KHC - Kraft Heinz Co.

[Kaegi2011]

A belated welcome to CoBF, Kaegi2011!

 

Thank you, John!  I've been a long time reader and learned pretty much all the stuff you can't learn from a book from CoBF, so when it was time to give back on a topic that I'm somewhat familiar with I thought I'd chime in.  As someone who has invested a significant amount of my career in the industry (when things were still fine and dandy!), I made the hard decision to switch industries a few years ago and have not looked back.  Wish I had the foresight to short KHC though!!!  ;D 

[gfp]

hey hey, look who finally got some financial statements together

https://www.wsj.com/articles/kraft-heinz-books-1-22-billion-in-impairment-charges-11565267075?mod=hp_lead_pos3

 

Oh, never mind, they are "preliminary"

http://ir.kraftheinzcompany.com/news-releases/news-release-details/kraft-heinz-reports-preliminary-financial-results-first-half

[TwoCitiesCapital]

This is a dumpster fire. Damn

[Kaegi2011]

I think David's anecdote explains the results well... If you look at other packaged foods peers the results are similar - flat(ish) topline, declining margins, in US/North America.

 

"United States net sales were $8.7 billion, down 1.9 percent versus the year-ago period. Pricing decreased 1.8 percentage points, driven by a 0.9 percentage point unfavorable impact from promotional timing versus the prior year period, increased in-store activity behind Lunchables and certainfrozen food categories, as well asprice reductions to reflect lower key commodity(2) costs in nuts, dairy and coffee. These factors more than offset price increases implemented in select categories, as well as higher commodity-driven prices in bacon. Volume/mix decreased 0.1 percentage points due to unfavorable changes in retail inventory levels and lower foodservice shipments that more than offset innovation-driven gains in frozen meals and dairy snacking, as well as underlying consumption growth across several areas including nuts, refrigerated meal combinations, and cream cheese.

 

United States Segment Adjusted EBITDA decreased 14.6 percent versus the year-ago period to $2.4 billion, due to lower net sales, cost inflation in procurement, manufacturing and logistics, as well as strategic investments in e-commerce, marketing and people."

 

 

[mwtorock]

always a battle between vendors and retailers, and the retailers like Walmart, Target, or Costco are getting an upper hand right now...

[Guest longinvestor]

Why are Walmart, Target, Costco, Kroger store brands becoming ever more popular? The squeeze on disposable income going on for a good 30 or more years. Besides, Costco/ Kirkland in particular is nurturing the quality of the products well. I’ve been buying Kirkland wines and they are quite good. If they win here, they win everywhere. At Freakin little advertising costs! It’s a wicked kind of edge.

[Kaegi2011]

always a battle between vendors and retailers, and the retailers like Walmart, Target, or Costco are getting an upper hand right now...

 

Yes, but in my opinion the far bigger battle is for the hearts and minds of consumers.  If it were just between brands and distribution channels, then that would suggest WMT/TGT/COST/KR all improving their gross margins.  A cursory look indicates that's not happening, and if anything margins are compressing, which suggests to me that the battle is for who pays for the pile of money the consumers are receiving. 

[stahleyp]

I can speak on Costco and Kroger (and Aldi).

 

It really boils down to this: why would I pay more for a inferior product?

 

For instance, Kirkland organic peanut butter is cheaper than non organic Jif or Skippy. Better product and lower cost.

 

Aldi cheese many times is rbst free (a hormone used to increase milk production). Why would I pay more for a name brand? To get added hormones?

 

Simply Truth (Kroger) has a ton of organic and natural things that are as cheap or cheaper than the less healthy name brands. 

[Ballinvarosig Investors]

What a mess. Revenue down, EBITDA down, debt the same - these guys promised to bring the debt to EBITDA level down to 3x, instead it's now up to 5x. The bonds of this thing are already just one level above junk, surely that gets cut in the next few months. If that happens, there'll be no way to financially engineer their way. I think this needs some sort of restructuring unless things can somehow improve in the next year. Asset sales won't cut it, I think they will need to raise fresh equity.

[Spekulatius]

What a mess. Revenue down, EBITDA down, debt the same - these guys promised to bring the debt to EBITDA level down to 3x, instead it's now up to 5x. The bonds of this thing are already just one level above junk, surely that gets cut in the next few months. If that happens, there'll be no way to financially engineer their way. I think this needs some sort of restructuring unless things can somehow improve in the next year. Asset sales won't cut it, I think they will need to raise fresh equity.

 

I smell a preferred deal with Warren B. 8% interest and warrants to purchase stock. This would kill the common stock price, so I am not sure how WEB would go about the conditions.

[alpha]

I would like to be a fly on the wall at a board meeting to witness what Greg Abel has been saying ;D

[gfp]

Anyone think they take this one private and milk the cash flows out of public spotlight?  It is despised but Warren is well aware that it is still a profitable business and will likely remain so.  I guess 3G needs a more traditional exit but they could come along in the deal and exit to BRK in a few years when the company is cleaned up.

[NBL0303]

Anyone have a view of what the normalized cash flow can be? It's not quite straight-forward because of the all of the charges, special items flowing through the financials the last few years. And its tricky with -1.9% North American sales, driven by price cuts.

