Q2 2023 Kraft Heinz Co Earnings Call

August 2, 2023

Good day, and thank you for standing by and welcome to the Kraft Heinz Company's second quarter results. At this time all participants are in a listen only mode to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

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

And marine Megillah head of global Investor Relations.

Thank you and Hello, everyone.

Welcome to our Q&A session for our second quarter 2023 business update.

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

Including items related to our business plans and expectations.

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And investment and related timing and expected impacts.

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 crop Science company Dot Com under news and events for a discussion of our non-GAAP financial measures and reconciliation to the comparable GAAP financial measures.

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

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

Before opening the call for questions I would like to thank the entire Kraft Heinz.

Proving again that our strategy works generating top line growth fueled by the three pillars, while reinvesting margin gains into the business.

And while we did lose share in the quarter as price gaps have stayed wider for longer than we would have liked.

We are managing the business for the long term and still generated mid single digit top line growth within the range of what we expected.

As you May remember on the last earnings call.

Introduced for action plans to drive share.

We have seen those plans take hold and they have led to improving results.

Each month within the quarter building momentum into the second half of the year.

Continued execution of these action plans and the lapping of last year's pricing are expected to drive improving volume trends in the second half of 2023 and into 2024.

Our results give me continued confidence in our strategy and in our business and I'm pleased to reiterate our full year guidance.

With that I'll have.

Andre and Carlos joining me halfway he's on a well deserved vacation with his family.

Let's open the call for Q&A.

Thank you as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw your question. Please press star one again.

One moment for your first question.

Yeah.

Our first question comes from Andrew Lazar with Barclays. You May proceed.

Great. Thanks, so much good morning, everybody.

Good morning, Good morning, Andrew.

I was hoping to dig into the promotional environment, a little bit and some of the comments from your prepared remarks about branded competitors promoting at a higher level than and Kraft Heinz.

In your view are branded competitors, either over promoting or promoting and what you see as sort of an irrational way or is it more that that KFC has not been able to ramp up its own merchandising activity yet to the extent needed given some of the supply constraints and leading the pricing actions I guess in other words.

Would you still expect the industry promotional levels to settle and below 19 levels or is there some concern building internally.

Competitive behavior could return to previous levels or beyond and that pricing could actually go negative at some point I'm just trying to put some context around all of US. Thanks, so much.

Good morning, Andrew Thanks for the question I will ask Carlos to answer.

I believe it's related to the U S retail.

Good morning, Andrew.

Yes.

Just kind of look at it is that if you look at the industry as a whole.

Today promotional levels.

It's still below 2019, we are seeing is that branded competitors are actually closer to those levels.

And.

We are working on is how do we continue to make sure that we act with a third of protecting our margins and are building the virtuous cycle as we continue to improve.

Improve on marketing continues to improve our services our innovation.

And importantly that we stay focused on driving the revenue management needed in order for us to be rationale in terms of the effectiveness of our promotions.

If you look at our promotions. This year, we actually have been very effective and efficient we actually are generating.

Attractive rois and investments.

I think the numbers right now were up 50 points versus 2019.

And Thats true because.

The focus that we have on those high gel AI driven revenue management tools that we are applying to making sure that every promotional it does have that kind of threw out a wide reach.

Turn.

Now on top of that we're also making sure that we are working to maximize the opportunity on those promotions. So the quality of our merchandising, especially when you look at display to continue to improve and in fact, our share of displays continued see increasingly improvements over the first quarter. So I think altogether.

What I'll say is our focus continues to be deemed very much leveraging our revenue management tools continued to focus on driving the investments in terms of marketing innovation, which we'll know we'll make sure that improve or our view as we go into the second half of the year and onto 2024.

Great I'll pass it on thank you.

Thank you Andrew.

Thank you.

One moment for questions.

Our next question comes from Ken Goldman with Jpmorgan you May proceed.

Hi, Thanks.

