Buffett’s 9% Heinz Dividend Means 3G Cutting Jobs

Bloomberg September 18, 2013 0

HJ Heinz Co.’s longtime leader Bill Johnson stood in the Veranda ballroom at the Four Seasons Hotel San Francisco , addressing the ketchup maker’s top 50 executives for the last time. Around the corner in a smaller room, his successor as chief executive officer, Bernardo Hees, waited to tell some of the same managers whether they still had jobs. What was slated as an annual leadership meeting became an opportunity for Hees to dismiss 11 senior executives , according to three people familiar with the gathering, who asked not to be identified because it was private

Buffett’s 9% Heinz Dividend Means 3G Cutting Jobs, Mini-Fridges

HJ Heinz Co.’s longtime leader Bill Johnson stood in the Veranda ballroom at the Four Seasons Hotel
San Francisco, addressing the ketchup maker’s top 50 executives
for the last time. Around the corner in a smaller room, his
successor as chief executive officer, Bernardo Hees, waited to
tell some of the same managers whether they still had jobs.

What was slated as an annual leadership meeting became an
opportunity for Hees to dismiss 11 senior executives, according
to three people familiar with the gathering, who asked not to be
identified because it was private. The June 17 session was about
a week after Heinz’s $23.3 billion sale to Warren Buffett’s
Berkshire Hathaway Inc. (BRK/A) and Jorge Paulo Lemann’s 3G Capital.

Since taking over at the Pittsburgh-based ketchup maker,
Hees eliminated hundreds of jobs, grounded corporate jets and
pulled the plug on mini-fridges at the office. Savings will help
pay down $12.6 billion in borrowing supporting the deal.

“The more cuts, the more quickly they can reduce the
debt,” Dave Novosel, an analyst at Gimme Credit LLC, said in an
interview. “It makes the math work better.”

The management turnover contrasts with Berkshire’s normal
approach. When Buffett buys a company, he typically leaves
senior employees in place and commits to holding the business
forever. The practice makes Berkshire a buyer of choice for many
sellers, he’s said.

Heinz isn’t “the classic Buffett playbook, which is buy a
great business and pretty much leave it alone,” said Jeff Matthews, a Berkshire shareholder and author of books about the
company.

Buffett’s Dividend

Annual interest expense at Heinz probably doubled to $560
million since the takeover, Novosel said. Omaha, Nebraska-based Berkshire also holds $8 billion in preferred stock that
receives a 9 percent dividend, or $720 million a year.

Managing those costs falls to 3G. While Buffett committed
more than $12 billion to the deal and has 50 percent of the
common equity, Lemann’s firm is in charge of operations at the
world’s largest ketchup maker, which also sells Ore-Ida potato
snacks and had 31,900 employees at the end of its fiscal year.

An August memo obtained by Bloomberg News outlines new
rules. They limit printing to 200 pages a month per employee and
restrict color pages to “customer-facing purposes.” Employees
can spend no more than $15 a month on office supplies and are
expected to reuse items such as box files. To save on
electricity, mini-refrigerators “are not permitted moving
forward” and staff should rely on appliances in common areas.

Such measures suggests there’s not much fat to trim, said
Noel Hebert, chief investment officer at Bethlehem,
Pennsylvania-based Concannon Wealth Management. Under pressure
from investor Nelson Peltz in 2006, Johnson embarked on a plan
to lower expenses by $355 million.

Consumer Focus

“When you start getting down to the amount of paper you
can use, it’s telling you the obvious stuff is gone,” said
Hebert, whose firm manages about $250 million.

Heinz shook up leadership to promote accountability and
faster decision making, according to a statement from Michael Mullen, a spokesman who declined to comment on the analyst’s
estimates or accounts from people who requested anonymity.
“Heinz will reinvest more of our dollars where they directly
impact our business — in our brands and our products, and most
importantly, in benefiting our consumers,” he said.

Employee spending on business trips was limited to $45 per
day for food and incidentals, two of the people said. The
aviation department, which included two leased aircraft and a
company-owned Gulfstream IV, was shut, according to one.

