Q4 2022 Kraft Heinz Co Earnings Call

February 15, 2023

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

[music].

Yeah.

Good day, and thank you for standing by and welcome to the Kraft Heinz Company fourth quarter results Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session need to press star one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star.

Darwin one again.

I'd now like to hand, the conference over to your Speaker today Anne Marie Mcdonald. Please go ahead.

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

During today's call we may make forward looking statements regarding our expectations for the future.

Including related to our business plans and expectations strategy efforts and investment and related timing and expected impact.

These statements are based on how we see things today and actual results may differ materially due to risks and uncertainties.

Please see the cautionary statements and risk factors contained in today's earnings release, which accompanies this call as well as our most recent 10-K.

10-Q, and 8-K filings for more information regarding these risks and uncertainties.

Additionally, we may refer to non-GAAP financial measures, which exclude certain items from our financial results reported in accordance with GAAP.

Please refer to today's earnings release, and the non-GAAP information available on our website at IR Dot Cloud Science company Dot Com under news and events for a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP financial measures.

Before we begin I'm now going to hand, it over to CEO Miguel Patricio for some brief opening comments.

Barry.

Thank you everyone for joining us today.

Let me take a moment to say.

Ill.

Thanks, Tim.

We have come so far.

Our transformation journey.

Okay.

Fourth quarter was no exception.

You can see the momentum building across our business.

This level of market share trends are improving.

Volumes are positive.

We are outpacing the competition in foodservice.

Market.

Having.

And importantly, we continued to invest for growth.

Once again, we have unlocked efficiencies over $400 million this year and this allow us to invest in new tools and capabilities for our teams.

New product innovation for our consumers.

From a pricing perspective, 99% of all new unit pricing.

Already been announced for 2023.

As we look to the rest of the year, we have no current plan to announce new pricing in North America, Europe , Latin America, and most of Asia.

I am very optimistic and very.

Excited about how we are positioned to deliver long term sustainable growth.

With that.

That hasn't been present.

In Harper to join me so lets open the call for the Q&A.

Thank you ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your Touchtone telephone. If your question has been answered you withdraw yourself from the queue. Please press star one again, we will pause for a moment, while we compile the Q&A roster.

Our first question comes from Andrew Lazar with Barclays. Your line is open.

Great. Thanks, good morning, everybody.

Well I think with one yet.

Your EBITDA guidance for fiscal 'twenty three excluding the impact from the 50 <unk> week is actually in line with your long term algorithm.

And when you detailed this I guess at Cagny a year ago, you sort of I think you said it would take multiple years to reach this level of growth. So I guess in this regard I'm trying to get a sense of whether if I have this right whether youre ahead of schedule.

And if so what you attributed to like what's gone better or faster maybe than you anticipated and I guess, most importantly are you in a place where you see this level of growth now as more sustainable. Thank you.

Thank you Andrew.

Sure sure good morning, again, and thanks for the question.

Thanks for noticing it.

In fact, we still got it.

I'm very proud about what they have been achieving as a company and I think 2033, we might get another step up in our performance.

That's about notice.

We don't own.

On the long term algorithm already net sales.

And also on EBITDA, if you remove the effects from currency and from the 50 <unk> week.

Okay.

The best way to show that transformation is working through results right. Then it's good to see how that needs to ensure that we finish that based on momentum and how thats translating into a stronger performance.

<unk> thousand 23. This is a consequence of our market share.

<unk> continued to improve.

Moving.

As for the service can finish it deliver that high.

Above 30% emerging markets growing double digits in a strong way.

Actually in our favor supply chain efficiencies continue to happen in 2033.

I have noticed in the guidance, we are expanding gross margin.

CFS shall go back to to cover 90 levels, which is allowing us to continue to increase the investment in the business for growth. So we are talking about the increased investments behind marketing technology and people, which are critical enablers for us to feel the growth of the company.

So we feel good about where we are moving.

Sure.

Great. Thank you very much.

One moment for our next question.

Our next question comes from Bryan Spillane with Bank of America. Your line is open.

Thanks, operator, good morning, everyone.

Mike My question is about just the free cash flow and a cup.

Couple of questions related to that I guess, the first is just simply on.

Can you give us a little bit more insight in terms of I guess the inventory build.

It finished goods inventory is it raw materials.

The decision to do that and I guess.

In the prepared remark, it's taught remarks, it's tied to service level. So.

Or are you going to need to carry elevated inventories through 'twenty. Three is my first question.

You bet.

Sure.

And thanks for the question.

As we said.

As you have seen throughout 2022.

Have to be really good EBITDA, you're right our case fill rate at the end of 'twenty. One was in the low <unk>, which is extremely low. So we had a lot of recovering to those or you have seen throughout the year the effect of a few things.

Keep in mind that we finished 2032 is given the low night so it did not.

Better than expected us to be on what we expect of ourselves should be big.

<unk> said that we do have.

Compared to historical levels higher EBIT coverage in average enrollment package materials also which is normal because we're also trying to build the Barclays given all the volatility and uncertainty. So we expect that those going back to my theaters to decline overtime, including starting in 2033.

These finished goods, even though we have made to increase inventory.

Spots, where the inventory levels are still though we still have a lot of opportunity to rebalance our inventory across the network I think one of the consequences of that.

And that the demand volatility is that the new structure hasnt been body straight enrollment in the wrong way, how this distributor demand and that takes time.

Sorted itself out if I can get your cost of ownership is shipping for IP right. Robyn afterwards, so because I think the effects and all the vessels that we have made in the past two years to output demand forecast, we are investing a lot of resources and better supply expanding.

We have a big project.

I think that's already started to network simplification so <unk>.

Combination of these investments.

<unk> been asked or less we're going back to the more historical levels of core review of executive My data showed spectrum system recovered in inventory, starting 'twenty three but into the future.

So I guess, it's worth kind of bridging that now to maybe how we should be thinking about free cash flow and free cash flow conversion for 'twenty. Three can you give us a little bit of perspective on it.

Capital spending will inventory or working capital be a tailwind like.

Can we get back to more normal free cash flow conversion in 2003 or is it still going to be somewhat.

Subdued relative to previous years.

So free cash flow will be better than 2030 June <unk>.

