Kraft Heinz Q4 2023 Prepared Remarks Earnings Call Transcript

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February 14, 2024

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 Q4 and full year 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 dotcraftheinscompany.com, 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, Carlos Abrams Rivera, will provide an update on our overall business performance. And Andre Massiel, our Global Chief Financial Officer, We'll provide a financial review of the Q4 and full year, and we'll discuss our 2024 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 dotcom. 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 Carlos.

Speaker 1

Thank you, Anne Marie, and thank you all for joining us today. I am very proud of our 2023 results and accomplishments. None of this would have been possible without the incredible team here at Kraft Heinz. We delivered results above our long term algorithm, driving full year organic debt sales growth of 3.4%, while improving both share and volume trends. We unlocked nearly $700,000,000 in growth efficiencies, contributing to adjusted gross profit margin expansion of approximately 2 40 basis points and enabling reinvestment in SG and A, primarily across marketing, R and D and Technology.

Speaker 1

And we did this without losing sight of our financial discipline. We strengthened our balance sheet ending the year with debt leverage of 3x. At the same time, We executed $300,000,000 in share buybacks, issued nearly $2,000,000,000 in dividends and increased our CapEx. I'm really excited about Spur's future of Kraft Heinz. And in 2024, we expect to drive top line growth, Return to positive volumes, expand operating margins and continue to reinvest in the business.

Speaker 1

Looking at 2023 results, we generated accelerated profitable growth, driving organic net sales, Content currency adjusted EBITDA and adjusted EPS growth all above our long term algorithm. And consistent with our strategy, we increased investments for future growth. SG and A was up $327,000,000 versus 2022, primarily driven by marketing, technology and R and D. And we also increased CapEx spend by $97,000,000 2023 was a year of rising investments. In 2024, we will continue to increase our investments, but at a more moderate pace as we believe we are approaching optimal levels.

Speaker 1

We have turned a coordinated transformation. Our strategy is working and is driving overall shareholder value. Now let's take a look at the business performance across foodservice, Emerging Markets and Growth Platforms in U. S. Retail.

Speaker 1

In 2023, each of these pillars contributed to organic net sales growth. Global Foodservice and Emerging Markets both grew 14% and our growth platforms in the U. S. Retail grew 2%. In the Q4, Foodservice grew organic net sales approximately 7% and Emerging Markets grew 12%, both in line with our long term algorithm pace.

Speaker 1

Organic net sales declined 2% in the U. S. Retail growth platforms, primarily due to ongoing consumer pressure. Let's go through each pillar in more detail. In Q4, our global foodservice business delivered approximately 7% sales growth.

Speaker 1

North American foodservice grew approximately 5% And our international firm grew more than 10%, both outpacing industry growth. For the full year of 2024, we expect continued momentum with organic net sales growing in line with our long term algorithm. We'll continue to drive success in foodservice by expanding distribution in new, attractive higher margin channels, Innovation and Global Brand Activation. Now turning to emerging markets. In the 4th quarter, We again delivered double digit growth.

Speaker 1

Organic net sales grew 12.3%, outpacing total international zone growth of 7.1%. Emerging market growth was primarily driven by volume mix, which is up 8%. Our strategy for growth in emerging markets is driven by our go to market model. This data sensitive repeatable model drives distribution and is designed to capture opportunities with the right product in the right market. As planned, we ended 2023 with approximately 90 For 2024, we expect to generate double digit growth.

Speaker 1

In the Q1, we will be lapping shipments timing in the prior year in Brazil. As a result, we expect to see relatively lower sales in Q1 compared to the rest of 2024. However, we are confident in our performance A sellout in the country remains strong. And now on to our final fillout growth, the growth platforms in the U. S.

Speaker 1

Retail. Before getting into the results, I would like to spend some time unpacking the dynamics in the North America business There are several moving pieces here. Let me first start with what worked well and then I'll move into where we experienced some performance headwinds. We set out a series of action plans in the beginning of 2023 to address market share and volume declines, and they worked. Share recovered across key categories with sequential volume improvement throughout the year.

