Q2 2022 Kraft Heinz Co Earnings Call (Pre-recorded)

Back to the historical appropriate levels of service and some others still working through it and even if you look on shelf availability.

We are much closer to the historical levels.

<unk>, if you think of potential availability in Brazil like the 90 394 right now in the 90 192. So we're getting there is still.

Some room to pivotal.

And would there still be some continued inventory build 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 we're going to manage their inventories moving forward is similar to <unk> historical levels, yes, there could be some room for further inventory buildup.

Okay. Thank you.

Yeah.

Thank you.

And our next question.

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

Thanks for the question I despite does 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 once the sale is actually is up.

Positive effects at this moment.

And we are monitoring the demand was very closely. So then we will also adjust our labor accordingly to make sure that we don't have an overhang.

There are always when you start to step down in production to make sure that they don't have more labor than they needed and have this effect that you are talking about but that's all right. Now this is not it's not that we shipped.

Okay, great. Thank you.

If 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're still obviously a lot higher year over year and you presumably have some hedges rolling into the new.

Drilling into the year that will roll off bolt on commodities and currency.

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

Is that is delta is still a lot of them.

A lot of volatility on that yes. They of course have received it yet.

Still very high we are working with different scenarios for next year, but but that it should talk about that.

He had been thinking.

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

Half a day or so that you have.

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 are your income statement shows.

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

<unk>.

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 <unk> had a bit to this one.

Independent price on what.

Market change, it's not on our hedge position so so.

But the true, though that book of business.

We price based on what Youre seeing health in the market multiple based on what's already double breasted pension parks, but the second thing is regarding to the fact that once you see the P&L is there is a change in the unrealized hedge on commodities. Okay. So does that mean that the hedges is positive or negative I just made that there was a change.

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

But again with the the important thing is we look at that market the market prices and that's how we make our processes.

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

I think you did shift.

Retail consumption in to Q 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 Dan.

And just in <unk>.

The inventory effect in Q2 is very small.

So.

Yes.

It's a very small number and again, we think that we don't know how retailers are going to manage their inventories.

What should we look at the levels pre pandemic.

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

Still a little below the historical level, which might be a 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 it is and you're are you refilling your own inventory than rather than retailer Azure.

We have now refilling, our own inventory, because you're going to think about the historical levels.

And eventually this will flow through the retailers are going to kind of do you want add something else.

Say, if you look at the presentation and the fact that we are able to provide service from the low <unk> to the low night 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 night. So that's 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 will take our next question from Alexia Howard from Alliance Bernstein Alethia.

Yeah.

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'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.

New outlets to make money and identify that 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 you've got guardrails on that expansion. Thank you very much.

Pass it on.

So.

Yes, Alex Thanks for the question.

Yes.

We are extremely proud and happy with what's happening in the fall or winter market model, because it's a very comprehensive model that we actually start by analyzing.

It starts by where we can make money. So we start by looking at the gross profit of each individual channel or sub market.

Traditional and modern trade.

Daniel in the regions in multiple countries. Thank you.

Expansion is a beta of Brazil, where we started Russia China.

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 let me start by analyzing debt falling to all delayed to how we're going to execute to start so it's a very comprehensive model.

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.

Offbeat are adapting to the coffee to 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 are the result speaks for itself so everywhere that implemented the model.

Growth has been significantly above the other in merch 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 to have a lot of.

Distributions to the game.

Okay.

On the profitability side, which is obviously very important right. There was a lot of it.

Sure that there's a lot of we don't put a lot of people out there who cannot.

They don't pay back on that.

We are also very disciplined.

To give you an example in Brazil.

We have about 1 billion points I'll say is that we could hypothetically serve we are still in the 130 <unk> hundred 40000, so and part of that is because the limits of our scale right. So that's very important.

We are in the Hopper is exploring alternatives.

Potential partnerships that you increased the penetration in some markets. So maybe that was a good marshal come into future, but but yes.

