Kraft Heinz’s slow first quarter stirs margin concerns
Pittsburgh Post-Gazette
In the Kraft Heinz Co.’s first quarterly earnings call after the company’s failed attempt to buy Unilever, analysts had questions.
Management for the food giant that makes iconic products such as Kraft macaroni & cheese, Heinz ketchup and Oscar Mayer hot dogs had reported a slow first quarter with less than exciting sales numbers.
Analysts want to know what’s ahead for the company headquartered in Pittsburgh and Chicago. The Unilever setback, after a string of successful big deals, got their attention.
“We’ve heard concerns from some investors that your approach to reducing costs may cut into muscle and that in turn could make it harder for you to execute additional deals going forward,” Alexia Howard, an analyst with Bernstein, told Kraft Heinz CEO Bernardo Hees.
It’s an important question for a team backed by private equity group 3G Capital and by Warren Buffett’s Berkshire Hathaway that is widely seen as using acquisitions as a growth tool. Kraft Heinz itself was created two years ago through the merger of the H.J. Heinz Co., which the joint venture bought in 2013, and Kraft Foods Group.
The market is concerned that management’s success in improving profit margins by shedding employees, plants and costs may be slowing down.
In the first quarter, Kraft Heinz reported a profit of $893 million, down from $896 million in last year’s first quarter. Net sales dipped 3.1 percent to $6.4 billion vs. $6.57 billion a year ago.
Results in the U.S., Canada and Europe were lackluster, although the rest of world segment that includes Latin America, Asia Pacific, Middle East and Africa were strong.
In her questioning during the conference call held after the markets closed Wednesday, Ms. Howard wanted to know if possible merger partners are too wary. “Do you agree that you may have an image problem with potential acquisition targets, and what can you do to overcome that?”
Mr. Hees argued that perception may not fit the facts.
He acknowledged that people may focus on the management team’s costcutting prowess and not on its mantra of meritocracy, high performance and dreaming big. And he argued that the team invests in building profitable growth over the long run.
Yet, Mr. Hees conceded there might be a perception problem. “That’s not for us to judge,” he said.
Bryan D. Spillane, an analyst with Bank of America Merrill Lynch, said he’d been fielding queries, too. “I think the perception is the cost savings are close to fully identified and the revenues are declining and there’s deleveraging, and it sort of underscores this notion that maybe the business — that the whole model is broken, that it’s not sustainable.”
Mr. Hees strongly disagreed with that line of thinking, defending the model that private equity firm 3G Capital has used for many years.
“Our strategy really continues to be focusing on creating profitable growth within the company,” he said, citing investments in product development, marketing, distribution systems and operational efficiencies.
Kraft Heinz shares closed at $89.70 on Thursday, up 56 cents.