You mentioned that the second half's organic sales growth rate will be more in line with the long term algo or not to put too fine a point on it just so we can model more accurately I was just curious does this mean you expect it to be within that 2% to 3% range Thats your long term algo or just getting somewhat closer to it.

Thank you Ken.

Please.

Good morning.

As we said in prepared remarks, we expect to gradually go towards the long term model.

It might happen that theyre going to reach there.

Between Q3, and Q4, but you should expect that revenue to be gravitating towards that.

Okay I'll follow up on that and then.

I wanted to ask a follow up about <unk>.

Capital allocation priorities paying down debts, I think number three on that list ahead of portfolio management, you highlighted that leverages, I guess more or less at your target does.

Debt Paydown does move down a notch and importance and I guess, what I'm getting at is there is there a scenario in which you might maybe start to buy back some stock again.

Yes.

Okay. So location policy now so as we said our priority has been to fund the business organically.

People have been doing that very consistently.

For us to maintain the dividend that we have which provide the value.

Yeah.

Is critical.

No I think we feel good about our.

Right.

That'd be great. It has in the past 15 months.

Monday as we've said before continues to be something that we actively look at that.

Maybe you guys have mentioned that multiple times.

These have been while we're doing that but there is no change at this point.

There is always take into consideration market dynamics in our capital structure, but we don't have anything of interest at this point.

Thank you.

One moment for questions.

Our next question comes from John Baumgartner with Mizuho you May proceed.

Good morning, Thanks for the question.

I wanted to stick with with North America, and the comments on promotions, but more so on delivery is there Carlos you highlighted the ROI, you're seeing and you touched on the quality promos a bit but the dig inside a bit more deeply versus history. How are you seeing the lift.

Sort of changing from quality promo programs that feature that display relative to the pre inflation are you seeing a greater role for price reductions going forward do this quality program still have the same degree of lift in terms of the influence of those drivers just trying to get a sense for as you lean into promo more in the back half of the programming does pricing need to be a larger.

Driver at the margin than you would've thought relative to feature and display a couple of quarters ago.

John Thanks for the question I'll say I think some of the parts were a little hard to understand but I think I got the gist of your question.

Related to the second half that we think about promotional level and we have said this in prior calls and as we think our guidance. There is a step up that will doing promotional levels as we go into the <unk>.

Half of the year in selected categories.

But always with a disciplined approach of positive returns.

But I would add too is that one of the things that we hope to do with our promotional investment to improve the effectiveness of those things, but that investment is to make sure. We love at entire portfolio and that we are thinking through how do we make sure we have the right product selection to the right audiences.

So for US when you look at our Barak you could see some when we combine the different kind of categories that we can bring together as we think about back to school in which we can bring in lunchables in our company. Some business together that idea of us being able to kind of go into the retail environment in actual lever the entire scale of our business allows us to be more.

Effective in terms of the returns of those promotions. So it's both looking at the two ROI through the AI management tools that we have as well as maximizing our presence in store leveraging our scale.

The last thing I'll say is as we think about going into the second half of the year. We're also seeing consumers behaving.

Wake in two different kind of camps, there are consumers, who are going to be looking for those.

More I would say larger packs at which they are going to look for the value by looking at the total size of the products that they are going to get in and why we are introducing more products in the <unk>.

Type of packages, whether that is in our Mac and cheese in our Lunchables and Youll see that that is focused on driving that particular type of behavior.

With consumer effectiveness.

Theres also going to be a number of programs specifically to making sure that we're keeping consumers. We're also focused on the cash flow within our categories, which is why we're also have been introducing more of the.

Smaller package more dollars more of the dollar type of products that allows us to maintain our consumers we think the category for longer so we're approaching that.

Two pronged <unk> at the same time always looking at making sure we have the right ROI in every investment that we make.