There is also 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 on 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 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.

Thank you.

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

Thanks and.

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 regard to gross margins.

Supply 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.

Yeah.

Yes, thanks for the question.

Look at this by far the highest impact but other than that that you have there growth efficiency remember that we've had the $2 billion.

Belinda communicated and that we are on track to deliver we delivered the 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.

Mix.

Is effective.

<unk> mall is mowing their quantum 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 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 with inflation or inflation event that we start to use that.

Okay.

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.

Whats driving that and is that sustainable and I guess, you're just setting 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 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.

It would 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 the expenditure there shouldn't be any market share.

What do we have the equipment the information.

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

Say that.

See you in there compared with 19.

19 foodservice.

So very transactional area 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.

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 the penetration of our brands across the globe.

Having great momentum in emerging markets and part is because our consumers are getting in touch with our brands.

Service.

So that's a very different change in mindset.

And as a consequence.

The team changed I think in past since 2019.

Please.

Yes.

Only thing I would complement that.

One on what you just said we have a say.

We used the model we have.

For service, we call you own the shift on the kitchen on the customer and that reflects the investments we've made on chefs.

SaaS tie extremely important, especially on the <unk> global Kearsarge since you have moved it because that's how you develop recipes or LTE on limited time offers where stones with those customers and this is the door into developing.

Making products for them to put in their stores. So we can invest on this capability and this is paying off peak time, you develop a relationship.

Customers.

Due to a different level that allows them to do.

Hey, Brian Spatter to get out of commodity composition and as bad as we continue to use the channel Israel do the brand I mean in terms of impressions a fantastic channel to build a brand impression. So from services is a walk behind floor 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 chefs embarking winter.

Customers.

On product development.

Yes, I would say wrap up 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 Miguel and 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.

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.

Having 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.

The thing that help us both in terms of providing great service and great value.

Way 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> company in the lease up.

The transformation.

Im proud of what we've done so far.

Cloud.

Each day, we continue to improve.

And so 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.

Turkey to raise your hand during Q&A you can dial star one one.

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Okay.

Yeah.

Yes.

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Yes.

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Yeah.

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Good day and thank you for standby 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 the session you will need to press star 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.

Ann Marie Mackellar. Please go ahead.

Thank you and Hello, everyone. This is Anne Marie Mccallum head of global Investor Relations of the Kraft Heinz Company and welcome to our Q&A session for 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 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.

And with regards to the external world.

I want to thank Mike.

Oh, great. Thank my team for delivering another.

Is there any solid result.

Also we are mindful of the current deflationary environment.

And that would affect our consumers and our customers.

We continue to develop solutions that benefit our consumers.

Our repayments.

Our relationships with retailers continued to strengthen and we have improved inventory and service levels.

So we can have no more optionality to execute.

Mutually 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 can.

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 thats just 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.

But you put into the high deck is reported to have Jonathan.

Thanks for the question.

Very good by the way so yes, you're right. So this is the GAAP gross margin so to get to adjusted to increase this number by 110 basis points.

Due to the changeover 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 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.

Hey, Gail 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 I suppose.

Recalling last year were.

Part of what happened in the U S. You had some supply chain issues and they affected service levels, especially around the holiday.

Or I guess does the guidance assume that they are still going to be.

No pressure, there and that you won't be fully merchandise for the holidays or are.

Are we are you are you in a position where you can be more fully sort of supplies and merchandise at the holidays in the U S.

Okay Brian .

So 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 service levels as you saw.

In our presentation and now that we are approaching kind of the low ninety's in terms of service in Q2.

<unk> going to allow us to continue to focus on driving.

The right kind of levels of both service and inventory with our retailers. So 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 only going to continue to 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.

Wanted to clarify a number one is there any major difference between a mutually strategic program.

And then just a really good promotion that's more than just the discount maybe just something more in depth or creative than usual 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 is demanding it.

