Categories
Breweries Europe FMCG

Kraft Heinz can pay down its $29B debt and maintain its $2B dividend

  • Organic net sales down 2% due to volume/mix declines in response to higher pricing in the US and to a lesser extent lower pricing in Canada
  • Further impairments of goodwill (453 USDm) and intangible assets (224 USDm)
  • Strategy presentation will be in early May and not in March. No guidance or outlook for 2020 has been presented.
  • Bonds downgraded to junk by S&P and Fitch.
  • Despite headwinds Kraft Heinz can maintain its dividend and still pay down the debt.

Kraft Heinz issued a press release on their Q4 earnings on February 13th. Kraft Heinz pays an annual dividend of approximately $500M and has debt of approximately $29B. Is Kraft Heinz able to maintain the current dividend while paying down the debt? CFO Paulo Basilio had the following comments on the earnings call regarding the dividend.

Finally, earlier today, we, together with our Board of Directors, announced that we are maintaining our current dividend. We believe our cash generation will remain at healthy levels, fully fund our plans and initiatives and allow us to continue meeting all our obligations as we transform the business and return Kraft Heinz to sustainable growth.

For instance, we will meet all of our 2020 debt maturities from cash already on hand. At the same time, we will not sacrifice necessary investments in the business because we are even more confident in our long-term prospects behind our new enterprise strategy, portfolio prioritization and the growth initiatives we will unveil in May. After meeting our obligations and invest in the business, maintaining a strong dividend to shareholders is a priority of the company, especially during this important period of transformation.

Investment-grade status also remains important to us, but we understand that the decline of our leverage may not come as rapidly as desired. We will utilize excess cash generation as well as potential divestiture proceeds to reduce leverage below 4x as soon as practical. And regarding the prospect of divestitures, we will continue to evaluate opportunities that are consistent with our strategy, in no rush and with price discipline as always.

With just over $6 billion in adjusted EBITDA and considering cash interest expense, taxes, patient contributions, working capital and capital expenditures, we generated roughly $2.8 billion of cash in 2019 that was available for dividend and debt reduction. This was closer to $3 billion, excluding tax repaid on divestitures. As a result, and together with divestiture proceeds, we reduced net debt by $3 billion in 2019, closing the year with nearly $2.3 billion of cash on balance sheet. These are critical variables to consider as we think about our ability to meet our commitments as we undertake our turnaround and business transformation, which brings me to our financial outlook.

To begin, I think it’s important to recognize that 2020 will be the first full year of what we expect will be a multiyear turnaround. For our first phase in 2020, specifically, we have set three priorities: one, establish a strong base of sales and earnings; two, rebuild the underlying business momentum; and three, continue to reduce debt, while maintaining our current dividend.

CFO Paulo Basilio on the Q4 earnings call.

Due to asset sales and continued strong cash flow from operations debt has been reduced, but EBITDA is also lower than two years ago, and thus the ratio between the two has remained somewhat constant above 4x.

The bars show the long term debt as a multiple of EBITDA (leftmost y-axis). The lines show the long term debt (grey) and TTM adjusted EBITDA (light blue) in USDm (rightmost y-axis).

The US is by far the biggest and most important geographic segment. Adjusted EBITDA and the adjusted EBITDA margin have stabilized in the US segment.

Adjusted EBITDA (USDm) in each geographic segment.
EBITDA margin in each geographic segment.

Maturity dates on long-term debt have been pushed forward in time. 2 USDb of 3.950% US senior notes are due July 2025 (US50077LAK26). Other than that little refinancing is necessary in the short term.

Aggregate principal maturities of long-term debt.

Kraft Heinz spends a bit more than $300M on interest payments each quarter.

Interest expenses (USDm).

