Kraft Heinz sees ‘significant’ investment in EMEA

The company reported a 1.7% decline in second-quarter net sales yesterday, with group-wide revenue decreasing to€4.68bn ($6.68bn).

Despite a 17.5% jump in operating income, which rose to €1.63bn ($1.92bn) thanks to Kraft Heinz’s aggressive cost reduction programme, the group missed Wall Street EBIT expectations by four cents a share. Net earnings increased 50.5% to €1.33bn ($1.56bn).

Hopes to pick up pace in Europe

On an organic basis, Kraft Heinz’s business in Europe saw sales slide by 0.8%, dropping to €564m ($595m). Currency exchange trimmed a further 4.1% off the top line.

During the quarter, the ketchup to snacks group found itself squeezed between currency exchange headwinds, lower pricing – with pricing in the region down 1.6% - and increased input costs. This more than offset a modest 0.8% gain from improved volumes and mix.

As a result, EBITDA in Europe decreased 8.6% to €171.9m ($202m).

Addressing analysts during a conference call, however, CEO Bernardo Vieira Hees was upbeat on the prospects for the region.

“Our big bets and ​whitespace initiatives from last year have been the main driver and that's very encouraging for the perspective of sustainable growth,”​ he explained. “We're this play out through positive investment-driven consumption trends, driven by our condiments and sauces portfolio, in Canada, Europe, Latin America, Asia and ​Middle East.”​

The company stressed that the volume mix gains it made in Europe were the result of “strong consumption gains in condiments and sauces”​ and “gains in ​foodservice”​.

Further investment is expected to support an acceleration in sales trends during the back half of the year, Hees continued. “We have been laying the groundwork to capture additional ​whitespace opportunities. That includes the significant commercial investment to drive top line growth in our EMEA region.”​

Could weak sales lead to another mega-deal?

Kraft Heinz was formed when investment groups 3G Capital and Berkshire Hathaway teamed up to merge the then Kraft Foods Group and HJ Heinz and form the world’s fifth largest food company in 2015.

The firm’s business model focuses on cost reduction to generate immediate earnings growth. Hees revealed that the company’s drive to strengthen margins is on-track for the year despite commodity cost headwinds. The group is targeting $500m of net incremental savings in 2017 versus 2016.

“In terms of our goal to establish industry-leading margins, we remain on track with our cost savings initiatives. Our total savings so far in 2017 have been stronger than expected. Cumulative savings from our Integration Program were ​approximately $1.45bn at the end of the second quarter. And all three areas of our program are contributing: renovation structure, ZBB and procurement, and manufacturing footprint.”​

Kraft Heinz said it is supporting its brands through innovation and marketing activities whilst also increasing return on investment by focusing on its most profitable businesses and shedding sales that generate weaker returns.

“In marketing, we are supporting our brands with a greater number of quality advertising impressions. At the same time, we have invested to build new in-house ultra-market capabilities such as revenue management and assortment management with objectives of driving these capabilities globally,”​ Hees revealed.

However, Kraft Heinz’s focus on margin growth has left it struggling to deliver higher organic sales. As such the Kraft Heinz model relies on M&A to fuel continued returns. This is believed to be a primary reason for Kraft Heinz’s failed attempt to merge with Anglo-Dutch consumer goods giant Unilever earlier this year. And analysts were again left wondering if another significant M&A move could be on the cards.

“Given the slowing pace of EBITDA growth and net synergy ​realisation at Kraft Heinz, we are even more convinced now that another sizable M&A deal is imminent,”​ Pablo Zuanic, an analyst with Susquehanna International Group, noted.

Kraft Heinz is precluded from making another approach for Unilever for just six months following its first attempt in February, according to UK takeover rules, leaving some pondering whether a hostile bid for the group could now be on the cards.