Kraft Heinz Q1 2023 Prepared Remarks Earnings Call Transcript

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May 3, 2023

There are 3 speakers on the call.

Operator

Hello. This is Anne Marie Magella, Head of Global Investor Relations at The Kraft Heinz Company. I'd like to welcome you to our Q1 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 reporting in accordance with GAAP. Please refer to today's earnings release and the non GAAP information available on our website at ir. Kraftheinzcompany.com. Under News and Events for a discussion of our non GAAP financial measures and reconciliations to the comparable GAAP financial measures.

Operator

Today, our Chief Executive Officer and Board Chair, Miguel Patricio, who provides an update on our overall business performance and Andre Maciel, our Global Chief Financial Officer, performance financial review of the Q1 and will discuss our 2023 outlook. 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 to kraftheinzcompany.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 thank you all for joining us today. I'm very pleased to share with you that 2023 is off to a great start for Kraft Heinz. We saw strong growth, both on top line and bottom line. And this growth is coming from all three pillars: foodservice, emerging markets and U. S.

Speaker 1

Retail growth platforms. We are also unlocking efficiencies in our variable costs and continuing reinvesting in our brands to improve profits and profitability. Building product solutions that offer value and accessibility for our consumers. At the same time, We are increasing investments in transformational drivers across marketing, R and D and Technology. In our belief, 2023 will be even better than originally thought, and we are raising both our adjusted EBITDA and adjusted EPS

Speaker 2

expectations. As you

Speaker 1

can see, our strategy is working as we continue advancing our transportation. While we are still on our journey, we are beginning to see signs of greatness emerge. It's not yet time to declare victory, but we are becoming the type of company we know we can be. Organic net sales grew 9.4% versus Q1 2022 with strength from both our North America and International Zones.

Speaker 2

The

Speaker 1

top line growth along with gross margin expansion Partially offset by continued reinvestment in the business drove constant currency adjusted EBITDA growth of 11.9% versus the previous year. This includes a 40 basis point negative net impact from divestitures and acquisitions. Adjusted EPS grew at an even faster pace of 13.3%, primarily driven by our adjusted EBITDA performance. Our adjusted gross profit margin of 32.8 percent Expanded approximately 130 basis points compared to the Q1 of 2022 and 60 basis points compared to the Q4 of 2022. Our new pricing Taking hold, our teams continue to unlock variable costs, efficiencies and the rate of inflation has moderated.

Speaker 1

Now let's dive deeper into the drivers of our top line growth. Remember, retailer is expected to contribute approximately 1 third of total top line growth. Foodservice grew nearly 36%. Emerging Markets grew 23%. And our growth platforms in the U.

Speaker 1

S. Led by pace Elevation and Easy Meals grew 8% in the quarter. So let's start with foodservice. North American foodservice grew over 25%, While international foodservice grew over 35%, and we gained share across both markets, Foodservice is fully a global business and we're leveraging our scale to support our customers while tailoring for local execution. Let me start with international.

Speaker 1

1 of the key drivers of growth is our chef led model. We have over 30 chefs dedicated to International Food Service, And we bring them into our conversations with customers, where they can listen to our customers' needs in a different way and co create menu concepts fit to their specific products and driving results. In the Q1, our share led model drove growth in the QSR channel of over 45% versus prior year across the zone. We are also leveraging successful local insights to scale up across multiple markets. Heinz selection is our brand platform for independent burger houses to drive distribution and consistent execution in this growing segment.

Speaker 1

We launched it 3 years ago in one market. It worked, so we scaled it. We are now in 18 markets on an increase of almost 30% versus the end of last year with 251 outlets in total. This momentum and our winning strategy is why we are confident that we'll continue growing our international foodservice business and continuing to outpace the industry. In North America Foodservice, we are driving volume growth in the categories where we have the right to win, leveraging the power of our iconic brands such as Heinz, Philadelphia and Kraft Mac and Cheese.

Speaker 1

In the Q1, days sold on our core SKUs were up 30% versus last year. We are also focusing on our largest customers, our distributors. They account for almost 80% of our foodservice sales in North America. Specifically, we have been successfully increasing distribution through mutual beneficial joint business plans. For example, we're selling in additional formats to our distributors such as Heinz Ketchup, Deep and Squids, And we are expanding penetration of adjacent categories, including A1 steak, Frost and Grapefruit Monster of those distributors that already carry ketchup.

