Kraft Heinz has taken another $1.2bn worth of writedowns and said there was a risk of more to come, intensifying concerns on Wall Street about the prospects for the Warren Buffett-backed food company as more shoppers shun its brands.
Shares in Kraft Heinz closed down 8.6 per cent on Thursday, bringing the sell-off this year to 34 per cent, after it disclosed the latest hit to its balance sheet alongside a near 5 per cent decline in first-half sales.
The Chicago-based company, whose products include Heinz ketchup, HP Sauce and Kraft macaroni and cheese, scrapped previously issued annual earnings guidance after its first-half profits halved from a year ago.
Miguel Patricio, its new chief executive, said he was planning a “comprehensive review” of Kraft Heinz that could include selling some brands. “The level of decline versus previous year is nothing we are proud of,” he said.
The group had promised to transform the food industry when it was created in 2015 by the combination of Kraft and Heinz in a deal engineered by the investment firm 3G Capital and Mr Buffett. But it has since become the poster child for struggling consumer goods companies. Products that had been household staples for generations have gone out of fashion.
The latest accounting charges disclosed on Thursday add to a $15bn writedown Kraft Heinz took earlier this year due to gloomier prospects for some of its best-known brands, including Oscar Mayer meats.
Difficulties continued in the first half. Price cuts in North America helped push net sales down 4.8 per cent from the same period a year ago to $12.4bn. On an organic basis, which excludes the impact of currency, acquisitions and divestitures, they fell 1.5 per cent.
“There’s going to be continued risk of future impairments, given any change in forecast or modelling assumption,” said David Knopf, chief financial officer.
The problems at Kraft Heinz have brought scrutiny to 3G’s once-lauded approach to expenses, with critics on Wall Street complaining it became too reliant on cost cuts to drive returns.
“Without this discipline we would be in a worse place today,” said Mr Patricio. “But we have to do more than that . . . Maybe in the past, we were too focused on the bottom line.”
Setting out his commitment to making “consistent investments” in its brands, Mr
Patricio said: “We need a strategy, first of all, for growth.”
The latest non-cash charges comprised a $744m goodwill writedown to reflect reduced forecasts for several of its international businesses and a $474m hit to intangible assets caused by the drop in its share price. They pushed net income in the six months to the end of June down from $1.76bn a year ago to $852m.
Mr Patricio said it was a priority to reduce the company’s debt burden, which stood at $29.8bn at the end of June compared with a market capitalisation of $33.6bn on Thursday. “We need to strengthen the balance sheet,” he said.
However, the chief executive, who is 40 days into the job, said it was too early to say what disposals were being planned.
“All we know is that the first half was not great,” said James Targett, analyst at Berenberg. “The uncertainty is ongoing.”
Kraft Heinz restated almost three years of earnings earlier this year after an internal investigation uncovered errors in the way it had accounted for supplier contracts. The internal probe pointed the finger at misconduct by employees in procurement. The company’s accounting is being investigated by the US Securities and Exchange Commission.
Mr Patricio, who was brought in from brewer Anheuser-Busch InBev to replace Bernardo Hees, said the company still had a bright long-term future. “Our brands are icons,” he said, noting many of them had been around for over a century.
He said he was scrapping the annual financial guidance as “setting short-term targets publicly won't be productive”. In the latest delay to its financial statements, the company also said it was unable to file its full quarterly report with the SEC by the prescribed due date.
Kraft Heinz’s earlier writedowns had dragged Mr Buffett’s Berkshire Hathaway, a major shareholder, to one of the largest quarterly losses in its history. Mr Buffett has since said Berkshire “overpaid” for its interest in Kraft.
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