Q2 2022 Kraft Heinz Co Earnings Call- Q&A Session

July 27, 2022

Yeah.

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Yeah.

Good day and thank you for standing by welcome to the Kraft Heinz Company second quarter results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone please.

Please be advised that today's conference is being recorded.

I would now like to hand, the conference over to your speaker today.

Ann Marie Mackellar. Please go ahead.

Thank you and Hello, everyone.

Marine Mccallum head of global Investor Relations of the Kraft Heinz Company and welcome to our Q&A session for our second quarter 2022 business update during.

During our remarks today, we will make some forward looking statements that are based on how we see things today actual results may differ due to risks and uncertainties and these are discussed in our earnings release and our filings with the SEC.

He will also discuss non-GAAP financial measures today during the call and these non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results and you can find the GAAP to non-GAAP reconciliations within our earnings release and supplemental materials posted at IR Dot Kraft Heinz company Dot com.

Before we begin I'm going to hand, it over to our CEO Miguel Patricio for a few opening remarks.

Well, Thank you Anne Marie and thank you everyone for joining us today.

I wanted to acknowledge the fact that we are leaving out there.

And with regards to the external world.

I want to thank Mike.

Oh, great. Thank my team for delivering another quite enough is there any solid results.

Also we are mindful of the current inflationary environment.

Our consumers and our customers.

But we continue to develop solutions that benefit our consumers and our retailers.

Our relationships with retailers continued to strengthen and we have improved inventory and service levels. So we can have now more optionality to execute.

Neutral leads strategic programs.

Well with that we're happy to take your questions.

Thank you and as a reminder to ask a question. Please press star one one on your telephone please standby, while we compile the Q&A roster.

And our first question will come from Bryan Spillane from Bank of America and your line is now open.

Alright, Thank you operator, good morning, everyone.

I had just one clarification question and then a second question. The first one just as a clarification Andre.

Slide deck.

I think it's slide 27, where you talk about the there's a portion or a section in there about gross margin and it shows gross margin of 33%.

Sure.

Not adjusted right. So that's just.

Gross margins I think as we did in the adjusted gross margin calculation. It looked like 31, 5%. So just wanted to clarify that that margin that you are.

That you put into the high death is reported and adjusted.

Thanks for the question.

Very good by the way so yes youre right. So this is the GAAP gross margin so to get to that Jeff.

To increase this number by 110 basis points.

Due to the change of unrealized hedge on commodities.

And in fact, if you adjust for that our margin in Q2, it's pretty much in line with the margin in Q1.

And if you will.

Let's see.

Expansion of margin if were not for the dilutive impact.

Pricing to offset inflation.

Okay. Thanks, Thank you for that and then my.

Question is just in the prepared remarks.

Miguel you talked a little bit about I think they are still being supply chain pressures in the back half of the year or currently I suppose.

Recalling last year were.

Part of what happened in the U S. You had some supply chain issues.

They affected service levels, especially around the holiday.

I guess does the guidance assume that theres still going to be so.

Pressure, there and that you will.

Won't be fully merchandise for the holidays or are.

Are you in a position where you can be more fully.

Supply the merchandise at the holidays in the U S.

Okay, Brian I think that to your question is addressing the U S. I will pass it to Carlos.

Okay. Thank you Miguel.

I think first of all thank you for your question. The reality is that we have continued to improve our production and our service levels as you saw.

A sensation and now that we are approaching kind of the low <unk> in terms of service in Q2 is going to allow us to continue to focus on driving that.

The right kind of levels of both service and inventory with our retailers.

For us it's important to see the continued progression that we have and we don't anticipate that actually going against us as we go forward in fact, when we're going to continue to see if we go into Q3 or Q4 is the continued expansion of our service.

As a result of continued improvement in terms of our performance. We saw that in Q2, where in fact, we have been able to kind of look.

Opportunities within for example brands like Philadelphia.

Schedule, both of which had record shares in fact highest share ever had in both of those businesses. So I think that as we go forward, we arent going to confuse improve our precision.

Okay.

Thank you.

And we'll take our next question from Ken Goldman from Jpmorgan, Mr. Goldman Your line is open.

Hi, everybody. Thank you.

You mentioned in the prepared remarks that you have the optionality now to execute more I think I caught it mutually strategic programs with retailers now that your service levels are in a better place I just wanted to clarify it number one is there any major difference between a mutually strategic program.

And just a really good promotion that's more than just the discount maybe it's just something more in depth or creative than unusual promotion I just wanted to kind of clarify that definition.

The second part of that is I wanted to ask if you are confident that these programs. If you do implement them that they're being driven from a position of strength right, whereby you're doing them, because youre able to versus maybe from a position where you're doing it because the consumer in a position of weakness themselves as demanding it. Thank you.

Okay Ken.

Two examples of these programs.

Because we have now.

Much better service levels, we can have so I'll give it two examples one is what we call the eichelberger.

<unk> has been a very successful.

Program, especially now during summertime when people barbecue more.

When we can put together.

Our sources our Ts.

To get there with.

The plans.

Supermarket chains.

If that would be very good and very well accepted.

By our customers I'll give you. Another example in a moment like this.

We are exploring value propositions.

We together with with customers. So I'll give you. The example of grilled cheese, you can have a grilled cheese.

For less than one product.

And.

We do programs with our customers putting together.

Our Mayo.

And.