Speaker 1

We are also launching innovation such as our Craft Deluxe Mayo, which was created by Chefs and for Chefs. It handles heat and cold in a way that no other meal Out there does and it tastes great. And our strategy is working, distribution increased over 4% year over year. We are also entering new channels. Keep in mind that restaurants and bars We have a tremendous opportunity in areas like $25,000,000,000 Education segment and the $30,000,000,000 Travel and Leisure segment.

Speaker 1

A great example of this is our recently announced upcoming launch of Lunchables in Schools. We reformulated the product to be compliant with the school lunch program to compete in this impact channel. And you have likely seen more Kraft Heinz products such as PC Lunchables and Philly Cream Cheese Cups as you walk through the airport recently. And of course, that's not a coincidence. We also recently launched Key Age Direct, our B2B e commerce platform to deliver product direct to food service customers.

Speaker 1

We are currently testing a subscription model of Kraft Heinz Direct in the Miami market. All of these channels represent a meaningful growth opportunity for the second half of the year and beyond. Now let's turn to our next pillar of growth, emerging markets. 1st quarter was yet another quarter of double digit growth, growing 0.23% versus the prior year and faster than the total international zone. Notably, we grew over 3.7% in volume.

Speaker 1

Our growth is being accelerated by our sustainable and predictable go to market model. We are currently working through implementation in additional markets such as Indonesia. We plan to have the model in place in 90% of our emerging markets business by the end of the year. With this outsized growth, Energy markets is becoming a larger part of the business. In this Q1, it represented approximately 44% of International Zone Organic Net Sales.

Speaker 1

As our emerging markets business grows, It's important to emphasize that while gaining distribution in the presentation of our go to market model is critical for growth, So to continuing to strengthen our portfolio through innovation that is relevant to consumers. In China, We recently launched Masters Organic Sauce. And in Brazil, we launched Hammers Premium Sauce collection of pasta sauce. It's equally important to support our brands and connect with consumers through disruptive marketing. For example, Kraft Heinz recently joined the debate where the ketchup belongs on pizza, with CKS by the way.

Speaker 1

Our Heinz Zola campaign took our pizza featuring crusts infused with Heinz Ketchup and Maple's, the birthplace of pizza. Well, the results, everyone loved it, but this campaign was scaled to markets throughout LatAm and Italy. You can expect to see a lot more disruptive marketing coming in your way. We've become implementing our go to market model back in 2018 as sales have grown every year, driven by countries such as Brazil, Turkey, Mexico and Poland. And by focusing on mix and efficiencies, we are improving our margins.

Speaker 1

For example, our adjusted EBITDA margin The Q1 increased approximately 160 points. Let's now turn to our final pillar of growth, growth platform in the U. S. Retail. Our North American zone grew 6.7% Compared to the Q1 of 2022, this was driven by pricing, partially offset by a 30 basis point impact from the cheese powder divest.

Speaker 1

Our growth platforms in the U. S. Grew more at 8.1%. As you know, our growth platforms represent the most attractive area of our business with higher category growth and higher gross margins than the Kraft Heinz average. They represent about 2 thirds of our North America business.

Speaker 1

And we did grow this elevation, the Yeezy Meals are expected to drive the bulk of future profitable growth. As you may recall, these are the platforms that we highlighted at CAGNY. Growth grew significantly faster than the rest of the U. S. Retail business, with cultivation at approximately 15% and Easy Mills at approximately 13%.

Speaker 1

Moving to service, we continue to make progress on our supply chain recovery. For the U. S, Case fill rates finished the Q1 in the mid-90s. There is still work to do in certain categories Such as quote cuts, but as upstream supply constraints ease and labor constraints improve, We continue to move toward our goal of the high 90s. In fact, 86% of our U.

Speaker 1

S. Volume Is already at or above 97% CFR. In terms of market share, In the Q1, we lost 30 points of mix adjusted business in total. However, we remain our priority platforms, We gained share alongside private label. Our share gain was sourced from branded competition.

Speaker 1

Our share losses in Q1 were concentrated in coke cuts, cream cheese and kids single serve beverages. In fact, those three categories drove more than 40% of our share loss in the Q1. We expect gradual year to go share improvement coming from sustainable profitable commercial strategies in addition to solving our remaining supply challenges. Specifically, there are 4 actions that we are taking to drive share. 1st, we are executing our joint business plans with key customers to drive shelf space and merchandising.

Speaker 1

It is joint business plan, which have already been signed. We have agreed on a set of common objectives and KPIs with our retail partners so that we work together. Next, we plan to decrease our market investments by double digits, focusing on growth platforms. 3rd, we plan to ramp up our innovation delivery throughout the year. And finally, we are working through sales for our remaining supply constraints.

