Kraft Heinz Misses but Integration 'On Track'

Following the close this afternoon, Kraft Heinz (KHC) reported third-quarter revenues of $6.36 billion and earnings per share of $0.44. Both figures were below consensus estimates, although we don’t think the comparison is applicable as this was the first report for KHC as a combined public company since Kraft and Heinz merged. As such, analysts had no historical basis to guide their estimates.

In total, net sales were down 9.0% for the combined company year over year, with a 6.7% FX impact and a 0.3% hit from divestitures. Organic net sales, therefore, decreased 2.0% year over year. Volume declined 2.7% compared to last year due to lower shipments in ready-to-drink beverages, foodservice, cheese and boxed dinners in the U.S. and Canada, but this was partially offset by strong growth in the Rest of World geographic group. Positively, net pricing increased 0.7%, but was offset by a negative impact related to key commodity costs in North America.

While these sales numbers are certainly not ideal, we knew coming in that this story was initially always going to be about cost cutting and margin expansion with 3G Capital and Warren Buffett at the helm. This is the key focus for the combined company, and once comfortable with its progress, additional changes can be implemented to help promote the company's brands and grow organic sales. Importantly, Kraft Heinz remains confident in its ability to deliver aggressive cost savings of $1.5 billion by 2017 through its zero-based budgeting strategy and other cost-cutting initiatives. In fact, management noted two major cost-savings actions that are already under way: the corporate headcount reduction (announced in August) and the North American manufacturing consolidation (announced in November).

As for capital distribution, the company announced it would be raising its quarterly dividend 4.5% to $0.575.

All in all, although we were not looking for an organic sales decline, we cannot say we are surprised. That being said, sales growth is not why we have invested in this company -- not at this stage in its life cycle. We are in it for the long-haul change and rationalization and are confident that 3G will maximize the potential of this merger and strip away any ancillary costs that can be better allocated toward the business.

The key line for us in the release is that the integration of Kraft and Heinz is "on track with leadership and organizational structure in place," indicating that the required changes have begun to take shape.

We have waited for the opportunity to lower our basis, and given the opportunity, we will be ready to buy.

We are on the conference call and will be listening for management’s update on the merger and outlook for costs and margins moving forward. We will be back with any incremental analysis as warranted.

Regards,

Jim Cramer, Portfolio Manager & Jack Mohr, Director of Research - Action Alerts PLUS

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long KHC.