time I went to BK a few years ago in my area was to get a cup of "JOE", I couldn't even finish it.  Nasty.

 

[DooDiligence]

I tried the new BK taco & it is terrible.

 

This & the fact that I've eaten at multiple newly remodeled locations in my area & the food quality in general is poor.

 

To make matters worse, the ketchup in every single location has been watered down (really?!?)

 

I sold ABEV because I have no faith in 3G's abilities.

 

 

Sorry for the late reply, but I'm just reading this today.  "BK taco?"  Just reading that turned my stomach a little.  I've referred to BK as "the Taco Bell of burger joints" before, so I guess it's fitting that they sell a taco.  I wouldn't eat at BK ever again if you paid me.  My dad was in the hospital for more than a week last summer after contracting salmonella poisoning from a BK, I guess salmonella is no joke at his age (almost 70).  He had no proof, but that was the only thing he had eaten in the last 30 hours when he got sick and he mentioned to my mother while they were eating that his burger tasted off.  The last time I went to BK a few years ago in my area was to get a cup of "JOE", I couldn't even finish it.  Nasty.

 

I hope your Dad didn’t have lasting effects.

 

I also hope QSR doesn’t ruin Popeyes, but I won’t hold my breath.

 

If they roll out a Popeyes personal pan pizza, you can expect the worst.

[bizaro86]

If they roll out a Popeyes personal pan pizza, you can expect the worst.

 

Lol. Tim Hortons here (their coffee/donut chain) has introduced burgers and fries. They are doing so without a deep fryer and without stocking ketchup...

 

You can really see the quality of thought in their operations...

[rkbabang]

I tried the new BK taco & it is terrible.

 

This & the fact that I've eaten at multiple newly remodeled locations in my area & the food quality in general is poor.

 

To make matters worse, the ketchup in every single location has been watered down (really?!?)

 

I sold ABEV because I have no faith in 3G's abilities.

 

 

Sorry for the late reply, but I'm just reading this today.  "BK taco?"  Just reading that turned my stomach a little.  I've referred to BK as "the Taco Bell of burger joints" before, so I guess it's fitting that they sell a taco.  I wouldn't eat at BK ever again if you paid me.  My dad was in the hospital for more than a week last summer after contracting salmonella poisoning from a BK, I guess salmonella is no joke at his age (almost 70).  He had no proof, but that was the only thing he had eaten in the last 30 hours when he got sick and he mentioned to my mother while they were eating that his burger tasted off.  The last time I went to BK a few years ago in my area was to get a cup of "JOE", I couldn't even finish it.  Nasty.

 

I hope your Dad didn’t have lasting effects.

 

I also hope QSR doesn’t ruin Popeyes, but I won’t hold my breath.

 

If they roll out a Popeyes personal pan pizza, you can expect the worst.

 

No he fully recovered, thanks.  LOL "Popeyes personal pan Pizza".  Or maybe just Popeyes Tacos.  They could always introduce milkshakes, maybe license the technology from BH.

 

 

[DooDiligence]

I tried the new BK taco & it is terrible.

 

This & the fact that I've eaten at multiple newly remodeled locations in my area & the food quality in general is poor.

 

To make matters worse, the ketchup in every single location has been watered down (really?!?)

 

I sold ABEV because I have no faith in 3G's abilities.

 

 

Sorry for the late reply, but I'm just reading this today.  "BK taco?"  Just reading that turned my stomach a little.  I've referred to BK as "the Taco Bell of burger joints" before, so I guess it's fitting that they sell a taco.  I wouldn't eat at BK ever again if you paid me.  My dad was in the hospital for more than a week last summer after contracting salmonella poisoning from a BK, I guess salmonella is no joke at his age (almost 70).  He had no proof, but that was the only thing he had eaten in the last 30 hours when he got sick and he mentioned to my mother while they were eating that his burger tasted off.  The last time I went to BK a few years ago in my area was to get a cup of "JOE", I couldn't even finish it.  Nasty.

 

I hope your Dad didn’t have lasting effects.

 

I also hope QSR doesn’t ruin Popeyes, but I won’t hold my breath.

 

If they roll out a Popeyes personal pan pizza, you can expect the worst.

 

No he fully recovered, thanks.  LOL "Popeyes personal pan Pizza".  Or maybe just Popeyes Tacos.  They could always introduce milkshakes, maybe license the technology from BH.

 

Chicken waffles with a strawberry shake would make that invisible sandwich they've got look like an invisible sandwich.

 

I've always loved their chicken & the sides are great as well.

 

The shrimp po-boys are pretty tasty too (it's not "Monster Po-Boy" but pretty good for the price).

