Kraft Heinz Q4 2023 Prepared Remarks Earnings Report

Kraft Heinz EPS Results

• Actual EPS: $0.78
• Consensus EPS: $0.77
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.85

Kraft Heinz Revenue Results

• Actual Revenue: $6.86 billion
• Expected Revenue: $6.99 billion
• Beat/Miss: Missed by -$132.58 million
• YoY Revenue Growth: -7.10%

Kraft Heinz Announcement Details

• Quarter: Q4 2023 Prepared Remarks
• Date: 2/14/2024
• Time: Before Market Opens
• Conference Call Date: Wednesday, February 14, 2024
• Conference Call Time: 6:00AM ET

The Kraft Heinz (NASDAQ:KHC) (NASDAQ: KHC) is a global food and beverage company that develops, manufactures and markets branded products for consumers, retailers, foodservice operators and other customers. Its portfolio includes condiments and sauces, cheese and dairy products, meals, meats, beverages, snacks and other packaged foods.

The company's well-known brands include Kraft, Heinz, Oscar Mayer, Philadelphia, Velveeta, Lunchables, Capri Sun, Jell-O, Maxwell House and Classico, among others. Products are sold through grocery stores, mass merchants, club stores, convenience retailers, e-commerce channels and foodservice distributors.

Kraft Heinz serves consumers in the United States and international markets across North America, Europe, Latin America and other regions. The company was formed in 2015 through the merger of Kraft Foods Group and H.J. Heinz Company. Kraft Heinz is led by Chief Executive Officer Carlos Abrams-Rivera.

Kraft Heinz Q4 2023 Prepared Remarks Earnings Call Transcript

Key Takeaways

• Strong 2023 performance: delivered 3.4% organic net sales growth, unlocked ~$700 million in growth efficiencies, expanded adjusted gross profit margin by ~240 bps, reduced debt leverage to 3x, and returned $2.3 billion to shareholders via dividends and buybacks.
• 2024 guidance calls for 0–2% organic net sales growth with positive volume growth in H2, 2–4% adjusted operating income growth, and 1–3% adjusted EPS growth, supported by modest margin expansion.
• Business mix was mixed: Global Foodservice and Emerging Markets each grew ~14% in 2023 (Q4: 7% and 12% respectively), while U.S. Retail growth platforms saw a 2.3% Q4 sales decline amid consumer pressures, trade timing issues, and reduced SNAP benefits.
• Operational efficiencies and revenue management drove nearly $700 million of savings, boosted adjusted gross profit margin by ~260 bps, saw inflation moderate to ~3% in Q4, and improved promotional ROI by ~5 points.
• Balance sheet and capital allocation discipline delivered target net leverage of ~3x a year early, with ~$2.6 billion remaining under the share buyback authorization and increased CapEx focused on digital and technology investments.

Presentation

[Anne-Marie Megela, VP and Head of Global Investor Relations at The Kraft Heinz Company]

Hello, this is Anne-Marie Megela, Head of Global Investor Relations at The Kraft Heinz Company. I'd like to welcome you to our fourth quarter 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 risk and uncertainties. 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-K, 10-Q, and 8-K 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.

[Anne-Marie Megela, VP and Head of Global Investor Relations at The Kraft Heinz Company]

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. Today, our Chief Executive Officer, Carlos Abrams-Rivera, will provide an update on our overall business performance, and Andre Maciel, our Global Chief Financial Officer, will provide a financial review of the fourth quarter and full year, and will discuss our 2024 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 ir.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 Carlos.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

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 net sales growth of 3.4% while improving both share and volume trends. We unlocked nearly $700 million in gross efficiencies, contributing to adjusted gross profit margin expansion of approximately 240 basis points and enabling reinvestment in SG&A, primarily across marketing, R&D, and technology. And we did this without losing sight of our financial discipline. We strengthened our balance sheet, ending the year with net leverage of three times. At the same time, we executed $300 million in share buybacks, issued nearly $2 billion in dividends, and increased our CapEx.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