Okay I apologize for my connection there, but just just to clarify if we think about price promotions versus sort of non price. The quality of the feature that display have you seen any sort of changes in terms of how deep you may have to go on price reductions going forward or do you think that kind of quality promo youll still see attractive lift, but you don't really have to get deeper on pricing.

But what do you have sort of been out here.

What we have seen throughout the first three years is that we can have been affected lifts without having to go as deep.

The debt what it look like for us.

With this data.

So that's what we have been observing for yourselves and I think that's too relates to moving forward.

The other thing that Carlos mentioned that I think moving forward youre going to start youll see more and more.

The increasing importance of mix.

This is Linda.

Are you doing more promotions or leave it at these prices so think of a heated locomotive lease related actions.

Okay. Thanks for your time.

Thanks, Craig.

Thank you.

One moment for our next question.

Our next question comes from Bryan Spillane with Bank of America, You May proceed.

Hey, Thanks, operator, good morning, everyone.

Good morning, Hi, So I had.

I guess I had I had just two questions first one just a clarification.

I think we talked about margins in.

In the prepared remarks that fourth quarter margins will be higher than the third quarter and just wanted to clarify was that a comment on gross margin or EBITDA margin.

Okay.

Isn't that end up being both but it's driven by the gross margin.

Okay. Most of it is.

That seasonal factor because in Q4, we typically sell.

Investments are obviously climate margin.

It looks just seasonality aside from maybe under a nice Q2 is higher than Q3, because we ship a lot of grilling season, which has higher margins. We ship for seller and then in Q4 or do we have like Green G is gravy.

Other items like that that have been high margin desserts.

That's why it's just mix related.

Okay, and then second question and I guess, maybe this is related to what John Baumgartner was just asking but maybe just more simplistically.

Coming out of the first quarter, you talked to and this is we're talking about North American retail.

One of the issues or one of the drivers of share.

Share of losses was just price gaps right that competitors, whether it's private label or branded in certain categories hadn't followed your pricing. So I guess I have two questions. One is have price gaps narrowed or are your share gains that you've seen sequentially over the last couple of months happen without the price gaps closing and then.

When we think about your comments about the expectations for volume growth in 'twenty four.

Is that dependent also on kind of normalized price gaps.

So I guess, what I'm trying to understand is like can you drive volume without those.

Those price gaps closing because you really can't control what your competitors do.

Okay.

But there is a couple of things if we look vessels.

The bulk of it with the last two three months, we have seen the price gaps narrow the movie.

Favorably to us so getting closer so there is certain.

Traditional companies on that.

And also all the other actions that.

Okay.

Remarks, right. So we had still some pockets of challenges in service that is now getting behind us.

Remaining item is cold cuts that as I said, it's going to be recovered by the end of Q3 early Q4, we have utilization started to ramp up I.

I think that was to give you more color on that.

Yes, Brian , but I would add is that first of all on the comment on private label.

Private label shares trains actually have been flat.

Since you look at the.

Second half of 2022, even with increasing price gaps that we had after our pricing back in February .

So we have taken that pricing to protect our margins and some branded competitors have not follow but at the same time, we continue to stay diligent on the way we think about the business now.

Andrew just mentioned in terms of.

We think about going forward why is it that would be the moderation of our improvement I'll give you three reasons under what kind of a look at it as we go.

Into the second half of the year into 2024 in the U S retails.

Number one we're investing more in marketing for lunch more innovation and we are lapping the pricing actions as we go into second half of the year.

And just to unpack and one more level. If you think about the innovation that we are seeing right. Now we are actually building momentum as we go into the year.

We are following this kind of a two pronged strategy innovation first youre going to see US continue to launch more disruptive innovation platforms and debt that include things like North Carolina plant based offerings.

New Christopher the microwave, which delivers great taste and the convenience and the restaurant retail platform and you'll see that already with things like the IHOP coffee line.

The second part of the innovation is also how do we take our existing brands into new spaces.

Already we introduced a new frozen Mac and cheese.

