KHC Kraft Heinz Company

By Heather Haddon and Micah Maidenberg 

Kraft Heinz Co. reported falling sales and wrote down the value of its brands for the second time in six months, as the food maker struggles to improve its products to satisfy shifting consumer tastes.

Chicago-based Kraft Heinz said on Thursday that it had booked charges reducing the values of its assets by $1.22 billion for the first six months of its fiscal year. That included $744 million related to businesses including international divisions and its U.S. refrigerated-foods unit, along with $474 million in declining value reflecting the company's lower stock price.

"We've been too focused on the present and literally on firefighting," Chief Executive Miguel Patricio told investors on a call. "We need to work on our competencies for the future."

Kraft Heinz's shares fell nearly 9% to $28.22. The stock is down almost 35% this year.

Big food makers are facing enormous pressure to improve their products and add new brands as consumers gravitate toward foods they perceive as fresher and healthier. General Mills Inc., Kellogg Co. and Campbell Soup Co. are some of the companies that have seen sales suffer in recent years as customers eschew their cereals, soups and other packaged foods. They have also been affected by competition from private-label products and higher costs for ingredients and other inputs.

Kraft Heinz, one of the world's largest packaged-food makers, has been hit harder than most. Some former employees and suppliers say the company's cost-cutting drive left well-known brands too diminished to compete. Kraft Heinz also hasn't acquired smaller brands more focused on healthfulness or natural ingredients or updated its products to the same degree as some competitors.

Kraft Heinz in February wrote down the value of its Oscar Mayer and Kraft Heinz brands by $15.4 billion and slashed its dividend. The food giant said in June that Velveeta, Cool Whip, A1 steak sauce and many other brands could also face downward revisions if sales continue to deteriorate.

The maker of Oscar Mayer hot dogs, Heinz ketchup and Kraft macaroni and cheese said its net sales fell 5% in the first half of this year compared with the first two quarters of 2018 to $12.37 billion. Organic sales, which exclude currency fluctuations and the impact of deals, dropped about 2%.

Weaker sales in the U.S. reflected lower prices that Kraft Heinz implemented for some products in an effort to gain market share and reflect lower prices for some ingredients, including nuts and coffee, the company said. Other food makers, including Mondelez International Inc. and Hershey Co., posted strong sales in the latest quarter after raising prices.

Mr. Patricio said the company hasn't done enough to advertise its brands to potential new consumers, such as Hispanic customers. It also needs to do more to come up with products for international markets, such as condiments in China, he said.

Kraft Heinz had delayed the release of its results for the first half of the year, and said it would continue delaying filings associated with that period as it considers further write-downs on the value of its brands.

Mr. Patricio said the company would stop offering forecasts for its future earnings as it sorts out its problems.

"We have a big agenda to build," Mr. Patricio said. "I think that working on short-term targets will not help."

Kraft Heinz belatedly released its full-year 2018 financial results in June after completing an internal investigation into accounting misstatements by employees. The irregularities understated the costs of goods sold across roughly three years by $208 million, an amount that Kraft Heinz said wasn't material to its revenue of around $26 billion annually. The company continues to face a federal probe into its accounting practices and lawsuits alleging insider trading by executives and top shareholders.

Mr. Patricio, a former Anheuser-Busch InBev SA executive who took over at Kraft Heinz in June, is tasked with bringing the company back from its biggest crisis since investment fund 3G Capital LLC and Warren Buffett helped broker the merger of Kraft Foods with H.J. Heinz in 2015.

Mr. Buffett said earlier this year that he overpaid for Kraft Heinz but didn't plan to sell his 27% stake. Berkshire Hathaway Inc. reported upbeat earnings last week, though those results didn't include Kraft Heinz because of the food company's delayed financial disclosure. After Thursday's results and share drop, Mr. Buffett's stake in Kraft Heinz is worth around $9 billion, compared with a $13.8 billion valuation last year.

Kraft Heinz has tried to shed some of its weakest brands to reduce debt. But the company has struggled to find bidders for old brands such as Maxwell House, according to people familiar with those discussions. Mr. Patricio has said he would put attempted sales on hold until he gets a better sense of the company.

3G is known for its zero-base budgeting approach through which a company justifies all of its spending each year. Some former employees and suppliers say Kraft relied too much on that approach, leaving its brands starved of innovation as the company boosted profits early after the merger.

Mr. Patricio on Thursday defended zero-base budgeting, but said the company's brands needed more investment.

"Our brands are icons. It's our job to ensure they are living icons," Mr. Patricio told investors.

Kraft Heinz has introduced new products and marketing campaigns in recent months to boost sales. It launched a new line of frozen meals co-branded with Oprah Winfrey last week, and recently listed the Oscar Mayer Wienermobile as a place to stay on Airbnb Inc.

Kraft is seeing sales declines in big categories that include coffee and cheese in the year through July 13, according to a UBS market analysis.

Kraft Heinz executives said on Thursday that sales suffered after retailers reduced their inventories during the year.

Net income for the six-month period fell to $854 million, or 70 cents a share, from $1.76 billion, or $1.43 a share, during the comparable period last year.

Write to Heather Haddon at heather.haddon@wsj.com and Micah Maidenberg at micah.maidenberg@wsj.com

(END) Dow Jones Newswires

August 08, 2019 17:51 ET (21:51 GMT)

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