Q1 2023 The Kraft Heinz Company Earnings Call - Q&A
Speaker 2: Good day and thank you for standing by. Welcome to the Crafthine's company, First Quarter Results. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. Thank you for your time.
Speaker 2: To ask a question during the session, you will need to press star 11 on your telephone. You will hear a message advising your hand is raised. To withdraw the question, simply press star 11 again and be advised that today's conference is being recorded. I would now like to hand the conference over to Anne-Marie McEller, Head of Global Investor Relations. The floor is yours.
Speaker 3: Thank you and hello everyone and welcome to our Q&A session for our first quarter 2023 business update.
Speaker 3: During today's call, we may make forward-looking statements regarding our expectations for the future, including related to our business plans and expectations, strategies, efforts, investments, and related timing and expected impacts.
Speaker 3: These statements are based on how we see things today, and actual results may differ materially due to risk and uncertainty.
Speaker 3: 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.
Speaker 3: non-GAAP financial measures, which exclude certain items from our financial results, recorded in accordance with GAAP.
Speaker 3: Please refer to the date earnings release and the non-gap information available on our website at ir.crafthinescompany.com under news and events for discussion of our non- GAAP financial measures and reconciliation to the comparable GAAP financial measures.
Speaker 3: Before we begin, I'm going to hand it over to our CEO , Miguel Patricio, for some brief opening comments.
Speaker 4: Well, thank you, Anne-Marie, and thank you, everyone, joining us today.
Speaker 4: and Marie, and thank you everyone joining us today. We are proud.
Speaker 4: Proud and confident. We are so confident that we are raising our guidance on the bit down earnings.
Speaker 4: by $100,000,000,000 versus purchase.
Speaker 4: which represents a solid double-digit growth versus previous year.
Speaker 4: These results are not a coincidence.
Speaker 4: They are because of our confidence.
Speaker 4: We have been consistently saying that we'll grow through emerging markets. And we grew 23% this quarter. We'll grow through food service globally. And we grew about 29% this quarter. And we'll grow through our priority growth platforms in the U.S. is in meals and text elevation where we had
Speaker 4: double-digit growth.
Speaker 4: The rest of the portfolio has to free up resources to invest in our strategy.
Speaker 4: These results are possible not only because of our strategy but because of everything that is behind our strategy.
Speaker 4: And we start with people. Today we have a great team and a very engaged team.
Speaker 4: Today we have a great team and very engaged team. SPEED
Speaker 5: Well.
Speaker 4: Agility is a big word for us and the thoughts that we have in place are transforming the company.
Speaker 4: In innovation, in supply, manufacturing, procurement, it's failed in logistics.
Speaker 4: And two good examples of that is innovation, where we have now a much stronger pipeline for the future, and we reduce the time of innovating from two years to a couple of months.
Speaker 4: or in supply that through the pods plus the partnership with Microsoft and the usage of artificial intelligence we are improving our planning, our service levels, reducing waste, reducing fines.
Speaker 4: We are in a very different place today. And finally, efficiencies. When we announced three years ago a $2 billion in five years of growth savings, there were a lot of people that were skeptical.
Speaker 4: That would present at $400 million per year.
Speaker 4: We not only delivered this number in three years in a row, but we are now increasing this bar to $500 million a year.
Speaker 4: With that, I have here with me today, Andrea, our CFO , Carlos Abrams-Bizera, our Zone President for North America, and Rafael, our Zone President for International, that are joining me. Please, we are ready for the Q&A. Thank you.
Speaker 2: And as a reminder, that is star 11 if you have a question. We will take a moment while we compile the Q&A roster.
Speaker 6: And our first question comes from Brian Spillane with Bank of America. Please proceed. Thanks, operator. Hey, good morning, everyone. I just wanted to ask, I guess, two questions related to the US. One is, I think, as we kind of strip out the...
Speaker 6: The food service piece and look at what's underneath it looks like there's a bit of a mismatch or mismatch I should say between kind of what we were seeing in the Nielsen data and what would have been reported underlying. So just trying to understand if there was any anything there relative to timing of shipments or promotions that might have affected the cadence and then 2nd, if you can just talk a little bit about.
