Heinz Spills Its Beans Over Buffett’s Berkshire

By Glenn Dyer | More Articles by Glenn Dyer

It seems not everything Warren Buffett touches turns to gold.

Kraft Heinz (KHC) shares fell on Friday after the food company, 27% owned by Buffett’s Berkshire Hathaway shocked by revealing a $US15.4 billion write-down of the value of its assets, chopped the dividend.

KHC which produced the update after trading had ended on Thursday also said it would sell assets to cut debt and revealed an investigation of its accounting by the US markets regulator, the Securities and Exchange Commission.

Shares in the food group plunged more than 20% in after-hours trading on Thursday and backed that up on Friday with a plunge of 27.5% to $US34.95 – the lowest price the shares have been since Kraft was spun out of Mondelez in 2012.

Berkshire’s shares fell 1.6% on Friday (for the voting stock) to be down 1% this year, against an 11% rise for the S&P 500 (the index Buffett measures his company’s performance against)

And the big loser was Warren Buffett’s Berkshire Hathaway which saw over $US4 billion wiped from the value of its 26.7% stake in KHC (325.634 million shares).

Since September 30, 2015, KHC shares have fallen 50.9%. That means Berkshire’s investment has dropped $US11.7 billion in principal value since then, including a $US11.3 billion loss in the last year.

The fall means Berkshire faces having to report the loss in its December quarter accounts this weekend, on top of a big drop in the value of its Apple holdings.

The impairment charge helped push Kraft Heinz to a net quarterly loss of $US12.7 billion compared with net income of almost $US8 billion for the same quarter of 2017.

Net sales in the three months to the end of December were little changed from a year ago, at $US6.89 billion – another sign that the company has lost all momentum and is stretched.

As a sign of its growing need for cash to cut debt, KHC company slashed its dividend by more than a third, to a quarterly rate of 40 US cents a share from 62.5 US cents a share.

It confirmed that by saying it is now looking to sell assets to pay down debt – just like its stablemate the global brewer, AB Inbev (The Brazilian bank, 3G Capital which owns a similar stake in KHC to that held by Berkshire Hathaway).

3G Capital is famous in business circles for so-called ‘zero base budgeting’ as a form of continual cost cutting which in the case of AB Inbev and Kraft Heinz has back fired badly. This cost cutting has helped profits rise, but not cut into huge debts – AB Inbev’s debt for example is above $US100 billion.

Kraft Heinz’s debt pile is smaller, but rose to $US30.9 billion in long-term debt at the end of last year, up from $US28.3 billion a year earlier.

It has already made two small asset sales to raise cash to start reducing that debt pile with more planned this year according to the post results briefing this week, but the CEO was still talking about acquisitions in Thursday’s conference call.

News of the massive write down and SEC probe (and the cut to the dividend) came in the 4th quarter report issued after regular trading had ended on Thursday.

It came two days before Berkshire Hathaway releases its 4th quarter and 2018 results on Saturday, along with the much anticipated annual investors’ letter from Warren Buffett.

Investors, the media, analysts, and shareholders will be reading the letter to see if there is any comment from Buffett about Kraft Heinz’s shock news

In its fourth-quarter earnings release, Kraft Heinz cautioned that “the fair values of certain goodwill and intangible assets” were “below their carrying amount”.

It recorded the non-cash charge as a result, related to its US refrigerated and Canada retail businesses and its Kraft and Oscar Mayer trademarks – two of the company’s core names.

The company also revealed it had received a subpoena last October from the SEC into its “accounting policies, procedures, and internal controls” in procurement. Kraft Heinz had since launched its own investigation and recorded a $US25m increase to costs of products as a result.

“The company 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,” it said.

“The company continues to cooperate fully with the US Securities and Exchange Commission.” “The company does not expect the matters subject to the investigation to be material to its current period or any prior period financial statements.”

Kraft Heinz does not normally provide a figure for future earnings guidance, but did so in a conference call after the results release,

Executives predicted adjusted earnings before interest, tax depreciation and amortisation (EBITDA) Ebitda of $US6.3 billion to $US6.5 billion for this year, down from $US7.08 billion in 2018 and lower than the average analyst estimate of $US7.5 billion, according to FactSet.

That means there will be no relief for shareholders, including Berkshire Hathaway until 2020 at the earliest.

Buffett has strongly backed 3G Capital’s management of Kraft Heinz in the past – especially at last year’s Berkshire annual meeting in May.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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