Kraft Heinz cost savings lead to higher earnings

by Jeff Gelski
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Kraft Heinz Kraft American Singles, Philadelphia Cream Cheese, Oscar Mayer Bacon
Sales grew for Kraft American slices, Philadelphia Cream Cheese and Oscar Mayer bacon.
 

PITTSBURGH AND CHICAGO — Efforts to cut costs in the second quarter pleased executives of the Kraft Heinz Co. In turn, earnings were pleasing as well.

Net income of $1,160 million, equal to 95c per share on the common stock, in the quarter ended July 1 was up 21% from $955 million, or 63c per share, in the previous year’s second quarter.

Bernardo Hees, Kraft Heinz Co.
Bernardo Hees, c.e.o. of Kraft Heinz

“In terms of our goal to establish industry-leading margins, we remain on track with our cost-savings initiatives,” said Bernardo V. Hees, chief executive officer of Kraft Heinz, in an Aug. 3 earnings call. “Our total savings so far in 2017 have been stronger than expected. Cumulative savings from our integration program were approximately $1.45 billion at the end of the second quarter, and all three areas of our program are contributing: organization structure, Z.B.B. (zero-based budgeting) in procurement and manufacturing footprint.”

Kraft Heinz still is targeting 1.7% of cumulative integration program savings by the end of 2017, or $500 million of net incremental savings in 2017 versus 2016, said Paulo Luiz Araujo Basilio, chief financial officer and executive vice-president.

Paulo Basilio, Kraft Heinz
Paulo Luiz Araujo Basilio, c.f.o. and executive vice-president of Kraft Heinz

“As far as the timing of savings is concerned, we've achieved a roughly $280 million of net incremental savings in the first half of the year and expect the remainder in the second half,” Mr. Basilio said. “As I mentioned earlier, so far this year savings have come in stronger than anticipated, but at this point, we are not ready to call upside to the $500 million of net incremental savings for the year.”

Net sales for the quarter slipped 1.7% to $6,677 million from $6,793 million after an unfavorable impact of a 0.8 percentage point from currency. Organic net sales dropped 0.9%, and pricing was lower by a 0.4 percentage point.

Kraft Heinz Smartmade meals and Devour meals
The introductions of Devour and Smartmade brands led growth in Kraft Heinz's frozen business.
 

In the United States, adjusted EBITDA rose 3.2% to $1,556 million driven by gains from cost-savings initiatives. Second-quarter U.S. net sales dropped 1.2% to $4,634 million. Distribution losses in cheese and meats as well as lower shipments in food service more than offset gains in frozen, macaroni and cheese, and condiments and sauces.

The introductions of Devour and Smartmade brands and solid performance in frozen snacks led growth in the frozen business, said Georges El-Zoghbi, chief operating officer of the U.S. commercial business for Kraft Heinz. Sales continued to grow for Kraft American slices, Philadelphia Cream Cheese and Oscar Mayer bacon.

Georges El-Zoghbi, Kraft Heinz
Georges El-Zoghbi, c.o.o. of the U.S. commercial business for Kraft Heinz

“That's not to say that some consumption challenges remain, but they are concentrated in few categories: natural cheese, mainly due to aggressive competitive pricing in the category; cold cuts as we rebuild our end market distribution and resumed merchandising after the self-imposed restrictions due to capacity constraints during 2016; and finally, ongoing weakness in salad dressings,” he said.

Mr. El-Zoghbi said he expects sequential improvement and profitable organic sales growth in the second half of the year.

Kraft Heinz Capri Sun Sport and Capri Sun Organic
Kraft Heinz plans to strongly support Capri Sun Sport and Capri Sun Organic in the third quarter.
 

“At retail, we expect to further leverage our scale for a better in-store activity going forward and more of it in Q3,” he said. “We also have a strong pipeline of innovation, renovation and communication to drive improved back half consumption trends in key categories and some of our more challenged categories. In Q3 alone, you will see robust support of Capri Sun Sport and Capri Sun Organic, more activity in our meals business, including Cracker Barrel Oven Baked Mac & Cheese as well as the second half of grilling season with our renovated line of Oscar Mayer hot dogs.”

Currency had a negative impact on Kraft Heinz second-quarter results in Canada, Europe and Rest of the World.

In Canada, adjusted EBITDA dropped 1.2% to $189 million while net sales fell 6.4% to $597 million. Incremental cost savings were offset partially by the impact of increased promotional activity, Mr. Basilio said.

Kraft Heinz Cracker Barrel Oven Baked Macaroni and Cheese
Kraft Heinz has planned more activity in its meals business, including Cracker Barrel Oven Baked Mac & Cheese.
 

“Importantly, our second-quarter performance in Canada shows that the go-to-market agreements achieved with our key retailers are, in fact, a win-win proposition and can drive profitable growth going forward,” he said. “As a result, we remain confident that we will continue to see improving trends in the growth and profitability of our Canadian business during the second half of the year.”

In Europe, adjusted EBITDA dropped 8.6% to $202 million while net sales slipped nearly 5% to $595 million. Kraft Heinz saw sequential improvement in volume/mix growth, Mr. Basilio said.

“Similar to Q1, strong currency headwinds continued to be a factor in the results, and pricing declined due to the timing of promotional activity in the U.K., as well as trade investments to address competitive activity in our Italian infant nutritional business,” he said.

Kraft Heinz Oscar Mayer hot dogs
During the second half of grilling season, Kraft Heinz plans to promote its renovated line of Oscar Mayer hot dogs.
 

Adjusted EBITDA in Rest of the World fell 12% to $180 million while net sales increased 1.6% to $851 million. Organic net sales decelerated in Rest of the World, coming in at 3% in the second quarter, which compared to 8.1% in the first quarter, Mr. Basilio said.

“What I would highlight here, however, is that more than 100% of the quarter-to-quarter deceleration was due to two factors that we do not expect to repeat going forward,” he said. “One was a negative impact from the general sales tax regime in India that you have heard a number of our global peers talk about recently. Two was a holiday-related shipment timing in Indonesia related to the shift in the Ramadan holiday versus last year, and unfortunately this more than offset strong double-digit gains in China, Brazil and the Middle East, as well as growth in condiments and sauces across most of our other markets.”

In the six months ended July 1, Kraft Heinz recorded net income of $2,052 million, or $1.69 per share, which was up 11% from $1,846 million, or $1.37 per share, in the same time period of the previous year. Six-month net sales slipped 2.4% to $13,041 million from $13,363 million. 
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