CHICAGO — S&P Global Ratings on June 20 downgraded its rating for Kraft Heinz Co. to BBB/A-3 from BBB/A-2, bringing it in line with the investment grades of fellow ratings agencies Fitch Ratings and Moody’s and leaving it one notch above junk status.
S&P said its view of Kraft Heinz is “diminished,” including its expectation that some of the Chicago-based company’s key brands are unlikely to grow sales without discounting or successful innovation and doubts the long-term success of the 3G cost-cutting strategy. The ratings agency also pointed to governance deficiencies around internal controls as an area of concern.
“We reassessed the business risk because of reduced pricing power, competition and our forecast that the company will be unable to meaningfully grow adjusted EBITDA,” S&P said. “The company’s weak adjusted EBITDA (before restructuring and integration costs) in the second half of 2018 (primarily in the core US market) is indicative of several large brands that still have high margins but are either out of favor with consumers, or face significant competition from other manufacturers’ offerings or store brands, which are increasingly important to retailers. This includes Kraft, Oscar Mayer, Planters and Maxwell House. Hurdles include the reduced loyalty of consumers who are increasingly willing to try new, innovative brands (including store brands that have improved quality) and embrace nontraditional (vegetarian, flexitarian) or healthier diets (for example, increased interest in plant-based, non-meat products).”
S&P has given Kraft Heinz a “stable” outlook, reflecting the ratings agency’s expectation that another significant EBITDA drop will not occur over the next two years and that the company will remain committed to the de-leveraging strategy it outlined earlier this year.
Looking ahead, S&P said it could raise Kraft Heinz’ rating if the company is able to reinvigorate its brands through R&D and marketing, leading to sustainable profit growth. The company’s rating also may be raised if it “meaningfully improves its balance sheet through debt repayment, resulting in adjusted leverage sustained below 3x and DCF to debt above 10 percent,” S&P said.
On the flipside, Kraft Heinz’ rating may be lowered if profitability weakens due to increased competition or a renewed shift in consumer demand away from the company’s products to on-trend brands or private label offerings, S&P said. The ratings agency also indicated that profits could fall due to “an inability to manage input cost volatility, including labor, commodities and freight and energy expenses.”
Kraft Heinz on June 7 filed corrected financial reports for the fiscal years 2016 and 2017 as well as the first three quarters of fiscal 2018 when the company filed its 2018 annual report with the Securities and Exchange Commission. The restatements came after the SEC subpoenaed the company last October about problems in its procurement area and a Kraft Heinz internal investigation that followed.
The impact of the restatements to previously reported amounts from 2015 to 2018 is less than 1 percent of net income or net loss for each period. The company’s 2018 annual report includes restated audited consolidated financial statements as of Dec. 30, 2017, and for the years ended Dec. 30, 2016, and Dec. 31, 2017, as well as restated unaudited interim financial statements for the quarterly periods ended April 1, 2017; July 1, 2017; Sept. 30, 2017; March 31, 2018; June 30, 2018 and Sept. 29, 2018.