Kraft Heinz will be paying an overall interest rate on its long-term debt of approximately 4.7% in 2020, which is more than both European peers (Danone 2.4%, Unilever 2.5%, Nestlé 3.3%) and US peers (Campbell’s 4.2%, Conagra 3.7%, General Mills 3.6%, PepsiCo 3.5%, Kellogg’s 3.2%, Mondelez 2.6%). Interest payments are expected to make up approximately 5.4% of revenue in 2020 (Unilever 1.2%), which is a lot compared to the fact that operating margins are approximately 20%.

Despite the debt maturing in 2025 carrying lower interest rates, the interest expenses are likely to remain constant due to the continued deleveraging.

US dollar notes. Maturity date on the x-axis. Coupon rate on the y-axis. The bubble sizes represent debt size.

Can the share price fall further? Absolutely, but the multiples are approaching record lows for the industry, and Kraft Heinz is a better company than many of its peers in terms of multiple metrics. Kraft Heinz has better margins in terms of operating income and operating costs.

Operating margin (%).
SG&A as a percentage of revenue (%).

EBITDA adjusted for impairment losses was 6,064 USDm in 2019 (7,024 in 2018). Depreciation and amortization was 994 USDm. Net property, plant and equipment was 7,055 USDm at year-end. Thus pre-tax income on non-cash net tangible assets was 72%. This compares favorably to other US food companies ($GIS 67%, $CPB 52%, $K 42%).

If EBIT is 5 USDb going forward and the effective tax rate is 21%, then net income after payment of interest and taxes is approximately 3 USDb. Taking into consideration capital expenditures and depreciation and amortization there should still be more than 500 USDm available each year for deleveraging after payment of the dividend of 2 USDb. Without divestments the deleveraging to 2x EBITDA will not happen within the next five years. That is anything but the end of the world though.

At current multiples that are at historic lows in absolute terms and relative to its peers Kraft Heinz offers a good investment despite the currently meager growth prospects. COVID19 and the delay of the strategy plan from March to May offers a small perfect storm and a buying opportunity.

Enterprise value to operating income.

Appendix

2020-02-24 CNBC – Warren Buffett: ‘Kraft Heinz should pay down its debt’

“I think Kraft Heinz should pay down its debt. Under present circumstances, it appears that it can pay the dividend and pay down debt at a reasonable rate,” Buffett said. “And it has too much debt, but it doesn’t have debt it can’t pay down. The debt holders are going to get the interest and the debt should come down by year-end. I think it will, and I think it can with the present dividend.”

Operating income has declined by $1B in the span of two years due to negative top line growth (US and elsewhere) and divestments (Canada).

Net sales (USDm) in each geographic segment.
Net sales and gross profit declines are levelling off.

Cheese and dairy is a low margin business facing fierce generic competition. Hence it makes sense to divest parts of this product segment.

Organic growth was -2.7% in the US for the quarter, which was attributable to volume/mix (-5.8%) rather than price (+3.1%).

Kraft Heinz earns 5 USDb on net tangible assets of approximately 7 USDb, which is superior in the industry.

There were further impairments in the 4th quarter of goodwill (453 USDm) and intangible assets (224 USDm), but of a much smaller magnitude than a year ago.

Goodwill (USDm).
Intangible assets (USDm).

The long-term debt has been reduced to $28B.

Long term debt (USDm).

Current dividend payments amount to nearly $2B each year.

2020-02-25 Bloomberg – Kraft Heinz, Macy’s, Renault Add to Fallen Angel Fear

2020-02-14 Reuters – Kraft Heinz’s credit rating cut to ‘junk’ by Fitch

2020-02-14 Bloomberg – Kraft Heinz’s Junk Downgrade Rekindles Bond Market Jitters

2020-02-13 Reuters – Kraft Heinz takes $666 million charge, misses sales expectations

2020-02-13 Bloomberg Opinion – Kraft Heinz’s Misery Isn’t Over Yet

2020-02-13 CNBC – Kraft Heinz delays the announcement of long-term turnaround plan, shares tumble

2020-02-13 Bloomberg – Kraft Heinz Shares Sink After Sales Miss Again

2020-02-12 Bloomberg – Kraft Heinz CEO Vows to Simplify Business Ahead of Earnings

