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S&P downgrades Kraft Heinz on unlikely growth of core brands

S&P Global Ratings on June 20 downgraded the ratings of The Kraft Heinz Co., citing its view that the company's key brands are unlikely to grow sales without discounting or successful innovation.

The downgrade applies to Kraft Heinz's long-term and short-term ratings, which are now rated BBB-/A-3 from BBB/A-2.

Ratings said its view of the U.S. packaged food producer has diminished, adding that it has doubts about the long-term success of Kraft Heinz's 3G cost-cutting strategy.

The rating agency said the company's several large brands — including Kraft, Oscar Mayer, Planters and Maxwell House — still have high margins but are either out of favor with consumers, or face significant competition from other manufacturers' offerings or store brands. Ratings said customers are starting to try new, innovative brands, instead of preferring the current household names.

The agency also highlighted the company's governance deficiencies around internal controls, poor post-Kraft integration cost takeout planning, and the ongoing SEC investigation, which arose from Kraft Heinz's reported $25 million increase in costs of products sold. The company admitted to overstating its financial results over the last three fiscal years, sending its stock down.

Meanwhile, Ratings maintained its outlook on Kraft Heinz to stable to reflect the agency's expectation that another meaningful EBITDA drop will not occur over the next two years and that the company will remain committed to the de-leveraging path outlined earlier in 2019.

The agency said it could raise the ratings if Kraft Heinz conducts effective research and development, as well as marketing that could reinvigorate its brands, or if the company improves its balance sheet through debt repayment. Ratings said an upgrade is also likely if the company avoids future large, balance sheet-leveraging deals.

Ratings said it could lower the ratings further if profitability weakens significantly 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. A downgrade is also likely if the ongoing SEC investigation uncovers material irregularities that affect the agency's view of the company and its standing in capital markets.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.