There will be a breadth as well right. So is that just two examples of bringing value a value proposition.

And the customers that facilities.

Extremely well.

This is bringing a little bit of creativity that who had never used thinking about.

Value.

The value of our products together with our customers.

And then the second part thank you for that the second during this I guess from a position where you feel it's from strength rather than maybe because the consumer is demanding at a little bit I just wanted to make sure about that maybe you answered that a little bit with the second part of that talking about the value proposition promos, but just curious for you.

Thoughts there.

No.

That's another thing.

Say here Ken speaking is we continue to have very productive conversations with <unk>.

Customers in a way that makes sense for both parties.

Yes, great.

Alright.

Right.

We feel very positive about it we are excited with the momentum that we have with our customers and with our consultants.

Understood Thanks very much.

Yeah.

Thank you.

We will take our next question from Andrew Lazar from Barclays and Mr. <unk>. Your line is open.

Thanks very much.

In the slide deck, you provided a breakdown of categories that are sort of more and less sensitive to price gaps of private label I think 15% of sales are in categories that are more sensitive where where gaps are increasing and I'm. Just curious how do you approach. These businesses in terms of balancing share and profitability do you do you take the necessary price to protect.

Profit and deal with the short term pressure on share or protect share and sort of take the short term profit hit.

And Youre talking about another 25% that are sensitive to private label gaps, but currently stable and I guess, if those were to expand from here I guess, what gives you confidence you can manage this bigger segment in the context of your sort of growth algorithm.

Thanks, so much.

Well, let me let me start I think the question specifically to the U S. So I'll take a shot I.

I think for US the reality is that even if we think about those businesses that may be.

As you saw a very small part of our portfolio is more exposed to private label.

One other thing so we're actually doing is working differently in terms of how we offer a consumer solutions.

Although many of which they are looking for a different choices across the spectrum of economic development of consumers.

One of the things we are actually looking at is how do we actually allow consumers to stay in our iconic brands.

Because of the number of range of products across our pricing ladder, whether that is let me give you. An example, something like Akamai area in which we have from natural to Deli fresh the original Oscar Mayer that allows consumers actually for it to have an option in which to actually stay within our brands knowing that over the last couple of years, we've actually been.

Renovating many of our iconic brands and investing behind them. So we have improved the quality we have improved the renovation of those brands in a way that makes about brands, even more valuable to consumers and frankly, we're seeing that already play out we see that for example, a product like crap achieve portfolio and we also have that kind of full.

The rate of product cost pricing ladder that in Q2 as yourselves gaining share as well so for us it's about being strategic about how we think about leveraging the entire portfolio that we have in a way that allows us to continue to offer consumers different approaches in terms of options and it's really a category by category right. So.

Even at a 50% where the prices are expanding they started very very deep.

Like in <unk> similar to <unk>, we do have a very good price levels, we have negotiated licenses the Florida effects EBIT price it at or below private label would have the draft <unk> that will have the deluxe aggregating.

Litigating shed so in the last several months so its working quite well for us.

For example, we have the partnership with <unk> block that is now starting industrial look a lot of capacity later in the year, which allow us to start to promote module brands, which are haven't been be able to do it in a consistent manner for years.

So it's really category by category with political is very close and makes sense that we are doing something that makes sense for both top and bottom line.

Thank you.

Hey, Kevin.

Thank you.

And our next question will come from Chris Growe from Stifel. Your line is now open.

Yes.

Mr. Grout. Please thank you for your line is not on mute.

Can you hear me now yes, Sir thank you.

I just had a quick question for you if I could around the revenue growth in the quarter outpacing consumption. I was just curious how much of that was foodservice strength for example in maybe the non measured channels versus actual inventory rebuilding and I think that's kind of.

Fits with an earlier question around.

Do you see.

Current availability is a constraint for the third and fourth quarter performance in the second half.

Or is that behind us now as I'm ultimately trying to get too. Thank you.

I think it is a combination of the sectors. So foodservice as you'll have seen in keynote presentation is growing north of 20%.

So.

That represents roughly 30% of our total revenue.

In measured channels in the U S. We've had we have been doing very well.

<unk> actually been gaining share we're taking those two channels because we were already pretty bad.

A gradual shift, but where those channels.

And dividend.

Months of announcing Q1 in fact in consumer.

Just a reminder, so I think it is.

Typically for the question regarding service levels I think that we are.

It's due to the low ninety's.

And what are the ideal level is in the high <unk>. So we still have work to do obviously, that's the average of the portfolio. Some categories that are in great shape. After the historical appropriate levels of service and some others do working through it and even if you look on shelf availability.

We are much closer to the historical levels.

Policy, if you think about on shelf availability.

In Brazil 90, 394, we are now in the 90 192. So we're getting there is still some room to grow.

And would there still be some continued inventory build that you would expect at retail as you improve your service levels.

We might obviously we cannot.

Comment on power, we don't know, how we better going to measure their inventories moving forward. If they were to look back to historical levels, yes, there could be some room for further inventory buildup.

Okay. Thank you.

Okay.

Thank you.

And our next question.

Will come from Steve powers from Deutsche Bank. Mr. Powers. Your line is now.

Good morning. Thanks.

Talk about your outlook contemplating greater price elasticity negatively impacting volume and mix I guess over the balance of the year is there a way for you to help us think through the P&L impacts of lower volumes at this point clearly there are many other moving parts, but all else equal if volumes are to move lower in places where you wanted.