We are expanding our deli Maxim Taco bell into more spaces within Mexican meals.

And as we speak we're also launching new Oscar Mayer Scrambler as we continue to expand on the <unk> platform.

What you see is comprehensive in terms of how we are approaching innovation in order to continue to shape the categories as we increased shelf space and quality displays as we go forward and that's already paying off and in fact.

Just to give you a factoid if you look at our Lunchables, we're creating a new Golden Lunchables as we go into our second half and we are seeing that in some of our top customers that increase it's about 40% our space within the shelf. So again, it's not only thinking through the kind of promotional event, but also what we're doing in terms of our.

Driving volume driving activities that are important as we go forward.

Okay.

Thank you.

One moment for our next question.

Our next question comes from Pamela Kaufman with Morgan Stanley You May proceed.

Hi, good morning.

Good morning.

In North America, you pointed to your organic sales growth of low consumption in certain parts of the portfolio like the grill platform elevation, alright, easy meal whats driving that gap.

Are you seeing a change in how retailers are managing inventory levels or shelf space for your brands.

And.

Let me, let me start with the thanks for the question, let me start with the second part of that bridge.

We have seen right now.

If you look at the second quarter and what we know today, we believe retail inventory is actually in pretty good shape.

On average retail inventory for us were flat across the North America business.

And where it did have been it was truly an isolated pockets in and earlier in the quarter. So that we actually saw that through the quarter to continue to improve.

And so there is no I don't see that as like ongoing situation as we go forward and that has been proven as we go through.

Through the quarter.

So and I'm sorry, the first part of your question then what's what.

Why was that.

Why were you ourselves below consumption across some of your platform.

Yes no.

Thank you.

I think if you look at our growth platforms, which continue to drive our priority and our strategy dose actually in consumption remained very strong.

Think about taste elevation growing 8% for the quarter EMEA was growing 6% in the quarter.

In those cases, the difference between organic and our consumption.

Typically in eastern meals.

There was a <unk>.

Inventory de load at the beginning part of the quarter that as I said earlier, we continue to improve as we go into as we go forward.

And I think for US is that remains our strategy remains the fact that the consumption continued to improve as we go through the quarter and the performance. We saw in those I think supports a continued focus on that strategy as we go into the second half of the year.

Okay. Thank you.

Thank you.

And then just a follow up question on your outlook for volumes improving in the back half.

You pointed to moderating pricing is one of the drivers, but in the second quarter pricing already moved past its peak.

Although volumes still Softbank why do you think that volumes will get better from here, considering the competitive environment and some of the macro headwinds you highlighted I'd like the student loan repayments resuming.

And I guess just related to that how much of a driver do you think that the innovation that you talked about can be for volumes.

Yes.

Okay.

Yes.

Yeah.

Our price our price in Q2.

It was closer to 11%.

The reason why we saw higher elasticity.

Higher volume decline as I said before it becomes the expanded price gaps now moving forward. This despite the gaps are not getting worse, if anything they're slightly getting better. So as you head into the second half as we continued to net price we still have.

<unk> passed that happened last year.

So that youre going to be lapping starting now in Q3.

And then had another one of the things that might take your policy here. So I have two rounds of price to fill that in.

It might have states alone.

So beyond the pricing side, there are other things like a Chihuahua action plans.

Help us to step off of this year and I forgot to actually I think Tom can speak about that.

I think I guess I would add to that too is that if you think about innovation is not just kind of the launching innovation, but what the innovation that allows you to actually performing market. So when I mentioned things like us being able to improve our presence and expanding our our shelving and things like lunchables because of the innovation.

And we'd love to have for example, we are going into new locations. So we're doing already announced yesterday. We are we're doing pilots on taking lunchables into the Prosection, we're launching innovation with its calls we are expanding our presence in bending all that actually helps us strengthen.

They're all kind of performance in stores.

Also are doing that.

If you think about.

