- Kraft Heinz reported dismal numbers for the first half of 2019 on Thursday, including a 54.6% drop in operating income, a decline in adjusted earnings before interest, taxes, depreciation and amortization of 19.3%, and a sharp reduction of 23.8% in earnings per share, all compared to the first half of 2018. The company also reported a $1.2 billion impairment charge based on extended projections in international markets and losses of stock value. It was Kraft Heinz's first earnings report since the February bombshell when it reported a $12.6 billion net loss, slashed its dividend more than 36% and disclosed an investigation by the U.S. Securities and Exchange Commission into its procurement accounting and control policies.
- On Thursday, the processed food giant withdrew all of its existing future guidance. CEO Miguel Patricio, who has been on the job for about 40 days, said he doesn't feel comfortable establishing targets right now — and short-term goals don't help achieve bigger aims. On the call, he outlined a sweeping agenda to focus the company more on growing its top and bottom line.
- Sales were also down 4.8% for the first half of the year compared to the same period in 2018. While part of this drop was due to unfavorable currency exchanges, CFO David Knopf said on the earnings call that some of the blame was due to retailers that significantly and unexpectedly decreased the amount of products they carried.
Considering the problems Kraft Heinz outlined in February's earnings report, it would be unrealistic to expect a glowing or upbeat report from the Chicago company this month.
In his first earnings call with investors, Patricio responded to the numbers with an unvarnished look at the problems of the past and present, flinty determination to improve the company and optimism tempered with the gritty realities facing the food business today. There were no punches pulled; Patricio started the call by admitting that Kraft Heinz's stock — once highly valued and traded — currently has one of the lowest prices among CPGs. He said he has the board's backing to work to remake the company and its strategies, which is starting immediately. Patricio vowed dedication to the company, and ongoing candor with shareholders.
"Our brands are icons," Patricio said on the call. "It is our job to make sure they are living icons. To do that, we must understand the future so we can lead, not follow. We must understand the consumer better than any other company. We have a good start on being data and process driven, but we must put more attention on consumers' insights."
Kraft Heinz's earnings call was not largely devoted to breaking down the minutia of the earnings report. Instead, it was mostly a new CEO laying out his plans for success. Patricio said he will be working internally to develop detailed plans for the company's improvements. He said he hopes to get his roadmap completed by the end of the year, and will report it to investors in early 2020.
However, the direction of Patricio's plans are clear. He told investors he hopes to grow Kraft Heinz's iconic brands through innovation and premiumization. He wants to increase the company's efficiency, especially in the supply chain and in marketing. Patricio wants to focus on the consumer and the future, being the first company to discover what the next trends will be.
"I am, the way that you are, disappointed in our first half results, but I am determined to rebuild our business momentum," Patricio said. "I have our board's support — and not only support, but expectation to set a new direction, a new forward. For me, there are no sacred cows, no preconceived ideas. Just fresh eyes and thinking about what is best for our great company."
Divesting brands is not part of that strategy at this time, he said, confirming talks that the company was no longer exploring the sale of brands including Breakstone's, Maxwell House and Ore-Ida.
"We don't want to rush to give away potential value to others," he said.
The company's best known brands, Patricio said, represent great opportunity. Heinz Ketchup, which has recently seen innovation through the Saucy Sauce blended line, now has 70% market share, he said. Philadelphia Cream Cheese has a 68% market share. Other of the strong brands in the company's portfolio could benefit from the same kind of innovation, as well as premiumization. He said these kinds of strategies helped AB InBev succeed in China when he was the company's president of the Asia Pacific region.
Efficiency, particularly along the supply chain, is another big focus. Last year, he said the company seemed to be focused only on cost cutting for supply chain — not efficiency. And it has cost them. In the last year, supply chain losses have been in the double digits, Patricio said. He plans to strengthen the supply chain through more technology and strategy, and the company's board is behind him.
He also said marketing dollars have not been used to their best potential. Kraft Heinz has spent more on marketing in general, but it has gone more to agency fees and other behind-the-scenes aspects. Patricio wants to retarget that spending toward areas that consumers see, such as media placement.
Patricio certainly has his work cut out for him, but that was apparent from the moment he was named as Kraft Heinz's new CEO. His plans are quite ambitious, which are fitting for a company that has fallen so far. Patricio said he is confident in the company's potential to turn around, especially given his personal experience with AB InBev. The keys are strong brands and deep consumer understanding, he said. Patricio also said the rapid transformation in the food industry is a big opportunity for Kraft Heinz to serve consumers better than anyone else.
"If we understand the future and lead the future, we are going to win," he said.
But what will investors think? Considering the company made the unorthodox move of tossing its previous guidance, it's far from clear cut. Kraft Heinz's shares fell more than 13% to an all-time low following the earnings report and the decision to pull guidance — at one point shares dipped as low as $26.05. It's been a sharp drop for the company's stock that was near $100 a share as recently as June 2017.
On the earnings call, both Patricio and Knopf shared their basic projections for the company through the end of the year. They expect the second half of the year to be better than the first, with growth across the board. Patricio said that consumption of categories Kraft Heinz is in is up across the board.