[Foreign Tuffett]

Looks like KHC beat on earnings. Given the company's debt load, it's tough to get excited when volumes continue to shrink ("Volume/mix was 2.1 percentage points below the prior year period as global growth in condiments and sauces was more than offset by lower shipments in the United States"). 

 

 

[DanielGMask]

Brk's 3rd quarter report is out and this note is there again: "evaluated our investment in Kraft Heinz for impairment as of September 30, 2019. Based on the available facts and information, the length of time that fair value was less than carrying value and our ability and intent to hold the investment until recovery, we concluded that recognition of an impairment loss in earnings at September 30, 2019 was not required. However, we will continue to monitor this investment and it is possible that an impairment loss will be recorded in earnings in future periods based on changes in facts and circumstances or intentions."

[LongTermView]

Brk's 3rd quarter report is out and this note is there again: "evaluated our investment in Kraft Heinz for impairment as of September 30, 2019. Based on the available facts and information, the length of time that fair value was less than carrying value and our ability and intent to hold the investment until recovery, we concluded that recognition of an impairment loss in earnings at September 30, 2019 was not required. However, we will continue to monitor this investment and it is possible that an impairment loss will be recorded in earnings in future periods based on changes in facts and circumstances or intentions."

 

I asked about this on twitter. How is it that there is no impairment when carrying value is $13.8B but fair value is $9.1B?

[Gregmal]

Well, with any other company, this would be called a red flag, at best. Berkshire gets judged differently though for some reason. Maybe they'll try to salvage the mark to market by taking it private again! The last big elephant!

[thepupil]

Could be wrong here, but think it’s simply because KHC is an equity method investment and not subject to mark to market either way (up or down).

[Cigarbutt]

Disclosure: I've been looking at KHC and am leaning towards the relative potential value of the investment at this point in time. Your conclusion about BRK's decision concerning the impairment decision IMO is central to the thought process as to whether this investment makes sense, or not, now.

I would say this was a tough call and will become harder as the burden of proof will build significantly over the next quarters if fair value (market) remains lower than carrying amount.

 

KHC's market value is considered readily available as it is actively trading in open markets. Under US GAAP, impairment has to be recognized if the FV is lower than CA AND if the decline is determined to be permanent. Once this determination is made, essentially and in most cases (there are exceptions), carrying amount is written down to fair value (where KHC is trading at the end of the reporting period) and the loss is immediately recognized. The key is to determine if the decrease in value is temporary or permanent (as a yes until proven otherwise with an openly traded investment). Given that KHC is openly traded, BRK's decision means that they consider that the market has been wrong and for some time. The fact that the market value is lower than carrying amount is defined as an indicator of impairment but BRK has to consider several factors in order to determine if the impairment is permanent or temporary. There have been exchanges with the SEC concerning this 'issue' (see below). Criteria include the outlook for the equity investment, general economic conditions as well as the ability and intent for the investor to hold the investment for the long run. Although not mentioned (AFAIK) by BRK, it seems that an internal calculation (estimate) of the NPV of future cash flows indicates (used in IFRS to measure the impairment value once considered other than temporary) that their estimated recoverable amount remains equal or superior than the carrying amount.

https://www.forbes.com/sites/alapshah/2019/08/12/obscure-berkshire-hathaway-filing-reveals-what-warren-buffett-thinks-about-kraft-heinz/#65d388023b82

If interested in the technicalities, see pages 143-7 of the pdf document:

https://www2.deloitte.com/content/dam/Deloitte/us/Documents/audit/ASC/Roadmaps/us-aers-a-roadmap-to-accounting-for-equity-method-investments-and-joint-ventures.pdf

 

For better or for worse, I've decided to wait in order to benefit from the possible outcome when more impairment will need be recognized before they can perceptibly turnaround and get organic growth going while keeping a lid on costs. This window of opportunity may never exist but even Mr. Buffett didn't get the timing right on this one.

[LongTermView]

AND if the decline is determined to be permanent.

 

Permanent is a tough word. The https://www.cnbc.com/2019/06/25/billionaire-warren-buffett-denies-any-tensions-in-partnership-with-3g-capital.html interview gives me the impression that the decline is serious:

“I made a mistake in the Kraft purchase in terms of paying too much,” Buffett said, adding that the writedown of the Kraft and Oscar Meyer brands was an acknowledgement of that. The company is now saddled with roughly $31 billion in debt. “It will take time to whittle that down,” he said.

[CorpRaider]

Didn't they already respond to the SEC with detailed reasoning for not making an impairment adjustment (discussed in another post on this site)?   

