Kraft Heinz Q3 2023 Prepared Remarks Earnings Call Transcript

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November 1, 2023

There are 4 speakers on the call.

Operator

Hello. This is Ann Marie Meguela, Head of Global Investor Relations at The Kraft Heinz Company. I'd like to welcome you to our Q3 2023 business update. During the following remarks, we will make forward looking statements regarding our expectations for the future, including related to our business plans and expectations, strategy, efforts and investments 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.

Operator

Please see the cautionary statements and risk factors contained in today's earnings release, which accompanies these remarks, as well as our most recent 10 ks, 10 Q and 8 ks filings for more information regarding these risks and uncertainties. Additionally, We will 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. Kraftheinscompany dotcom, under News and Events for a discussion of our non GAAP financial measures and reconciliations to the comparable GAAP financial measures. Today, our Chief Executive Officer and Board Chair, Miguel Patricio and President of Kraft Heinz, Carlos Abrams Rivera will provide an update on our overall business performance and Andre Matial, our Global Chief Financial Officer, We'll provide a financial review of the Q3 and will discuss our 2023 outlook.

Operator

We have also scheduled a separate live question and answer session with analysts. You can access our earnings release, supplemental materials and audio of our question and answer session at ir. Kraftheinscompany.com. A replay of the question and answer session will be available following the event through the same website. With that, I will turn it over to Miguel.

Speaker 1

Thank you, Ann Marie, and thanks you all for joining us today. I'm so proud of what the teams have accomplished. In the Q3, we again generated accelerated profitable growth. All three of our growth pillars, Food service, emerging markets and our U. S.

Speaker 1

Retail growth platforms contributed to the top line growth. At the same time, we improved our productivity across our value chain. Our share and volume trends Continue to improve versus the Q2 of 2023 as we execute our action plans and reinvest and lock the efficiencies back into the business across marketing, R and D and technology. Importantly, our taste elevation And EZ Meals platforms in the U. S.

Speaker 1

Are not just seeing an improvement in market share, we are now taking share. And we continue to strengthen our balance sheet, hitting our target net leverage of approximately 3 times, while at the same time increasing investments to support the long term growth of the business. Of course, we still have much to do and some headwinds to face, but our strategy is working. Our balance sheet is solid, and we believe we are positioned to return more value to our stakeholders. I will now turn it over to Carlos, our newly appointed President of Kraft Heinz, to run through our quarterly results in more

Speaker 2

detail. Thank you, Miguel. In the Q3, we grew top line and improved profitability. Organic net sales increased 1.7 percent with constant currency adjusted EBITDA and adjusted EPS growing at a much faster pace, 12.9 and 14.3 respectively. The increase in profitability was driven primarily by gross profit margin expansion, which was a result of unlocking efficiencies across our value chain and pricing to inflation.

Speaker 2

And in line with our strategy, we are reinvesting unlock efficiencies back into the business to grow organically. We are increasing year to date investments in SG and A across marketing, R and D and Technology and CapEx by approximately $385,000,000 versus last year. As Miguel mentioned, We are continuing to fuel organic sales through growth across all three pillars. In the 3rd quarter, Foodservice sales grew approximately 9%. Emerging Markets organic net sales grew 10% and now grow platforms in the U.

Speaker 2

S. Retail organic net sales grew 3%. Our foodservice business gained market share as our consolidated 9% sales growth outpaced the industry both in North America and International. For the full year, we expect foodservice to grow low to mid double digits versus the prior year. As you may recall, our foodservice growth strategy consists of 3 levers.

Speaker 2

1st, we drive sales through our CHF led model, leveraging our dedicated CHF networks to create tailor made menu solutions for our customers. 2nd, we are prioritizing higher margin spaces by expanding across attractive channels like non commercial with higher growth and higher margin. And lastly, using Foodservice as a flywheel for innovation allows us to better solutions for our customers and launch insight driven innovation. Now, let's turn to emerging markets. We continue to deliver double digit organic net sales growth in emerging markets.

Speaker 2

In the Q3, organic net sales grew 10%, outpacing power internationally. We generated high double digital guided net sales growth in 2 out of 3 of our business units, LatAm and East. However, we experienced temporary softness in Asia. We expect to return to normal level of growth in Asia in 4th quarter and we expect to continue to deliver double digit growth in emerging markets. We plan to continue to drive growth in emerging markets through our differentiated strategy consisting of 3 levers.

Speaker 2

First is data driven, repeatable go to market model to drive distribution, designed to capture opportunities with the right product in the right market. By the end of 2023, we expect to have 90% of our emerging markets go to market model designed and ready for implementation. 2nd, it's through the power of our Heinz brand, which extends well beyond ketchup. Local jewels complement Heinz across several of our international market and third, our foodservice business, which we are underpenetrated with less than 5% share in global market of approximately $1,400,000,000 And finally, let's look at the U. S.

