(Adds details on supply chain cost cuts, COVID-19 performance; updates shares)
CHICAGO, Sept 15 (Reuters) – Kraft Heinz Co on Tuesday forecast better-than-expected quarterly sales growth and said it would step up its marketing budget and overhaul of its supply chain, hoping to save $2 billion by 2024 and halt weak sales and brand deterioration.
Shares in Chicago-based Kraft Heinz jumped about 3% in premarket trading.
Packaged food companies like Kraft Heinz and Campbell Soup that market canned food and salty snacks have for years faced a perception that their products are unhealthy. At the same time, the industry is battling aggressive competition from cheaper private-label brands from Walmart and Kroger .
At its virtual investor day, Chicago-based Kraft Heinz said it plans to increase spending on marketing by 30% to just over $1.4 billion, a move many shareholders have hoped for since media and advertising veteran Miguel Patricio took over as chief executive in July 2019. Shares of Kraft Heinz have risen 4.6% since then.
“We are totally rethinking our operations in manufacturing logistics and procurement – it is absolutely critical because in the five next years, we are going to improve our operations big-time,” Patricio told Reuters in an interview ahead of the presentation – his first major strategic update.
Of the $2 billion cost cuts, $1.2 billion will come from procurement and $800 million will come from making Kraft Heinz’s logisitical network more efficient.
The company expects third-quarter net sales growth in the mid-single-digit range versus last year, beating analysts’ expectations of a 2% increase in sales, according to Refinitiv data. The highly leveraged company, whose debt pile was $27 billion at the end of last year, also said it will reduce net leverage to about four times EBITDA by the end of this year. At the end of the second quarter, the company’s net leverage ratio was 4.2 times EBITDA.
Fueled by shoppers in lockdowns buying more packaged food, Kraft Heinz forecast high-single-digit quarterly adjusted core earnings growth and mid-single-digit full-year adjusted core earnings growth. Patricio said sales growth has slowed from that early peak, but is still faster than last year. “That first period was a big competitive advantage because we had a big spike in consumption when people (were) panicky and stocking up products at home.”
The company has begun streamlining its supply chain, Patricio said, and is trying to build better relationships with suppliers – many of whom have been critical about Kraft Heinz’s culture under the management of cost-focused private equity firm 3G Capital.
“When you cut costs too much, actually your costs increase because you lose efficiencies,” Patricio said. Kraft Heinz will continue to reduce costs but doesn’t need to be as aggressive if it can work with factories, transportation and logistics companies to preserve margins by being more productive.
“We had a very transactional relationship with our suppliers. … They are part of the equation to find solutions to improve productivity in our factories,” he said.
Patricio said Kraft Heinz will invest most of its media budget in five areas, including ready-made meals like Mac & Cheese and healthy snacks.
It also aims to promote products that can be used as ingredients, such as Oscar Mayer bacon and Planters nuts that can be used in salads.
The company, whose portfolio doesn’t currently include many sweet foods, plans to spend heavily on promoting “indulgent desserts” and children’s beverages.
Kraft Heinz, which owns the Capri Sun drink brand, needs to invest in making existing brands better, not making more types of products, he said.
“For example, we launched more than 50 different flavors of salad dressing in the last five years. … That brings an unbelievable problem of complexity to our factories.” (Reporting by Richa Naidu; additional reporting by Siddharth Cavale and Praveen Paramasivam; editing by Peter Henderson, Chizu Nomiyama and Jonathan Oatis)