CHICAGO — The softness in the company’s macaroni and cheese business was emblematic of the challenges facing The Kraft Heinz Co. in late 2023, said Carlos A. Abrams-Rivera, CEO.
In a call with investment analysts on Feb. 14, Abrams-Rivera explained why the macaroni and cheese business is weak and used the steps Kraft Heinz is taking to revitalize the business as an example of how the company is adapting to a changing market.
Kraft Heinz’s net income for the year ended December 30, 2023 was $2.85 billion, or $2.33 per common share, up 21% from $2.36 billion, or 1 $.93 per share in 2022. Net sales were $26.64 billion, up 0.6% from $26.49 billion in 2022.
Results in 2023 included $662 million in special charges, down from $913 million in 2022. Adjusted net earnings per share rose 7%, including a negative effect of 2.1 percentage points from the prior year’s 53rd week. Adjusted for the extra week, organic net sales rose 3.4%.
Abrams-Rivera said Kraft Heinz has achieved many of the goals set at the beginning of last year.
“We put in place action plans in early 2023 to drive market share and volume improvement – and they worked,” he said. “We also performed well against our efficiency program.”
It also cited as positive a strengthened balance sheet with a net leverage ratio of 3x adjusted EBITDA at the end of the year, a level of leverage in line with the company’s target.
Abrams-Rivera said Kraft Heinz’s share “has recovered in key categories with consistent year-over-year volume improvement.”
Compared to earlier guidance, 2023 results were mixed. Adjusted sales growth of 3.4% compared with third-quarter estimates of 4% and 4% to 6% earlier in the year. Constant currency EBITDA growth of 5.1% was on the low side of guidance of 5% to 7% a quarter ago and below the 6% to 8% expected earlier in the year. The company beat its gross profit margin guidance, expanding margins by 240 basis points, versus the 125 to 175 basis point improvement expected at the start of the year.
The results and guidance disappointed investors. In trading on Feb. 14, Kraft Heinz shares were trading at $33.67 on the New York Stock Exchange, down $2.46, or 7%, from the Feb. 13 market close.
Net income for the fourth quarter was $757 million, or 62¢ per share, down 15% from $890 million, or 73¢, in the last quarter of 2022. Net sales were $6.86 billion, which was down 7% from $7.38 billion. The impact of the 53rd week was cited as a contributing factor to lower earnings and lower sales.
While overall adjusted sales fell 3 percent, retail consumption fell a more modest 1.6 percent, said Andre Maciel, executive vice president and global chief financial officer.
“This is mainly due to trading time and (one) offloading of inventory,” he said. “Additionally, our top line was impacted by the decline in SNAP benefits, which disproportionately impacted some of our categories where we over-index to SNAP consumers.”
Abrams-Rivera further cited a tougher consumer environment as an explanation for the difficulties facing the company in general and the macaroni and cheese business in particular.
“Frankly, it’s a business that’s driven disproportionately by our SNAP exposure,” he said. “So that affected some of the business in Q4.”
More broadly, he said: “In the fourth quarter, the industry faced headwinds that were driven by continued consumer pressure. Looking ahead, we expect some of that pressure to dissipate, especially as the SNAP benefit cuts wear off.”
Steps identified by Abrams-Rivera to strengthen the macaroni and cheese business include the launch of a new marketing campaign and increased innovation. New flavors and new packaging configurations are examples of innovation, as is a new plant variety developed in partnership with TheNotCompany.
“We’re also making sure that we continue to provide even better value with Mac and Cheese by leveraging the fact that we have in our portfolio, partnerships that we can do with brands like Oscar Mayer to offer a truly complete dining solution for consumers, plus offering bulk packs around 12-packs and 4-packs in different formats for different types of value-seeking consumers.”
Finally, Abrams-Rivera said the company is focusing on maintaining or improving its relationships with retailers.
“We’re actually improving the overall assortment to optimize traffic down the aisle,” he said.
Asked Feb. 14 by an investment analyst how Kraft Heinz management “thinks about the consumer” in 2024, Abrams-Rivera said changes in consumer behavior aren’t limited to those at the bottom end of the economic ladder.
“Regardless of income levels consumers are looking for value and they continue to be under pressure,” he said. “What we’re seeing is that lower-income consumers are actually shopping more at places like dollar stores, higher-income consumers, more club stores. But mostly, we’re seeing them look for complete, smaller trips to stretch their dollar further.”
Abrams-Rivera said Kraft Heinz is working to address these changes by ensuring the company has value propositions and by expanding distribution to different channels. He said the company currently has 300 inventory units in dollar stores.
“And year-over-year, we’re going to grow another 10 percent or so over what we’ve had in the past,” he said. “So we’re making sure we’re in the right channels with the right assortment and continuing to invest in our innovation.”
For higher-income consumers, Kraft Heinz introduced a number of brands to club stores, including Capri Sun and Lunchables. The number of SKUs in club stores is expected by the company to increase by 20% in 2024.
Among the 2023 marketing highlights, Abrams-Rivera noted the company’s first-ever global Heinz campaign, which seeks to highlight the “irrational love for the brand born from actual consumer stories.” Spanning more than 16 countries, the campaign spotlights products beyond ketchup, including beans and mayonnaise.
“You can continue to expect more from this global approach as we strive to generate best-in-class marketing activations,” he said.
New product highlights last year included Lunchables Grilled Cheesies in September, with more new products expected this year, Abrams-Rivera said.
For 2024, Kraft Heinz forecasts organic net sales growth of zero to 2%. Prices are expected to be positive throughout the year and volumes should turn positive in the second half, the company said.
After the jump in 2023, adjusted gross profit margin is expected to expand modestly — 25 to 75 basis points — in 2024. A headwind is expected for adjusted earnings per share, which is expected to rise 1% to 3% in 2024 Expenses of $45 million, including interest and other items, are expected to hold back growth.
Over the past two years, Kraft Heinz has raised prices to match inflation “dollar for dollar,” Maciel said. That won’t be the case in 2024, he said.
“In 2024, we expect prices to be around 1%, which is below the inflation we expect of 3%,” he said.
To achieve the target level of gross margin improvement, increased efficiency will be required, he said.