How material is that on margins in terms of fixed cost deleverage per unit sold.

I'm really asking just how fixed versus variable cost structure is at this point.

Thanks for the question. Despite does not is not immediate.

Because we're still building inventory remember our service so that was in the low nineties. So as it continues to produce more than what the cell is activated.

Positive effects at this moment.

We are monitoring the demand curve.

Service is very closely. So then we are also adjust our labor accordingly to make sure that we don't have an overhang there.

When you start your step down on production to make sure that they don't have more labor.

Neither didn't have this effect that youre talking about but right now this is not the competition.

Okay, great. Thank you and if I can.

Good.

You gave some good color on the cost outlook for the remainder of 'twenty two I guess I'm just curious.

How you see if possible early positioning looking out to 'twenty three on the one hand, you mentioned cost hopefully, peaking and maybe starting to receive some differences, but on the other hand, we are still obviously a lot higher year over year.

Presumably have some hedges rolling into the new rolling into the new year that will roll off bolt on commodities and currency.

Maybe a little bit of color. If you. If you have any on early positioning visibility on constant currency looking out to the first part of 'twenty three.

Is that delta.

Lots of volatility yes.

Yes.

We see that.

Still very high we are working with different scenarios for next year, but.

I'm going to talk about that.

It had been.

Picking up.

Throughout the year that we wanted to have a carryover effect into next year, especially in the course.

Apple Bayer so that should help.

But early to tell.

Okay very good thank you.

Thank you. Our next question will come from Robert Moskow from Credit Suisse. Your line is now open.

Hi, Thanks.

Here.

Your income statement shows.

Losses on your derivative hedges into Q I imagine that's commodity inputs are now falling.

And if that's right should we assume at some point that necessitates more accounts and you're saying on any specific products.

And then a quick follow up.

So thanks for the question. So a couple of things maybe to answer. The final question is other juniper debenture. This one we.

At competitive price on what.

Market changes not on our hedge position.

So so.

I think what the triple debt Opportunistically.

Nuclear reprice based on what Youre seeing health in the market multiple based on what's already doubled Brexit pension parks, but the second thing is regarding to the effect of what you see now is there is a change in the unrealized hedge from commodities.

So does that mean that the hedges, it's positive or negative you just made that there was a change there.

Period over period, so we still have a hedge gains we've had nice gains in both Q1 and Q2, but because part of that materialize, we'd see this negative effect on the realized portion.

But again I think the important thing is we look at the market the market prices and Thats, how we make our processes.

Okay, maybe I'll follow up my follow up is.

I think you did shift.

Consumption in <unk> and I think you said that you'd be refilling shelves in <unk> can you give us any number as to how much that might.

Then just in <unk>.

The inventory effect in Q2 is very small.

So.

Yes.

It's a very small number and again.

We don't know how retailers are going to manage their inventories.

So look at the levels pre pandemic.

Yes.

Still have room to grow money those are the big data and our own shelf availability as I said before.

They were a little below the historical level, which might be a further indication that is a possibility.

Yes, Andre I guess, but you also said youre producing above you're saying so I don't know is it a material amount or are you just.

And are you refilling your own inventory than rather than retailer Azure.

We have now refilling, our own inventory with Goldman Sachs. Please go into thinking about their historical levels and eventually these are important differentiators, but then I'll come to want to add something else. Yes, I mean, I will say if you look at the presentation and the fact that we are able to provide service from the.

Low <unk> to the low <unk> is a result of us being able to actually leverage our entire supply chain in a way that now with the inventory levels in many of our categories that we can provide that service at the same time.

As Andrew said, we are still at low rates. So thats just opportunity for us to continue to drive that to the high <unk> by pushing to the right level of inventories internally. So that we can actually be able to better service our customers.

Thank you for the clarification question.

Yes.

Thank you.

And we'll take our next question from Alexia Howard from Alliance Bernstein Alethia.

Yes.

Good morning, everyone.

Good morning Allison.

Can I ask about the comment you made in your prepared remarks about the international zone and the expansion of that distribution point.

It seems as though in the.

That go to market areas, there's been a very material expansion of distribution points in some of those emerging market. How do you ensure that you've got the critical mass in those.

New outlets to make money and whether you can give us data on how profitable you are in some of those regions, but we've seen some other companies kind of dig themselves. The profit hole is and trying to do that expansion and I just want to find out how you're making sure that <unk> got guardrails on that expansion. Thank you very much and I will.

Pass it on.

So.

Yes, Alex Thanks for the question.

One is the extra.

I'm extremely proud and happy with what's happening there and follow up want to market model, because it's a very comprehensive model that.

We actually stopped by analyzing.

This starts by where we can make money. So we start by looking at the gross profit of each <unk>.

The digital channel.

Sub market, let's say.

Traditional modern trade.

Depending on the regions multiple countries. Thank you and then just expansion.

<unk> of Brazil, where we started Russia, China yeah.

Best countries. So they have.

The profitability that you can achieve in different regions and different channels is significant.

It can be significantly different so we start by analyzing that fall into all delayed to how we're going to execute in store. So it's a very comprehensive model of <unk>.

Very detailed analytics with execution.

So as you saw and you alluded to on the on the slides we started this model.

<unk> in Brazil.

Yes.

Our adaptive coughed into Russia into China, and now yes, we are scaling up up to by the end of the year, we expect to have 75% of all of our markets aimed to just go to market model.