[blainehodder]

I've been long KHC from this level down to 25s and back to here.  Im using this run to exit flattish and I consider myself lucky. The market has given a lot of credit for a quarter that was really still terrible by any realistic metric. If these rev and EBITDA comps continue, they are destined for bankruptcy. This turnaround has definitely NOT yet turned around. I did think that Buffett would have forced asset sales and whipped the exec team into doing anything and everything to right the revenue ship, but it just isn't looking like it will pan out. The market is likely giving horrible stink bids for KHC assets knowing if KHC doesn't want them, they are almost certainly terrible. There are just way better stocks to be long here in my opinion. I am thankful for the run but I think this is an opportunity to sell, not chase.

 

[DanielGMask]

Brk's 3rd quarter report is out and this note is there again: "evaluated our investment in Kraft Heinz for impairment as of September 30, 2019. Based on the available facts and information, the length of time that fair value was less than carrying value and our ability and intent to hold the investment until recovery, we concluded that recognition of an impairment loss in earnings at September 30, 2019 was not required. However, we will continue to monitor this investment and it is possible that an impairment loss will be recorded in earnings in future periods based on changes in facts and circumstances or intentions."

 

I asked about this on twitter. How is it that there is no impairment when carrying value is $13.8B but fair value is $9.1B?

 

Berkshire is reducing its carrying value with every dividend received so I guess they are estimating the current dividend will be maintained and even though the stock may not recover to BRK’s original cost, with the reduction in value from the dividend it may get to par in a few years.

 

The Company is profitable but highly leveraged, something that may burden the recovery. 80% of long-term debt is due after 2023 so insolvency doesn't seem a high risk if things remain constant.

[Cigarbutt]

Brk's 3rd quarter report is out and this note is there again: "evaluated our investment in Kraft Heinz for impairment as of September 30, 2019. Based on the available facts and information, the length of time that fair value was less than carrying value and our ability and intent to hold the investment until recovery, we concluded that recognition of an impairment loss in earnings at September 30, 2019 was not required. However, we will continue to monitor this investment and it is possible that an impairment loss will be recorded in earnings in future periods based on changes in facts and circumstances or intentions."

I asked about this on twitter. How is it that there is no impairment when carrying value is $13.8B but fair value is $9.1B?

Berkshire is reducing its carrying value with every dividend received so I guess they are estimating the current dividend will be maintained and even though the stock may not recover to BRK’s original cost, with the reduction in value from the dividend it may get to par in a few years.

 

The Company is profitable but highly leveraged, something that may burden the recovery. 80% of long-term debt is due after 2023 so insolvency doesn't seem a high risk if things remain constant.

The above bolded part is an interesting conceptual possibility allowing for the divergence to disappear but there are other alternatives.

The Market quotation seems to indicate that a dividend cut is possible, an appraisal I agree with. However if KHC is able to maintain the dividend, it will have meant that the turnaround or at least the stabilization of operations happened faster than expected and then one would expect the gap to close as sentiment would raise quoted value to or above carrying amount.

[DanielGMask]

Brk's 3rd quarter report is out and this note is there again: "evaluated our investment in Kraft Heinz for impairment as of September 30, 2019. Based on the available facts and information, the length of time that fair value was less than carrying value and our ability and intent to hold the investment until recovery, we concluded that recognition of an impairment loss in earnings at September 30, 2019 was not required. However, we will continue to monitor this investment and it is possible that an impairment loss will be recorded in earnings in future periods based on changes in facts and circumstances or intentions."

I asked about this on twitter. How is it that there is no impairment when carrying value is $13.8B but fair value is $9.1B?

Berkshire is reducing its carrying value with every dividend received so I guess they are estimating the current dividend will be maintained and even though the stock may not recover to BRK’s original cost, with the reduction in value from the dividend it may get to par in a few years.

 

The Company is profitable but highly leveraged, something that may burden the recovery. 80% of long-term debt is due after 2023 so insolvency doesn't seem a high risk if things remain constant.

The above bolded part is an interesting conceptual possibility allowing for the divergence to disappear but there are other alternatives.

The Market quotation seems to indicate that a dividend cut is possible, an appraisal I agree with. However if KHC is able to maintain the dividend, it will have meant that the turnaround or at least the stabilization of operations happened faster than expected and then one would expect the gap to close as sentiment would raise quoted value to or above carrying amount.

 

Agreed.

[Kaegi2011]

They reported earlier today and stock is down ~8%.  I'm still of the camp that they cannot right this ship.  Shitty brands will continue to decline, and the better brands will continue to do OKish, so net net it'll just be a slow bleed.  They've tried selling assets but I have to believe bids sucked and the cash taxes they need to pay make those deals a non-starter.  What else is there to do?  A pref from BRK?  No strategic will touch it (how do you un-3G the place?). 

