Q4 2024 Kraft Heinz Co Earnings Call - Q&A
Good morning and welcome to the Kraft Times Company Q4 2024 earnings.
Speaker Change: At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded.
It is now my pleasure to introduce Anne-Marie Magella. Thank you, Anne. You may begin.
Anne-Marie Magella: Thank you and hello everyone. 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, strategy, efforts and investments, and related timing and expected impacts.
Anne-Marie Magella: These statements are based on how we see things today, and actual results may differ materially due to risk and uncertainties.
Anne-Marie Magella: 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.
Anne-Marie Magella: Additionally, we may refer to non-GAAP financial measures, which exclude certain items from our financial results reported in accordance with GAAP.
Anne-Marie Magella: Please refer to today's earnings release and the non-GAAP information available on our website at ir.brackheinzcompanies.com under News and Events for a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP financial measures.
Anne-Marie Magella: I will now hand it over to our Chief Executive Officer, Carlos Abrams-Rivera, for opening comments. Carlos, over to you. Well, thank you, Marie, and thanks, everyone, for joining us today.
Carlos Abrams-Rivera: I want to thank the crop hunting team for their hard work and dedication this past year. You know, even though it was a tough year.
Carlos Abrams-Rivera: We stay focused on building for the future and improving profit margins while boosting the free cash flow.
Carlos Abrams-Rivera: We do know that the economic landscape is rough, but we are proud that we returned $2.7 billion to our stockholders through shared buybacks and dividends.
which provide the highest yield in the food industry.
Carlos Abrams-Rivera: Looking ahead to 2025 we are seeing key successes that aren't yet showing up in our financials.
Carlos Abrams-Rivera: And we're expected to see improving top line throughout the year while preserving profitability.
Carlos Abrams-Rivera: Frankly I'm proud of the progress the teams are driving and confident that our strategy will yield long-term returns for our shareholders.
Carlos Abrams-Rivera: Now, with that, today I have Andre joining me, so let's open for the call for the Q&A.
Great, thank you.
Speaker Change: We'll be starting the Q&A session. If you'd like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys.
Speaker Change: And our first question comes from Andrew Lazar with Barclays. Please proceed with your question.
Speaker Change: Great, thank you so much. Carlos, you mentioned a number of times in the preparator marks the plan to be disciplined in how you approach reinvestment this year.
Speaker Change: specifically calling out your expectation for some gross margin expansion and flat price in 2025, despite the stated plan to invest in price in some key areas.
Speaker Change: I guess what I'm hearing most from investors this morning is that they're really wondering if this outlook provides enough room to do what's needed this year to get the key brands back into volume growth.
Speaker Change: So I guess my question is, sort of what gives you the confidence that this plan is accounting for, you know, an adequate level of investment given sort of current market share trends? Thanks so much.
Thanks, Andrew.
Speaker Change: I think, you know, first of all, I guess, let me put it into context of the margin expansion. You know, if you think about 2024, we increased our margin by 100 bapes.
Speaker Change: When you look at it, you know, the way we're seeing 2025, it's somewhere between flat to 20 beats. So, while yes, it's an expansion, it certainly is much reduced than we have had in the past.
Speaker Change: And as I think about now our plan and what gives me confidence, let me just highlight a couple of things.
Speaker Change: First, if you think about our growth pillars, we actually have a head start going into this year. And let me break it down in each of the growth pillars. In away from home, 75% of new customer wins are already locked in.
Speaker Change: That's about 40% of a year-over-year incremental growth in our away-from-home business.
Speaker Change: Now, in emerging markets, we are building on the 17 percent distribution increase with new 40,000 additional points planned in 2025 that we have already mapped out and making sure that our teams are clear on where they're going to be able to secure those.
Speaker Change: And then frankly, in North America, retail and the rest of the business.
Speaker Change: What you see is that 75% of the 2025 innovation pipeline is already locked in.
Speaker Change: And on top of that, we also are leveraging our brand growth system that we have proven through the pilot that we did in 2024. So in each of our pillars, we have things going on already in 2025 that is about us continuing versus completely something new.
Speaker Change: And at the same time, and you mentioned this in your question, we are investing in certain places. We are investing in price. We are investing in product, and we are investing in marketing.