Speaker 6: in the US specifically kind of how you're seeing the promotional activity or the promotional environment as we kind of head into some of the big summer holidays. You know, is it intensified? Is it kind of in line with your expectations? Just kind of how you're seeing those summer holidays set up. So you're seeing those summer holidays set up.
Speaker 7: Please.
Speaker 8: Please.
Speaker 9: Okay.
Speaker 4: When I look at the US performance, I don't think there is nothing at the normal happening in the acquire. The inventory load was immaterial.
Speaker 9: given where we landed at the end of Q4, as I said before.
Speaker 9: So it's really a functional of the sellout and the food service which performed very well in the quarter. In the results of maybe people are a little appreciated a bit of impact on that. I believe it has something to do also with the fact that last year we all micro-owned things, everything was shut down. So that impacted the sellout in the beginning.
Speaker 9: the guidance from the beginning, so nothing changing from that regard. Obviously not through that way and I'm always emphasizing that work for 2019 levels. And it's going to have it marks how well we are doing in terms of continuing to improve our lives with the tools that we have in place.
Speaker 9: And so not yet, but I'll give some kind of, the pencil that you've got to give some color on the promotion of environment.
Speaker 4: The one thing I guess I would add Brad to what Andrew just said is, as you mentioned, the ROI is continuing to improve. Let me give you a little more color as to what's behind that. We have spoken about the Agile scale and how that has re-engineered Kraft Heinz. Part of that is us... We have spoken about the Agile scale and how that has re-engineered Kraft Heinz.
Speaker 9: Creating ownable agile revenue management tools that actually allows us to improve the returns of our promotion. So like for example, we have a trade management system that we created in house and it gives us real time access to. Essentially over 10,000 promotional events, and then what we do is we actually create digital tools that leverage that large amount of data to provide insights and recommendations in a very simple way.
Speaker 9: Now, those solutions then help us to make sure that allows us to figure out what is the right death of discounts, what is the right time of the year, and what are the right promotional taxes we have seen. So if you look at our Q1 numbers, we saw about a 10-point improvement in ROI in this particular quarter versus what we saw a year ago.
Speaker 9: And it's about 15 points if you compare that to 2019 Q1. So again, our ownable tools continue to help us make sure that we are driving that investment. So as we go forward, our continued focus is make sure that we invest in the business, that we are focused on the renovation of our business and marketing.
Speaker 9: driving a stronger quality with those event-based activities that really have the high ROIs.
Speaker 9: And wrap, I don't know if anything you wanted to comment on what you're seeing international promotions.
Speaker 10: It's not very different than what you described Carlos. I think.
Speaker 10: And what Andrea mentioned, you might see a bit of an increase. We'll see a bit of an increase in some market and promotional activities from the year to go. But nothing significant compared to not including our guidelines. Thanks, Brad.
Speaker 10: mentioned you might see a bit of an increase. We'll see a bit of an increase in some market and promotional activity throughout the year to go but nothing significant is compared to not including all our guidance. Thanks Brad. All right thanks guys.
Speaker 2: Thank you for the question one moment for our next. Any comments from the line of Andrew Lazar with the Barclays, please go ahead. Great. Thanks for morning.
Speaker 11: I think you outperformed expectations obviously in the first quarter on organic sales growth and maintained the full year outlook. I guess you know potentially implying slower go-forward trends maybe than originally planned for. Is there something you're seeing in the market that necessitates this adjustment?
Speaker 11: or is this more a function of conservatism? And I appreciate the FLIR outlook is already above your sort of long-term algorithm.
Speaker 4: Hi Andrew, and then maybe you want to answer that question. Sure. The money Andrew will give you two. Thanks for the question. So there is nothing that you have to expect. We are holding the guidance in thought line. And if I look at Vetsus Aquarabelliz market was expecting.
Speaker 4: We over deliver quite a lot in the International zone, which I think people still don't fully appreciate the impact of.
Speaker 4: emerging market growth in our portfolio and the food service portion of the international market in our portfolio as well. They've been performing extremely well as Miguel indicated and they continue to do so. Momentum is very solid. When it comes to the US, nothing changes in our internal expectations. We just think that this moment is good to be prudent given macroeconomic uncertainties about interest rates and our...