Sure.

Okay Ken.

I'll give you two examples of these programs.

Because we have now.

What's been a service levels, we can have it all.

Two examples one is what we call the eichelberger.

Yes.

Has been a very successful.

Program, especially now doing semi when people barbecue more and when we can put together.

Our sources our Ts.

To get there with with the bonds.

Supermarket chains.

<unk> has been 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.

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

For less than one dollar.

And.

We do programs with our customers, putting together our chief our Mayo.

And.

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

And the customers that facilities.

Scrutiny well this is Bruce.

Bringing a little bit of creativity, that's who we had never used thinking about.

Value or bringing the value of our presence together with the 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 your thoughts there.

Hello.

The other thing I would say here again speaking is we continue to have very productive conversations with.

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 consumers.

Understood Thanks very much.

Thank you.

We'll 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 <unk>.

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.

So much.

Well, let me, let me start and so I think Andrew the question specifically 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 that may be as you saw a very small part of our portfolio. Those are more exposed to private label what other things. So we're actually doing is working differently in terms of how we offering consumers 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 we actually allowed consumers to stay in our iconic brands.

Of the number of range of products across our pricing ladder, whether that is let me give you. An example, something like Oscar Mayer in which we'd have from natural to Deli fresh 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 them. So we have improved the quality we have improved the renovation of those brands in a way that makes them about brands you've been more valuable to consumers and frankly, we're seeing that already play out we see that for example, a product like in our crop achieved portfolio.

Also have that kind of a full array of products across 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.

Really a category by category.

Even at a 50% where the prices are expanding their stories are very different <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.

The graph <unk> they don't have the deluxe.

<unk> sure. So in the last several months, but it's 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 module brand, which you haven't been 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. Your line is now open.

Yes.

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

Can you hear me now yes, Sir.

Yes.

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 this is kind of.

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 and we're ultimately trying to get too. Thank you.

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

Taking those two channels, because we were already pretty bad.

A gradual shift, but where those channels.

And so I think was more pronounced in Q1 in fact in Brazil.

It was very minor so I think it is modest dividend for the first two regarding service level doesn't have seen is due to the low ninety's.

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.

But if you look on shelf availability.

We are much closer to the historical levels. So we bought a few if you think about the availability in Brazil like the 90 394 right now in the 90 192, so they are getting that.

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 bid or theyre going to measure the inventory is moving forward and say were too low compared to historical levels, yes, there could be some room for further inventory buildup.

Okay. Thank you.

Yeah.

Thank you.

And our next question.

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 if volumes are to move lower in places where you.

We anticipate 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.

Not really.

Because we're still building inventory remember it's.

What's been the low ninety's so as it continues to produce more than what the cell is activated.

There were positive effects at this moment.

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

When he is done just 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 that's all right. Now this is not the it's not that we.

Sure.

Okay, great. Thank you.

If 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.

Presumably have some hedges rolling into the new rolling into the new year that will roll off bolt on commodities and currency. So just maybe a little bit of color. If you. If you have any on early positioning visibility on constant currency looking at the first part of 'twenty three.

Is that delta.

A lot of volatility yes.

Yes.

We ceded.

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

I'm going to talk about that.

Let's see that you had been thinking.

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

Half a day or so to 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.

Okay.

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 on <unk>, one we typically price on what.

Market changes not on our hedge position.

So so.

I think what the triple that book.

The fiscal year, we price based on what Youre seeing health in the market multiple based on what's already double breasted pension part, but the second thing is regarding to the effect of what you see now is there is a change in the unrealized hedge commodities. Okay. So does that mean that the hedges, it's positive or negative I just made that there was a change there.

The period over period. So we do have a hedge gains we had in hedge gains in both Q1 and Q2, but because of that materialize, we'd see this negative effect on the realized portion.

But again with these important thing as we look at the market the market prices and Thats, how we make our decisions.

