Kraft Heinz Forecasts a Return to Growth in the 3rd Quarter

Heading into its second-quarter earnings report, investors had modest expectations for Kraft Heinz' (KHC -0.60%) business trends. The packaged foods industry has been under pressure thanks to slow sales growth and rising costs for key inputs.

Kraft's actual results surpassed the low bar that shareholders had held, as improvements in several key areas put the company on firmer footing heading into the second half of fiscal 2018.

Data source: Kraft Heinz' financial filings. 

What happened this quarter?

Kraft Heinz continued to see the type of declines in its core sales growth and profitability metrics that have pushed the stock lower lately. However, trends improved when compared to the prior quarter to lift results slightly higher than management had predicted. The food giant also had positive comments about its outlook for the rest of the year.

Image source: Getty Images.

Highlights of the quarter included:

• Organic sales fell 0.4% to mark a solid improvement over the prior quarter's 1.5% decline. Notably, prices rose across most of Kraft Heinz' portfolio.
• Revenue in the core U.S. segment fell 1.9% compared to a 3.3% drop in the prior quarter. Canada remained a major headwind on the overall business as sales fell 8% in that market.
• Earnings were pushed lower by non-repeatable charges including a $265 million impairment loss. After accounting for these temporary events, profit declines were more modest. Adjusted earnings fell by 4% and adjusted earnings per share ticked up by 2% to $1.

What management had to say

In a press release, CEO Bernardo Hees described the overall results as "stronger than the expectations we put forward as recently as three months ago." Management provided more detail in an investor presentation, saying the second-quarter growth figure benefited from demand trend improvements in "most countries and most key categories."

As a result of the brightening demand picture, executives are more confident in their outlook both for the current year and for fiscal year 2019. "We believe we are now in a position to drive sustainable top-line growth from a strong pipeline of new product, marketing, and [growth] initiatives that are backed by investments in capabilities for brand and category advantage," Hees said.

Looking forward 

Organic sales are down by less than 1% over the first half of the year, as a 1.1% increase in prices has been offset by bigger declines in sales volumes. However, executives believe they'll get back into positive growth territory, and stay there, beginning in the current quarter.

The earnings picture is more clouded thanks to challenges including cost inflation and rising tariff charges. Yet Kraft Heinz is now targeting rising profitability by the fiscal fourth quarter while expecting "further momentum into 2019."

Overall, the second-quarter results contain more good news than bad, with the most encouraging data point being that sales trends improved in the context of rising prices. If Kraft Heinz can extend those wins into the coming quarters, it has a good shot at putting its almost two-year stretch of disappointing growth figures behind it.