$The Kraft Heinz Company(KHC)$ $Invesco QQQ(QQQ)$  $DJIA(.DJI)$ $NASDAQ(.IXIC)$  

The Kraft Heinz Company (KHC) is a global food and beverage company. Its brand portfolio includes Heinz, Kraft, Oscar Mayer, Philadelphia, Kool-Aid, and Jell-O amongst others. Its revenue stream can be broken down into the following product categories: condiments & sauces (34%), cheese & diary (14%), ambient foods (11%), frozen & chilled foods (11%), meats & seafood (9%), refreshment beverages (7%), desserts, toppings & baking (5%), coffee (3%), infant & nutrition (1%), and others (4%). The company also groups its revenue based on consumer needs: Taste Elevation (34%), Fast Fresh Meals (22%), Easy Meals Made Better (20%), Flavourful Hydration (7%), Real Food Snacking (5%), Easy Indulgent Desserts (4%) and Others (8%). Its sales remains concentrated in US (69%) with international markets contributing to 31% of revenue (Canada at 7% and UK at 5%).

Investment Overview

Investing in marketing and innovation to compete against private label. With consumer facing strained from prolonged high interest rates environment and uncertainties, Kraft Heinz has stepped up its marketing and innovation investment to provide better value propositions to consumers. Of which includes (i) partnership with popular brands to launch themed products like Super Mario themed Mac & Cheese and Transformers themed Lunchables, (ii) new product innovation to satisfy changing consumer needs like tikka flavoured beans and pickle flavoured ketchup, and (iii) high quality convenient meal prep line-ups like Taco Bell Cravings Kits.

Supply chain efficiencies to drive gross margin expansion amidst lacklustre sales volume. Despite a below inflation pricing strategy, volume growth has remained elusive. Notably, the company’s largest market, North America, saw 4.2% point decline in volume/mix despite a 1.3% point price increase (versus inflation rate of 3-4% during the same period). Nonetheless, the company has increased its gross margin expansion guidance by 50bps to range of 75 to 125 basis points during its 1H24 earnings call, from an initial 25 to 75 basis points during its FY23 earnings call, supported by improvement in supply chain efficiencies through means like digitalisation and cost discipline. As of 1H24, it has achieved 190 basis points y/y margin growth, above its guidance range. For 2H24, management expects margin growth to be muted on high base effect. Heading into 2025, margin expansion is expected to moderate to 25 to 75 basis points level.

Downgraded organic growth guidance on challenging consumer environment. With 1H24 organic growth tracking at -1.5% and continued challenging consumer environment, the company has reasonably lowered its sales guidance to -2% to 0% (previous: 0 to +2%). Whereas it continued to maintain its adjusted EPS growth guidance of 1% to 3%. Bottom-line growth would be largely driven by margin expansion from productivity improvements. With 1H24 adjusted EPS growth at -0.7%, the company is expecting a stronger 2H24, which will be driven by growth outside the US with completion of its plant maintenance and the appropriate execution in terms of pricing, marketing and distribution.

Upside risk on steep rate cuts scenario as the company will be a key rate cut beneficiary given its high leverage ratio and prove attractive to dividend investors for its high yield amongst peers. However, there could be downside risk if sales continues to remain soft in 2H24 contrary to the company’s guidance.

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