<unk> fuels are going to be in the long term algorithm of 100% and thats in great part because of Capex investments as we have said as well during when we unveiled the long term algorithm. We are investing for growth and we have a step up investment in capex.

I've seen in 2010 to two very spending a little more than $900 million, which is a big increase vessels with <unk>.

750 that were in the best we are ramping up these again in 2033 and 2024 as part of our long term plan.

And then we should go back down to closer to three 5% of net sales starting 2020, but thats. The current perspective, so when the capex start to come down that do help us to be able to step up change to go through perhaps even 100% as we've said the long term outlook.

So okay.

If you want to expect something this year.

It should be like.

About 80% or so.

Just a ballpark in mind.

Okay. That's helpful. Thank you very much I appreciate all the color.

Thank you.

One moment for our next question.

Our next question comes from Chris Growe with Stifel. Your line is open.

Hi, good morning.

Hi.

Hi, I just had a question for you in relation to promotional spending and you had some data and some charts are a chart that showed that it was down.

Since 2019 and down more than your branded competition I just want to get a sense of.

Do you expect to increase that is it kind of tied to service levels as those improve throughout the year and then also to better understand what's the appropriate bogey for that level of rebuilding promotional spending so what portion of that 5% decline you show since 2019 should should rebuild you have got some good data and capabilities now can you be.

More efficient with promotional spending I think the answer is yes, I just want to get little more a little more color on that thank you.

Maybe <unk> you can you can start and then and then Atlas.

Comment.

Yeah. So.

And thanks for the question we have.

We have increased trade investment and a very significant way from 2000 $17 million to $19 million.

That space alone.

So it really starts from a very high base fees.

2019.

With our centralized revenue management organization more than 50 people put it indicate that should best in North America alone.

We have started to get them.

Those are the inhibition.

We put a lot of discipline.

And science behind making promotional decisions in a way that benefits us and big.

Davis.

You have seen a lot of that coming to fruition now and the results of the last three years and as long as the <unk> from service level as well, but industrial put in perspective, if you look at Q4 volume sold on promotion.

We had about 25% of unfulfilled promotion support 32 that's.

That's higher than 2010, it was about 22% two percentage points, but still lower than the vendor competitors in all categories.

And I think there's about 35%.

It also.

Too much and to look at where we are right now in terms of promotional investments, we still have a significant amount of promotions that have negative rois.

<unk> is not about cutting promotions about deploying in a smarter way. So we are in the majority of them have seen their results come back, but there's still a lot of opportunities for us to go ahead, we would supply the bulk of that increase is the company to give you a precise number of where this is going to land, but what I can tell you with confidence is that we're not going to get anywhere close.

2019 levels.

Yes, let me as Carlos said.

I will say is just building on some of the comments that Andrew just mentioned is that.

We think about promotional activity going forward. It really is about being surgical about how we invest those promotion dollars thinking through making them around event based activity for that.

The way we are thinking through how do we make sure that we are driving the best utilization of that particular.

Beds versus the price based activity.

What happens then is it allows us to actually make sure. We are focused in terms of driving at positive Rois and I think if you as you've.

<unk> heard from Andrew we have made a huge drive from what we wanted to send a team and we're not going back.

When you look at some of our focus on improving the ROI of our programs today on average if you think of 2022 versus 2019, we've actually triple the level of ROI returns about promotions from three years ago. So again it is a signal that all of the investments we're doing in terms of revenue.

Management.

Scale work in terms of better understanding how to read the data and how to utilize our funding is actually driving specifically better ROI in every funding that we're doing.

And thank you for your question. Thank you and have a good color there I appreciate it.

One moment for our next question.

Our next question comes from Cody Ross with UBS. Your line is open.

Thank you operator and good morning.

Just a quick question around your organic.

Good morning, just a quick question around your organic sales guidance, you guided 2023 organic sales growth of 4% to 6% based on that route based on wrap around pricing from 2022, and the incremental price that you discussed for 2023, we estimate that your volume growth assumption is flat to down low single digits is that correct.

And then if so what gives you the confidence that elasticity will remain so low as we move throughout the year. Thank you.

Okay.

Yeah, Tycho thanks for the question.

So so as you well noted.

We are finishing Q4 growing about 10% and we just.

To have a new round of price that suggests.

Implemented so that certainly has.

Our positive in fact, especially in the first half of the year.

Expect to be gradually throughout the year sort of stupidity.

We start to lap the price increases from last period that.

We ended up landing in the second half on something closer to our long term growth algorithm. Okay.

Being said that.

The growth in 2023 is all driven by price so volume is still negative.

Obviously, it improves throughout the quarters as we start to lap the prices, but even at the end of the year. It will still be negative that tells me that as we think about the future.

It's not a massive benefit would be once we want a good balance as we think about top line growth between price and volume and I'm going to talk more about that next week.

Got it.

We had contemplated in the guidance an increase at the level of elasticity compared to what we saw in 2032.

It's still not the way up to the historical levels.

In terms of what.

What gives confidence.

So.

You'll start to settle out.

This allows for the industry throughout Q4, it was still very strong in fact, if we look at sellout.

Looking at price and volume based on the sell out Q1, it was better than any other quarter in the year.

Now, we obviously, we would each have keep activity.

Hi.

Because throughout this year, we can see the consumers.

We will change the behaviors Carlos you want to comment something on that the one thing I would add there coatings effect that we also are making sure that we continue to expand in terms of the number of formats and price points that we offer within our categories to make sure. We maintain the consumers that have been with us over the last couple of years. So that is means that.

If you look at the data for example in Q4.

Earnings over $100000 and consumers absolutely with that particular group, we actually grew over 13% in terms of consumption and at the same time, we're making sure that as consumers going to plug we are actually increasing the number of offerings, whether it's the Mac and cheese and Delta in terms of club and those consumers are going to dollar stores, we're actually.

Improving the number of Skus that we have available to them. So that way, there's a point in which they can come into the category and those who are choosing to look at value in terms of club sizes. We also have the assortments. So it is for us to be agile in terms of how we think about the consumer continues to change and we've been having with an offer that provide the best value for them.

Coverage of their social economic situation.

Okay.

Great. Thanks, Thanks, so much quite frankly.

One moment for our next question.