Speaker 1

We will be selective about where to compete to protect our profitability. We do not want to quickly chase share to further invest purposefully in the areas most aligned with our strategy. And for U. S. Retail, that's primarily our Gro platform.

Speaker 1

Let me give you more details on what we are doing. First, we plan to gain our fair share on shelf space. On mac and cheese, we are focusing on increasing features and displays for our delicious portfolio. Craft, mac and cheese deluxe and Velveeta shells and cheese have higher revenue and profitability per unit and also offer consumers a premium taste and brewingness that provides a sense of comfort. Our joint business plans also provide for us 1 quality merchandising or merchandising that includes features and display for key windows, for example, for cream cheese around the holidays.

Speaker 1

We are working to expand distribution of formats That creates incredible consumption, such as Lunchables 5 pack that is lunchbox ready, really soft 2 packs and Capri Sun Variety packs. In fact, we are having the largest number of displays for Capri Sun ever planned for this summer. 2nd, we intend to increase marketing spend double digits. 2 brands where we are focusing investments to drive share are Philadelphia and Kraft Mac and Cheese. Our cream cheese, we are focusing on Philly's one of a kind kind of difference as well as our recently launched Landscape Philadelphia.

Speaker 1

Mac and Cheese, once again, we are focusing on our liquids portfolio and will reinforce the brand values of Comfort and Indulgence. We expect this incremental investment in cream cheese and mac and cheese to stabilize share in both categories by the end of the Q2.

Speaker 2

Next, we continue

Speaker 1

to focus on innovation, both disruption and extension. As we progress in the year, we expect a significant ramp up in innovation. From a distribution perspective, We have HomeBake, where consumers can cook 9 dishes, veggies and sides, all together in just 3 minutes, call at 425 Degrees to make a delicious meal. Next, we have Not Mayo. We launched Not Mayo in the Q1 recently, leveraging the power of partnership with NotCo.

Speaker 1

We plan to scale the product nationally later this year. Our latest summer data shows that not Mayo It's phenomenal versus what is in the market. Later this year, we plan to introduce crispy microwavable grilled cheesy sandwiches that's already in just 60 seconds. In addition, we are excited to launch consumer driven line extensions to drive incremental sales. 1st, turn up the hits with Heinz Spiced Ketchup, including 3 varieties, each featuring a different prepper.

Speaker 1

Next, we are introducing counter time lemonade in a pouch. And finally, we are taking IHOP coffee brand nationally into the dry coffee category featuring roast and Q2. Our 4th avenue to drive share is by addressing the remaining issue with our supply chain. On Gold Cut, we entered the quarter with low inventory levels due to previous supply constraints and throughout the year, we experienced labor shortages at 1 of our key plants. These issues have been solved as we are now improving plant efficiencies and rebuilding inventory to fully service the business.

Speaker 1

Expected recovery in this category by the end of Q3. For frozen potatoes, In a year with bad potato crop, we have been able to leverage our scale and new partnership with Simplot to give us more expense to the potatoes and regain share in the Q1. We decided to pull up The timing of time downtime of capital improvements from the Q3 into the Q2. This will position us fully support of our potatoes business in the second half. So through our joint business plan, incremental investments in marketing and accelerated pace of innovation and working through remaining supply constraints, we expect to drive gradual share improvement as we move through the year.

Speaker 1

As we continue To advance our transformation, we are becoming the company we know we can be. I'd like to tell you a little bit more about what we are doing. Our teams have made incredible advancements across innovation, disruptive marketing, sales and supply chain to build scalable, sustainable solutions that drive profitable growth. We could not have accomplished what we have results, our talent people. So, well, let's dive in.

Speaker 1

1st, innovation. At CAGNY, You saw how we are approaching innovation in a new entirely new way with cross functional integrated teams that use agile ways of working in partnerships to develop better products and faster. This innovation is also fueling entry into new attractive categories. Last month, we launched just spices in the U. S.

Speaker 1

And we are elevating the overall cooking experience for American families. With our majority interest in Germany based Just Prices, We are bringing together this high quality product, data and direct to consumer capabilities with Kraft Heinz scale and brand loyalty to disrupt the U. S. Spice category. We also recently launched Tinky Pads, a new hot sauce, a brand that we created in collaboration with world renowned musician at Sheeran.

Speaker 1

The additional launch was in the U. K. And we now have listings confirmed across Europe, Australia, New Zealand and North America. Today, we introduced Heinz pasta sauces for the first time. And recently, we announced that Heinz and Absolute teamed up to create a limited edition tomato vodka based sauce.