We're making sure we're prioritizing those brands.
Speaker Change: where we know that we can benefit from having the brand growth system insights.
Speaker Change: We are investing in technology-less solutions that are actually helping us drive the efficiencies that lead to improved margins.
Speaker Change: things that we have built in 2024 that now we can still see reaping benefits in 2025, along with investments specifically in price, product, and marketing.
Speaker Change: I'll just add to that. Good morning, Andrew. So, I'll add that.
Carlos Abrams-Rivera: When you think about our top line improvement, as Carlos said, it does not only come from price. It comes also from lapping.
Higher than inflation.
Speaker Change: and we are going to price the inflation linkage to commodity categories, coffee being one example, like we have done historically. So there is some price embedded into the plan in commodities and emerging markets.
Speaker Change: So the combination of efficiencies ahead of inflation, price in emerging markets and commodities give us some room to be investing more in price or trade in the places where it makes the most sense.
Great. Thanks so much. Appreciate the call.
Speaker Change: Thank you. Our next question comes from Peter Galbo with Bank of America. Please proceed with your question.
Speaker Change: You know within the within the organic sales guide it's for 25, you know Andre how are you thinking about the growth rates?
for each accelerate, protect, and balance.
Carlos Abrams-Rivera: within that Organic Sales Guidance. And then the Part B to that question, you know, Carlos, I think a year ago, you kind of gave us...
Speaker Change: market growth rates for each of those, you know, accelerate, protect and balance, how you see, you know, the market growth for 25 comparing to those targets you gave us a year ago. So thanks for the call on both of those.
Okay, I can start. Good morning.
So I think about the pillars of growth.
Speaker Change: First, emerging markets. We will see gradual improvement, building from Q4 in all the quarters. And we do expect to exit 2025 at double-digit growth.
In a way from home.
We do expect some
Speaker Change: A slight improvement in Q1 to Q4, but then building from the base gradually throughout the rest of the year and probably exiting around the mid-single-digit territory, so still below ALGO, but a good improvement versus 2024.
and he started Accelerate Platforms in the U.S.
Speaker Change: We do expect an elongated recovery, as I have said before, and most of the U.S. improvement in trends in retail comes from accelerates.
So that's that's where we are investing most of
Speaker Change: The price, that's where we are investing a lot of our product enhancements.
Speaker Change: So that's where we're going to see a sharper improvement again throughout the year. Not as much in Q1 for the reasons already mentioned before.
Speaker Change: I think investments get more concentrated from Easter, and also there is the Easter effect between Q1 and Q2. But at the end of the year, you should see Accelerator being the one driving most of the improvement in the US.
Speaker Change: I think what I would add is I think we all can agree that you know tactic wins battle but strategies wins wars and and our strategy hasn't changed.
Speaker Change: We have not only continued to drive resources and prioritizing our accelerated platforms, but also making sure that a year later we continue to live under the rules of each of those particular categories. So I feel great about the fact that
Speaker Change: We see kind of how our balance portfolio continues to live into the role of making sure they're contributing with the right margins. At the same time, making sure that they are bringing renovation and innovation into the categories to make sure they're relevant with consumers.
Speaker Change: But, again, our strategies haven't changed in any one year. It's not going to make us change that. I think that we, as we stand here, I'll tell you, I feel even more confident that we have this right strategy for us to deliver our long-term algorithms over the long term.
Thank you. Thank you.
Speaker Change: And our next question comes from John Baumgartner, Missouho Securities. Please proceed with your question.
Good morning. Thanks for the question.
I want to ask you a question.
Speaker Change: Good morning. I wanted to ask about the marketplace activities in the U.S. and the market share softness. As you've reduced the unprofitable trade, which is net positive for margins, are you getting the sense that maybe your consumers have become a bit more accustomed or trained to buy on deal, a bit more for your...
Speaker Change: or you're reinvesting elsewhere, whether it's in marketing or display, the lifts on that are just sort of insufficient to counter the volume drag. I'm just curious if maybe making these changes to promo is a bit more painful up front than you had anticipated with the elasticity to the consumer.
There is a
Speaker Change: As we said throughout last year, I think not all promotions are working the same as they used to. We do believe that base volume has also a significant implication on the size of lift that we observe.
