The manufacturer of iconic packaged foods, including Kraft Macaroni & Cheese and Heinz Ketchup, said earnings for the third quarter ending in September fell 3.4% to $1.5 billion and net sales fell 9% to $6.4 billion compared to the same time last year. This included a 2% drop in organic net sales overall.
The drop comes in part from continued challenges in the ready-to-drink beverage and dinner categories in the US, as well as in frozen meals in several world markets, CEO Bernardo Vieira Hees said.
The decline was announced several days after the company, which officially merged July 2, said it would close seven plants in the US and Canada in the next year or two – a move that will cost about 10% of Kraft’s legacy workers’ their jobs.
The closures are part of the company’s three-step plan to create value and drive growth, Hees said during the quarterly call.
“Our strategy is based on three objectives: profitable sales growth, best-in-class margins and a superior return of capital as investment grade company,” Hees said.
Striving for best-in-class margins
The recently announced facility closures fall under the second objective, which Hees plans to achieve by making the firm’s manufacturing and distribution footprint more efficient and by adopting a “zero based budgeting” approach.
By closing the facilities, Kraft Heinz not only will “eliminate excess capacity and reduce operational redundancies for the new combined company,” it also will free funds to “invest heavily in modernizing many of our facilities with the installation of state-of-the-art production lines” that “will facilitate further product quality improvements and innovation,” Hees said.
As for the zero-based budgeting approach, which several other large companies are embracing or carefully scrutinizing, Hees said the systematic approach is not a one time event, but rather “a business tool that we apply in different ways.”
ZBB is “really fighting for the penny in terms of capturing all the opportunities that allow us to be in a position that you can reinvest more behind working dollars, behind our people, behind our products, behind our brands and so on,” he said.
Funding innovation and sales growth
This idea will help the company fund its first objective of sales growth, Hees said.
Digging deeper into this goal, Hees said the company will drive growth by focusing on four pillars: the first is launching fewer but bigger and bolder innovations that the company calls “big bets.”
The second is investing in working media dollars and third is leveraging the scale of its go-to-market capabilities by building aggressive sales teams and, fourth, by taking Kraft brands global over time.
The CEO did not share many details about the firm’s innovation pipeline, other than to say it is full for 2016. He did, however, shed some light on the types of products investors and consumers can expect by pointing to “big bet” innovations that launched earlier this year, including Heinz Yellow Mustard, which he said “was a significant disruption to the market category in both the United States and Canada” that generated high single-digit market share in four months.
Other recent “big bet” innovations include Lunchable Uploaded and P3 portable snack products, he said.
To complement these launches, Hees said the company will continue shifting its advertising spend from non-working to working media.
Supporting superior returns
As for achieving its third objective of creating a “superior return of capital as an investment grade company,” Hees said Kraft Heinz will maintain its existing dividend policy.
With these objectives front of mind, and clear steps for achieving them, Hees said the firm is on track despite sliding profits.
“We are on target” to achieve internal expectations and goals, and “are very pleased with the progress of the business and very optimistic about the prospective that we can build here together,” Hees said.