Speaker 1

This collaboration brings together the expertise of Heinz in creating pasta sauces with the magic of absolute vodka to further intensify the flavor. And the results of our new innovation strategy are already being recognized. This year, we were named Fast Companies 2023 list of most innovative companies in consumer goods, in particular, the great work done through our joint venture with Nautco. Here, we are elevating the plant based space by leveraging artificial intelligence to develop great safety products quarter. We are just getting started.

Speaker 1

In disruptive marketing, we are moving at the speed of culture driving substantial earned media growth. In the Q1 alone, we had $7,500,000,000 earned media impressions, increase of 150% versus the Q1 of last year. Our total consumer engagement grew 24% across the 2nd. Driving this success are activations like the ketchup boat guide. We survive on nothing but ketchup and spices well adrift on a boat.

Speaker 1

Our internal agency team, The Kitchen, created what became the most successful earnings campaign for Heinz ever generating 3,300,000,000 media impressions with paid media spend of only $10,000 And our Lunchables' upcoming entrance into schools drove the news cycle and prompted school administrators to take notice. Announcement garnered $1,400,000,000 earned media impressions with 99% positive or neutral sentiment and cost nearly nothing to execute. And last, but definitely not least, we are transforming our organization And we are already seeing the joint wins materialize. We have gained additional distribution in several categories based on these recommendations, while driving incremental sales for our customers. That shifts our supply chain management from being reactive to proactive.

Speaker 1

The entire platform was built in house. In a matter of fact, just last week, we filed a U. S. Patent application for this powerful tool. We have already started to see results with more cases being shipped per day at the pace of an additional $30,000,000 net sales of the year.

Speaker 1

At the same time, there has been a 42% reduction in operator alerts as we prevent issues from arising in the first place. And this is just the beginning of what data and technology can do for our business. So as you can see, we had a very strong quarter. We delivered profitable growth coming from all three pillars of growth: food service, emerging markets and U. S.

Speaker 1

Growth platforms. As we drive top line and unlock variable cost efficiencies, we are increasing SG and A by double digits with investments in marketing, R and D and Technology in order to accelerate future profitable growth. With that, let me pass it to Andre, who will give you more details on our financial results. Thank you, Miguel.

Speaker 2

From a financial perspective, we had a very strong quarter, building on the momentum we saw at the end of 2022. Let's take a look at the details. We delivered strong top line and bottom line performance across the company. Volume was down 5.3% as we began to see increased elasticity in the Q1, which was anticipated. On average, elasticities were still 30% to 40% below historical levels.

Speaker 2

In North America, We grew organic net sales 6.7 percent. And in international, we grew more at 18.1%. We grew constant currency adjusted EBITDA 11.9 percent with 14.1% growth in North America and 12.7 percent international. Currency negatively impacted adjusted EBITDA in the quarter by 1.6 percentage points. In International Zone, we were negatively impacted by an approximately $20,000,000 impact from Sycom Gabriel in New Zealand in February.

Speaker 2

This was the worst storm in the region in Athens and caused severe flooding around the country. I'm pleased to say though that our employees are all safe and that our Hastings plant is now up and running with the business recovery. We generated almost $1,500,000,000 of adjusted EBITDA in the Q1. The year over year growth of 10.2% operating primarily on pricing and gross efficiencies, more than offsetting inflation. Adjusted gross profit margin expanded as we over the last year's lag between price flow through and inflation.

Speaker 2

Our margin expansion also fueled investments in marketing, R and D and Technology, consistent with what we outlined in our long term growth algorithm. Adjusted gross profit margin performance in the Q1, which grew approximately 130 basis points versus last year. Pricing and supply chain efficiencies optimized favorable to our plan, while commodity costs are coming down as expected anticipated. In terms of adjusted EPS, we grew approximately 13% to Q1 2022, driven by our strong adjusted EBITDA performance. The low decline impacts were minimal with $0.01 positive impact on reduced interest expense and $0.01 negative impact each from effective tax rate and the non cash pension and post retirement medical benefits.

Speaker 2

Free cash flow conversion was 26% in the quarter. Even though Q1 trend should be seasonally low, there is more work to be done, particularly on reducing inventory levels. We are actively working on this and I will provide more details in a few minutes. Now switching gears into the topic of our transformation. As we continue on our journey to accelerate profitable growth, Let me start with revenue management.