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.

And 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.

What should we look at the levels pre pandemic.

<unk>.

Still have room to grow money.

And our own shelf availability as I said before.

They were a little below the historical level, which might give further indication that 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 you are are you refilling your own inventory than rather than retailer Azure.

We have now refilling our own inventory.

Thanks Ali.

Given their historical levels.

And eventually this will flow through different theaters, but when it comes 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 <unk>.

So as to the low night 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.

Andrew said, we're still a low night, 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 will take our next question from Alexia Howard from Alliance Bernstein.

Good morning, everyone.

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 and 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 a 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'll pass it on.

So.

Yes, Alex Thanks for the question I mean.

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 that we actually start by analyzing.

It starts by where we can make money. So we start by looking at the gross profit of each individual channel or sub market.

Traditional and modern trade.

Daniel on the regions multiple countries. Thank you.

Expansion of.

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

West country, so they have the.

Profitability, you can achieve in different regions and different channels seeking income.

It can be significantly different.

So we start by analyzing that fall into all delayed to how we're going to execute to start so it's a very comprehensive model off of.

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.

<unk>.

Adapted in coffee to 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.

At all times being significantly above the other merch margins are also growing so so we will continue to roll that out.

Our model that again.

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 to have a lot of.

Distribution to begin.

Yes.

On the profitability.

<unk> decided to just obviously very important right.

So that we don't lose the locals.

A lot of people out there who cannot.

That will pay back on that.

We are also very disciplined.

To give you an example in Brazil.

We have about 1 billion points I'll say is that we could hypothetically serve we are still in the 130 <unk> hundred 40000, so and part of that is because they believe it will probably scale right. So that's very important.

We are in the Hopper IDEXX bloody alternatives.

Potential partnerships that you increased the penetration in some markets. So maybe there was more to come in the future. But this is also 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.

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.

Now 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.

Thank you.

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

Thanks and.

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.

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 parts.

Highest impact, but other than the lease that you have there growth efficiency and remember that we've had the $2 billion.

Linda communicated industrial did extra delivery, we delivered the 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 they're not.

During the quarter is not significant so really 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 deflation or inflation.

The statute is that.

Let me put this in.

Better position.

It is to continue to recover.

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.

For international and that does sound sustainable in your view.

Thanks for the question I think that Thats, 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.

That 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.

We have the equipment the information.

Developed markets North America Europe , It system regarding <unk> strategy that I'll, let Ralph talk a little bit of what we're doing on the international sale of default.

Before I talk about international just wanted to say that.

See you in there compared with 19.

In 19 foodservice.

So very transactional area 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.

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

<unk> strategic channel that generates the penetration of our brands across the globe.

Even greater momentum in emerging markets and part is because our consumers get in touch with our brands.

In foodservice.

Very different change in mindset.

As a consequence.

<unk> changed I think since 2019.

Please.

Yes, the only thing I would complement them into <unk> to Miguel said.

We have.

We use the model, we can find frontline service, we own the shirt on the kitchen on the customer and that reflects the investments we've made on chefs because SaaS tie extremely important, especially on the <unk> global Kearsarge as you allude to because that's how you develop.

<unk> or LTE on limited time offers where stones original <unk> customers and both vis vis the door into developing vaca.

Making products for them to put in their stores. So we've invested on this capability and this is paying off peak time, Vince do you develop a relationship.

Customers.

Due to a different level that allows them to do.

Hey, Brian Spatter to get out of commodity composition and is that we continue to use the channel as well to do the brands I mean in terms of impressions a fantastic channel to build a brand impression. So foodservice is a walk behind Paul 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 our investment chefs embarking winter.

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 Miguel and 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 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 are our team and beam.

You can 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.

They got help us 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.

<unk> company.

<unk>.

Transformation.

Proud of what we've done so far very proud, but each day, we continue to improve and.

And so 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 Kraft Heinz.

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