Speaker 1

I also wanted to highlight some notable performance in our growth platforms in the quarter. We again grew organic net sales in taste television, up low single digits. Our field sheets business saw strong growth, a function of service recovery and the successful joint business plan execution with our retail partners. This also led to share gains of 2.8 percentage point in the quarter. In our ORIDA business, through our partnership with Simplex, we resolved our capacity issues, delivering strong growth and gaining 1.3 percentage point of share.

Speaker 1

Within our meat business, our disciplined paid up as we grew full year adjusted EBITDA mid single digits despite the top line pressure. We even saw sequential share improvements From losing 2.5 percentage points of share in Houston's leading focus to relatively flat share in the 4th quarter As we work to resolve the remaining service challenges, we are doing what we set out to do in this business, to deliver Proved profitability and rebuild our foundation. Now turning to some of the headwinds we experienced in the quarter. First, the industry was more challenging than we had originally anticipated as the impact of higher interest rates continued to weigh on the consumer And the impact from lapping excess SNAP benefits in the quarter hit peak level. We will lap the reduction of SNAP benefits in the Q2 of 2024.

Speaker 1

Secondly, our organic net sales was impacted by trade timing and a reseller inventory deload, both of which we were anticipating. Together, this drove approximately 150 basis points versus our performance in U. S. Retail consumption. The trade timing was a one time occurrence and a function of lapping a prior year trade act approval release.

Speaker 1

With regards to the inventory deload, this is anticipated to be limited to the Q4 as retailer inventory was nearly flat year over year on a full year basis. As a result of these puts and takes, organic net sales in North America declined 3% with U. S. Retail Growth Platform Declined 2.3%. Looking to market share, you can see the underlying momentum.

Speaker 1

Despite tough industry pressures, we continue to improve our share from the lows earlier in the year. And as a reminder, we face Expected headwinds after pricing 75% of our portfolio in February, followed by the reduction in SNAP benefits in March. We're also monitoring the impact of presumed student loan repayments in October, but we don't believe there is a meaningful impact at this point. Our total U. S.

Speaker 1

Retail performance represented by the dark blue line recovered from the lows and continued to improve into the Q4. We did see a dip from November to December, primarily driven by our meats business as a result of less promotional spend. Consistent with our overall strategy, we will not go after share in a nonprofitable unsustainable way, particularly in our bid business. Our focus remains on delivering the best value for our consumers and doing in a way that provides an economically benefit structure for us and our customers. In Taste Elevation and Easy Meals represented by the Live Blue line, we continue to gain share.

Speaker 1

In December, we gained 30 basis points of share and finished this year strong. The improvement we saw in market share performance was driven by action plans that we set at the beginning of the year. We executed on our joint business plans with key customers to drive shelf space and quality merchandising with a 1.5 percentage point share of sales expansion versus the prior year. We increased the marketing investments with full year spend up 15% versus the prior year. We ramped up innovations throughout the year, supported by a 15% increase in R and D spend.

Speaker 1

And finally, we saw remained supply constraints with a cash flow rate in the high 90s as we exited 2023. And from a marketing and innovation perspective, We laid out a lot of groundwork in the year. We launched our first ever Global Heinz campaign that highlights the irrational love for the brand, born out of actual consumer stories. This campaign spans more than 16 countries and goals beyond just ketchup into categories including beans and mayonnaise. You can continue to expect more of this global approach as we look to generate best in class marketing activations with our new Global Growth Office now at the center.

Speaker 1

And we also received external recognition for our efforts. At the Cannes Lions International Festival of Creativity, we were awarded 21 Lions for our marketing campaign. Heinz was the most awarded food brand and the 4th most awarded brand overall. On the R and D side, we have made investments in both products and technology. Our agile ways of working and partnerships Allowing us to develop better products faster.

Speaker 1

A great example is our 360 CRYST technology platform, which leverages our new intellectual property. We launched Lunchables Grilled Cheeses in September with more new products expected in 2024. We are also elevating the plant based space through our partnership with Nutco, which leverages artificial intelligence to develop great tasting products quicker than ever before. We started with nut cheese and nut mayo in early 2023, and in November, we announced the launch of nut mac and cheese. We plan to scale into several more categories and begin international expansion in 2024.