Our next question comes from Ken Goldman with Jpmorgan. Your line is open.

Hi.

Just hoping to get a better sense of the magnitude of the gross margin improvement you are expecting this year in <unk>.

Besides the obvious ones in terms of the cadence of inflation, if theres any considerations, we should have about maybe the timing from quarter to quarter of that improvement.

And to that please.

Hi, Ken.

Thanks for the question.

You have to see that in Q4.

It happened the way that we said we would do.

Are irrelevant sequential improvement.

Which puts us in Q4 in line with the 2019 gross margins.

We expect in Q1 two two.

These 12 months integral and it'll be down as well.

You have contracts that are getting renewed and.

Some inflation that was not passed over to us last year now as well is going to affect us.

And it had been put in place.

Sure.

Guidance, but then but you should expect.

Semi closer to flattish in Q1 compared to prior year and from that issue such as the expansion.

Over a year basis.

No.

In terms of profit.

Ballpark, you should think about the 50.

Two are under the magnitude.

Magnitude of gross margin expansion, which is what's allowing us to increase investments behind marketing technology and people, which is so important to us.

Very helpful. Thank you.

One moment for our next question.

Our next question comes from Pamela Kaufman of Morgan Stanley . Your line is open.

Hi, good morning.

Can you talk about the competitive dynamics within your categories in prepared remarks, you indicated that the private label share is increasing but that is primarily coming from your branded competitor.

Maybe if you could just elaborate on what youre seeing there now.

That would be helpful.

Yeah.

Maybe under and Carlos can comment on that.

Sure.

Let me start.

Thank you for the question by the way as you.

Phil and let me speak for the North America business first and then maybe under can give you a.

Perspective overall the company, we do see they continue to show improvement as we continue to go forward.

Q4, you saw that May suggest a share actually grew by 20 basis points and when you look at the market share that have known me suggested and in December is actually was flat.

And what we're seeing is that the bet that we're making in terms of continuing to invest in our businesses in terms of renovating our key products, making sure. We're investing innovation make sure we invest in our marketing that absolutely paying off. So you can see that in terms of those particular platforms and brands that we want to continue to drive our growth are in fact driving this.

Share improvements as well whether that is in places like Lunchables in places like Kraft cheese versus like Heinz ketchup, Mac and cheese all of those kind of drove actually positive shares as you look at Q4. So for US is how do we continue to make sure. We built on those at the same time that we are also making sure we address any of the.

Potential still some supply chain constraints that we have been a couple of categories. So for US is making sure that we are driving the investment that we're making in the brands that those are in fact already translated into share improvements and now making sure that we have continued to support the brands that are still a bit challenged in terms of supply chain so that weakening.

Fact, unleash the continued growth of our retail environment.

Andrew do you want to offer than anything you would like to add from an international standpoint.

Well the thing is like we have to look a bit of different regions right because.

In Europe , Indeed, the situation there.

A bit tougher from a private label perspective growing more.

Price gap has been widening.

Although the price private label has been putting price the same but the gap has been widening I mean, we have put a lot a lot of initiatives in place.

Relaunching value brands, where we are.

We are not like we didn't have to like HP. Being example that is in the best process categories. So and then also do a lot of activities and price spectrum.

So this is like it's really keep.

Strong specialty versus branded competition, but then in the rest of the world in the emerging markets, specifically, where you don't see that much of a private label issue and we continue to gain share.

Okay, Yes.

To put it in perspective.

Retail in Europe is about 5% of our business and Thats, what <unk> was talking about just why not.

Add to these points.

Two thirds of our growth.

I mean.

From a mark to market.

And from.

Foodservice on these two channels, we continue gaining share.

And growing in a very very positive way double digit.

Great. Thank you.

Okay.

One moment for our next question.

Our next question comes from Stephen Powers with Deutsche Bank. Your line is open.

Yes, Hey, good morning, two questions.

One is.

On service levels and fill rates on slide 16.

Got you show, how you've seen improvement.

In the fourth quarter really every month within within the fourth quarter. I guess question is number one on this is just has that improvement continued into into 'twenty three thus far and what have you really assume that sort of is the base case $4 23.

Relative to.

The ultimate goal of getting back to the high Ninety's does that is that an assumption in the guidance or is that more of a an aspiration blossom plus of allowances in the outlook.

Carlos Let me, let me come in.

To give you a perspective I guess the way, we see it kind of in North America.

As you said, we are in vaccine progress in our supply chain and our service level. When I look at the December numbers those were the highest service levels, we had across the entire year now at the same time, we are still seeing the industry, having continued to see some challenges, particularly upstream when you think about ingredients and some packaging materials.

Now as we go forward. Our goal is in fact to get to the kind of service levels, our customers and we need.

Towards the end of the year.

I think for US what we are seeing is that the recovering somewhat to take really even packages. The company very asymmetrical. So if you think about for us.

Still with remnant of avian flu and the impact that that had in terms of the industry and some of our business in <unk> and.

And in places like in our cream cheese sauce business, where some packaging materials have been a challenge.

And.

So those are the type of things that I would now we're working through is places where in fact, while most things are beginning to come in terms of more stable supply chain. There's still a couple of places where we are seeing some of those kind of challenges at the same time. Our team is making sure that we are adapting to whatever situation that's happening in I'll give you.

An example of that which is as you saw the price of eggs.

So hi.

And to make sure that we hope to adapt and dental products that go with AG. So a product like just crack an egg we need to make sure. We actually brought down inventories to make sure that understanding that consumers may not be hub.

Having a reduced demand of that type of product.

We are both focused on how do we make sure we continue to drive that service levels towards the 98%, which is our goal and then secondly is making sure that as we do that we are.

Adjunct are responding to those specifically ingredients that may be challenged in the short term, but we see improving significantly as we exit 2023.

Okay great.

If I could follow up also.

Alright.

Okay.

I was just going to ask if I could follow up on the elasticity point that you've been talking about you also exited the year with elasticity in sort of at their most favorable point.

Kind of going off the data on slide nine.

You've obviously talked about.

Assumption of those elasticities sort of normalized directionally through 'twenty, three I guess, taking the question.

What's your base case.

Function of the pacing of that normalization and you talk about.