Office Jobs

Office jobs have been a particular target for Hees. About
600 were cut in the U.S. and Canada, the company said in August,
the month it announced about 250 positions were in jeopardy in
the U.K. and Ireland. Heinz expects annual savings of about $150
million from 1,200 job cuts, according to a filing last week.

Management set a goal for margins of about 30 percent on
earnings before interest, taxes, depreciation and amortization,
one person said. That’s akin to profitability at Google Inc. and
Apple Inc. and double what food makers like Mondelez
International Inc. and Kellogg Co. make, data compiled by
Bloomberg show. Heinz’s margin was about 17 percent in the
fiscal year ended April 28.

Heinz posted $2.01 billion in Ebitda last year on $11.5
billion in revenue. After interest, capital expenditures,
dividends and other costs, the company generated $325 million in
free cash flow, according to Novosel. He estimates the figure
will fall to $250 million this fiscal year on payments to
Buffett and creditors.

3G Managers

3G has a playbook for costs dating to the early 1980s, when
Lemann’s longtime partner Carlos Alberto Sicupira ran Brazilian
retailer Lojas Americanas SA. There, according to a 2004 Harvard
Business School case study, Sicupira implemented zero-based
budgeting to control costs.

The approach requires managers to develop annual budgets
from scratch, rather than use the previous year as a baseline.
Some managers found zero-based budgets an effective tool in
their examination of costs, according to Donald Sull, who co-wrote the case study and is now a professor at the London
Business School
.

Hees ran Burger King Worldwide Inc. for 3G before taking
over at Heinz. Paulo Basilio, a 3G partner, was named Heinz’s
chief financial officer in June. The new head of operations is a
14-year veteran of All America Latina Logistica SA, which Lemann
and his partners once controlled.

Craziness Shunned

The cuts at the 144-year-old company pushed some executives
to weigh leaving Heinz, the people have said. The new management
sought to build spirit by embroidering employees’ shirts with
the ketchup maker’s logo and has proposed composing a company
song, one person said.

Some of the expense-cutting push echoes values Buffett
instilled at Berkshire. The billionaire has been drawn to
businesses, like auto insurer Geico, that are low-cost
operators, and celebrates a culture of thrift.

Hiring and acquisitions increased Berkshire’s workforce by
6.5 percent to about 288,500 last year, he told shareholders in
a March letter. “Our headquarters crew, however, remained
unchanged at 24,” he wrote. “No sense going crazy.”

In opening remarks at the San Francisco meeting, Hees
discussed his intention to take Heinz public again, the people
said. Burger King returned to the stock market in 2012, less
than two years after 3G bought the Home of the Whopper.

Buffett’s Plan

Buffett “has no plans to ever sell a share of Heinz
stock,” his assistant said in an e-mail. The billionaire
declined to comment on job cuts or Matthews’s remarks. Steve Lipin, an outside spokesman for 3G who works at Brunswick Group,
declined to comment.

By going private, Heinz eliminated a common-stock dividend
that cost $666 million last year. 3G pushed for the deal to be
completed ahead of schedule to avoid a quarterly payout, said
two people familiar with the transaction.

Even with added interest expenses, Heinz has steady cash
flow
to cover obligations and reduce leverage, said Gimme
Credit
’s Novosel. That helped win record-low borrowing costs for
a U.S. junk-rated business in March.

Heinz’s 4.25 percent notes due in 2020 traded at 94.38
cents on the dollar on Sept. 13 to yield 5.21 percent, according
to Trace, the bond-price reporting system of the Financial
Industry Regulatory Authority. Novosel estimated in a July note
that Heinz will be able to pay down about $250 million of debt
this fiscal year without tapping its cash pile.

Still, lowering leverage “is going to be a long-term
project,” he said.

To contact the reporter on this story:
Matthew Boyle in London at
mboyle20@bloomberg.net;
Noah Buhayar in New York at
nbuhayar@bloomberg.net

To contact the editors responsible for this story:
Dan Kraut at dkraut2@bloomberg.net;
Celeste Perri at
cperri@bloomberg.net

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Article originally posted in Bloomberg website.

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