Speaker 1

And finally, I would like to thank each and every one of our people at Kraft Heinz. Without you, none of our success would be possible. We have made significant investments in our people and I can say with confidence that our culture has truly become a competitive advantage for Our employees are more engaged than ever. In 2023, we have the highest engagement score. Not only are we improving relative to ourselves, But we are also above the external benchmark for overall engagement, awaiting the top quartile of key cultural attributes including growth, Inclusion and Empowerment.

Speaker 1

The transformation is our company has been noticed outside as well. We are receiving External recognition, being named by Chicago Tribune as a top workplace and by Forbes as one of America's best large employers. And this goes beyond North America. We were certified as a great place to work in 16 countries, up from 0 in 2019. With that, let me hand it over to Andre to provide more details on our Q4 financial results and to discuss our 2024 outlook.

Speaker 2

Thank you, Carlos. For total Kraft Heinz, organic net sales declined 0.7%. Price was up 3.7%, while volumemix declined 4.4%. We saw sequential volume improvement relative to the 3rd quarter In North America, organic net sales declined 3% with price up 2.5% And volume mix declining 5.5%. The implied elasticity impact is over too, but there are a couple of nuances here.

Speaker 2

1st, on the price side, as Carlos noted, there is a trade timing impact as we lapped the trade accrual release in the prior year. On the volume side, we saw our retailer inventory deload in the quarter. Accounting for these 2 anticipated dynamics, We are otherwise in line with historical elasticity levels. In the international zone, organic net sales grew 7.1% with price up 7.7% and volume mix declining 0.6%. We continue to see strong performance here with growth across both developed and emerging markets.

Speaker 2

Let's take a closer look at North America Zone. Organic net sales declined 3%. Our U. S. Retail consumption for the same period declined to a lesser degree, down 1.6%.

Speaker 2

And this was primarily driven by the trade timing and the inventory load I just mentioned. Furthermore, our top line was impacted by the decline in SNAP benefit for our U. S. Retail growth platform performance. Organic net sales declined 2.3%, while U.

Speaker 2

S. Retail consumption was flat. Performance was further impacted again by the year over year decline in SNAP benefits. Turning to constant currency adjusted EBITDA. Total Kraft Heinz declined 5%.

Speaker 2

This includes a negative 7% impact from a 53rd week in the prior year. Excluding this, we grew 2%. We also experienced a couple of non recurring impacts in the 4th quarter, which we were not originally expecting. That negatively impacted our adjusted EBITDA performance by approximately $25,000,000 The primary driver here consisted of costs related to a system write off as a result of refining our global approach to modernize technology assets. Despite this impact, our adjusted EBITDA margin increased 40 basis points in the quarter, driven by adjusted gross profit margin expansion that more than offset increased investments in SG and A.

Speaker 2

In the 4th quarter, Supply chain efficiencies, moderating inflation and rational promotions all contributed to our adjusted gross profit margin performance. For the full year, we over delivered on our annual efficiency target of $500,000,000 generating nearly $700,000,000 driven by Continuous improvement throughout our supply chain and in part by getting back to a more normalized operating environment. Inflation continues to moderate with approximately 3% inflation in the 4th quarter, primarily driven by tomatoes and sweeteners. On the promotional front, we continue to see a rational environment while at the same time improving our return on investment. Our ROI increased about 5 percentage points in 2023 versus the prior year, a testament to the investments we have made in our revenue management team and Technology.

Speaker 2

Our strategy here is working with COGS efficiencies and revenue management fueling an adjusted gross profit margin of 34 point 8% in the quarter, a 2 60 basis points year over year improvement. In terms of adjusted EPS, in the 4th quarter, We declined about 8% or $0.07 versus the prior year. This was primarily driven by a 53rd week in 2022 and a higher effective tax rate in the current year. These impacts were partially offset by positive adjusted EBITDA performance and less interest expense. On a full year basis, adjusted EPS grew over 7% or $0.20 versus the prior year.