And the numbers the results speaks for itself so everywhere.

The model.

Growth has been significantly above.

And which markets are also growing so so we will continue to roll that out it's a model that again requires a lot of analytics.

Festival, but at the same time, a lot of discipline on execution.

To kind of keep expanding in those regions.

A lot of distribution to begin.

Yes.

On the profitability side, which is obviously very important the right. There was a lot to make sure that we don't know.

A lot of people out there who cannot.

Have a payback on that.

We are also very significantly.

Example, in Brazil.

We have about 1 billion points I'll say is that we could.

Tactically serve.

<unk> hundred 30, <unk> hundred 40000, so and part of that is because the leverage of our scale right. So that's very important.

We are in the Hopper IDEXX bloody alternatives.

Partnerships that you increase the penetration in some markets. So maybe there is more to come in the future, but yes.

An important consideration.

Since we are talking about Brazil, I think that.

Now with the acquisition of handler that is very strong in the south.

And at the high end is very strong in the southeast this gives us.

Even a bigger opportunity to expand our distribution and the strength of our brands. We are really now with great scale in Brazil.

We are very happy with how this acquisition is going into the plans that we have in place for four and a business there.

Great. Thank you very much I'll pass it on.

Operator, we have time for one more question.

And we will take our last question from David Palmer with Evercore ISI. Your line is open.

Thanks.

In your prepared remarks about gross margins you talked about the fact that you're protecting profit dollars and not margin in there that was causing a 450 basis points of decline in that math makes sense, but I'm sure there's more going on going on underneath the surface with regards to gross margins.

Supply chain I am sure is a friction costs and maybe theres some timing with regard to pricing versus input. So anything that you would call out that was also a factor in gross margins that we can be thinking about even into 'twenty three as a comparison.

Yeah.

Yes, thanks for the question.

Look at this is Mike by various parties.

Highest impact, but other than that you have there growth efficiency and remember that we have attributed a blend.

And as I've communicated and that we are on track to deliver we deliver their first two years.

In line with expectation in year, three which is now we continue to be on track so that certainly EBIT.

Thanks.

Is effective it's relatively small it's mowing their quantum slightly positive as we continue to accelerate the growth platforms, where it has.

Higher margin.

But it does not.

In the powder is not significant so we're in this in this quarter.

It's about the dilutive effects, but again moving forward, we should expect to continue to deliver good growth efficiencies and as we continue to price at inflation or inflation.

Is that true is there.

Okay.

In a better position for us to continue to recover the money.

Thanks for that and then on foodservice.

Very impressive growth there.

Over 20% growth in North America does imply some something's happening there are some big market share wins.

What's driving that and is that sustainable and I guess, you're just setting the big global <unk> as the momentum driver.

For international and that does sound sustainable in your view.

Thanks for the question I think that that's just the one thing I want to highlight that this will help in the prepared remarks that.

Our foodservice now in Q2 is 14% higher than Q2, 2019, which is really remarkable.

There is a component of Av.

So it could be pricing that channel consistent to what we've been doing at retail. So price also has has a lot to do with the growth that youre seeing in Q2, but volume continues to grow as the expenditure there shouldn't be any market share.

It would have been.

They can put their information.

Developed markets North America, Europe , and sinter regarding <unk> strategy that I'll, let Ralph talk a little bit of what we're doing on the international some of default before profit talks about international just wanted to say that.

See you in there compared with 19.

19 service.

Very transactional areas for the company, but its not really strategic.

And what the small part of the company that we didn't put a lot of attention.

We have a great team to date with a lot of ambition and really looking at this channel.

As a critical strategic channel that generates penetration of our brands across the globe. We are having great momentum in emerging markets and part is because our consumers are getting in touch with our brands.

In foodservice.

So that's a very different change in mindset and as a consequence.

<unk> changed.

I think importantly since 2019.

I'll file please.

Yeah, the only thing I would complement them into people don't want to Miguel said, we have.

We use the model we define service.

You own the shirt on the kitchen on the customer and that.

Reflects the investments we made on chess because SaaS are extremely important, especially on <unk> global <unk> as you all know that because that's how you develop.

<unk> or LTE on limited time offers.

With those customers and this is the door into developing into innovative products.

Them to put in their stores. So we've seen vessel on this capability and this is paying off peak time.

<unk> developed a relationship.

Customers.

Thanks to a different level that allows them to do.

Turning to price better to get out of commodity composition.

We continue to use that channel as well.

I mean in terms of impressions fantastic channel until June brand impressions. So from services is a quant beyond fall growth offer across international but in the U S as well and Congress can complement that but we've been very successful with this model our investment shafts and partnering with the <unk>.

The customers.

On product development.

Yes, I would say the only thing I would add here is just the fact that the model that we have we also liquid looking at it at a global basis. So the same concept of us being able to kind of Magellan wrap up pointed out leveraging our points of distribution.

Houston and away from home in order for us to kind of build though.

<unk> brands in retail that type of a virtuous cycle is something we're going to continue and we see that paying off for us at the same time over the last couple of years not only have we reorganize ourselves and focus on our team and beam.

And kind of the right expertise and capabilities will split service, but we have also simplified our portfolio quite a bit I can tell you that since the last two years, we have reduced the number of Skus skus in the U S. Foodservice by App. So that allows us to actually pivot to the things that really matter to our customers in a way.