2020-01-08 Reuters – Kraft Heinz names Campbell executive to head U.S. business

2019-05-06 CNBC – Warren Buffett on Kraft Heinz restating earnings
2019-02-15 CNBC – Warren Buffett on what he plans to do with his Kraft Heinz shares and 3G Capital
2018-05-07 CNBC – Warren Buffett: Changing Consumer Habits Hit Coke And Kraft Heinz
Categories
Breweries Europe FMCG

AB InBev continues to deleverage and offers value

AB InBev ($BUD, $ABI.BR) issued a press release on their Q4 earnings on February 27th.

AB InBev 2019Q4 presentation.
AB InBev 2019Q4 presentation.

The company has maintained its dividend while continuing to deleverage.

Accounting for the proceeds expected to be received from the divestment of the Australian operations (while excluding the last 12 months EBITDA from the Australian operations), the net debt to EBITDA ratio would be 4.0x for the 12-month period ending 31 December 2019.

Q4 press release
Debt relative to EBITDA will decrease to 4.0x upon divestiture of Carlton & United Breweries to Asahi.

Since closing the SAB combination the debt has been reduced and maturities extended to eliminate near term refinancing risks.

AB InBev 2019Q4 presentation.

AB InBev is by far the largest brewery in the world after the merger of Belgian Interbrew and Brazilian AmBev in 2004 and acquisitions of Anheuscher-Busch in 2008 and SABMiller in 2016.

AB InBev continues to have the strongest margin in the industry. EBIT margins are greater than 30%, which is unrivaled in the industry.

Cash flow generation is also better than those of rivals Heineken ($HEIA.AS) and Carlsberg ($CARL-B.CO).

Likewise the return on capital and net tangible assets is unparalleled within the brewing industry.

The best-in-class margins and cash flow generation and return on assets is due their strong brands and their economies of scale.

Interbrands released their report on the 100 top ranked brands in the world on the 17th of October. AB InBev is featured on the list with two of their brands; Budweiser (#32) and the rapidly growing Corona (#79).

The AB InBev brands command a higher price per hectolitre than those of its competitors; Heineken and Carlsberg.

In terms of economies of scale, cost synergies of USD3.2B have been realized three years after the acquisition of SABMiller.

AB InBev 2019Q3 presentation.

AB InBev has a large presence in the Asian markets, which experienced negative organic volume growth in Q3 (-6.5%) and Q4 (-5.2%). The business in Asia is seeing a further decline due COVID19.

2019-10-06 CNBC – Budweiser wants to take on China, the world’s largest beer market where local brews rule

In the light of the temporary decline in on-premise channels it is interesting to not that the DTC business is now a billion dollar business growing by double digits.

AB InBev has better margins and cash flow generation than those of its competitors and it is deleveraging. Yet it trades at low multiples in absolute and historical terms and has reached the lows of December 2018. AB InBev is too good an investment to pass at current prices.

References

2020-02-27 Reuters – AB InBev sees 10% hit to first-quarter profit from coronavirus

2020-02-27 Bloomberg – AB InBev Cuts CEO Bonus as Brewer Sees Worst Quarter in a Decade

2020-02-06 Bloomberg Opinion – Beer Drinkers Want More Than a Typical Lager These Days

2019-10-25 Bloomberg Opinion – The King of Beers Is in a Bind

2019-10-25 Midgard Finance – AB InBev increases prices in South Korea and Brazil and sees volume decline

2019-10-06 CNBC – Budweiser wants to take on China, the world’s largest beer market where local brews rule

Categories
Breweries

Constellation Brands raises forecast and takes further Canopy impairment charges

Constellation Brands issued a press release on its third quarter earnings before the opening bell with the following highlights.