Ultimate assumptions of not going all the way back to historical activities. So just how do we think about that is we expect 'twenty three to be sort of the mirror image of.

<unk> 22 from an elasticity standpoint, or any more color you can offer around that would be great. Thank you.

Yes.

<unk>.

Okay.

As we have said what we contemplated in the guidance that elasticity gradually go back to the historical levels and we expect historical that wasn't the guidance should be.

Okay stablish towards the end of the year.

And.

We expect Q1 to be the big analysis would be a little worse than it was in Q4 and again. It goes if you wanted to.

Think about it linearly going back to historical levels towards the end of the year.

Obviously, we think that.

We keep a close eye on.

We are obviously fully aware and have actions in place on these net.

The reduction in subsidies, which is happening.

And that has implications that we are ready for that so so.

<unk> seen strength, but we.

We believe that the last piece is we have normally graduate back to their historical levels.

But I do want to say anything about the type of actions that youre, taking the yes, I think for US we have seen this coming so for US is making sure that we continue to provide great value to consumers regardless of the situation. They are in and I think as I mentioned earlier for US. It is making sure we use kind of the full price size I could picture in terms of.

Options for consumers to make sure that we also maintain them in the franchise and that we talked about in terms of our promotional levels.

We are using much more rigorous way in which we can understand the ROI of those investments.

Consumers are looking for particular events, where there is certain key holidays, and so forth we have presence, but in a way that actually allows us to be in a much more positive ROI than in the past. So it is it is part of what we see in <unk> North America, we are seeing.

Our standards right now is that at the end of the year, we will go back to historical levels.

That's what we kind of rebuilding on our guidance as we think about 2023.

Okay perfect I appreciate it thank you.

Operator, we'll take one more question sure one moment for our next question.

Our next question comes from Michael Lavery Piper Sandler Your line is open.

Okay.

Thank you good morning.

Wanted to drill into your foodservice growth pillar, a little bit more.

<unk>.

Slide 13, or 12, I guess it is interesting with some color here can you just unpack a little bit of.

Now you're gaining share relative to competitors is it new items in existing customers as it is it broadening.

Your distribution into new accounts.

Yeah.

Is it is it did those customers gaining share I'm sure. There are some components of maybe a few different things, but what's the primary driver of outperformance there.

Michael we are having a great momentum from service across the globe, both on U S and North America, and the International Zone. So I will ask Carlos <unk> to.

Comment.

And I would say.

In North America, I will say is.

<unk>.

And the items that you mentioned is all of them.

We are growing into Q4, we grew by more than 20% and we actually gained share and for me the way I kind of look at it is the investments that we have put in place are paying us. So we have put new leadership in place we have simplified our portfolio significantly reducing almost 50% the number of Skus that we had only a couple of years ago.

We have renovated.

Third portfolio would it bolstering bolstering kind of our sales team to make sure. They drive distribution in the right places and more importantly, we're also investing in capacity to make sure we support that growing demand.

As we look forward.

Just to give you a sense of the opportunity here is we still are only 25 of our top 50 <unk> in the U S. So we know everything that we're doing continues to be an opportunity for us to further drive growth and then going back specifically to your question is no.

Already what we are seeing is that we are in fact expanding distribution across all areas of foodservice, we are winning with distributors. So we actually expanded with key distributors are presence. We're actually also expanded with no commercial accounts. So if you think about hospitality.

Particularly distributors, who service those kind of non commercial businesses. We have also made an effort against those and those are working we have expanded in new restaurants, and things like fast cash flow think about.

From then is a type of restaurants that we actually have now increased the number of items, we sell into them <unk>, which continues to be a focus for us as a company from Papa John's Pollo tropical our places in which we are actually now expanded number of Skus, we sell into.

So it's an area that we continue to be bullish on and we and why one of the places that we feel that we can be winning globally and with that let me wrap up if you want to build on.

Let me just before I have I'll just build on one thing Carlos mentioned.

One of the reasons of our improvement in growth as well as capacity we've been investing.

Throughout this year's foreign capacity.

On foodservice.

And we continue to do.

So so.

And now in May we will have.

And next 12, 25% capacity in U S pouches.

And we will have 50% more capacity on <unk> squeeze which are absolutely critical items.

For the growth of foodservice.

With that in mind.

Yes.

Go ahead.

Sure.

What has been already said about right.

Bright spot of foodservice.

Yes.

Next week on Cagny, we're going to go deeper on the reasons for our success.

Two things, adding up on the international front, where we are winning and indeed, we are growing a lot in winning big time share in foodservice one this global partnerships really leveraging.

Leveraging our scale and global capabilities to offer our partners more insights and customized solutions remember many times, we compete with local players, but having this global insight.

The big difference for us to test innovation, one mark to market and when successful scale up to additional markets and we've been building this model and replicate and posted consistently across the globe and he is working really well. The second point is what we call the shift led model.

That could be called our secret sauce, let's say in foodservice.

This strategy evolves around talent chest, I mean, basically if you don't have a ship.

Very easy to be beat on the discussion of price led discussion basically transactional only and when we bring access to the conversation I mean really partnering with with the <unk>.

And different needs I think defining menu whole sets fit for their specific projects and move to.

<unk>, although sometimes basic.

The execution the perfect execution of it is driving the foodservice just to remind them within international food service is still growing.

Growing very strongly.

It's one third smaller as a percentage of that deceleration than than in the U S. So although like retail sides of the business comparable leaves like we have a law to grow students with service so definitely.

Who can continue to see.

Good very good strong success with this within the next quarters and years.

Thank you. Thank you.

But I'm not sure I would say that on food service I think in the past <unk> said, it's transactional and we define.

This is one of the strategic pillars for us for growth and we've been investing on talent with technology on people on portfolio and it's paying off we are going.

We're excited with that.

And Murray, yet so that will wrap up our Q&A session. Thank you all for your calls I am going to turn it over to Magellan for some closing comments.

And just want to say that we continue to we're very excited about what we are doing we feel it transformation withholding that Germany still very far from finishing.

Well in every day and why are we still excited we're excited because we see momentum building.

This level of App market share, especially in the growth platform is growing.

Service and emerging markets gaining market share.

And with a great momentum.

Second we see a very different level of agility in our company. We are today, a very agile organization that is able to.