Speaker 2

Retail growth platforms in our North America zone. In the Q3, our North America organic net sales declined 0.1% versus prior year, while our growth platforms in the U. S. Grew 3.3%. Total North America results were primarily impacted by declining volumes in our meat business.

Speaker 2

As a reminder, the meat category is a part of our energized platform and we are focused on rebuilding profitability, acting rationally and protecting our adjusted EBITDA dollars. This approach continues to work as we generated higher adjusted EBITDA on lower guided net sales in meat in the 3rd quarter. In the 3rd quarter, The meat category had a negative 1.2 percentage point impact on total North America organic net sales growth. Within U. S.

Speaker 2

Retail growth platforms, Taste Elevation organic net sales grew an impressive 7% And Easy Meals organic net sales grew 5% in Q3. Ketchup, mayonnaise and Mexican sauces in taste elevation And frozen potatoes in easy meals led the year over year growth. Now turning to market share. As Miguel had previously mentioned, our actions plans are working. They are driving sequential improvement in both share and volume trends.

Speaker 2

As a reminder, these plans consist of executing joint business plans with key customers to drive shelf space and quality merchandising with a 1.5 percentage point year to date improvement in U. S. Share on shelf index versus prior year, Increasing marketing investment 25% versus prior year with a focus on growth platforms, Ramping up innovation throughout the year, supported by an increase of 8% versus prior year in R and D spend and solving remaining isolated supply constraints. This is behind us in most categories with a case fill rate in the high 90s at the end of Q3. As you can see, these investments are paying off.

Speaker 2

Looking at our U. S. Dollar share, we have recovered from the low levels experienced earlier this year. As you recall, we faced expected headwinds after pricing 75% of our portfolio and the reduction of SNAP benefits earlier this year. We have planned for the activity to return to more normal levels and that's what we have seen.

Speaker 2

In July, At a point when volume losses in cold cuts were at the highest, we hit the lowest share levels of the year. Since then, we have improved volume as year over year price gaps have narrowed. In Taste Elevation and Easy Meals, which are represented by the light blue line, We have steadily improved and are now gaining market share from branded players. If you recall from last quarter, our share loss was concentrated in 3 categories: cream cheese, cold cuts and kids single serve beverage. Across cream cheese and cold cuts, we have seen recovering share, particularly in the month of September.

Speaker 2

In cream cheese, Offstream packaging constraints in the first half of last year impacted our ability to promote in key windows and as a result, We lost display and considerable share to private label. We started recovering share in July as we work with key retailers to rebuild display. Now October month to date, we are growing approximately 50 basis points of share versus prior year in cream cheese. In cold cuts, we are investing to hit the right price points, which is helping to drive an improvement in our share performance. Additionally, we plan to continue to focus on improving service in our value portfolio where case fill rates are still in the low 80s.

Speaker 2

We are expecting improvement by the end of the year. In kids single serve beverage, our share continues to be pressured primarily driven by the reduction in the SNAP benefits as well as lapping competitive out of stock in the prior year. We have improvement plans in place, which include an increasing advertising support as well as new consumer promotions and displays activations. As previously mentioned, to support our action plans and to continue building for the future, We are investing in SG and A across marketing, R and D and technology. In the Q3, we increased our spend in marketing by 25%, R and D by 8% and technology by approximately 24% versus the Q3 in 2022.

Speaker 2

In the Q3, we increased marketing spend by 25% year over year. By leveraging the power of iconic brands like Heinz, We continue to generate best in class marketing activations. We are embracing a holistic and sustainable approach to marketing, Inserting ourselves into culture. For example, our Global Heinz creative approach is multi dimensional. It's currently live in more than 16 countries, including the U.

Speaker 2

K, Egypt and China with a multi category approach across more than just ketchup and also in categories such as beans, soups and mayonnaise. And it's working. At the 2023 Cannes Lions International Festival of Creativity, Heinz was the most awarded food brand and the 4th most awarded brand overall. At the same time, we are moving at the speed of culture. After the ketchup and seemingly ranch sauce combination went viral, in under 24 hours, our teams jumped on that trend.

Speaker 2

Ketchup and similarly ranch became an overnight sensation, sweeping the news online, even spreading international with consumer clamoring to get their hands on the product. We were even able to get from idea to shelf as a limited release with a national customer in less than 3 weeks. This launch demonstrates our powerful agility and how our teams are using agile at scale to move at the speed of culture. Turning to R and D. We continue to build our innovation pipeline enabled by our agile innovation engine.

