- Kraft Heinz is on the rebound from a disastrous start to the year, though numbers posted in its latest earnings report on Thursday are still mostly in the red. In the most recent quarter, net sales were just over $6 billion — down 4.8% from the same time a year ago. Adjusted earnings per share ticked down 9.2% — from 76 cents a year ago to 69 cents this year. Net income was up 45.4% from a year ago — to $899 million — but the company said that was mostly driven by the sale of the Canadian cheese business.
- Despite beating analysts' expectations and progress to improve the company's top and bottom lines, CFO Paulo Basilio said on a conference call to discuss the report that he anticipates similar results coming for the next quarter. Regardless of structural and process changes already coming to the company from CEO Miguel Patricio, some of the issues that impacted the company's earnings — including currency, higher commodity costs and a difficult volume/mix in the United States — will persist, Basilio said. However, he said, price increases in the U.S. will continue to add to profits.
- On the call, Patricio touted the improvements the company has made so far, but said the numbers are uneven across categories and countries. "To change our trajectory, we must improve our execution around the category, brand and sales initiatives by making critical fixes and closing any capability gaps, and drive greater efficiency in our supply chain, across procurement, manufacturing and distribution," he said.
These numbers are a far cry from the bombshell the company dropped in February, where the CPG giant reported a $12.6 billion net loss and saw its stock plummet by more than 28%. But they still aren't good.
However, as Patricio has reiterated every time he has spoken to the investor community at large, he — an outsider who took the helm of the company in July — has a plan. The more formal strategy is under construction and will be released in greater detail early next year, but in Thursday's earnings call, he gave a bit of a preview.
The major ideas can fit into a few buckets: Improve innovation, get rid of underperforming SKUs, become more consumer and future-focused, invest more into top-level marketing and continue to streamline processes. He hinted that divestitures of segments that do not contribute to the companies future goals may be on the table in the future — a departure from his previous stance, when he said he wanted to focus on which of the mega-company's more than 200 brands would be the most valuable for the company.
SKU rationalization and innovation improvements seem to be two sides of the same coin. In the past, Patricio said, Kraft Heinz seemed to be focused on the present, rather than the future. He described a "frenzy of innovation" in the last few years to bring new products to market and try to offset the kinds of sales declines many legacy companies have seen.
Many of those new products, Patricio said, did nothing to help the company's bottom or top lines.
"It was very cannibalistic. It caused a lot of complexity. As a result, a lot of supply chain losses and lower margins," Patricio said.
He did not specify any products that would be likely to be cut, but he said they were generally not high volume.
A better innovation strategy would help both grow the business and cut down on these types of inefficiencies, he said. The company needs to commit to understanding consumers and the future, focusing on where new products will have staying power. Patricio said he has unified research and development throughout the company, and he is focused on shortening the pipeline to get new products to consumers from two years to six months.
"We have to do bigger innovation," Patricio said. "We have to do fewer innovations. We have to do bolder innovations. We have to do profitable innovations. And it has to be incremental. Instead of doing everything — you know, all products innovating and launching and throwing new products in the market that will not really generate extra profitability for our company."
This stance is an unusual one in the CPG industry today, where leadership tends to push innovation at all costs. However, given Kraft Heinz's recent problems, it makes sense to take a more measured look at what it's doing. Several other CPG companies have poured money into innovating products that seem like they would work for consumers, but ended up with disappointing sales. In recent months, upcycled snacks from Tyson and free-from children's snacks from Kind both were pulled from the market despite the fact that they ticked many consumer trend boxes.
But Kraft Heinz also has been remiss in really finding where consumer trends are, Patricio said. He mentioned that the company was one of the first to get veggie burgers to market with its Boca line 15 years ago. Today, plant-based everything is hot, but not enough was done to keep Boca on top of that segment, and Patricio said the company is missing out. In the future, he said, more insight is needed.
While the company didn't sugar-coat its future growth expectations, Kraft Heinz stock was up more than 11% in Thursday morning trading. And while a more detailed plan and more wholesale change is coming, Patricio said it still won't be quick growth.
"What I aim is that 2020 is the year we stabilize the business, that we build the foundation for growth in 2021," he said.