Did that help with both in terms of providing great service and great value in away from home and with that let me pass it over to Miguel for some closing remarks, okay well. Thank you all for one of your questions today.

As you've seen we have company.

Lisa.

Transformation.

Im proud of what we've done so far.

But each day, we continue to improve.

With vault.

And that's just getting started we have so many opportunities ahead of us and we are all very excited about what's to come. Thank you very much and thank you for the continued interest in <unk>.

Thank you. This concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a wonderful day.

Sure.

To raise Johan during Q&A, you can dial one one.

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Good day, and thank you for standby and welcome to the Kraft Heinz Company second quarter results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star.

One one on your telephone.

Please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today.

Anne Marie Mackellar. Please go ahead.

Thank you and Hello, everyone. This is Anne Marie Megillah head of global Investor Relations at the Kraft Heinz Company and welcome to our Q&A session of our second quarter 2022 business update during.

We will also discuss some non-GAAP financial measures today during the call and these non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results and you can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at IR Dot Kraft Heinz company Dot com.

Before we begin I'm going to hand, it over to our CEO Miguel Patricio for a few opening remarks.

Well, Thank you Anne Marie and thank you everyone for joining us today.

I wanted to acknowledge the fact that we are leaving out there a lot of uncertainty.

Regarding to the external world.

Since I want to thank my team and to congratulate my team.

For delivering another quarter I don't know if is there any solid results.

Also we are mindful of the current deflationary environment and how it affects our consumers and our customers.

But we continue to develop solutions that benefit our consumers and our retailers.

Our relationships with retailers continued to strengthen and we have improved inventory and service levels. So we can have now more optionality to execute mutually strategic programs.

We are happy to take your questions.

Thank you and as a reminder to ask a question. Please press star one one on your telephone please standby, while we compile the Q&A roster.

And our first question will come from Bryan Spillane from Bank of America. Your line is now open.

Alright, Thank you operator, good morning, everyone.

I had just one clarification question and then a second question. The first one just as a clarification Andre.

In the slide deck.

Yes.

I think it's slide 27, where you talk about that there is a portion or a section in there about gross margin and it shows gross margin at 33%.

Sure that is not adjusted right. So that's just given the gross margin I think as we did in the adjusted gross margin calculation. It looked like 31, 5%. So just wanted to clarify that that margin that you are.

That you put into the high deck, it's reported adjusted.

Thanks for the question.

Very good by the way. So yes, you are right. So this is the GAAP gross margin so to get to adjusted.

To increase this number by 110 basis points.

Due to the change of unrealized hedge on commodities.

In fact, if you adjust for that our margin in Q2, it's pretty much in line with the margin in Q1.

And if you can't answer.

You would see an expansion of margin if were not for the dilutive impact of re pricing to offset inflation.

Okay. Thanks. Thank you for that and then my question is just in the prepared remarks.

Miguel you talked a little bit about I think they are still being supply chain pressures in the back half of the year Ed or currently.

Bose.

Recalling last year were.

Part of what happened in the U S. You had some supply chain issues.

They affected service levels, especially around the holiday.

I guess does the guidance assume that they're still going to be.

Pressure, there and that you won't be fully merchandise for the holidays or.

Or are you are you in a position where you can be more fully sort of.

Supplied in merchandise at the holidays in the U S.

Okay, Brian I think that to your question is addressing the U S.

Ill pass it to Carlos.

Okay. Thank you Miguel.

Hey, Thanks, I think first of all thank you for your question. The reality is that we have continued to improve our production and our service levels as you saw.

In our presentation and now that we are approaching kind of the low <unk> in terms of service in Q2 is going to allow us to continue to focus on driving.

The right kind of levels of both service and inventory with our retailers.

For us it's important to see the continued progression that we have and we don't anticipate that actually going against us as we go forward in fact, when we're going to continue to see as we go into Q3 or Q4 is the continued expansion of our service.

As a result of the continued improvement in terms of our performance. We saw that in Q2, where in fact, we have been able to kind of look.

Opportunities within for example brands like Philadelphia, Heinz Ketchup, both of which had record shares in fact higher share to ever had in both of those businesses. So I think that as we go forward, we arent going to confuse the improve our position.

Okay.

Thank you.

And we will take our next question from Ken Goldman from Jpmorgan, Mr. Goldman Your line is open.

Hi, everybody. Thank you.

You mentioned in the prepared remarks that you have the optionality now to execute more.

Call it mutually strategic programs with retailers now that your service levels are in a better place I just wanted to clarify it number one is there any major difference between.

Mutually strategic program.

Really good promotion that's more than just the discount maybe just something more in depth or creative than unusual promotion I just wanted to kind of clarify that definition.

Okay Ken.

I'll give you two examples of these programs.

Because we have now.

Much better service levels.

So I'll.

I'll give you two examples one is what we call the eichelberger.

It has been a very successful.

<unk> program, especially now doing semi time when people barbecue more and when we can put together.

Our sources our Ts.

Together with the.

<unk>.

Pulse supermarket chains.

If that would be very good and very well accepted by.

Our customers I'll give you. Another example in a moment like this.

Exploring value propositions.

We together with with customers. So I'll give you example of grilled cheese, you can have a grilled cheese.

For less than one product.

And.

We do programs with our customers putting together.

Keith our Mayo.

And.

There will be a breadth as well right. So is that just two examples of bringing value added proposition.

