Kraft Heinz stumbles in 2017

by Monica Watrous
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Planters nuts, Oscar Mayer cold cuts, Kraft natural cheese, Kraft Heinz
Net sales in Kraft Heinz's U.S. business fell 1.1% in the fourth quarter, reflecting volume declines in Planters nuts, natural cheese and cold cuts.

PITTSBURGH — The past year was one of “missteps” for The Kraft Heinz Co., leading to financial results that “did not meet our potential,” said Bernardo Hees, chief executive officer.

Bernardo Hees, Kraft Heinz Co.
Bernardo Hees, c.e.o. of Kraft Heinz

“We had a slow start, some missteps along the way, and took some decisions to accelerate investment in Q4 that held back 2017 financial performance,” Mr. Hees said during a Feb. 16 earnings call.

Net income attributable to common shareholders of the Kraft Heinz Co. in the year ended Dec. 30, 2017, was $10,999 million, equal to $9.03 per share on the common stock, up sharply from $3,452 million, or $2.84 per share, in the year prior. Net sales for the year declined to $26,232 million from $26,487 million.

For the fourth quarter, net income attributable to common shareholders of the Kraft Heinz Co. was $8,003 million, equal to $6.57 per share, up from $944 million, or 78c, in the year-ago period. Net sales of $6,877 million were up 0.3% from prior-year sales of $6,857 million. Organic net sales declined 0.6%.

Bernarndo Hees Kraft Heinz pull quote

“At Kraft Heinz we believe it’s critical to take away clear learnings from the past year, and there were four key areas that held back our 2017 operational results,” Mr. Hees said. “No. 1 is customer contracts. Here we’ve learned that having agreements in place signed and sealed at the start of the year can avoid first-quarter commercial activation misses and lead to better retail execution for the balance of the year. This was the story of our Canadian and Russian business in 2017.

“Two is faster actions to achieve the right balance between pricing and key commodity costs, particular in a few of our larger U.S. categories, as well as our Brazilian vegetable business during the year.

“Three is moving quickly and making the necessary adjustments when executing critical category and brand turnarounds...

Ore-Ida and Oscar Mayer, Kraft Heinz
Kraft Heinz plans to ramp up manufacturing in its frozen potato and U.S. meat businesses.

“And finally, No. 4 is to have better service as we ramp up manufacturing in new facilities and new production lines, eliminating disruptions and achieving benchmark levels through the process. I’m talking here about our frozen potato and U.S. meat business.

“The other factor that held back our 2017 financial results were decisions we took during the fourth quarter where the HR-1 Tax Cuts and Jobs Act was in process. This new law provides us with additional cash and incentives to accelerate investments to grow our business.”

Increased investments in marketing, in-store sales teams, e-commerce and supply chain dampened fourth-quarter EBITDA in the United States, Mr. Hees said.

Net sales in the company’s U.S. business fell 1.1% to $4,787 million in the fourth quarter, reflecting volume declines in Planters nuts, natural cheese and cold cuts.

David Knopf, Kraft Heinz
David Knopf, c.f.o. of Kraft Heinz

“By segment the United States was more or less consistent with our expectations, although we made a decision to invest to protect distribution in cold cuts, and that held back the contribution from pricing in Q4,” said David Knopf, chief financial officer. “In Canada, while we expected year-end 2017 retail inventories to be lower than 2016, they came in even lower than our initial expectations and look to be permanent. So this will likely translate into some headwinds moving forward.

“Europe was consistent with expectations, benefiting from gains in the U.K. and strong growth in Southeast and Central Europe where we are now selling the Kraft brand. And in Rest of World the accelerated growth we expected in Asia from China and Indonesia was held back by more prolonged slowdown than expected in Brazilian canned vegetables.”
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