Speaker 2

This increase was driven by strong adjusted EBITDA performance despite lapping a 53rd week in the prior year. And we continue to strengthen our balance sheet, while at the same time reinvest in the business. We generated full year free cash flow conversion of 81%. The year over year improvement was primarily driven by inventory with working capital back to 2019 levels. We increased CapEx spend by $97,000,000 versus the prior year to 3.8% of net sales.

Speaker 2

About 50% of the increase was linked to spend on digital initiatives. And lastly, we have improved net leverage 1 year ahead of our initial plan, ending the year at our target ratio of approximately 3 times, Even as we executed against our new share buyback program that was approved by the Board in November. We are prioritizing shareholder returns through disciplined capital deployment. For the full year, We returned approximately $2,400,000,000 to shareholders through capital returns. About $2,000,000,000 was through our competitive dividend, And we repurchased $450,000,000 of shares through January, of which $300,000,000 was in the 4th quarter and $150,000,000 was in January.

Speaker 2

This dips about $2,600,000,000 remaining against our $3,000,000,000 authorization. Before getting into our guidance for 2024, I would like to take a moment to discuss some of the puts and takes as we see it When you think about the operating environment for the year, overall, the cost environment is getting better. Inflation is moderating, but on a year over year basis, costs are still higher. In regard to consumer health, We continue to see a pressure on consumer with a retained focus on seeking value. And at the same time, their interest rate environment remains high.

Speaker 2

I also wanted to highlight a change in our profitability metric that we included in our guidance. If you recall, Throughout 2023, we provided guidance for adjusted EBITDA. Going forward, we will be providing guidance for adjusted operating income. This change is a result of our work to rewire the organization and create a closer connection to total shareholder return, drive an increasing level of accountability throughout the company. This also aligns to our profitability metric within our incentive KPIs.

Speaker 2

Now let me take us through our 2024 outlook and some key assumptions. We expect organic net sales growth of 0% to 2%. We anticipate a positive price contribution throughout the year with an inflection to positive volume growth in the second half of the year. Growth is planned to come from Foodservice, Emerging Markets and U. S.

Speaker 2

Retail driven by our growth platforms. Adjusted operating income is anticipated to grow 2% to 4%. Within this, Adjusted gross profit margin is expected to expand modestly between 25 to 75 basis points. Looking to SG and A, 2023 was a year of rightsizing investments. For marketing, we ended the year at healthy levels with marketing as a percentage of net sales at 4.5%.

Speaker 2

We plan to increase investments in SG and A in 2024, but to a much lesser degree than what we saw in 2023 as we begin to approach more optimal levels. For adjusted EPS, we expect 1% to 3% growth versus the prior year. This growth is driven primarily by adjusted operating income growth with headwinds coming from taxes and interest and other expense. In terms of taxes, we expect an effective tax rate on adjusted EPS to be in the range of 20% to 22%. This represents an approximately 200 basis points or $0.07 headwind on adjusted EPS.

Speaker 2

This is driven by an increase in statutory rates And fewer discrete items that were benefited in 2023. Within interest expenses and other expense income, We expect a $45,000,000 headwind year over year or an approximately negative $0.03 impact to adjusted EPS. This is driven primarily by FX headwinds and debt refinancing that will come at a higher rate. Our outlook does not contemplate any additional share buyback in the year outside of what you have already repurchased in January. And finally, a little color on the shape of the year.

Speaker 2

As we think about our organic net sales guidance, We do expect Q1 2024 to have a similar profile to Q4 2023 and as we progress throughout the year, We should trend to our long term algorithm. With that, let me pass it back to Carlos for some closing comments.

Speaker 1

Well, thank you, Andre. Let me again reiterate how proud I am of our 2023 performance. It was a great year and we have made continued progress against our strategy. We are growing across our key pillars. We are investing in our business to drive future growth and we are doing so while maintaining financial discipline.

Speaker 1

With that, I hope to see many of you at CAGNY next week, where you will be able to meet members of the Kraft Heinz leadership team and create the CAGNY 20 24 results of the year. Thank you for your time and interest in

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Kraft Heinz Q4 2023 Prepared Remarks
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