Speaker 2

First, we are utilizing intellectual patent protected technology to create disruptive platforms with our new grilled cheeses, the first product of many expected to come out of our exclusive 360 crisp platform. 2nd, We are expanding into new aisles across multiple location and host foods through innovation launches such as frozen Kraft Mac and Cheese and our Heinz Culinary Tomatoes line in the U. K. 3rd, we are leveraging our iconic brands to meet evolving consumer trends such as wellness, snacking and plant based to competing priority growth spaces. And lastly, we are adapting to local taste and creating unique flavor combinations across the world, particularly international, where our goal is to become the number one in taste television.

Speaker 2

And in fact, this year, we are honored to announce that both Heinz Remix and 360 Crisp were named to Times Magazine's Best Inventions of 2023 list. For over 2 decades, Time has developed an annual list dedicated to the year's top inventions, which are evaluated based on criteria including originality and ambition and impact. Kraft Heinz is the only large food company to make the 2023 list and we are the only company to have more than one invention featured the food and drink category. Finally, through agile scale and strategic partnerships, We are delivering solutions across our value chain to accelerate growth and help drive efficiencies. As part of Agile Scale, our teams are building digital first solutions to power Kraft Heinz to get to better insights faster.

Speaker 2

These digital solutions are helping to contribute to our annual growth efficiency target, which have accelerated to $500,000,000 for 2023. Our investments in capabilities and technology are helping us drive transformation across several areas of the business. Importantly, we're not the only ones benefiting from these improvements. Our customers and suppliers are as well. Our U.

Speaker 2

S. Kantar Scores are improving each year and we have been recognized with our 1st ever World Procurement Award for supplier collaboration and innovation. Not only are we stepping up our investments in 2023 to unlock new growth of efficiency opportunities throughout our business, but we are also investing for the future through our ESG goals and our responsibility to consumers, our employees and the planet. We released our 2023 ESG report together at the table on October 16. It reflects key progress across each of our 3 ESG pillars, healthy living and community support, Environmental Stewardship and Responsible Sourcing.

Speaker 2

Now I would like to give credit to our employees as they are the key to our success. I'm incredibly inspired by the passion and commitment to making Kraft Heinz a place we all want to be and a place others want to join. Each year, we are being certified as a great place to work in more and more countries, including being named as one of the 100 Most Loved workplaces in America in 2023 by Newsweek. These are a testament to how far we have come and a benchmark for all who dare to do better. Before I hand it off to Andre, I would like to start by saying that I am So proud of what we have been able to achieve across the business as we have executed our strategy, delivering results in 2023 and building momentum for 2024.

Speaker 2

I also would like to highlight that this morning, we announced 3 changes to our leadership and organizational structure to best support accelerated profitable growth and to lead the future of food. First, we named our new EVP and President of North America, Pedro Navio. Pedro is a consumer goods veteran and currently our President of Taste, Meals and Away From Home for the North America zone. 2nd, we have elevated our growth and omni channel functions to a global level, providing the structure and support to leverage Centralized expertise and resources. The goal of this structure and these investments is to drive growth and disruptive innovation across the business, where we provide optimal service to our customers and put our consumers first.

Speaker 2

3rd, we have divided our international zone into 3 zones. They are Europe and Pacific Developed Markets, which include Europe, Australia, New Zealand, Japan and South Korea West and East Emerging Markets, which includes LatAm, Eastern Europe and the Middle East and Asian Emerging Markets, which includes the rest of our Asian business outside of Japan and South Korea. We recognize these markets require different sets of strategies and skills And this new structure provides the necessary focus and resources to optimize our growth potential. And I am proud to say that every single one of these leadership appointments supporting these changes have been sourced internally. This speaks to the exceptional quality of the talent at Kraft Heinz and the focus and value we place on people development and growth.

Speaker 2

Let me now hand it over to Andre to provide more details on our Q3 financial results and to discuss our outlook for the remainder of the year.

Speaker 3

Thank you, Carlos. For total Kraft Heinz, Organic net sales grew 1.7% in the quarter, fueled by our 3 pillars of growth. Price grew 7.1 percentage points over the same period, partially offset by a 5.4 percentage point decline in volumemix. Our volume trends have improved on a sequential basis as the impact of pricing wanes and our action plans have started to take shape. We expect volume trends to continue to improve.

Speaker 3

In North America, organic net sales declined 0.1%. This was driven primarily by our meats business, which had a negative 1.2 percentage point impact on total North America organic net sales growth. From an adjusted EBITDA perspective, total Kraft Heinz grew 11.9% versus prior year, And our adjusted EBITDA margin increased 2.3 percentage points, driven by adjusted gross profit margin expansion and partially offset by increased investments in SG and A. Adjusted gross profit margin increased approximately 400 basis points versus the Q3 of 2022. This expansion was driven by pricing previously executed to offset inflation, Strong gross supply chain efficiencies and positive mix in North America as growth platforms outpaced our lower margin meats business.