Speaker 2: J. P. Morgan, please proceed.
Speaker 11: Hi, there's been some anecdotal evidence that consumers are beginning to trade down in terms of where they're doing their grocery shopping, either going from premium channel to more mainstream or mainstream to discount. I'm curious if this is something you're starting to see as well, even if it's just on the margin. And if so, is it in any way?
Speaker 11: I guess, informing your decisions about product mix new products, you know, things like that. Maybe under there and kind of just can comment.
Speaker 4: Good morning. So, as you have seen last year, the channel migration has started. So, we don't see like a normal accelerated trend over that. We have seen consistently, now for several months, the dollar channel and the measurement to show that you're in a special opportunity robot and network interests. You're in a special opportunity robot and network interests.
Speaker 4: gaining ground consistently. And as this is not a new phenomenon, we have been prepared for that for a while. So I'll pass to Kalei if she can talk about the type of activities we are doing in those channels. But we don't see anything abnormal happening. or
Speaker 9: Yeah, well, what I would add in terms of color, I guess, first in retail, I mean, there have been some channels shifting, which we expected. And, you know, for the lower-income consumers, it means kind of moving to more value-focused retailers or into the dollar channel. And, as Andrew said, we anticipated this. Now, for higher-income consumers, that also means...
Speaker 9: you know, thinking about what are the places that it can go in instead of maybe the specialty retailers to more traditional grocery and club. And for us, what we're looking to do is actually making sure that we have the right solutions for those that are expected channels.
Speaker 9: So, whether that is more club-sized packaging in brands like Mac and Cheese and Jello and adding more dollar SKUs so that consumers who are stretched are actually able to stay within the category. And then, as we talked earlier, being…
Speaker 9: savvy about how we go about our professional activities in certain categories so that we can in fact be there with consumers with the right overall kind of meal solution. So if you think about what a you know grilled cheese sandwich can do with craft singles what craft my cheese can do in terms of families what else can my hum does can do.
Speaker 9: us being able to be there for those kind of meal solutions is part of our answer as well.
Speaker 9: You know the one other thing that would say is if you look at that same channel shift within food service We're also making sure that we are adjusted to for that. We are seeing how Our business continues to grow in in QSR and for us It's continued to grow that in a business and we are doing that and we're growing share of that business as well. So it's
Speaker 9: Making sure that consumers are shifting to from certain restaurants to QSR we are making sure we are there for them to to continue to drive our products and and continue to drive our growth.
Speaker 9: which is the way it resulted in Q1. So, thank you for the question, Ken.
Speaker 2: Thank you. We have one moment for our next question, please.
Speaker 2: Any comments from the line of Jason English with Goldman Sachs please proceed?
Speaker 6: Hey, good morning folks. Thanks for spot me in. Two quick questions. First, the gross March Outlook for the year. Great seat moving up. It implies that your gross Marcher for the year is going to look a lot like your first quarter, which would of course market end to what has been like a sequential build with every quarter moving.
Speaker 12: I guess the question is why would that be the case, especially given that cost inflation appears to be moderating?
Speaker 12: I guess the question is why would that be the case especially given that cost inflation appears to be moderating? Is that okay?
Speaker 12: So, Jason, could you repeat the question talking about this project that you have to grow matching throughout the year? Yeah, gross margin has been building sequentially, right? You have a chart in one of your slides showing every quarter moving higher. Your full year guidance implies that it kind of goes sideways, that you're going to finish the year at a margin rate very comparable to the first quarter. So my question is why...
Speaker 4: a little bit. Scythes, there is a component of mixing or portfolio as well given the type of product that sell more during Q1 and Q4 in comparison to what sells in December . But beyond that, no, because the costs are continuing to be, the price is, we put a lot of price in the middle of the quarter, so we have full reflection of that now in Q2.
Speaker 4: But remember that well and then we're going to start to map something from next year right but no the ground margin We'll gradually increase to all day here
Speaker 12: Okay, that's helpful. And it's expected, if that's your image, is because of how that makes which multiple system are needed? Yes, that's helpful. I appreciate that. And then free cash flow. Can you tell us what your outlook is for the full year in terms of conversion or level, however you want to communicate that? And I know you talked about working inventory down.
