National Post (National Edition)

Kraft Heinz `moving to offence, making decisions to win big'

- SIDDHARTH CAVALE AND RICHA NAIDU

CHICAGO • Kraft Heinz Co. on Tuesday said it would sell its natural cheese business to French dairy company Groupe Lactalis for US$3.2 billion, step up its marketing budget and overhaul its supply chain, hoping to save US$2 billion by 2024 and halt weak sales and brand deteriorat­ion.

The company also forecast better-than-expected sales for the year, sending shares of Kraft Heinz up about 1.5 per cent in afternoon trading.

Packaged food companies like Kraft Heinz and Campbell Soup that market canned food and salty snacks have for years faced a perception that their products are unhealthy. At the same time, the industry is battling aggressive competitio­n from cheaper private-label brands from Walmart and Kroger.

At its virtual investor day, Chicago-based Kraft Heinz said it would now manage its business by distributi­ng brands among six platforms built around the occasions people consume Kraft products and the foods they are paired with. The company previously managed its business as 55-plus categories, which created complexiti­es.

For example, the company's biggest platform will be called “Taste elevation,” which will include brands such as Heinz Ketchup, Master and ABC, which as sauces and condiments add “increased taste and texture” to regular foods. Other platforms include “easy meals made better” for products such as Mac & Cheese, and “Flavorful Hydration” for its Capri sun type drinks.

Kraft also plans to increase spending on marketing by 30 per cent to just over US$1.4 billion, a move many shareholde­rs have hoped for since media and advertisin­g veteran Miguel

Patricio took over as chief executive in July 2019. Shares of Kraft Heinz have risen 4.6 per cent since then.

“Kraft Heinz has played defence for far too long ... but now we are moving to offence. We are making decisions to win big,” Patricio said during the presentati­on — his first major strategic update, which was initially planned for the spring but was pushed to September due to the coronaviru­s pandemic.

The company also announced that it would sell its natural, grated, cultured and specialty cheese businesses in the United States — including its Breakstone's and Cracker Barrel brands — to Lactalis, while retaining its more popular Philadelph­ia Cream Cheese, Kraft Singles, Velveeta Processed Cheese and Cheez Whiz brands.

The sale is part of plans to reduce its net leverage of about US$27 billion to about four times EBITDA by the end of this year from the 4.2 times EBITDA it achieved at the end of the second quarter.

Fuelled by shoppers in lockdowns buying more packaged food, Kraft Heinz forecast high-single-digit quarterly adjusted core earnings growth and mid-singledigi­t full-year adjusted core earnings growth. Patricio said sales growth has slowed from that early peak, but is still faster than last year.

The company expects third-quarter net sales growth in the mid-singledigi­t range versus last year, beating analysts' expectatio­ns of a 2 per cent increase in sales, according to Refinitiv data.

The company has begun streamlini­ng its supply chain, Patricio said, and is trying to build better relationsh­ips with suppliers — many of whom have been critical about Kraft Heinz's culture under the management of cost-focused private equity firm 3G Capital.

“Investors might be cautious with the US$2 billion savings plan announceme­nt since aggressive cost cutting is what led to KHC's downturn in the first place,” CFRA analyst Arun Sundaram said, pointing to the company's muted stock reaction on Tuesday.

Kraft Heinz CEO Patricio tried to assuage concerns saying while the company will continue to reduce costs, it wont be as aggressive if it can work with factories, transporta­tion and logistics companies to preserve margins by being more productive.

“When you cut costs too much, actually your costs increase because you lose efficienci­es,” Patricio said.

Of the US$2 billion cost cuts, US$1.2 billion will come from procuremen­t and US$800 million will come from making Kraft Heinz's logistical network more efficient.

The Portuguese CEO said Kraft Heinz will invest most of its media budget in five areas, including ready-made meals like Mac & Cheese and healthy snacks.

It also aims to promote products that can be used as ingredient­s, such as Oscar Mayer bacon and Planters nuts that can be used in salads.

The company, whose portfolio doesn't currently include many sweet foods, plans to spend heavily on promoting “indulgent desserts” and children's beverages and will invest in making existing brands better, not making more types of products, he said.

WHEN YOU CUT COSTS TOO MUCH, ACTUALLY YOUR COSTS INCREASE BECAUSE YOU LOSE EFFICIENCI­ES.

 ?? ANDREW HARRER / BLOOMBERG FILES ?? Kraft Heinz on Tuesday forecast better-than-expected sales for the year, sending
shares of Kraft Heinz up about 1.5 per cent in afternoon trading.
ANDREW HARRER / BLOOMBERG FILES Kraft Heinz on Tuesday forecast better-than-expected sales for the year, sending shares of Kraft Heinz up about 1.5 per cent in afternoon trading.

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