Speaker 3

When comparing to the Q3 of last year, it is important to note that adjusted gross profit margin was the lowest quarterly margin of the year as we experienced peak dilutive impact of pricing to offset inflation. Compared to pre pandemic levels in Q3 2019, Our 3rd quarter adjusted gross profit margin increased approximately 160 basis points. This increase was primarily driven by the divestiture of our lower margin nuts and cheese businesses as well as improved productivity. In terms of adjusted EPS, we grew 14.3% or 0 point 0 $9 versus the Q3 of 2022, primarily driven by strong adjusted EBITDA performance, partially offset by a higher effective tax rate. We have continued our disciplined approach to promotions, maintaining structurally lower levels relative to 2019.

Speaker 3

In the Q3, we reduced our volume sold on promotion in the U. S. By 7 percentage points versus 2019 compared to a 4 percentage point reduction by branded competition. And now returns on investment have improved 15 percentage points over the same period. This demonstrates that investments in our revenue management team and technology are paying off.

Speaker 3

In the Q4, we're expecting a higher level promotions, which is consistent with our strategy to promote around key occasions and is contemplated in our guidance. We continue to generate higher gross efficiencies as we drive continuous improvement throughout our supply chain. And we remain on track for our gross efficiency target of $2,500,000,000 by 2027. We closed the 3rd quarter pacing well ahead of our $500,000,000 annual target, surpassing our 4 percent of COGS benchmark, a material improvement from approximately 3% of COGS in 2022. Turning to inflation, we see moderation, but are still experiencing pockets of persistent inflation including in labor, tomatoes and sugar.

Speaker 3

We are now expecting mid single digit inflation for the full year. We continue to strengthen our balance sheet, generating year to date free cash flow conversion of 68%, while at the same time increasing investment in CapEx by approximately $150,000,000 over the same period versus 2022, supporting long term growth of the business. The majority of the improvement in free cash flow conversion versus the prior year is related to the lapping of the $620,000,000 tax payment on divestiture proceeds in 2022. We also reduced net leverage to 2.9 times, reaching our long term target of approximately 3 times. Turning to our outlook for the year.

Speaker 3

We now expect organic net sales for the fiscal year 2023 to be at the low end of our 4% to 6% range at approximately 4% versus 2022. We are raising our constant currency adjusted EBITDA guidance to 5% to 7% growth versus 2022 from the prior range of 4% to 6% growth. Our constant currency adjusted EBITDA outlook includes a negative 2 percentage point impact from lapping the 53rd week in 2022. Based on current exchange rates, We now expect a 1 percentage point adjusted EBITDA headwind from currency on the full year. For adjusted gross profit margin, We are increasing our expected year over year expansion to a range of 200 basis points to 2 50 basis points from a prior range of 150 basis points to 200 basis Turning to adjusted EPS.

Speaker 3

We are raising our guidance to a range of $2.91 to $2.99 reflecting 5% to 8% growth versus 2022 from our previous range of $2.83 to $2.91 Our adjusted EPS outlook includes negative currency impact of approximately $0.04 at current exchange rates, approximately a negative $0.03 impact from non cash pension and post retirement benefits and a negative $0.06 impact from lapping the 53rd week in 2022. Our outlook also contemplates an effective tax rate on adjusted EPS of 19% to 20%. With that, let me pass it to Miguel for some closing comments.

Speaker 1

Thank you, Andre. I would like to reiterate that I'm so proud of what we have achieved. We are generating accelerated profitable growth Fueled by our 3 pillars, share and volume trends are improving as a result of the action plans we implemented, And we continue to strengthen our balance sheet, hitting our target net leverage of approximately 3 times. On a more personal note, this is my last earnings call as CEO of Kraft Heinz. It's been an honor and a privilege to lead this great iconic company and to play a role in this chapter of our transformation story.

Speaker 1

I'm absolutely thrilled and so excited about where Carlos will take this company. I could not be prouder to continue partnering with him next year as I continue in my role as a Board Chair. I thank those of you in the investment community for always asking me the hard questions, for challenging us, for provoking us to think even more strategically about the business that we are so fortunate to lead. But most of all, I want to say thank you to our people, the 37,000 employees of Kraft Heinz Who get up day in and day out working so hard to bring our company purpose, let's make life delicious to life. I can honestly say that each one of you has made my life more delicious, And I cannot wait to see how you and this company will further succeed under Carlos' dynamic leadership.

Speaker 1

Thank you for your time and interest in Kraft Heinz.

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Kraft Heinz Q3 2023 Prepared Remarks
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