Prioritising margins over volume
- 3Q23 adjusted EPS of US$0.72 beats estimates, organic sales of US$6.6bn miss estimates
- Revised up FY23 EPS guidance on better margins and guided for 4% FY23 organic net sales growth (low end of previous guidance of 4%-6%)
- Achieve net leverage target of below 3.0x ahead of expected timeline with net leverage ratio at 2.9x
3Q23 EPS of US$0.72 – above market expectations, driven by price increase and efficiencies. Kraft Heinz (KHC) 3Q23 delivered above expectations adjusted EPS of US$0.72 (vs est of US$0.66), up 14.3% y-o-y. Adjusted revenue for 3Q23 came in at US$6.6bn (vs est of US$6.7bn), up by 1.7% y-o-y, on +7.1 percentage points (% pts) increase in price taken to mitigate higher input costs, offset by -5.4% pt drop in volume/ mix. Volume has improved on a sequential basis, and the company expects volume trends to continue to improve. The company expects volume to turn positive in FY24, we believe it would likely be in 2H24 based on current volume trend trajectory (assuming constant +1.6% ppt volume/mix improvement as per 3Q23). Adjusted gross margin also expanded to 34%, a 4% ppt y-o-y increase on better pricing and operational efficiencies.
Raised FY23 adjusted EPS guidance on better margins, but lowered net sales growth to 4%, at lower end of previous range; maintain overall strategy of margins over volume The company revised its organic net sales growth to lower range of ~4%, from previous guidance of 4% to 6% versus the prior year. For adjusted EBITDA, growth has been revised up 5% to 7% versus prior year, from 4% to 6% previously (on a constant currency basis). For Gross Profit Margin (GPM), the company now expects expansion of 200 to 250 basis points (bp) versus the prior year, compared to the previous expectation of 150 to 200 bp. The revised GPM expansion reflects mid-single-digit inflation for the full year, down from mid-to-high single-digit inflation previously expected for the full year, with pricing and efficiencies continuing to contribute to the recovery. Hence, adjusted EPS is projected to be in the range of $2.91 to $2.99, compared to the previous range of $2.83 to $2.91. The company continues to maintain its strategy of prioritising margins over volume with promotion still tracking behind its branded peers with no plan on going aggressive on promotions to gain market share.
Improvement in balance sheet; net leverage reduced to 2.9x. The company managed to achieve its long term net leverage target of about 3.0x a year earlier than internal expectations, with net leverage at 2.9x. This was a result of significant improvement in Free Cash Flow conversion at 68% year-to-date (YTD) (versus 37% in YTD ‘22), with majority of the improvement over previous year related to the lapping of the US$620m tax payment divestiture proceeds in 2022.
The company has filed for US$24bn mixed shelf offering post its 3Q23 results announcement. No specific details on use of proceeds have been shared. We will continue to watch out for new developments.