To change to adapt to predict much better than in the past we have invested to grow.

Gross margin expansion since the investments in technology and people in marketing and R&D.

We are excited.

And as well because we anticipated pricing.

Today, we have 90, 699% of all our pricing for 2023 already announced.

Have about 95% of our pricing already accepted and we have about 90% already implemented.

And so the way, we see will continue delivering quarter after quarter year after year.

Thank you so much for your attention.

To see you in Cagny next week I think we have a lot of excitement to share with you. Thank.

Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.

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Ask the question during the special need to press Star one on your telephone you will then hear an automated message advising your hand is raised to withdraw. Your question. Please press star one again I would now like to hand, the conference over to your Speaker today, Andrew <unk>. Please go ahead.

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

During today's call we may make forward looking statements regarding our expectations for the future.

Including related for our business plans and expectations strategy efforts in investments and related timing and expected impact.

These statements are based on how we see things today and actual results may differ materially due to risks and uncertainties.

Please see the cautionary statements and risk factors contained in today's earnings release, which accompanies this call as well as our most recent 10-K Ken.

<unk> 10-Q, and 8-K filings for more information regarding these risks and uncertainties.

Additionally, we may refer to non-GAAP financial measures, which exclude certain items from our financial results reported in accordance with GAAP.

Before we begin im now going to hand, it over to CEO Miguel Patricio for some brief opening comments.

Sorry.

Thank you everyone for joining us today.

Let me first take a moment to say.

Ill hop.

Hi, Steve.

We have come so far.

On our transformation journey.

And the fourth quarter was no exception.

You can see the momentum building across our business.

This levels and market share trends are improving.

Volumes are positive.

We are outpacing the competition in foodservice and emerging markets and by a lot in.

And importantly, we continued to invest for growth.

Once again, we have unlocked efficiencies over $400 million this year and this allow us to invest in new tools and capabilities for our teams and.

Our new product innovation for our consumers.

From a pricing perspective, 99% of all needed pricing has already been announced for 2023.

As we look to the rest of the year, we have no current plan to announce new pricing.

Erica Europe , Latin America, and most of Asia.

Hi.

I am very optimistic I'm very.

Thanks Simon.

That's how we are positioned to deliver long term sustainable growth.

With that.

<unk> had some Brad Harper.

Harper to join me so lets open the call for Q&A.

Our first question comes from Andrew Lazar with Barclays. Your line is open.

Great. Thanks, good morning, everybody.

Good morning, Good morning, Andrew.

Your EBITDA guidance for fiscal 'twenty, three excluding the impact from the 50 <unk> week.

In line with your long term algorithm.

And when you detailed this I guess at Cagny, a year ago, you sort of I think I said it would take multiple years to reach this level of growth. So I guess in this regard I'm trying to get a sense of whether if I have this right whether youre ahead of schedule and and if so what you attributed to like what's gone better or faster maybe than you anticipated and I guess, most importantly are you in a place.

Where you see this level of growth now has more sustainable thank you.

Thank you Andrew for the question is that could you answer this for sure.

Sure Hi, Andrew Good morning, again, and thanks for the question and thanks for noticing it.

In fact, we feel that in the.

We're very proud of what they have been achieving as a company and I think 2033.

We might get another step up in our performance.

And that's without notice.

We don't own.

On the long term algorithm already or net sales.

Also on EBITDA, if you remove the effects from currency and from the 50 <unk> week and I think this is.

The best way to show that transformation is working through results right. Then it's good to see how to ensure that we finish that based on momentum and how thats translating into a stronger performance in <unk>.

1023. This is a consequence of our market share in the U S continued to improve.

Okay.

As for the service continues to deliver that high.

Above 30% emerging markets growing double digits in a strong way. So obviously, there's a group are working in our favor supply chain efficiencies continue to happen and it's a 1033 as you might have noticed in the guidance, we are expanding gross margin and.

CFS shall go back to to covenant levels, which is allowing us to continue to increase.

The investment in the business for growth. So we are talking to the increased investments behind marketing technology and people, which are critical enablers for us.

The growth of the company. So we feel good about where we are moving.

So the distributor.

Great. Thank you very much.

One moment for our next question.

Our next question comes from Bryan Spillane with Bank of America. Your line is open.

Thanks, operator, good morning, everyone.

Mike My question is about just the free cash flow and I have.

Couple of questions related to that I guess, the first is just simply on.

Can you give us a little bit more insight in terms of I guess the inventory build.

Was it finished goods inventory is it raw materials.

The decision to do that and I guess.

In the prepared remark, it's taught remarks, it's tied to service level. So.

Or are you going to need to carry elevated inventories through 'twenty. Three is my first question.

You bet.

Sure.

And thanks for the question.

Look as we said.

As you have seen throughout 2022.

We have to be really good EBITDA, you're right. Our case fill rate at the end of 'twenty. One was in the low <unk>, which is extremely low. So we had a lot of recovering to those or you have seen throughout the year. The effect of those things are done.

Remind us we finished 2032 is given their low ninety's. So it's still not what maybe better than expected us to be on what we expect of ourselves should be.

That being said that we do have that.

Back to historical levels higher inventory coverage in average enrollment package materials also which is normal because we're also trying to build the Barclays given all the volatility and uncertainty. So we expect that those going back to my theaters to decline overtime, including starting in 2023 and in finished goods, even though we need to increase inventory.

You said that.

Spots, where the inventory levels are still though we still have a lot of opportunity to rebalance our inventory across the network I think one of the consequences of that.

The <unk> the demand volatility is that leased pasture hasn't been body straight enrollment in the wrong way, how the distributor demand and that takes time to sort itself out right because it would be too costly for us you've been shipping the IP right Robin afterwards, so because it'd be the effects and all of these vessels that we have made in the past two years to our.

Nate demand forecast, we are investing a lot of resources and better supply Sandy.

We have a big project, but I think that's already started to network simplification. So.

Combination of these investments.

It bounced up and outdoor lastly, going back to the more historical levels of core review of executive My data showed spectrum system recorded an EBIT, starting 'twenty three but into the future.

So so I guess, it's worth kind of bridging that now to maybe how we should be thinking about free cash flow and free cash flow conversion for 'twenty. Three can you give us a little bit of perspective on.

