Kraft Heinz 'big bets' gaining traction in U.S.

by Eric Schroeder
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Kraft Heinz Macaraoni and Cheese, Kool-Aid Jammers
Kraft Heinz recently reformulated its Kraft macaroni and cheese and its Kool-Aid Jammers.

PITTSBURGH — The Kraft Heinz Co. may not be claiming victory in any category, but the company believes its “big bets” activities in the United States are beginning to gain traction in the marketplace. “Big bets” are defined by the company as innovations that receive more assessing and consumer insights before launch.

George Zoghbi, Kraft Heinz
George Zoghbi, c.o.o. for Kraft Heinz U.S.

“The launch of our Kraft mac and cheese renovation has been well-received by consumers,” George Zoghbi, chief operating officer for U.S., said during a May 4 conference call with analysts. “And we supplemented that with the launch of new premium mac and cheese under the Cracker Barrel brand in the same category. We launched Capri Sun Organic and renovated our Kool-Aid Jammers product with fewer calories and no preservatives. We added a new line of premium pasta sauces under the Classico Riserva brand made with no artificial ingredients or added sugar. We strengthened our barbecue sauces business by adding new lines under the Heinz brand, betting on consumer regional preferences in this category. And we added new lines to our salad dressing business, including new packaging formats.”

Kraft Heinz Organic Capri Sun, Classico Riserva Pasta Sauce, Cracker Barrel premium macaroni and cheese
In the quarter, Kraft Heinz launched Capri Sun Organic, Cracker Barrel premium macaroni and cheese and Classico Riserva pasta sauces.

Net income attributable to Kraft Heinz shareholders in the first quarter ended April 3 totaled $896 million, equal to 74c per share on the common stock, up 61% from $558 million, or 47c per share, in the same period a year ago. Net sales eased 4% to $6,570 million, down from $6,830 million.

Adjusted EBITDA for the U.S. segment increased 33% to $1,493 million, driven by gains from cost savings initiatives and favorable pricing net of commodity costs that partially were offset by volume declines in ready-to-drink beverages and frozen nutritional meals. U.S. net sales, meanwhile, increased 0.2% to $4,715 million.

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

“Within organic growth, pricing was flat, reflecting pricing gains across most categories despite headwinds from deflation in key commodities,” said Paulo Basilio, executive vice-president and chief financial officer. “Flat volume mix mainly reflected innovation in Lunchables and P3, the food-service gains, shipment timing and gains in coffee that were partially offset by lower shipments of ready-to-drink beverages, where we were up against a pre-price increase buy-in with Capri Sun last year as well as lower consumption of bacon and frozen nutritional meals.”

In a May 5 report, Credit Suisse analyst Robert Moskow said Kraft Heinz’s strong revenue and EBITDA greatly improved his assessment of the company’s organic growth rate. As a result, Credit Suisse raised its revenue and EBITDA estimates for the company for 2016 and 2017, and raised its target price to $96 per share from $85.

Robert Moskow, Credit Suisse
Robert Moskow, Credit Suisse analyst
“Synergies are dropping to the bottom line faster than expected, and the company isn’t stripping away trade promotion dollars at the expense of volume to the degree that we had assumed,” Mr. Moskow said. “As a result, we now expect a more stable year for organic sales and a more robust gross margin simultaneously. Some of the beat in 1Q came from one-time factors that won’t necessarily repeat next year (such as unusually strong new product pipeline fill and an early Easter). In addition the margin benefits from commodity deflation will narrow as the year progresses. However, the company has a bigger long-term pipeline of new products than we thought, and the U.S. business is growing at a (high-single digit) rate in non-measured channels thanks to good performance in food service, club and dollar stores.” 
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