And the customers that preceded it.

Extremely well.

This is bringing a little bit of creativity that who had never used thinking about.

Value are bringing the value of our products together with our customers.

Thoughts there.

No.

The other thing I will say here again speaking is we continue to have very productive conversations with <unk>.

Customers in a way that makes sense for both parties.

Yes, great.

Alright.

Right.

We feel we feel very positive about it we are excited with the momentum that we have with our customers and with our consultants.

Understood Thanks very much.

Yes.

Thank you.

We will take our next question from Andrew Lazar from Barclays and Mr. <unk>. Your line is open.

Thanks very much.

In the slide deck, you provided a breakdown of categories that are sort of more and less sensitive to price gaps with private label I think 15% of sales are in categories that are that are more sensitive where where gaps are increasing and I'm. Just curious how do you approach. These businesses in terms of balancing share and profitability do you do you take the necessary price to protect.

Profit and deal with the short term pressure on share or protect share and sort of take the short term profit hit.

Thanks, so much.

Well, let me let me start I think Andrew a question specific to the U S. So I'll take a shot.

I think for US the reality is that even if we think about those businesses. There may be as you saw a very small part of our portfolio is more exposed to private label. One other thing. So we're actually doing is working differently in terms of how we offering consumer solutions in a moment in which they are looking for a differential uses across the spectrum of.

Development of consumers.

So one of the things we're actually looking at is how are we actually allowed consumers to stay in our iconic brands.

The number of range of products across our pricing ladder, whether that is let me give you. An example, something like Akamai area in which we have from natural to Deli fresh the original Oscar Mayer that allows consumers actually for it to have an option and wish to actually stay within our brands knowing that over the last couple of years, we've actually been rental.

Many of our iconic brands and investing behind it. So we have improved the quality we have improved the renovation of those brands in a way that makes up about brands you've been more valuable to consumers and frankly, we're seeing that already play out we see that for example, you have products like crap achieved portfolio.

Also have that kind of a full array of product gross pricing ladder that in Q2, as you're still gaining share as well so for us it's about being strategic about how we think about leverage the entire portfolio that we have in a way that allows us to continue to offer consumers different approaches in terms of options.

Really a category by category, so even at a 50% where the prices are expanding the story is very very different <unk> similar to cost cuts. We do have a very good price led we have negotiated licenses to the Florida effects EBIT price it at or below private label.

The graph <unk> didnt have the deluxe.

Litigating shed so in the last several months so it is working quite well for us.

For example, we have.

The partnership is implant that is now starting industrial look a lot of capacity later in the year, which will allow us to start to promote these brands, which haven't been to be able to do in a consistent manner for years.

So it's really category by category, we would've put us very close in makes sense that we are doing something that makes sense for both top and bottom line.

Thank you.

Hey, Kevin.

Thank you.

And our next question will come from Chris Growe from Stifel and your line is now open.

Okay.

Mr. Grout. Please thank you for your line is not on mute.

Can you hear me now yes, Sir thank you.

You.

Fits with an earlier question around.

Do you see product availability is a constraint for the third and fourth quarter performance in the second half or is that behind us now as I'm ultimately trying to get too. Thank you.

I think it is a combination of these factors so foodservice as you'll have seen in keynote presentation is growing north of 20%, so and that represents roughly 30% of our total revenue.

In measured channels in the U S.

We've had we've had been doing very well <unk> actually been gaining share year to date in those two channels, because we were already big bet.

A gradual shift, but where those channels.

And even though I think was more pronounced in Q1 in fact in consumables.

So I think it is modest typically for the question regarding service level doesn't have is due to the low ninety's.

The ideal level is in the high <unk>, we still have work to do obviously, that's the average of the portfolio. Some categories that are in great shape better than historical appropriate level of service and some others do working through it.

But if you look alone shelf availability.

We are much closer to the historical levels. So we bought a few if you think of potential availability.

And it seemed like the 90 394.

90, <unk> hundred 92, so we're getting that theres still some room to grow.

And would there still be some continued inventory build that you would expect at retail as you improve your service levels.

Obviously, we cannot.

Comment on par with although how we bid or theyre going to measure the inventories moving forward is so low compared to historical levels, yes, there could be some room for further inventory buildup.

Okay. Thank you.

Okay.

Thank you.

And our next question.

It will come from Steve powers from Deutsche Bank. Mr. Powers. Your line is now yes, hey, good morning, good morning. Thanks.

Can you talk about your outlook contemplating greater price elasticity negatively impacting volume and mix I guess over the balance of the year is there a way for you to help us think through the P&L impacts of lower volumes at this point clearly there are many other moving parts, but all else equal.

Volumes are to move lower in places, where you anticipate how material is that on margins in terms of fixed cost deleverage per unit sold.

I am really asking just how fixed.

Fixed versus variable cost structure is at this point.

Thanks for the question. Despite this not.

Not really.

Because we're still building inventory remember our service and obviously in the low nineties. So as it continues to produce more than what the cell is activated.

The positive effects at this moment.

We are monitoring the demand very closely so that we are also adjust our labor accordingly to make sure that we don't have an overhang.

There are always when you start you stepped down production to make sure that they don't have more labor.

Neither of them have this effect that you are talking about but thats all right. Now this is not the competition.

Okay, great. Thank you.