  • Generates reported basis EPS of $1.85 and comparable basis EPS of $2.14, including Canopy Growth equity losses of $0.25; excluding Canopy Growth equity losses, achieved comparable basis EPS of $2.39
  • Generates $2.1 billion of operating cash flow and $1.5 billion of free cash flow, an increase of 5% and 14%, respectively
  • Increases fiscal 2020 reported basis EPS outlook to $0.95 – $1.05; increases comparable basis EPS outlook to $9.45 – $9.55
  • Increases fiscal 2020 operating cash flow target to approximately $2.3 billion and free cash flow projection to $1.5 – $1.6 billion
  • Agrees to revise original Wine & Spirits agreement with Gallo in connection with Federal Trade Commission review; expected to close by the end of fiscal 2020
  • In a separate, but related, transaction, agrees to divest Nobilo Wine brand to Gallo for $130 million; expected to close in first half fiscal 2021
  • Signs agreement with Kings & Convicts Brewing to divest the Ballast Point brand and certain related facilities; expected to close by the end of fiscal 2020
  • Promotes Garth Hankinson to Constellation’s CFO replacing David Klein who will assume the Canopy Growth CEO role

Volume, net sales, operating income and margins for wines and spirits (W&S) was down YoY for the quarter.

 Vol (%)Sales (%)Income (%)
Beer6.8-14.20.0
W&S-13.5-9.7-12.4
Figures for the trailing twelve months (TTM) for shipment volume, net sales, operating income and operating margin.

The poor performance in terms of EPS was attributable to further impairment losses of $534 million related to Canopy Growth.

Goodwill

Given the headwinds caused by Canopy Growth it might be a while before Constellation Brands once more trades at its all time high of $234.22 from April 2018 despite some of the best operating margins in the industry.

Time series of enterprise value relative to EBITDA for selected breweries.
Operating margin time series for selected breweries.
Revenue time series for selected breweries.

Reuters – Constellation raises profit forecast after beer-driven quarter

Bloomberg – Constellation Brands Jumps After Boosting Profit Forecast

Categories
2019Q3 Breweries Europe

AB InBev increases prices in South Korea and Brazil and sees volume decline

AB InBev issued a press release on their quarterly results before the market opened.

The two most important headlines of the quarter were probably the listing of Budweiser APAC on the HKEx and implementation of price increases in South Korea and Brazil that drove volume declines.

Quarterly (YoY) organic volume growth (%).
CNBC Television – 30sep2019 – Budweiser APAC CEO speaks about the promise of the Asia market

Whereas revenue and revenue per hectolitre were up, volume was down and EBITDA margins contracted.

TTM revenue per segment
TTM volume per segment
TTM revenue per hectolitre

The proceeds from the listing of Budweiser APAC was used to reduce debt and AB InBev is on track to reduce the debt to 4 times normalized EBITDA before the end of the year; one year earlier than the prior guidance. Deleveraging to approximately 2 times EBITDA still remains the commitment.

Comparison of breweries

AB InBev continues to have the strongest operating margins in the industry because of their strong brands and their economies of scale. For example cost synergies of USD3.2B have been realised three years after the acquisition of SABMiller.

Interbrands 2019 report

Interbrands released their report on the 100 top ranked brands in the world on the 17th of October. AB InBev is featured on the list with two of their brands; Budweiser (#32) and the rapidly growing Corona (#79).

Media coverage

Reuters – AB InBev loses $13 billion in value as beer drinking slows in Brazil and South Korea

Bloomberg – Beer Giant AB InBev Loses $20 Billion in Market Value

CNN – Budweiser brewer hit by slumping sales in China

Financial Times – AB InBev scales back annual profit target after quarterly miss 

Bloomberg – The King of Beers Is in a Bind

WSJ – Budweiser Brewer Issues Profit Warning, Sending Shares Sharply Lower

2019-10-24 Bloomberg – Budweiser APAC Posts Sharp Profit Drop

2019-10-06 CNBC – Budweiser wants to take on China, the world’s largest beer market where local brews rule

2019-10-06 CNBC – Budweiser wants to take on China, the world’s largest beer market where local brews rule