 

Maybe they need to spin off the shitty assets along with a lot of leverage and just let it run out.  It'll be basically an unwind ala MDLZ/KRFT, except maybe the good brand co keeps a few decent assets like Philly.

 

I wonder if there's some long/short trade here with the stock and debt stack.  My sense is that they have maybe another year with the ratings agencies before being downgraded (assuming no major change in performance and they keep the div)...  Leverage is just too high. 

[TwoCitiesCapital]

Is there any precedent for this?

 

I have a hard time imagining Uncle Warren allowing this to happen to one of his holdings, but also maybe the shrewd business man wins over the friendly CEO?

 

I guess the question is, has there ever been a time where Buffett had such a massive stake in something and let it go bust OR divested from it?

 

I'm no Berkshire historian, but don't recall anything off the top of my head ND am inclined to believe he'll step in some way to help out - of course, that may not help other shareholders.

[Kaegi2011]

Just to play devil's advocate for a moment...

 

https://www.bloomberg.com/news/articles/2020-02-10/softbank-backed-brandless-shutters-less-2-years-after-investment

 

Perhaps this is a sign of things to come.  Small brands have been funded by VCs in hope of being sold off as a multiple of sales to the giant CPGs.  That game is largely over, I think.  Most large CPGs are struggling, and buying growth is very expensive (e.g., Blue Buffalo).  So maybe the assault on large brands is starting to abate, and declines can start to stabilize.  Or... Brandless was just an interesting idea that failed to take hold, and doesn't mean jack for the lumbering CPGs. 

 

I still think the old brands have lost the millennial generation, but maybe I'm wrong. 

[Kaegi2011]

Is there any precedent for this?

 

I have a hard time imagining Uncle Warren allowing this to happen to one of his holdings, but also maybe the shrewd business man wins over the friendly CEO?

 

I guess the question is, has there ever been a time where Buffett had such a massive stake in something and let it go bust OR divested from it?

 

I'm no Berkshire historian, but don't recall anything off the top of my head ND am inclined to believe he'll step in some way to help out - of course, that may not help other shareholders.

 

Share for asset swap?  He'll take Philly and Heinz and maybe Oscar, and leave the rest.  I think it's tax free to BRK, but no idea on tax implications for KHC.  And of course, you still have the leverage issue... 

 

And as I think about it, a Pref won't make sense as Warren would want something like 8-9%, and since it's not tax deductible it'll be the equivalent of 12% pre-tax debt for KHC.  Why in the world would they take that deal when their current stack is fine (for now...).  Plus Warren isn't going to like the risk / reward either as there will unlikely be upside (vs. something like BAC or GS) and he's still behind the creditors (and his cash flows will just accelerate the decline, but maybe he can extract enough to make out ok...). 

[Cigarbutt]

They reported earlier today and stock is down ~8%.  I'm still of the camp that they cannot right this ship.  Shitty brands will continue to decline, and the better brands will continue to do OKish, so net net it'll just be a slow bleed.  They've tried selling assets but I have to believe bids sucked and the cash taxes they need to pay make those deals a non-starter.  What else is there to do?  A pref from BRK?  No strategic will touch it (how do you un-3G the place?). 

 

Maybe they need to spin off the shitty assets along with a lot of leverage and just let it run out.  It'll be basically an unwind ala MDLZ/KRFT, except maybe the good brand co keeps a few decent assets like Philly.

 

I wonder if there's some long/short trade here with the stock and debt stack.  My sense is that they have maybe another year with the ratings agencies before being downgraded (assuming no major change in performance and they keep the div)...  Leverage is just too high.

I've come to a similar conclusion. Lately, I've done some work on the retail side and there is a palpable shift with no end in sight concerning the rise of private-label brands at the expense of historical name 'brands' (even with the 'better' brands). Retailers ultimately control the shelf space and now they have discovered that they even have some pricing power with changing public perception with potential "premiumization". i believe this is following a similar path to newspapers. It was good while it lasted.

 

Anecdote: At lunch today, I opened a new mayonnaise product. It tasted identical and the container was the same except for the word "Kirkland" (private label at Costco) and nobody even noticed the name change.

https://www.foodnavigator-usa.com/Article/2019/08/30/The-rise-and-premiumization-of-private-label-Sales-surpass-143bn-notes-Nielsen

[CorpRaider]

Well, the first thing that occurs to me is why the f are they paying a cash dividend?