July 31, 2020

Breakingviews: Kraft boost may be more than a flash in the pan

by Breakingviews.

Kraft Heinz is cooking up something new. The $43 billion food giant grew sales 4% in the quarter after Covid-19-induced lockdowns created new opportunities to eat packaged mac and cheese. That’s a double helping of luck, because higher profit makes the company’s high debt load more manageable. If its biggest shareholder 3G Capital uses the moment wisely, the boost could be more than just a flash in the pan.

The maker of Velveeta cheese, 47%-owned by Jorge Paulo Lemann’s private equity firm and Warren Buffett’s Berkshire Hathaway, said that increased sales of condiments, frozen potatoes and other foods desirable in a societal catastrophe helped boost adjusted EBITDA to $1.8 billion, a more than 12% increase from the same quarter last year. American pantry-stocking was a major driver – U.S. adjusted EBITDA rose nearly 18%.

That helps reduce the relative burden of Kraft’s $29 billion of borrowings, partly offset by $3 billion of cash. If profit were to grow at the current rate for four more quarters, Kraft’s net debt could slide to 3.8 times EBITDA, from well above 4 times now. That’s in line with where Chief Executive Miguel Patricio wants to be, and closer to peers including Mondelez International. Reducing indebtedness is a matter of urgency, because interest payments and dividends gobbled up nearly three-quarters of Kraft’s free cash flow last quarter.

It’s encouraging that Kraft isn’t taking its good luck for granted. The company wants to keep customers – including families without kids – that it managed to acquire during the pandemic, and is talking about growth. That’s a departure from the skills 3G typically brings: levering up and cutting costs to boost returns. But with sales growing faster than GDP – a rare and happy circumstance – changing up the recipe is a good idea.

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