Speaker Change: So, base volume is an area that you're paying too much attention to, especially, again, a lot of the product enhancements should help that base, which should give us a stronger starting point for the lifts to come up.
Speaker Change: There are places where we are contemplating as well base price changes instead of simply a promotion so there is a discussion some category to make it more sense to one versus the other and in on promotions Again, we have seen
Speaker Change: you're going to see some of that reflected as we head into next year.
Speaker Change: You know, one of the things that we continue to see is consumers increasing the number of locations in which they buy their food. So we are seeing...
Speaker Change: you know smaller size of baskets per trip but increasing the number of trips. So for us it's also important not just to make sure that we have the right price but that we also have right distribution in different channels in the U.S.
Speaker Change: where the consumers are shopping at the right price point for us to make sure that we are attracting the purchases for consumers in the moment they need it.
Thank you. And our next question comes from Ken Goldman.
with J.P. Morgan. Please proceed.
Speaker Change: Hi, I wanted to dig in a little bit on the increase in your tax rate, if I could, into 25. You know, we've heard from a number of multinational food companies and beverage companies in the last couple of weeks.
Speaker Change: I don't think any of them have really talked about quite the increase in tax.
Speaker Change: that you're about to experience. I didn't know if there's anything unique in how you had previously considered tax in some of these other countries that we should consider, or if there's anything you know about that's, you know, slightly different in how you approach
Speaker Change: the way you think about tax rate and and and so forth with the understanding that of course your tax Your cash tax rate isn't going up quite as much So just wanted to get a little bit of color there Just it just seems a little bit more unique to a craft than what we might have expected Given the size of the the announcement. Thank you
Good morning. Look, I think companies have different...
Speaker Change: strategies when it comes to taxes so it's equal for me to comment on what others have. We did have a more competitive tax rate in the P&L compared to other peers, you can see that very clearly.
Speaker Change: We had to record in December, in Q4, a $2.4 billion tax benefit in the P&L, in that income, this quarter. And that's linked to a transfer we did in a certain business operation.
Speaker Change: and that was part of the efforts to reduce the gas impact.
Speaker Change: of several countries enacting the Global Minimum Tax Regulation. So we did have this relevant benefit in the P&L this year, but as a consequence, the tax rate in the P&L will have a 500 pips increase starting 2025. On the flip side,
$120 million
Speaker Change: cashed gains per year for the next 20 years, which makes the impact in our cash tax rate, which ultimately is the one that I'm most interested at, being about 200 to 300 bps.
Speaker Change: Thank you. And our next question comes from Leah Jordan with Goldman Sachs. Please receive us your question.
Leah Jordan: Thank you. Good morning. I wanted to ask about Lunchables, just seeing if you could provide an update on how you see the recovery.
Speaker Change: in that business. I know you had a supplier issue in the fourth quarter. It seemed like it was gonna be resolved.
Speaker Change: meeting price adjustments or is it more of a step up in innovation as you're planning and then just any color on the competition you're seeing in the category from private label and smaller brands.
Thank you for the question.
Speaker Change: First, I would say, yes, that the supplier ingredient issue that we face in Q4
Speaker Change: still lingers through Q1. We will have that. We will exit Q1 in a much better location in terms of service. So I think that you still see as we see the data in January, but again, as we go through the quarter, that will improve significantly.
Speaker Change: Now, in terms of the overall category, what I'll say is, you know, our focus has been how do we continue to invest in the business that we believe can be a great source of growth for us as a company.
Speaker Change: And I'm proud of the fact that the team have been looking at
Speaker Change: Using a brand growth system, looking at the places that actually can solve different pain points for consumers.
Speaker Change: So, you'll see as we go into the rest of the first half, a product that is much improved.
Speaker Change: with better quality, better ingredients and us continue to bring different innovation and marketing to our launchable business.
Speaker Change: So, I think what you see right now, don't think of that as a sign of how the year is going to be, but you'll see that still it's a lingering effect of Q4. If you look at the sellout, December and January, for example, for lunchables.
Speaker Change: There are four SKUs in particular that are linked to the upstream supplier issue that we mentioned that are declining more than twice the average rate of launchables as a whole. And those are dragging the sell-out down quite a lot.
