The Kraft Heinz Company reported fourth quarter and full year 2018 financial results reflecting solid organic net sales growth in all segments that was more than offset by higher operating costs, as well as non-cash impairment charges related to goodwill and intangible assets.
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"Our fourth quarter and full year 2018 results reflect our commitment to re-establish commercial growth of our iconic brands, turn around consumption trends in several key categories, and expand into new category and geographic whitespaces," said Kraft Heinz CEO Bernardo Hees.
"We are pleased with those actions, the returns on our investments, and the momentum built for 2019.
"However, profitability fell short of our expectations due to a combination of unanticipated cost inflation and lower-than-planned savings.
"Going forward, our global focus will remain on leveraging our in-house capabilities, developing our talented people, and delivering top-tier growth at industry-leading margins."
Kraft Heinz net sales were $6.9 billion, up 0.7 percent versus the year-ago period, including an unfavorable 2.2 percentage point impact from currency and a net 0.5 percentage point benefit from acquisitions and divestitures.
Organic Net Sales increased 2.4 percent versus the year-ago period.
Pricing was down 1.6 percentage points, as increased promotional activity and pricing to reflect lower key commodity(2) costs in North America, particularly the United States, more than offset higher pricing in EMEA and Rest of World markets.
Volume/mix increased 4.0 percentage points, driven by a combination of strong consumption gains in North America and condiments and sauces growth across Latin America, North America, and EMEA.
During the fourth quarter, as part of the Company's normal quarterly reporting procedures and planning processes, the Company concluded that, based on several factors that developed during the fourth quarter, the fair values of certain goodwill and intangible assets were below their carrying amounts.
As a result, the Company recorded non-cash impairment charges of $15.4 billion to lower the carrying amount of goodwill in certain reporting units, primarily U.S.
Refrigerated and Canada Retail, and certain intangible assets, primarily the Kraft and Oscar Mayer trademarks.
These charges resulted in a net loss attributable to common shareholders of $12.6 billion and diluted loss per share of $10.34.
Adjusted EBITDA decreased 13.9 percent versus the year-ago period to $1.7 billion, including a negative 2.4 percentage point impact from currency.
Excluding the impact of currency, Kraft Heinz lower Adjusted EBITDA reflected a decline in the United States that more than offset Constant Currency Adjusted EBITDA(1) growth in all other business segments.
Adjusted EPS decreased 6.7 percent to $0.84, as lower Adjusted EBITDA, higher depreciation and amortization expenses, as well as higher interest expense more than offset lower taxes on adjusted earnings in the current period.
Kraft Heinz received a subpoena in October 2018 from the U.S. Securities and Exchange Commission (the "SEC") associated with an investigation into the Company's procurement area, more specifically the Company's accounting policies, procedures, and internal controls related to its procurement function, including, but not limited to, agreements, side agreements, and changes or modifications to its agreements with its vendors.
Following this initial SEC document request, the Company together with external counsel launched an investigation into the procurement area.
In the fourth quarter of 2018, as a result of findings from the investigation, the Company recorded a $25 million increase to costs of products sold as an out of period correction as the Company determined the amounts were immaterial to the fourth quarter of 2018 and its previously reported 2018 and 2017 interim and year to date periods.
Additionally, Kraft Heinz 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.
Kraft Heinz continues to cooperate fully with the U.S. Securities and Exchange Commission. ■
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