I guess capital spending well inventory or working capital be a tailwind like can.

Can we get back to more normal free cash flow conversion in 'twenty, three or is it still going to be somewhat I.

I guess subdued relative to previous years.

So free cash flow will be better than 2010 in Q1.

It's still not going to be in the long term algorithm of I, 100% and Thats in great part because of Capex investments as we have said as well during.

Unveiled that long term algorithm we are at.

Best in Port growth.

And we have a step up investment in Capex.

Seem to it doesn't tend to vary spending a little more.

The $900 million.

<unk> is a big increase vessels with the 700 to 750 <unk> during the best we are ramping up these again in 2023 and 2024 as part of our long term plan.

And then we should go back down to closer to three 5% of net sales is starting 2025 thats. The current perspective, so when the capex start to come down that debt to help us to be able to step up change to go through perhaps even 100% as we've said the long term outlook.

So okay.

If you'd like to expect something this year.

It should be like.

About 80% or so this wasn't just a ballpark in mind okay.

Okay. That's helpful. Thank you very much I appreciate all the color.

Thank you.

One moment for our next question.

Our next question comes from Chris Growe with Stifel. Your line is open.

Hi, good morning.

Hi.

Had a question for you in relation to promotional spending and you had some data and some charts are a chart that showed how it was.

Since 2019 and down more than your branded competition I just want to get a sense of.

Do you expect to increase that as that kind of tied to service levels as those improve throughout the year and then also to better understand what's the appropriate bogey for that level of rebuilding promotional spending so what portion of that 5% decline you show since 2019 should should rebuild you've got some good data and capabilities now can you.

More efficient with promotional spending I think the answer is yes, I just want to get little more little more color on that thank you.

Maybe <unk> you can you can start and then and then Atlas.

Comment specifically in U S.

So.

And thanks for the question.

We have increased trade investment and a very significant way from 2017 to 19 more than $1 billion.

Aerospace total.

So it really starts from a very high base fees.

Late 2019.

With our centralized revenue management organization, we have more than 50 people put it indicated to that in North America alone and we have started to get any progress our sales organization.

We put a lot of discipline and.

In science behind making promotional decisions in a way that benefits us.

Davis.

You have seen a lot of that coming to fruition now and the results of the last three years as long as the <unk> from service level as well, but industrial put in perspective, if you look at Q4 volumes sold on promotion.

We had about 24% of unfulfilled promotions and coupons 32, that's higher than 2010, it was about 22% two percentage points, but still lower than the vendor competitors in all categories.

2000, I think is about 35% and also.

Too much and to look at where we outright knock those off promotional investments, we still have a significant amount of promotions that have a negative rois.

It's not about cutting promotions about deploying in a smarter way. So we added the majority of them have seen their results come back, but there's still a lot of opportunities for us to go ahead with declining bunch of that increase is it component to give you a precise number of where this is going to land, but what I can tell you with confidence is that we're not going to get anywhere close.

2019 levels.

Yes, let me as Carlos said.

Well, what I'll say is just building on some of the comments you just mentioned is that.

We think about promotional activity going forward. It really is about being surgical about how we invest those promotional dollars thinking through making them around event based activity for that.

The way we are thinking through how do we make sure that we are driving the best utilization of that particular.

Beds versus the price based activity.

What happens then is it allows us to actually make sure. We are focused in terms of driving at positive rois.

I think if you just.

<unk> heard from Andrew we have made a huge derived from what we went to say on that team and we're not going back.

Management.

It's still work in terms of better understanding how to read the data and how to utilize our funding is actually driving specifically better ROI in every funding that we're doing.

Well thanks for your question. Thank you.

Over there I appreciate it.

One moment for our next question.

Our next question comes from Cody Ross with UBS. Your line is open.

Thank you operator and good morning.

Just a quick question around your organic good morning, just a quick question around your organic sales guidance, you guided 2023 organic sales growth of 4% to 6% based on that route based on wrap around pricing from 2022, and the incremental price that you discussed for 2023, we estimate that your volume growth assumption is flat to down low.

Single digits is that correct and then if so what gives you the confidence that elasticity will remain so low as we move throughout the year. Thank you.

Okay.

Yeah, Hi, thanks for the question.

So so as you well noted.

With it.

Finishing Q4, but only about 10% and we.

Yes.

Have a neuron depressed that suggests.

Implemented so that certainly has.

Our positive in fact, especially in the first half of the year.

Expect to be gradually throughout the year. So this should be.

As we start to lap the price increases from last year.

We end up landing in the second half on something closer to our long term growth algorithm.

Yes.

Being said that.

The growth in 2023 is all driven by price. So volume is still negative obviously it improves throughout the quarters as we start to lap.

Right.

But even at the end of the year. It will still be negative that tells me that as we think about the future.

It's not a matter that the ones we want a good balanced as we think about top line growth between price and volume undergone a pokemon about next week in APAC.

We had contemplated in the guidance that increase at the level of elasticity compared to what you saw in 2022, but it's still not the way up to the historical levels.

In terms of.

What gives confidence.

So.

You saw the sell out.

This allows for the industry throughout Q4, it was still very strong in fact, if we look at sellout elasticity looking at price and volume based on the fill out Q4, it was better than any other quarter in the year.

Now, we obviously, we would each have keep activity.

Hi.

Because throughout this year, we can see benefit consumers.

We will change the behaviors Carlos you want to comment something on that the one thing I would add their quota is the fact that we're also making sure that we continue to expand in terms of the number of formats and price points that we offer within our categories to make sure. We maintain the consumers that have been with us over the last couple of years. So that is means that.

If you look at the data for example in Q4.

Earnings over $100000 and consumers absolutely with that particular group, we actually grew over 13% in terms of consumption and at the same time, we're making sure that as consumers going to plug we are actually increasing the number of offerings, whether it's <unk> and delta in terms of club and those consumers are going to dollar stores, we're actually.

Improving the number of Skus that we have available to them. So that way, there's a point in which they can come into the category and those who are choosing to look at value in terms of club sizes. We also have the performance. So it is for us to be agile in terms of how we think about the consumer continues to change and we've been having and offer that provide the best value for them.

Okay socioeconomic situation.

Okay.

Great. Thanks for taking my question.

