PITTSBURGH – Kraft Heinz Co. management blamed “calendar effects” for the company’s soft earnings and sales results for the first quarter of fiscal 2017. The company expects performance to accelerate during the second quarter and the rest of the fiscal year as its schedule normalizes and new “big bets” product development initiatives take hold.
During a conference call with financial analysts on May 3, Georges El-Zoghbi, COO of the company’s US commercial business, said a shift in Kraft’s merchandising windows vs. 2016, primarily driven by a later Easter holiday, impacted measured channel consumption as well as market share.
“We also experienced one less day in the quarter due to comparisons with leap year in 2016 as well as a delay in tax returns from February last year to March this year,” he said. “That impacted families that claimed child tax credits. Importantly, these families are a big, core component of the Kraft Heinz consumer base. Together, these changes in the calendar versus last year drove more than half of the 3.6 percent decline in measured channels category growth and market share.”
During the first quarter, ended April 1, Kraft Heinz recorded net income of $893 million, equal to $0.73 per share on the common stock, a slight decline when compared with the same period of the previous year when the company earned $896 million, or $0.74 per share.
Sales for the quarter fell 3 percent to $6,364 million from $6,570 million the previous year.
“There is no doubt that the US consumption was softer than expected,” said Bernardo Hees, CEO. “As you know, the shift in merchandising window, such as Easter, was expected. However, other largely calendar-related factors caused the overall consumer takeaway to be weaker than anticipated.”
Kraft Heinz’s regional business units all experienced challenges during the quarter. Sales in the United States fell 3.5 percent to $4,552 million. Business unit EBITDA fell 1.4 percent to $1,472 million. Volume/mix decreased 4.2 percent during the quarter. In addition to the calendar effects previously cited, management said distribution losses in the club channel contributed to the volume/mix decline. The categories most affected were food service, cheese, meats and nuts, according to the company.
Kraft Heinz’s Canadian business proved to be even more difficult during the quarter. Sales fell 12.2 percent to $443 million and segment EBITDA declined 16.6 percent to $126 million.
|Bernardo Hees, CEO, Kraft Heinz|
“… Canada also held back organic growth in Q1,” Hees said. “This was driven by go-to-market agreements with key retailers being made much later this year than in past years. And this was largely due to our choice to not sign into significant price-oriented requests that have come about in the Canadian retail market. As a result, we lost frequency and depth of promotion activity during the quarter.”
In Europe, sales fell 6.8 percent when compared to the same period of the previous year to $543 million, and EBITDA declined 5.6 percent to $170 million. Promotional timing in the United Kingdom and Italy affected the business unit as well as consumption weakness in The Netherlands and Italy, according to the company.
The company’s Rest of World business generated $826 million in sales, an increase of 7.5 percent when compared with the previous year, but EBITDA fell 12 percent to $146 million. Currency headwinds and pricing actions taken to offset higher input costs affected the business unit’s performance.
Product development pay-off
Giving Kraft Heinz Co. management confidence about company performance during the rest of the year is the expected results from many of its product development “big bets.” Hees said the company chose to delay several new product launches from March to April.
“In the end, however, we are confident that the sacrifice we made in sales will lead to a resumption of profitable growth for both Kraft Heinz and for our retailer partners,” he said. “I’m not going to get into the specific initiatives that have not hit the market yet, but what we saw in Q1 was a very healthy contribution from both year 2 big bets and the new-to-the-world initiatives.”
Examples he cited included accelerated consumption in Mac & Cheese and frozen meals from products like Cracker Barrel Mac & Cheese and Devour Frozen Meals in the United States; gains from Heinz Seriously Good Mayonnaise across Europe, Brazil and Australia; the growth of Planters in China; the launch of Heinz Seriously Good Sauces and no salt, no sugar added Heinz Beanz in the UK.
While Hees praised the performance of Kraft Heinz’s big bets, he added that when it comes to product development management prefers renovation to innovation.
“…We like the renovation a lot more than innovation because the payback is a lot faster,” he said. In some areas, it’s almost immediate.
Using the company’s Oscar Mayer brand, he noted that 18 months ago Kraft Heinz began building out the Oscar Mayer Naturals business.
“That’s approaching about $100 million business now, and it will be a lot larger,” Hees said. “We did similar things in Mac & Cheese last year when we removed artificial ingredients from Mac & Cheese. And we are very, very happy with the performance. We’re growing share in the Mac & Cheese category at the back of renovation and innovation.
“A couple of years ago, we did that on Philadelphia, and you see our share and our growth there. Similarly, when we did that on Kraft Singles, we’re still growing share on Kraft Singles. And all of them, we actually catered our campaign and our communication to reflect that. So, while we did not change our communication strategy, we had very, very good growth rate, both in terms of absolute and market share and faster payback on all of these.”
Paulo Luiz Araujo Basílio, CFO, said management is expecting company profitable organic growth to ramp up as the year progresses, particularly in the second half.
“First … we have a much stronger retail calendar in the US for the balance of the year, beginning with better retail events in Q2,” he said. “Second, we expect and have already been seeing a restoration of normal go-to-market activity in Canada, including our innovation and marketing agendas in light of having completed all agreements with key retailers. And third, we expect the positive investment-driven consumption trends in Europe, Latin America and Asia, Middle East and Africa to continue.”