In Case You Missed It … Kraft Heinz: Procurement Investigation, Shares Slide and Missed Earnings Estimates

A busy day today for traders following the news in the early hours that Kraft Heinz had missed end-of-year earnings estimates. The WSJ reported the firm had written down the value of its Kraft and Oscar Mayer brands by $15.4 billion, disclosed an investigation by federal securities regulators and slashed its dividend, sending its stock down more than 20% after-hours trading.

A three-year high-profit-margin firm, Kraft Heinz has emphasised that it is positioning itself to be part of “more consolidation in the future that we believe is necessary and will happen.”

The culmination to a fourth-quarter loss was made up partly from the company’s struggle to keep innovating on certain brands while keeping its market-leading position, as consumer demand shifts towards healthier ingredients, and partly from ‘unexpectedly higher costs’ last year and ‘significant pressure on the value of its brands since its $49 billion merger in 2015.’

The high costs include an additional $300 million spent on marketing its brands, development of new brands and improving recipes, making improvements to its supply chain and adding more salespeople to visit stores.

Another cost – and a procurement-related one - followed the announcement of an investigation from the Securities and Exchange Commission (SEC) into accounting practices in the procurement division. The firm is fully cooperating with the agency but an internal investigation had led to a further (and out-or-period) $25 million in costs in the quarter. In October last year a subpoena was issued from the SEC partly related to agreements, side agreements, and changes or modifications to its agreements with its vendors. “The company 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,” it has said.

According to the WSJ, ‘Kraft Heinz said that the charge isn’t material to earnings, as the company spends more than $11 billion on procurement annually.’

While sales, which rose slightly, were not necessarily the problem for the fourth-quarter loss, CEO Bernardo Hees said: "We were overly optimistic on delivering savings that did not materialize by year-end … For that, we take full responsibility. And we have taken steps to ensure this does not happen again by planning process, procedures and organization structure."

In a general business sense on what has happened at Kraft Hienz, Spend Matters Chief Research Officer Pierre Mitchell has talked about how any procurement department should work with finance departments, see that as part of our US coverage here.

 

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