One moment for our next question.

Our next question comes from Ken Goldman with Jpmorgan. Your line is open.

Hi.

Just hoping to get a better sense of the magnitude of the gross margin improvement you're expecting this year end.

Besides the obvious ones in terms of the cadence of inflation. If there's any considerations, we should have about maybe the timing from quarter to quarter of that improvement.

Go ahead please.

Hi, Ken Good morning, Thanks for the question.

You have to see that in Q4.

It happened the way that we said we would.

Our RASM sequential improvement.

As in Q4 in line with the 2019 gross margins.

We expect in Q1 two.

Maybe.

<unk> integral and it'll be down as we have contacts that theyre getting renewed and some inflation that was not passed over to us last year now.

It's going to affect us.

And it had been contemplated in our guidance.

Guidance, but then but you should expect.

Somewhere closer to flattish in Q1 compared to prior year and from that issue such as the expansion.

Year over year basis.

<unk> and.

Amazon.

That's the ballpark you should think about 50 bps to 100 Bips.

The magnitude of gross margin expansion, which is what's allowing us to increase.

Estimates behind marketing technology, and people, which is so important to us.

Very helpful. Thank you.

One moment for our next question.

Our next question comes from Pamela Kaufman of Morgan Stanley . Your line is open.

Hi, good morning.

Can you talk about the competitive dynamics within your categories and prepared remarks, you indicated that the private label share.

Increasing but that is primarily coming from your branded competitor.

Maybe if you could just elaborate on what youre seeing there.

That would be helpful.

Yes.

Maybe under and kind of just kind of comment on that.

Sure.

Let me start.

Thank you for the question by the way.

So and let me speak for the North America business first and then maybe under can give you his.

Perspective overall the company, we do see they continue to show improvement as we continue to go forward I mean in Q4, you saw that May suggest a share actually grew by 20 basis points and when you look at the market share that have known me suggested and in December is actually was flat.

And what we're seeing is that the bet that we're making in terms of continuing to invest in our businesses in terms of renovating our key products, making sure. We're investing innovation make sure we invest in our marketing that actually pay enough. So you can see that in terms of those particular platforms and brands that we want to continue to drive our growth are in fact driving this.

Share improvements as well whether that is in places like Lunchables in places like Kraft cheese base like Heinz ketchup, Mac and cheese all of those kind of drove actually bug of shares as you look at Q4. So for US is how do we continue to make sure. We built on those at the same time that we are also making sure we address any of the.

Potential still some supply chain constraints that we have been a couple of categories. So for us is making sure that as we are driving the investment that we're making in the brands that those are in fact already translating into share improvements and now making sure that we have continued to support the brands that are still a bit challenged in terms of supply chain. So that we can.

Fact, unleash the continued growth of our retail environment.

Andrew do you want to cover that.

Anything you would like to add from an international standpoint can you just square.

Let me go.

It seems like we have to book a bit of different regions right because.

I mean in Europe , Indeed, the situation.

A bit tougher from a private label perspective growing more.

The price gap has been widening.

Although the price private label has been putting price the same but the gap has been widening.

With a lot a lot of initiatives in place.

Relaunching value brands, where we.

Not.

We are not like we didn't have to like HP. Being example that is in the desktop category. So and then also do a lot of practice in price spectrum.

So so this is like it's really keeping us strong specialty versus branded competition, but then in the rest of the world in the Mercury market, specifically, you don't see that much of a private label issue and we continue to gain share.

Okay, Yes.

Just to put it in perspective.

Retail in Europe is about 5% of our business and Thats, what all of US was talking about.

Add to this point that two thirds of our growth.

Coming.

From emerging markets.

And from.

Foodservice on these two channels, we continue gaining share.

And growing in a very very positive way double digit.

Great. Thank you.

Yes.

One moment for our next question.

Our next question comes from Stephen Powers with Deutsche Bank. Your line is open.

Yes, hey, good.

Two questions.

First one is.

On service levels and fill rates on on slide 16.

Got you show, how <unk> seen improvement.

In the fourth quarter really every month within within the fourth quarter. I guess question is number one on this is just has that improvement continued into into 'twenty three thus far.

And.

What have you really assume just sort of is the base case for 'twenty three relative to <unk>.

Ultimate goal of getting back to the high 90 days is that does that assumption in the guidance or is that more of a an aspiration you've left some less of allowances in the outlook.

Okay got.

Carlos Let me comment.

To give you a perspective I guess the way, we see it kind of in North America.

As you said, we are in fact seen progress in our supply chain and our service level effects. When I look at December numbers those were the highest surplus levels, we had across the entire year now at the same time, we are still seeing the industry, having continued to see some challenges, particularly upstream would you think about ingredients and some packaging materials.

Now as we go forward. Our goal is in fact to get to the kind of service levels, our customers and we need.

Towards the end of the year.

I think for US what we're seeing is that the recovery somewhat opaque to really even packages company very asymmetrical. So if you think about for us.

Still.

Still with the remnant of avian flu and the impact that that had in terms of the industry and some of our business and cold cuts.

And in places like our cream cheese sauce business, where some packaging materials have been a challenge.

And.

So those are the type of things that I would now we're working through is places where in fact, while most things are beginning to come in terms of more stable supply chain. There are still a couple of places and what we are seeing some of those kind of challenges at the same time. Our team is making sure that we are adapting to whatever situation that's happening in I'll give you.

An example of that which is as you sell the prices of eggs.

So hi.

And to make sure that we are also adapting denim products that go with AG. So a product like just crack an egg we needed to make sure we actually brought down inventories to make sure that understanding that consumers may not be but we have.

Having a reduced demand of that type of product.

We are both focused on how do we make sure we continue to drive that service levels towards the 98%, which is our goal and then secondly is making sure that we do that.

Agile in responding to those specifically ingredients that may be challenging, but in the short term, but we see improving significantly as we exit 2023.

Okay great.

If I could follow up also.

Alright.

Okay.

I was just going to ask if I could follow up on the elasticity point that you've been talking about you also exited the year with elasticity in sort of at their most favorable point.

Kind of going off the data on slide nine.

You've obviously talked about.

Assumption of those elasticity sort of normalized directionally through 'twenty three I guess the question is this.