[petec]

Anyone think they take this one private and milk the cash flows out of public spotlight?  It is despised but Warren is well aware that it is still a profitable business and will likely remain so.  I guess 3G needs a more traditional exit but they could come along in the deal and exit to BRK in a few years when the company is cleaned up.

 

3G doesn’t need an exit. They are permaholders in most of their businesses.

[gfp]

Maybe that's right.  They did take outside money for the '3g global food holdings' but I have no idea the terms.  Anyway, Jorge Paulo isn't slowing down (despite sleeping during some meetings..)

https://www.bloomberg.com/news/articles/2019-08-09/billionaire-lemann-says-it-s-a-horror-that-swiss-retire-at-60?srnd=premium

 

Anyone think they take this one private and milk the cash flows out of public spotlight?  It is despised but Warren is well aware that it is still a profitable business and will likely remain so.  I guess 3G needs a more traditional exit but they could come along in the deal and exit to BRK in a few years when the company is cleaned up.

 

3G doesn’t need an exit. They are permaholders in most of their businesses.

[John Hjorth]

I would like to be a fly on the wall at a board meeting to witness what Greg Abel has been saying ;D

 

Almost ten years ago Uccmal wrote this :

 

... But WEB obviously has a weakness for attractive young women which is not a bad thing...

 

Perhaps the simple solution to all the miseries of KHC is to remove Ms. Cool from the KHC board, so Mr. Abel can start functioning in normal way at the KHC board meetings.

[gfp]

See, they do take money off the table.  They have sold some KHC in the past and just filed this prospectus to sell $1.7 Billion worth of QSR shares -

 

https://www.sec.gov/Archives/edgar/data/1618756/000119312519219134/d782179d424b3.htm

 

Anyone think they take this one private and milk the cash flows out of public spotlight?  It is despised but Warren is well aware that it is still a profitable business and will likely remain so.  I guess 3G needs a more traditional exit but they could come along in the deal and exit to BRK in a few years when the company is cleaned up.

 

3G doesn’t need an exit. They are permaholders in most of their businesses.

[DooDiligence]

See, they do take money off the table.  They have sold some KHC in the past and just filed this prospectus to sell $1.7 Billion worth of QSR shares -

 

https://www.sec.gov/Archives/edgar/data/1618756/000119312519219134/d782179d424b3.htm

 

Anyone think they take this one private and milk the cash flows out of public spotlight?  It is despised but Warren is well aware that it is still a profitable business and will likely remain so.  I guess 3G needs a more traditional exit but they could come along in the deal and exit to BRK in a few years when the company is cleaned up.

 

3G doesn’t need an exit. They are permaholders in most of their businesses.

 

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.

 

Got lucky & sold before this hit the wires,

 

https://www.reuters.com/article/us-ambev-corruption-idUSKCN1UY1QA

 

I'm hope they don't screw up Popeye's.

[Foreign Tuffett]

* At first glance, it doesn't look possible for them to pay down material amounts of debt while keeping the dividend at its current level.

* Plus, they need to allocate more money to R&D and marketing.

* Plus, they want to maintain an IG credit rating.

* Plus, after not getting much inbound interest for Maxwell House, they have backed away from asset sales

 

I don't see how they can make it all work without cutting the dividend again.

[Spekulatius]

* At first glance, it doesn't look possible for them to pay down material amounts of debt while keeping the dividend at its current level.

* Plus, they need to allocate more money to R&D and marketing.

* Plus, they want to maintain an IG credit rating.

* Plus, after not getting much inbound interest for Maxwell House, they have backed away from asset sales

 

I don't see how they can make it all work without cutting the dividend again.

 

Uncle Warren will backstop this, but it’s going to be expensive. 8% preferred with equity kicker?

[DooDiligence]

https://www.reuters.com/article/us-kraft-heinz-cfo/kraft-heinz-names-new-cfo-as-knopf-departs-idUSKCN1VG19X?il=0

[Kaegi2011]

Looks like they sold something like $3bn.  I wonder if the perma-holder status only applies to their ABI holdings where it seems like the three guys personally hold the shares.  It seems like for QSR and KHC they invested out of a more traditional fund structure (at least according to news articles), which would imply that there is a time limit on those funds (how else does an external investor monetize their holdings if they can never sell...?).  Maybe the time limits are longer than traditional PE fund, but I can't think of a way where there is no time limit.  They've also sold shares for both QSR and KHC, which would lend credence to the fact that maybe their fund structures do not allow for permanent capital for their investments.

 

See, they do take money off the table.  They have sold some KHC in the past and just filed this prospectus to sell $1.7 Billion worth of QSR shares -

 

https://www.sec.gov/Archives/edgar/data/1618756/000119312519219134/d782179d424b3.htm

 

Anyone think they take this one private and milk the cash flows out of public spotlight?  It is despised but Warren is well aware that it is still a profitable business and will likely remain so.  I guess 3G needs a more traditional exit but they could come along in the deal and exit to BRK in a few years when the company is cleaned up.

 

3G doesn’t need an exit. They are permaholders in most of their businesses.

[gfp]

https://www.cnbc.com/2019/09/17/kraft-heinz-falls-after-second-largest-shareholder-3g-capital-sells-more-than-25-million-shares.html

[Gregmal]

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

[UK]

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."