What Kraft Heinz’s write-down means for other consumer brands
By Uday Sampath Kumar and Nivedita Bhattacharjee - Feb 27th, 09:45
Shares of Kraft Heinz slumped 20% after the food company posted a quarterly loss, disclosed a Securities and Exchange Commission (SEC) investigation and wrote down the value of its Kraft and Oscar Mayer brands.
The gloomy results highlighted the tough environment for the packaged food industry. The forecast from the company, which is one of billionaire Warren Buffett's largest investments, reflects changes in consumer trends away from processed foods to healthier alternatives.
The after-hours slump erased $12bn from Kraft Heinz's stock market value and left its shares trading at their lowest point since HJ Heinz Company bought Kraft Foods Group in 2015, to create the world's fifth-largest food and beverage company.
The $15.4bn write-down indicates declining fortunes of the iconic brands and other losses in asset value, meaning the company views those assets as less valuable than before the merger.
"We expect to take a step backwards in 2019," CFO David Knopf told analysts on a post-earnings conference call, promising "consistent profit growth" starting in 2020.
Kraft, which owns Velveeta cheese and Heinz ketchup brands, forecast adjusted earnings before interest, tax, depreciation and amortisation (ebitda) between $6.3bn and $6.5bn in 2019, lower than analysts' estimates of $7.47bn, according to IBES data from Refinitiv.
On a post-earnings call with analysts, CEO Bernardo Hees said the entire packaged foods industry would be likely to remain challenged, blaming the rising popularity of private label brands and higher commodity costs.
"Kraft Heinz is in a worse position than many other consumer packaged goods companies because it has got a very weak portfolio of brands. They are not delivering the level of growth that's needed in this sort of market," GlobalData Retail managing director Neil Saunders said.
The company, which competes with General Mills and Kellogg, cut its quarterly dividend to 40 US cents per share from about 63c per share.
Buffett's Berkshire Hathaway and Brazil's 3G Capital control Chicago-based Kraft Heinz.
In addition to lower-than-expected earnings, the company disclosed it had been subpoenaed by the US SEC in October, related to an investigation into its accounting policies, procedures and internal controls related to procurement.
The company said it was working on ways to improve its internal controls and determined the problems required it to record a $25m increase to the cost of products sold.
"That has really made a bad set of results even worse because it has also thrown some uncertainty into the mix," Saunders said.
For the quarter ended December 29, Kraft had a net loss of $12.6bn. It earned 84c per share on an adjusted basis, missing Wall Street estimates of 94c, according to IBES data from Refinitiv.
Net sales of $6.89bn fell short of analysts' estimates of $6.94bn in the reported quarter.Business Live
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