Speaker Change: in these last two months. We do expect that to continue to happen into February. We think the service issue will be fully resolved during the month of February and then we're going to see gradual recovery on the sellout from that point onwards.
Thanks for the question.
Speaker Change: Thank you. And our next question comes from Tom Palmer with Citi. Please proceed with your question.
Speaker Change: Good morning, thanks for the question. I wanted to just ask on
Speaker Change: This is a little bit of a follow-up, but on the organic sales growth and inflection as the year progresses, I think that the comment in the prepared remarks was sequential improvement.
Speaker Change: It sounds like the second quarter has maybe some unusual timing benefits with the Easter shift and then also left lapping the plant downtime from a year ago. So just trying to understand, are we looking for kind of an underlying sales trends, this bigger inflection?
Speaker Change: starting in the third quarter to overcome that? And if so, what are the key drivers of that inflection? Thank you.
Speaker Change: So, good morning. Thanks for the question. So, yes, in the second quarter, you should see a relevant improvement on the trends.
Speaker Change: But only because of Easter being about a hundred peeps shift from key one But also we start to lap the factory closure temporary closure. We had in the quarter We start to lap that lunchables Report that was issued
early in April.
price investments.
Speaker Change: start more pronounced as we head into Easter and beyond, and as we continue to launch some product enhancements, Lunchables being one of them.
Thank you.
And our next question comes from Michael Livery.
with Piper Sandler. Please proceed with your question.
Speaker Change: Thank you. Good morning. I wanted to ask a similar question to Andrew's but with the advertising as opposed to promotional spending.
Speaker Change: You pointed out the 4.5% level, but that doesn't include market research, and even for peers, excluding that, the advertising level averages closer to 5 or more.
Speaker Change: is your marketing spending enough and I know it's come up but you know with just competitive and consumer dynamics is that at the right level that there need to be some upside to that figure as well.
I guess I will start by saying.
And thank you for the question.
Speaker Change: not all brands, not all countries are created equal. So I think one of the things you see is that
Speaker Change: We're also making sure that some of the analysis that we have done in the past years is that we have kind of the right levels of marketing in different categories and in different countries based of our needs and what it means to be successful.
Speaker Change: The second thing that you should also know is that, we talked about earlier, we have especially designated categories to accelerate, protect, and balance.
Speaker Change: Our marketing dollars are going to continue to follow that. That is part of the strategy of us making sure we invest in those businesses that we believe as a community.
have a bigger tailwind as we go forward.
Speaker Change: So, again, in a different level of spending by different type of strategy.
Speaker Change: And the last thing I will say is, one of our focus has been over the last two years
Speaker Change: doing two things. First, making sure that we improve the return of every dollar that we invest in marketing. So we have the analytical tools to allow us to do that.
Speaker Change: There's actually a dramatic shift in terms of how much consumers will see in terms of our marketing as we are shifting away from Again places of non working dollars being more efficient with those do the dollars so that actually can be beneficial to the brands
Speaker Change: And just to compliment, as you have said before quite a few times, we do believe
Carlos Abrams-Rivera: Our sufficiency levels are around 5% and we're going to gradually get there, but to Carlos' point
Speaker Change: You'll see in 2025, we're going to release 60 to 80 million dollars more marketing, like brand media marketing, which is quite a lot. It's more than a 10% increase in our overall media investment.
Speaker Change: be it about media levers or across certain brands. So even though the P&L will be flat on the percentage of revenue on a year-over-year basis, you'll see a lot more marketing pressure, which is important.
Okay, thanks so much.
Thank you.
Speaker Change: And our next question comes from Chris Carey with Wells Fargo Securities. Please proceed with your question.
Hi everyone.
Oh
I wanted to ask
Speaker Change: I think one of the things I personally struggle with is that
The categories in which you compete are actually running.
more or less in line with historical growth rates.
Speaker Change: your business is just underperforming those categories in which you compete. And certainly there are...
Speaker Change: specific categories that have had some issues and you'll be lapping those and surely that will be helpful but it does feel like there's a bit broader of a dynamic underway and I think that's where some of these questions are coming from around
I guess if you could diagnose...
what you think.
Speaker Change: is driving some of this underperformance for all of the categories on a broader level, whether that's execution, whether that's affordability.
Speaker Change: And really what I'm getting at, I suppose, is say we're sitting here in a few months and we're not seeing the pickup. What is the correct action?