I could you gave some good color on the cost outlook for the remainder of 'twenty two I guess I'm just curious how you see if possible early positioning looking out to 'twenty three on the one hand, you mentioned cost hopefully, peaking and maybe starting to recede in some cases, but on the other hand, we are still obviously a lot higher year over year and you presumably have some hedges rolling into the new.

Rolling into the new year that will roll off both on commodities and currency.

Maybe a little bit of color. If you have any on early positioning visibility on constant currency looking out to the first part of 'twenty three.

Is that Delta is due.

The volatility of that yes, the crops have receded.

Still very high we are working with different set not just for next year, but im going to talk about that.

Thank you Bing.

Taking a.

Price throughout the year that we wanted to have a carryover effect into next year, especially in the first half.

For the year, so that should help.

But early to tell.

Okay very good thank you.

Thank you. Our next question will come from Robert Moskow from Credit Suisse. Your line is now open.

Hi, Thanks.

Here.

Your income statement shows.

Losses on your derivative hedges in <unk> I imagine that's commodity inputs are now falling.

And if that's right should we assume at some point that necessitates more accounts and you're saying on any specific products.

And then a quick follow up.

So thanks for the question. So couple of things first one maybe to answer. The final question is on the Geneva Debenture, There's one independent.

It depends on price on what.

Market changes not on our hedge position.

So.

I think what the trigger events.

Nuclear reprice based on what Youre seeing how big that market multiple based on what's already Democratic pension parks, but the second thing is regarding to the effect of what we see now is there is a change in the unrealized hedge from commodities.

Does that mean that the hedges is positive or negative you just made that there was unchanged.

The period over period, so we still have any hedge gains we had nice gains in both Q1 and Q2, but because part of that materialize, we'd see this negative effect.

Realized portion.

Again with the the important thing is we look at that market the market prices and Thats, how we make our processes.

Okay, maybe I'll follow up my follow up is.

I think you did shift.

Consumption in <unk> and I think you said that you'd be refilling shelves into Q can you give us any number as to how much that might.

Then just in <unk>.

The inventory effect in Q2 is that as more.

So.

Yes.

It's a very small number.

We think that we don't know how retailers are going to manage their EBIT bodies.

So look at the levels pre pandemic.

Yes.

Still have room to grow.

There is an hour of shelf availability as I said before.

They were a little below the historical level, which might give further indication that there is a possibility.

Yes, Andre I guess, but you also said youre producing above you're saying so I don't know is it a material amount or are you just.

And your are you refilling your own inventory than rather than retailer Azure.

We have now refilling, our only been 30 with Goldman Sachs. Please go into thinking about the historical levels and eventually these will flow through that we paid us a little color you want to add something else I mean, I will say if you look at the presentation and the fact that we're able to provide service from the low <unk> to the low night as is.

As a result of us being able to actually leverage our entire supply chain in a way that now with the inventory levels in many of our categories that we can provide that service at the same time.

As Andrew said, we're still a low values. So thats just opportunity for us to continue to drive that to the high <unk> by pushing to the right level of inventories internally. So that we can actually be able to better service our customers.

Thank you for the clarification question.

Thank you.

We will take our next question from Alexia Howard from Alliance Bernstein Alethia, Tony Robinson.

Good morning, everyone.

Good morning Alexia.

Can I ask about the comments you made in your prepared remarks about the international zone and the expansion of that distribution point.

It seems as though in the.

That go to market areas that has been a very material expansion of distribution points in some of those emerging market.

Do you ensure that you have got the critical mass in those.

New outlets to make money igen, whether you can give us data on how profitable you are in some of those regions, but we've seen some other companies kind of dig themselves the profit whole as they're trying to do that expansion and I just want to find out how you're making sure that you've got guardrails on that expansion. Thank you very much and I'll pass it on.

Sure.

So.

Yes, Alex Thanks for the question.

Good morning.

Extremely proud and happy with what's happening there and follow up want to market model, because it's a very comprehensive model.

We actually stopped by analyzing.

This starts by where we can make money. So we start by looking at the gross profit of each <unk>.

The vigil, either channel or sub market, let's say.

Traditional and modern trade.

Depending on the regions multiple countries IQ and expansion.

<unk> of Brazil, where we started Russia, China <unk>.

West country, so they have the.

Profitability, you can achieve in different regions and different channels is significant.

Can be significantly different.

So let me start by analyzing that fall into all delayed to how we're going to execute in store. So it's a very comprehensive model of <unk>.

Very detailed analytics with execution.

So as you saw and you alluded to on the on the slides we started this model.

<unk> in Brazil.

Yes.

Our adaptive coughed into Russia, and China and now yes, we are scaling up up to by the end of the year, we expect to have 75% of all of our markets aimed to just go to market model.

And the numbers the results speaks for itself so everywhere that we implemented the model.

All times being significantly above.

And what's your margin barrels so growing so so we will continue to roll that out. It's a model that again requires a lot of analytics to be profitable, but at the same time a lot of discipline on execution.

To kind of keep expanding in those regions that still have a lot of.

Distribution to begin.

Thanks, Tom.

On the profitability side, which is obviously very important the right there was a little bit.

Sure.

We don't put a lot of people out there that we cannot.

I don't pay back on that.

We are also very disciplined.

To give you an example in Brazil.

We have about another 1 billion points I'll stay with that.

Tactically serve.

During the 130 <unk> hundred 40, <unk>, so and part of that is because the limits of our scale. So that's very important.

