Kraft Heinz to restate financial statements after procurement misconduct

Kraft Heinz will be restating financial results for 2016, 2017 and the first three quarters of 2018 after several employees in the procurement area were found to engage in misconduct. In a SEC filing, the company said the correction will decrease the total cost of products sold in prior financial periods by about US$208 million.

Of the amount, about US$27 million was recorded in the previously furnished fourth quarter 2018 cost of products sold. In the filing, the company said that it does not believe the misstatements were “quantitatively material” to any quarter, with the largest correction being a US$38 million increase to cost of products sold in the third quarter of 2017. However, its 2018 annual report and first quarter results are expected to be delayed as a result.

Meanwhile, the company underscored that findings from the investigation did not identify any misconduct by any member of the senior management team. It added, “The company has implemented and continues to implement certain remedial actions, including employee personnel actions and certain improvements to its internal controls, to mitigate the likelihood of this occurring in the future.”

The misstatements principally relate to the incorrect timing of when certain cost and rebate elements associated with complex supplier contracts and arrangements were initially recognised. Once corrected for, the company expects to recognise corresponding decreases to costs of products sold in future financial periods, explained the filing.

Additionally, Kraft Heinz also conducted a comprehensive review of significant supplier contracts to identify other potential misstatements in the timing of the recognition of supplier rebates, incentive payments, and pricing arrangements.

The review identified additional misstatements, “which may or may not have resulted from the misconduct [by the employees]”. They are primarily related to certain supplier contracts and arrangements where the allocation of value of all or a portion of rebates and up-front payments to contractual elements in the current period should have been deferred and recognised over an applicable contractual period. The misstatements will also be corrected.

Leadership changes

This comes as the company faces turnover in its global leadership team. Kraft Heinz US marketing chief and global brand officer Eduardo Luz will be leaving the company at the end of May, according to several media reports after an internal memo was issued to employees. This comes after Kraft Heinz appointed Miguel Patricio in late April to succeed CEO Bernardo Hees, who will serve until the end of June to ensure a seamless transition.

While Luz has clocked just eight months in his current position, he has previously spent five years as the president of grocery, the largest business segment of Kraft Heinz. The internal memo reported by CNBC credited Luz for helping its grocery unit restore top-line growth and driving Heinz brand’s growth, which has seen 26% increase in sales over the past six years, according to Nielsen. During his time, he also breathed new life into the branded frozen-food business by overseeing the launch of frozen meal brand Devour.

“Eduardo Luz has decided to leave Kraft Heinz at the end of May. We thank him for his many contributions over the past six years and we wish him continued success,” said the company in a statement.

Kraft Heinz US president of beverages, snacks and desserts Adam Butler, who has held various roles in the company for than a decade, will “assume CMO responsibilities on an interim basis”. His time in the company includes eight years at Kraft Foods, before it was acquired by Heinz.

The global food and beverage giant recorded net sales of approximately US$26 billion in 2018. In the fourth quarter results for 2018, Hees said that the global focus going ahead will “remain on leveraging our in-house capabilities, developing our talented people, and delivering top-tier growth at industry-leading margins.”

Patricio, who will take over Hees’ position in July, joins after serving as a global chief marketing officer at Anheuser-Busch InBev (AB InBev) from 2012 to 2018. According to Kraft Heinz’s press release announcing his appointment, Patricio had helped develop and implement a strategic playbook for global brands Corona, Budweiser and Stella Artois, accelerating organic sales growth to high single digits. This represented more than one-third of AB InBev’s organic growth and accounted for more than 20% of its 2018 year-end global revenues.

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