Prior year a year ago.

This is actually going to be the first holiday season.

Going to go into the holidays with full service Philadelphia cream cheese, and Thats true for the last several years. So now we have an opportunity to actually truly kind of leveraged the power of our brand make sure we build a kind of our shelf display as we go into this one of the most important season for Philadelphia business.

And we also see into that two week coffee I mentioned earlier. The fact that we had a new line of with IHOP in terms of bringing coffee a new high up cost into the stores that actually allows us to also expand our coffee category into their stores and actually win additional spaces as we go into the second half of the year. So the innovation place.

Couple of roles at both attract consumers and shaper category to grow but it also help us expand our presence in order to increase the volume as well.

Well I didn't expect it to improve as a function of lapping prices the list here at <unk>.

Innovation ramping up.

Shelf resets in the fall I think it would be favorable to us that's the expectation.

Service level recovery, particularly in cold cuts.

Got it thank you.

Thank you.

One moment for questions.

Our next question comes from Cody Ross with UBS you May proceed.

Hi, Thank you for taking our questions just wanted to focus on gross margin and specifically your inflation outlook.

What's driving you to move your inflation outlook lower this year.

So commodities.

In general continue to come down.

As hedges roll off and our contracts get digested some of them are based on indexes. We have seen costs continue to move favorably.

Rich has been allowing us to expense the gross margin and by consequence of being allowing those structure their rate of investment behind the business, particularly in marketing R&D and technology.

Any particular.

So if any particular commodities.

Yeah.

That is declining.

Yes that you would call out that's driving that.

I don't think there is a particular one of your portfolio is so so larger so many commercial aspect of the business as a general movement of commodities coming down.

They just add to that.

Sure.

Tornado.

Pedro.

Crops and speaking other than that we're seeing generally pretty much moving favorably.

Understood and then in light of the declining commodities or your outlook for inflation do you think you took too much price. Given you said you took price ahead of competitors and they have not followed and then I'll pass it on.

I would say, let me answer that one.

I would I would do everything again.

We had very high inflation and we are leaders in the vast majority of categories, where we play.

And it's our role as leaders to try to compensate this price increases with.

These inflation with price increases.

I would do everything again I mean, we can always go back on price. If we think we have to when we have to but but we had to lead price increases.

So yes.

That would be my answer to you.

The only thing I'll say is.

Does it have to be very.

Systematic in terms of pricing to offset the inflation and thats, what we have done.

And it's not like ahead of inflation, we should look at our gross margin in Q2 is still slightly below 2021 levels.

And the other thing that is not worth mention that gross margin. We showed I think prepared remarks, our efficiency plan is trending very well.

We're basically ahead of the $500 million as we have said we will deliver.

Some other good news, let me build on that point.

From one brand.

I think that the only sustainable way to keep increasing our investments behind the brand and to grow.

Our volumes in shares for the future is by improving gross margin and investing back in marketing R&D and technology, which is exactly what we are doing because we've had.

Hi.

Very good gross margin this quarter, we could increase marketing this quarter by 23% with increased R&D by 10%, we could increase our investments in technology.

And that's in process.

Possible because he's the one side.

Yes, we had price decreases but on the other side because we are every months and delivering more and more efficiencies in supply we're excited with that pipe as well.

And.

That's right.

Notable difference as well.

Because we have been based on the opting to use those resources to put back in the long term and make them. The technology. They have upped that you'll be adding more promotions.

So thats that.

That makes sense because it would be I think promotions for low return when I'm thinking about the long term here I hope people multiple victims are always at a given that these things are very different.

And that'll wrap it up for today's Q&A session. Thank you all for your questions I will turn it over to legal.

Well.

Just kind of wrap up the call for us.

Alright.

Thank you all for the time and four four detention and the patience with US. So thank you so much and hope to talk to you and see you very soon.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

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Q2 2023 Kraft Heinz Co Earnings Call

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