We are in the Hopper is exploring alternatives.

Partnerships that you increased the penetration into the market. So maybe that was a good mantra going into future, but but yes. This is al.

It's an important consideration.

Since we are talking about Brazil, I think that.

Now with the acquisition of handler that is very strong in the south.

And at the high end is very strong in the southeast this gives us.

Even a bigger opportunity to expand our distribution and the strength of our brands. We are really now with great scale in Brazil.

We are very happy with how this acquisition is to go into the plants.

That we have in place for the business there.

Great. Thank you very much I'll pass it on.

Operator, we have time for one more question.

<unk>.

And we will take our last question from David Palmer with Evercore ISI. Your line is open.

Thanks.

In your prepared remarks about gross margins you talked about the fact that you're protecting profit dollars and not margin and that that was causing a 450 basis points of decline in that math makes sense, but I'm sure there's more going on going on underneath the surface with regard to gross margins.

Apply chain I'm sure was a friction costs and maybe theres, some timing with regard to pricing versus input. So anything that you would call out that was also a factor in gross margins that we can be thinking about even into 'twenty three as a comparison.

Yes.

Yes, thanks for the question.

Look at this is by far the highest impact but other than the leap that do have their growth efficiency and remember that we have the $2 billion.

Well communicated and that we are on track to deliver we deliver their first two years in line with expectation in year, three which is now we continue to be on track so that doesn't equal EBIT.

Okay.

Is effective.

This model is low in the quarter slightly positive as we continue to accelerate the growth platforms, where it has higher margin.

But the number in the quarter is not significant so really this in this quarter.

It's about the dilutive effects, but again moving forward, we should expect to continue to deliver the growth efficiencies and as we continue to price with inflation or inflation eventually start to ease.

Let me put this in.

In a better position for us to continue to recover the margin.

Thanks for that and then on foodservice.

Very impressive growth there.

Over 20% growth in North America does imply some something's happening there are some big market share wins.

What's driving that and is that sustainable and I guess you are just citing the big global <unk> as the momentum driver for.

For international and that does sound sustainable in your view.

Thanks for the question I think that that's just the one thing I want to highlight that we will have to in the prepared remarks that.

Our foodservice now in Q2 is 14% higher than Q2, 2019, which is really remarkable.

There is a component of Av.

Likely to be pricing that channel consistent to what we've been doing in retail. So price also has has a lot to do with the growth that youre seeing in Q2, but volume continues to grow as does the expenditure there should have been gaining market share in the.

What would have been at the core.

If you put the information.

Developed markets North America Europe it system.

<unk> strategy that aligns the Roswell Park, a little based on what we are doing.

On the international Zone before before the profit talks about international Doug just wanted to say that.

Since you unveiled compared with 19.

19 foodservice.

It's a very transactional areas for the company, but its not really strategic.

And with a small part of the company that we didn't put a lot of attention I think we have a great team to date with a lot of ambition and really looking at this channel as a crew.

<unk> strategic channel that generates the penetration of our brands across the globe, we are having great momentum in emerging markets and part is because our consumers are getting in touch with our brands.

Input service.

So that's a very different change in mindset.

The consequence.

<unk> changed I think importantly, since 2019.

Please.

Yes, the only thing I would complement I mean to build on what <unk> said.

We have.

We use the model we define service we call it we own the chef on the kitchen on the customer and then.

Reflects the investments we've made on chess because SaaS are extremely important, especially on <unk> global <unk> as you allude to because that's how you develop the recipes or LTE on limited time offers where stones with those customers and both this is the door into developing 308.

<unk> products.

For them to put in the store. So we've seen vessel on this capability and this is paying off peak time Vince.

<unk> developed a relationship with us.

No.

Thanks to a different level that allows you to do.

Thanks, Brian Spatter to get out of a commodity composition and is that we continue to use the channel Israel to build the brand I mean in terms of impressions a fantastic channel to build brand impression. So from services is that walk behind fall growth.

Also across international but in the U S as well and Congress can complement that but we've been very successful with this model of investing on SaaS and partnering with the <unk>.

Customers.

On product development.

Yes, I would say Ralph the only thing I would add here is just the fact that the model that we have we also liquid looking at it at a global basis. So the same concept, but being able to kind of Magellan wrap up pointed out leveraging our points of distribution in away from home in order for us to kind of build our iconic brands and retail that type.

A virtual cycle is something we're going to continue and we see that paying off for us at the same time over the last couple of years not only have we reorganize ourselves and focus are our team and beam.

And kind of the right expertise and capabilities will split service, but we have also simplified our portfolio quite a bit I can tell you that since the last.

Two years, we have reduced the number of Skus skus in the U S foodservice by App.

So that allows us to actually pivot to the things that really matter to our customers in a way that they got help with both in terms of providing great service and great value in away from home and with that let me pass it over to Miguel for some closing remarks, okay well.

Thank you all for your questions today.

<unk> you had a company.

Lisa.

Transformation.

Proud of what we've done so far.

But each day, we continue to improve.

And so with vault.

And that's.

Having started as we have so many opportunities ahead of us and we.

All very excited about what's to come. Thank you very much and thank you for the continued interest in <unk>.

Thank you. This concludes today's conference call. Thank you for your participation and you may now disconnect everyone have a wonderful day.

Q2 2022 Kraft Heinz Co Earnings Call- Q&A Session

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