Kraft Heinz stock tanks after revealing SEC probe, profit losses and dividends slash

22 Feb 2019 --- Troubled Kraft Heinz saw its shares plummet by almost 20 percent in the hours after trading yesterday, after the US food giant posted quarterly losses, revealed it was being investigated by the US Securities and Exchange Commission (SEC) and wrote down the value of Kraft and Oscar Mayer brands. This comes amid the difficult and challenging environment for the packaged food industry as consumer preference steers further away from traditional products and shift to healthier alternatives.

Kraft Heinz says it is continuing to cooperate with the SEC after initially receiving a subpoena in October 2018, associated with an investigation into the company's procurement area. More specifically, the company's accounting policies, procedures and internal controls related to its procurement function, including, but not limited to, agreements, side agreements, and changes or modifications to its agreements with its vendors.

This comes amid a bleak results and forecast from the world’s fifth largest food and beverage company on Thursday with “unanticipated cost inflation” weighing in on results. 

Kraft Heinz – which is trying to expand into new categories – wrote down the value of the Kraft and Oscar Mayer brands by US$15 billion, posted a US$12.6 billion loss and reduced its dividend by 36 percent. 

Based on “several factors that developed during the fourth quarter,” Kraft Heinz says that as part of its normal quarterly reporting procedures and planning processes, it decided that, “the fair values of certain goodwill and intangible assets were below their carrying amounts. As a result, the company recorded non-cash impairment charges of US$15.4 billion to lower the carrying amount of goodwill in certain reporting units, primarily US Refrigerated and Canada Retail, and certain intangible assets, primarily the Kraft and Oscar Mayer trademarks. These charges resulted in a net loss attributable to common shareholders of US$12.6 billion and diluted loss per share of US$10.34.”

Fourth-quarter net sales inched up 0.7 percent while Organic Net Sales increased 2.4 percent. The company says the Q4 and full year 2018 financial results reflect solid organic net sales growth in all segments that was more than offset by higher operating costs, as well as non-cash impairment charges related to goodwill and intangible assets.

“Our Q4 and full year 2018 results reflect our commitment to re-establish commercial growth of our iconic brands, turn around consumption trends in several key categories, and expand into new category and geographic whitespaces,” says Kraft Heinz CEO Bernardo Hees. 

“We are pleased with those actions, the returns on our investments, and the momentum built for 2019. However, profitability fell short of our expectations due to a combination of unanticipated cost inflation and lower-than-planned savings.” Going forward, the global focus will remain on leveraging our in-house capabilities, developing talented people and delivering top-tier growth at industry-leading margins, he says.

Kraft Heinz net sales were US$6.9 billion, up 0.7 percent versus the year-ago period, including an unfavorable 2.2 percentage point impact from currency and a net 0.5 percentage point benefit from acquisitions and divestitures. Organic Net Sales increased 2.4 percent versus the year-ago period. Pricing was down 1.6 percentage points, as increased promotional activity and pricing to reflect lower key commodity costs in North America, particularly the US, more than offset higher pricing in Europe, the Middle East and Africa (EMEA) and Rest of World markets. 

Adjusted EBITDA decreased 13.9 percent versus the year-ago period to US$1.7 billion, including a negative 2.4 percentage point impact from currency. Excluding the impact of currency, lower Adjusted EBITDA reflected a decline in the US that more than offset Constant Currency Adjusted EBITDA growth in all other business segments. 

Adjusted EPS decreased 6.7 percent to US$0.84, as lower Adjusted EBITDA, higher depreciation and amortization expenses, as well as higher interest expense more than offset lower taxes on adjusted earnings in the current period.

Following this initial SEC document request, Kraft Heinz, together with external counsel, launched an investigation into the procurement area. 

In the fourth quarter, as a result of findings from the company’s investigation into its procurement area, Kraft Heinz says it recorded a US$25 million increase to costs of products sold as an out of period correction. The company also determined the amounts were immaterial to the fourth quarter of 2018 and its previously reported 2018 and 2017 interim and year to date periods. 

Additionally, Kraft Heinz is in the process of implementing “certain improvements to its internal controls to mitigate the likelihood of this occurring in the future,” and has taken other remedial measures.

“The company does not expect the matters subject to the investigation to be material to its current period or any prior period financial statements,” a statement reads. 

In early 2017, Kraft Heinz Co withdrew its US$143 billion bid for consumer goods giant Unilever two days after the company’s surprise approach became public amid stiff opposition from the Anglo-Dutch target to engage in discussions. At the time when Unilever rejected the bid, it said the Kraft Heinz approach “fundamentally undervalued” the company. 

Kraft Heinz was formed in 2015 in a deal backed by Warren Buffett's investment company Berkshire Hathaway. It came after private investment group 3G Capital combined with Berkshire Hathaway four years earlier to acquire the iconic Pittsburgh company H.J. Heinz Co.

3G Capital has a history of taking over companies and aggressively cutting costs. Bernardo Hees, a 3G partner, has slashed jobs and pursued other savings, some of them granular, as CEO of Kraft Heinz. In a 2015 memo to employees, Hees reportedly reminded them to print on both sides of the paper, reuse office supplies like binders and turn off computers before leaving the office to cut down on energy costs. The company even went as far as stopping the stocking of the corporate office with free Kraft snacks.

Around this time last year, the company announced Warren Buffett, aged 88, would retire from the Company’s Board of Directors as he decreases his travel commitments.

In January, Kraft Heinz completed the acquisition of Primal Nutrition, LLC, makers of Primal Kitchen branded products. Primal Kitchen is a better-for-you brand which primarily focuses on condiments, sauces and dressings such as mayonnaise, salad dressings and avocado oil, with growing product lines in healthy snacking and other categories.

The acquisition is part of Kraft Heinz Springboard platform, which was launched in March 2018. The platform’s objective is to nurture, scale and accelerating growth of disruptive US brands within the food and beverage space.