You wouldn't think that a VP of Breakthrough Innovation could steal the show, but KRFT takes day one with a management team that hit that right notes. SYY was at the other end of the spectrum highlighting commercials targeted at consumers that don't even buy the company's products.
General Mills (GIS)
Operating environment across key US categories is improving – much improved versus a year ago. Trends are improving, inflation is moderating, and new product news is accelerating. Advertising dollars are down in 2013? Don’t like to see that.
So, in summary – losing share across categories, lower advertising spend and 2014 growth to be driven by acquisitions.
Ralcorp will improve the long-term earnings algorithm. Private label has been going through an evolution to private brands that offer a compelling value proposition to both retailers and consumers. Private label and branded can synergize procurement. Acquisition is beneficial to scale, makes CAG the clear leader in private brands. Cost synergies will come from supply chain as well as SG&A - $225 million by year 4 post transaction. Transaction will add $0.05 to FY 2013 EPS and $0.25 to FY 2014 EPS.
Kraft Foods (KRFT)
Company has iconic brands with near-perfect household penetration, focused on execution across the portfolio. Company has made significant progress against a “bloated” overhead structure – targeting being the leanest company in packaged food. New KRFT is about consistent, sustained, profitable growth with innovation at its core. KRFT was worst – on just about any metric, aspires to be first. Our favorite on the day, may be damning with faint praise, but the company hit all the right notes.
The company provided a solid overview of operating units, with generally positive business momentum across multiple regions. Interesting comments regarding China, as the company is seeing a slowing industry and heightened competition. Beer industry has structurally changed over the past ten years due to consolidation – beers are made to a much higher quality standard, bottles and labeling have improved as well. Image has changed, as beer is now a beverage to which emerging market consumers aspire. Graham Mackay remains one of the more impressive CEOs across all sectors.
The presentation began by highlighting the overall attractiveness of the U.S. tobacco manufacturers profit pool – note that management didn’t frame the discussion as cigarettes alone. Cigarettes are plagued by the weakest recent and long-term volumes trades as adult smokers switch to alternative products. Despite some promotional challenges in the cigarettes business, Altria’s business is in a position to grow profitably and in the process return cash to shareholders via dividends (primarily) and share repurchases.
CEO Irene Rosenfeld was her usual bullish self, despite some recent EPS prints that would argue against a significant degree of optimism. To Irene’s credit, she continued to speak candidly about some of the issues that have caused MDLZ’s top line to drag (lower coffee pricing, capacity constraints and some execution issues). Some of those issues will mitigate over time, hence her confidence that the company can see a return to a more robust top line growth profile.
A less than inspiring presentation from SYY. The company outlines a number of cost savings initiatives through FY2015, however case volume is down and doesn’t look to inflect without further bolt-on acquisitions in a very competitive space. The company sees a choppy (read negative) microenvironment ahead in which it expects restaurant traffic to be down (restaurants = 57% of its overall business). We expect its big share of food sales across the U.S., Canada, and Ireland to be challenged through this business transition.
The company is seeing improving trends across its focus areas of Coffee, Peanut Butter, and Fruit Spreads and will increase cap ex to over 3% of sales over the next couple years to support these areas. FY 2013 earnings outlook of $5.17 – 5.22, with top line of 6%, aided by lower commodity costs and integration of the SaraLee coffee business. SJM is making a strong push in China with innovation and know-how with its minority interest in Seamild. Expects peanut butter sales to be resilient and follow on strength from K-cups with new users still coming into the category and existing increasing buying in 2013.
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