Speaker 4: So free cash flow, as we said last quarter, we expect this year to close in the 75% to 80% range, which is in line with our plan. We even talk about that in Cagney. And then we expect by 2025 to go up to 100%. This has to do maybe with the context of the path that we have done.urtle Senators
Speaker 4: this year and next year, which is close to 4% and then expect to wind down. Working capital, yes, and being once a drag last year and in Q1 was also a negative hit. We prioritize service to level recovery. The payback is obviously there. I want to compare this. We have a very robust plan, very robust.
Speaker 4: like Jane or the Littling Residence. But we have a very clear line of light path to bring it down throughout the year. So the expectation for inventory is to land a year at similar levels to where it was at the pre-pandemic level.
Speaker 4: But we have a very clear line of, right path to bring it down throughout the year. So the expectation for inventory is to land the year at similar levels to where it was at pre-pandemic level. That's the percentage of cogs.
Speaker 2: Got it. Thanks. Thanks. Like I saw pass it on. Thank you. One moment for our next question, please. Any calls from the line of John Baumgartner with Mizzou Hoh Securities. Please proceed.
Speaker 6: Good morning. Thanks for the question. I wanted to come back to promotion in the US, Carlos. There were a few categories that drove the bulk of US share loss in Q1, but I think those are also categories where your promotion levels really seem below branded competitors. So it is fair to isolate the share losses to reduce promo and lingering supply chain issues.
Speaker 9: or are there other factors in play outside of promo and supply chain? So this is John . I think that's a fair assessment, but I guess let me start with the fact that as we think about growing the business, you know, we have a very different approach to how we're going to do that.
Speaker 9: with a double digit investments in marketing, technology, and R&D. And as you said, there are a few kind of categories where we fell as slow down.
Speaker 9: And let me remind you too that we took pricing in the middle of the quarter as we were catching up to margins. So if you think about a couple of those categories, let me highlight a couple of them. One, you know, cream cheese, for example. We did see some supply chain challenges that we had in the quarter. Those are things that prevented us from really taking advantage of the Eastern time period.
Speaker 9: And we'll be, and in fact we are now in a position that will be better off as we go into the year to go.
Speaker 9: Another one I'll tell you is cold cuts in which we began the year with a low inventory situation in our business and again as we think about cold cuts by the end of the summer we should be in a much better place in terms of completely supplying the overall business. So that is the short term supply constraint, it's a well assessment of...
Speaker 9: of how we see the quarter as well. The one thing I would add too is that there are places where categories, we're simply not gonna be changing volume down. So if you think about bacon, it's a category that, you know, we are, that probably was about a point of headwinds, you know, when you look at the data and consumer data, but we're simply not gonna be changing volume that is not profitable.
Speaker 9: So that gives you a sense about how we're looking at business and what drove that first quarter.
Speaker 6: Okay, thanks Carlos. On the international side, your categories, I guess historically your categories have been pretty defensive in terms of demands or economic weakness and I'm curious you're doing a lot of good things, ramping distribution, launching new products, but as you transform the business with growth and food service to new sauces.
Speaker 6: the B partnership with ABI. How do you think about the marginal structure? Are these new outlets and products introducing greater volatility into the business or do they benefit you in that they reduce some of the impact of private label and price sensitivities in places like the UK and Europe ? How do you think about the net resilience you're building outside the US? Thank you.
Speaker 10: Okay, I'll do what I have for that one.
Speaker 10: Yeah, well happy to, I think we need to differentiate a bit what, how we're growing in emerging markets and in the developed markets across the international. I mean what you described probably applies a lot to the developed markets because as you know as we've been talking about across emerging markets we are growing.
Speaker 10: significantly and the go to market and the opportunity having an execution of this go to market and this is the continues to be on the developed market. I mean, it's a mix and we've been renovating our portfolio.
Speaker 10: significantly in all the especially mentioned Europe and then launching products that have been incremental not only sources on the easy news category like those are the two platforms that will be growing especially the process that they can a patient so so this has been the focus I mean
Speaker 10: right now is delivering the results that we expect and again providing the gains that we need and the resources from the core and the innovation growth that comes from those those introductions.