Speaker 2

Jigme Contest's pricing strategy, price pack architecture, mix management and promotional integration, And we are evolving in all these areas. We have significantly improved our ROIs on promotion activity, executing fewer and better promotions. We have reduced our volume sold promotion in the U. S. By 12% versus Q1 2019, compared to an 8% reduction by branded competition.

Speaker 2

These initiatives have driven overall volume decline. As you can see, our base volumes continue to be healthy, of 2% versus 2019. We have been disciplined on promotions. Year to go, Even with this additional spend, we expect volumes total promotion for the rest of the year to decline high single digits relative to 2019 levels. In supply chain, we have announced a growth efficiency target of $2,500,000,000 by 2027, freeing up on average $500,000,000 per year.

Speaker 2

We are on track to continue to start into 2023 This efficiency, along with slightly moderating inflation and improving service levels, is leading to a gradual reduction in cost levels. On a full year basis, we are still expecting high single digit inflation with low double digits in the first half of the year and now mid single digits in the second half of the year. The timing will be a function of hedges running off and new contracts coming in place. Now let's discuss working capital efficiencies, our 3rd funding source and where we have the most work to do, particularly in inventory management. We prioritized accelerating service level recovery in the Q1, And now we are taking actions to reduce inventory levels.

Speaker 2

1st, we are redundancy network. Non service levels have normalized across most categories, we can begin to focus on efficient production and distribution and ensure that inventory is in the right place within our network. 2nd, we plan to reduce our inventory buffers. And we continue to implement our plan to improve demand for cash accuracy, leveraging our CAPT Heinz Hive, proprietary demand planning solution created in Azure 3,000,000 109. Miguel spoke to you about exciting AI powered tools that are accelerating our transformation.

Speaker 2

This is another example. Throughout the past year, we have seen significant improvement in forecast accuracy, driven by Craftsman Hive. Our distribution forecast accuracy is up 10 percentage points year over year in the Q1 and up 5 percentage points versus Q4 twenty twenty two. We are seeing a similar trend in production forecast accuracy, with a 6 percentage point improvement year over year and a 4 percentage point quarter over quarter. As the machine learning modules to ingest more data, then become smarter and generate more accurate signals.

Speaker 2

This gives us reasons to believe quarter improvement will continue throughout the year. As we look ahead for the remainder of the year, We still expect organic net sales growth of 4% to 6% in past 2022, above our long term algorithm of 2% to 3%. Growth is anticipated to be price driven with the continuous function that elasticity will increase closer to historical levels. We are now increasing our expectation for adjusted gross profit margin to expand 125 basis points to 175 basis points compared to our prior expectation of 50 to 100 basis points. This increase is due to accelerated product execution, which is now 95% implemented, slightly lower inflation expectations and better variable cost efficiencies.

Speaker 2

This enhanced adjusted gross profit margin allow us to further increase our investments across marketing, R and D and technology in 2023. Our SG and A is now expected to increase by double digit percent versus prior year. As we outlined in our long term algorithm, we are accelerating investments for growth, while preserving our top tier adjusted EBITDA margin. Speaking of which, constant currency adjusted EBITDA is now expected to grow between 40% to 6% or 6% to 8% when excluding the impact from lapping the 53rd week in 2022. Based on current foreign exchange rates, we expect 0.5 percentage point headwind from currency.

Speaker 2

As we think about some of the phasing, there are a couple of considerations. We expect organic net sales growth rate to moderate to mid single digits as we map pricing actions from the prior year, to remain relatively flat to Q1 levels, with an expansion in Q4 due to seasonality. We now expect adjusted EPS to be in the range of $2.85 to $2.91 Our outlook now contemplates an effective tax rate and adjusted EPS of 19% to 21%. Of our business in 2020. As you can see, we had very strong performance in the quarter.

Speaker 2

Organic net sales, adjusted EBITDA and adjusted EPS all grew faster than our long term algorithm. Our adjusted gross profit margin expanded both sequentially and versus the prior year, allowing us to continue to invest for growth. As a result, we are raising our guidance for constant currency adjusted EBITDA and adjusted EPS. With that, let me turn it over to Miguel for some closing comments.

Speaker 1

Thanks, Andre. I'm very proud of the Craft Pins team for the results we delivered in the Q1. They demonstrate that our strategy is working, Not only generating strong top line growth, but improving gross margins that are allowing us to reinvest in the business. And those investments are transforming our company across every function, marketing, sales and supply chain among others. We are still on a journey of greatness, but we are beginning to see the signs that we are becoming the company I know we can be.

Speaker 1

Thank you for your time and for your interest in Kraft Heinz.

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