Speaker Change: to take? Is it incremental pricing, incremental advertising, a rethink of execution? So I realize that's a big question, but I'd love your observations or thoughts on this topic. Thank you very much.
Thank you. Appreciate the question.
Speaker Change: I guess let me just start by putting things in perspective a little bit in terms of the way I see it. You know, our portfolio is about over 200 brands and over 40 countries.
Speaker Change: If you think about today where we see our challenges, they are concentrating in four brands and only in the U.S. retail business.
Speaker Change: and pricing in order to drive top-line improvements in particularly those areas that again there are a subset of the large brands that we have and a number of countries who will participate.
Speaker Change: At the same time, we're doing that, we're also being conscious of making sure we manage through our margins so that we don't go backwards in our gross margins.
Speaker Change: And in terms of the investment we're making, you know, I think that it's easy for us to just point to the things that we actually have proven already. Let me give you an example of Capri Sun. We've actually improved five points in dollar sales in the fourth quarter.
Speaker Change: And that came about us renovating the product to make sure we win on taste. Innovating, we bring in new multi-cell packaging, single-cell bottles, bringing value to consumer, expanding into convenience channel.
Speaker Change: So, for us, it is that we already have kind of a blueprint in which we have applied our brand ecosystem to the critical brands in order to see results that we continue to see experience as we go forward.
So,
Speaker Change: So I know that sometimes it can seem like a lot, but again, for us, it's specific, it's a few brands, it's in the U.S. retail, and it's places in which we are attacking, leveraging kind of the proven methodology that we have now developed through a brand growth system in order to drive top line growth. The only thing I'll add is...
Look, there is not a...
Speaker Change: One answer, like there's not a silver bullet. I think given the different categories that you play and different dynamics, the approach differs a lot. So there are places where, yes, it's affordability. And that's where we are going to invest the price the most, to ensure that the price gaps are established.
Speaker Change: There are places which is about continuing to invest in the products to maintain or increase product superiority and that's where we see investment in places like Capri Sun Lunchables and there are a few others.
So, you will see next week in Cagney.
Speaker Change: I think that they are a good answer for what you're seeking for, because there is a lot of time in that presentation that we're going to be talking about our path to growth, given a specific themes across the different platforms. So, I think I think you're going to see what you're asking in more detail over there.
Thanks guys.
Thanks. Operator, we have time for one more question.
Speaker Change: Okay, great. And our last question comes from Alexia Howard with Bernstein.
Please proceed with your question
Good morning, everyone.
Morning. Morning.
okay
Speaker Change: Can I hit on the GLP-1 topic? We've seen other protein focused companies in North America already announcing plans to lean into the rising uptake of these GLP-1 injectable weight loss drugs.
Speaker Change: First of all, do you believe Kraft Heinz is seeing any impact from them, and what opportunities are there to meet the unmet needs of these patients over time? Thank you.
Thank you, Alexia.
Speaker Change: I guess let me start with the last part of your questions and no we have not seen any meaningful impact from GLP-1 in the business.
Speaker Change: Now, we do know that consumers who do use GLP-1s typically, what they're looking for is more protein and more hydration alternatives.
Speaker Change: So, you know, here at CraftVines, we're making sure we continue to provide those choices for every consumer. And we've seen that, whether that is...
Speaker Change: you know, making sure, you know, in our portfolio that we highlight in products like Oscar Mayer, Lunchables, P3, even our quesadillas and deli macs and Heinz beans, the amount of protein that actually can deliver for consumer in a tasty and accessible and affordable way.
And then at the same time...
Speaker Change: We're also making sure that we continue to drive the importance of us.
Speaker Change: elevating the portfolio of any product that has protein. So the fact that we have this taste elevation products platform within our...
Speaker Change: company allows us to make sure that no matter what protein people are using at home that we can actually elevate it and make sure that it delivers a great taste and looking for.
Speaker Change: So, I think you'll see us continue to emphasize this in the process as we go forward, because for us it's important that we provide choices for every consumer and every lifestyle.
Thank you, Alexia.
Speaker Change: Thank you everyone for your questions today. We look forward to seeing you all at Cagney next week. See you next week. Thank you.
Speaker Change: Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.