What's your base case.

Function of the pacing of that normalization and you talk about.

Ultimate assumptions of not going all the way back to historical efficacy. So just how do we think about that is we expect 'twenty three to be sort of the mirror image of.

<unk> 22 from an elasticity standpoint, or any more color you can offer around that would be great. Thank you.

Yes.

Okay.

As we have said what we contemplated in the guidance that thesis gradually go back to the historical levels and we expect historical that wasn't the guidance to be.

Okay.

Towards the end of the year.

And.

We expect Q1 to be the way that the big analysis would be a little worse than it was in Q4 and again. It goes if you wanted to.

Think about it linearly going back to historical levels towards the end of the year.

There are others, we think that.

We keep a close eye on.

We are obviously fully out in the half.

With the actions in place on these net.

It's actually the subsidies which is happening.

And that has implications that we are ready for that so so.

Each of those teams right, but we believe that the last piece is we have normally graduate back to the historical norms.

I want to say anything about the type of actions that you're taking.

I understood. We have seen this coming so for US is making sure that we continue to provide great value to consumers regardless of the situation. We're in and I think as I mentioned earlier for US. It is making sure that we use kind of the full client size I could picture in terms of options for consumers to make sure that we also maintain them in the franchise.

And then we talked about in terms of our promotional levels.

We are using much more rigorous way in which we can understand the ROI investments.

It is it is part of what we see in <unk> North America, we are seeing.

Our stance right now is that the end of the year, we will go back to historical levels.

And we are definitely kind of rebuilding our guidance as we think about 2023.

Okay perfect I appreciate it thank you.

Operator, we'll take one more question sure one moment for our next question.

Our next question comes from Michael Lavery Piper Sandler Your line is open.

Thank you good morning.

Just wanted to drill into your foodservice growth pillar, a little bit more than slightly.

Slide 13, or 12, I guess it is interesting with some color here can you just unpack a little bit of how you are gaining share relative to competitors is it.

New items in existing customers as it is it broadening.

Your distribution into new accounts.

Is it is it those customers gaining share I'm sure. There are some components of maybe a few different things, but what's the primary driver of outperformance there.

Michael.

Having a great momentum from service across the globe, both on U S and North America, and the International Zone, So I'll ask <unk> to comment.

And I would say.

In North America.

And the items that you mentioned is all of them.

We have renovated asset.

Third portfolio really fostering bolstering kind of our sales team to make sure. They drive distribution in the right places and more importantly, we're also investing in capacity to make sure we support the growing demand. So as we look forward and just to give you a sense of the opportunity here is we still are only 25.

Our top 50 <unk> in the U S. So we know everything that we're doing continues to be an opportunity for us to further drive growth.

And then going back specifically to your question is no.

Already what we are seeing is that we are in fact expanding distribution across all areas of foodservice we're.

Winning with distributors. So we actually expanded with key distributors or impressions were actually also expanded with no commercial accounts.

Think about hospitality.

From then is a type of restaurants that we actually have now increased the number of items, we sell into them <unk>, which continues to be a focus for the company from Papa John's Pollo tropical our places in which we are actually now expanded number of Skus, we sell into.

So it's an area that we continue to be bullish on and we and why one of the places that we feel that we can be winning globally and with that let me wrap up if you wanted to build on that which is to be first half or just build on one thing Carlos mentioned.

One of the reasons of our improvement in growth as well as capacity we've been investing.

Throughout this year's foreign capacity.

On foodservice.

And we continue to do.

So so.

And now in May we will have.

And that 25% capacity.

<unk>.

We will have 50% more capacity on <unk> squeeze which are absolutely critical items.

For the growth of foodservice.

In mind.

Yes.

Go ahead.

Sure.

<unk> has been already said about right.

Bright spot of foodservice.

Yes.

Next week on Pagni, we're going to go deeper on.

The reasons for our success.

Two things, adding up on the international front, where we are winning and indeed, we are growing a lot in winning big time share in foodservice one is global partnerships really leveraging.

Leveraging our scale and global capabilities to offer our partners more insights and customized solutions remember many times, we compete with local players, but having this global insight.

The big difference for us to test innovation, one mark to market and when successful scale up to additional markets and we've been building this model and replicate them.

Consistently across the globe and it's working really well the second point. This is what we call the shift in that model.

It could be called our secret sauce, let's say in foodservice.

This strategy evolves around like talent chest, I mean, basically if you don't have a share.

Very easy to be beat on the discussion of price led discussion.

Transactional only and when we bring our shacks to the conversation I mean really partnering with our customers in different need I think defining menu coal sets fit for their.

Specific projects and those two things, although sometimes basic.

The execution the perfect execution of it is driving.

The foodservice and just to remind that we did international food service is still growing.

Really very strong.

It's one third smaller as a percentage of that deceleration than than in the U S. So although like retail sides of the business comparable lease like we have a law to grow students with service so definitely.

We continue to see.

Good very good strong success with this within the next quarters and years.

Thank you. Thank you.

Well Im not sure I would say that on foodservice I think in the past we were very transactional and we define.

This is one of the strategic pillars for us for growth and we've been investing on <unk>.

With technology on people on portfolio and it's paying off we are going.

We're excited with that.

And Murray, yet so that will wrap up our Q&A session. Thank you all for your calls I am going to turn it over to Mcgowan for some closing comments.

And just wanted to say that we continue to we're very excited about what we are doing we feel it transformation withholding that Germany still very far from finishing.

Evolving everyday and why are we still excited we're excited because we see the momentum building.

This level of App market share, especially in the growth platforms growing foodservice and emerging markets gaining market share.

And with a great momentum.

Second we see a very different level of agility in our company. We are today, a very agile organization that is able to.

To change to adapt to predict much better than in the past we have invested to grow.

Gross margin expansion.

<unk> and technology and people in large T E.

We are excited as well because we anticipated pricing.

And today, we have 90, 699% of all of our pricing for 2023 already announced.

About 95% of our pricing already accepted and we have about 90% already implemented.

And so the way we see it will continue to delivery quarter after quarter year after year.

Thank you so much for your attention.

I expect to see you in Cagny next week I think we have a lot of excitement to share with you. Thank.

Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Q4 2022 Kraft Heinz Co Earnings Call

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