Speaker 4: And just to add, just to add, if you remember, again, international zone, you have developed as market-to-market markets, right? The market's 10% of our business, we expect you will double-visuals like you're having doing. There's a detailed link about extending the distribution.
Speaker 4: But it has to be done in a profitable way. And you might have noticed in the preparing marks that since we start to require from our emerging markets a certain level of minimum ROI or EDA, I think we're seeing a very healthy balance between top and bottom line. And we saw very significant growth margin expansion in emerging markets across the board.
Speaker 4: in the quarter and I think that we have expectations for that to continue to improve. So we feel very good that part of the investments that Miguel has said about $100,000, $150 million, which is going across marketing, R&D, technology and in some cases sales headcount. But in the case of the emerging markets, we are accelerating the growth of the market.
Speaker 4: So it's very good because that allows us to build their consumers to do the future growth of the public. Let me mention 1 thing that you said that you mentioned that entry new categories with innovation. You're right. I mean, we launched in UK. I'm past the sauce and. And in a couple of months, we achieved 7% share.
Speaker 4: And we continue growing. We just launched a vodka pasta sauce with Absolut that is being extremely successful in the market. But it's not only in Europe . I mean, if you look at the profile of innovation that we are having right now in the U.S., it's very different from the past. In the past, we had a lot of innovation, but really not incremental. It was very kind of realistic.
Speaker 4: I just think about what we've been launching, like notical, that we are going to be national during the summertime. It's basically 80% incremental to the category, or just spices that we just launched in the last few direct to consumer.
Speaker 4: which is spices, which is a huge market where we don't play today. Or things like that, that we are launching globally throughout the year, that is in hot sauces, that is a pretty growing category that we were not playing. Or even Kraft Mac and Cheese frozen that we are launching.
Speaker 4: That we are leader in craft making with craft mac and cheese. We have a very strong portfolio frozen, but we didn't have an option of mac and cheese frozen. And I can continue this list and tell you about home bake and increase from micro really, really incremental innovation that that will start to change the profile of innovation. In our company.
Speaker 2: Operator, we have time for one more question. Thank you one moment, please. And a question comes from Stephen Powers with a Deutsche Bank. Please go ahead.
Speaker 11: Oh, great. Thank you. I just wanted to follow up on the supply topic. It sounds like you've made good headway and have a good visibility to improve what's going forward, but I guess just framing that as they're way to think about what the supply challenges in the first quarter cost to. And then as you move forward with those supply supply
Speaker 11: bottlenecks resolved, do you resume a more normal growth trajectory in those categories with those issues behind you? Do you accelerate a catch up over the next couple of quarters?
Speaker 11: as you dig out of the hole? Or is it more prudent for us to think about a more gradual ramp of recovery, again, as those issues abate? Thank you.
Speaker 4: Andre, maybe Carlos then. OK, good morning Steven. Thanks for your question. Look, we always expect as some of the solutions, the problems get solved as Carlos indicated, we expect over time to be reviewing the entire retailer and that should come together with some.
Speaker 4: improvement in the top line performance. But again, it's all concentrated in our guidance here. Remember that our priority in the U.S. is to grow in the growth platforms. And the priority growth platforms have performed very well in the first quarter, particularly hybrid technological integration and hetero-
Speaker 4: But we expect curry boards like clean juice to improve their performance all the year as those problems get behind us. In other curry boards, like in clean meats, that color is also set. Not necessarily, we're going to be strong acceleration in growth because we're also trying to be proven to have the profitability there. So it's about having the right balance.
Speaker 13: But yes.
Speaker 9: Yes, I mean, you know, there's not much to add. What I would say is we continue to see improvements in service levels. So just to give you a. You know, kind of a framework last year, I think at this time of the year, we were kind of in the, in the mid eighties. We're now in the mid nineties, actually closer to the high levels of nineties.
Speaker 5: Thank you very much.
Speaker 4: Operator, that will be it for the Q&A session. I'd like to turn it over to Miguel for some closing comments. I just want to thank you for the time you spent with us and looking forward to sharing more information and more results with you. Thank you so much.
Thank you and with that we conclude today's conference call. Thank you for your participation. You may now disconnect.
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