I'm really excited about the 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. Looking at 2023 results, we generated accelerated profitable growth, driving organic net sales, 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&A was up $327 million versus 2022, primarily driven marketing, technology, and R&D, and we also increased CapEx spent by $97 million. 2023 was a year of right-sizing investments. In 2024, we will continue to increase our investments but at a more moderate pace as we believe we are approaching optimal levels. We have turned a corner in our transformation. Our strategy is working and is driving overall shareholder value.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

Now, let's take a look at the business performance across food service, emerging markets, and growth platforms in U.S. retail. In 2023, each of these pillars contributed to organic net sales growth. Global food service and emerging markets both grew 14%, and our growth platforms in the U.S. retail grew 2%. In the fourth quarter, food service grew organic net sales approximately 7%, and emerging markets grew 12%, both in line with our long-term algorithm pace. 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 food service business delivered approximately 7% sales growth. North American food service grew approximately 5%, and our international zone grew more than 10%, both outpacing industry growth.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

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 food service by expanding distribution in new, attractive higher-margin channels, innovation, and global brand activation. Now, turning to emerging markets. In the fourth quarter, we again delivered double-digit growth. 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-centric, 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% of our emerging markets either already leveraging the model or in the process of implementing it. For 2024, we expect to generate double-digit growth.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

In the first quarter, 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 as sellouts in the country remain strong. Now, onto our final pillar of growth, the growth platforms in the U.S. retail. Before getting into the results, I would like to spend some time unpacking the dynamics in the North America business, as 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.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

I also wanted to highlight some notable performance in our growth platforms in the quarter. We again grew organic net sales in taste elevation, up low single digits. Our cream cheese 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 points in the quarter. In our Ore-Ida business, through our partnership with Simplot, we resolved our capacity issues, generating strong growth and gaining 1.3 percentage points of share. Within our meat business, our discipline paid off 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 Q3 in cold cuts to relatively flat share in the fourth quarter as we worked to resolve the remaining service challenges.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

We are doing what we set out to do in this business, to deliver improved 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 levels. We will lap the reduction of SNAP benefits in the second quarter of 2024. Secondly, our organic net sales were impacted by trade timing and a retailer inventory deload, both of which we were anticipating. Together, this drove the 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.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

With regards to the inventory deload, this is anticipated to be limited to the fourth quarter 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 declining 2.3%. Looking to market share, you can see the underlying momentum. Despite tough industry pressures, we continue to improve our share from the lows earlier in the year. And as a reminder, we faced 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 resumed student loan repayments in October, but we don't believe there is a meaningful impact at this point.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

Our total U.S. retail performance, represented by the dark blue line, recovered from the lows and continued to improve into the fourth quarter. We did see a dip from November to December, primarily driven by our meat business as a result of less promotional spend. Consistent with our overall strategy, we will not go after share in an unprofitable, unsustainable way, particularly in our [audio distortion]. Our focus remains on delivering the best value for our consumers and doing it in a way that provides an economically beneficial structure for us and our customers. In taste elevation and easy meals, represented by the light blue line, we continue to gain share. In December, we gained 30 basis points of share and finished the year strong. The improvement we saw in market share performance was driven by action plans that we set at the beginning of the year.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

We executed on our joint business plans with key customers to drive shelf space and quality merchandising, with a 1.5% [audio distortion] share of shelf expansion versus the prior year. We increased the marketing investment, with full-year spend up 15% versus the prior year. We ramped up innovations throughout the year, supported by a 15% increase in R&D spend. And finally, we solved remaining supply constraints, with a case fill rate in the high 90s as we exited 2023. And from a marketing and innovation perspective, we laid 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 goes beyond just ketchup, into categories including beans and mayonnaise.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

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. 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 fourth most awarded brand overall. On the R&D side, we have made investments in both products and technology. Our agile ways of working and partnerships are allowing us to develop better products faster. A great example is our 360CRISP technology platform, which leverages our new intellectual property. We launched Lunchables Grilled Cheesies in September, with more new products expected in 2024. We are also elevating the plant-based space through our partnership with NotCo, which leverages artificial intelligence to develop great-tasting products quicker than ever before.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

We started with NotCheese and NotMayo in early 2023, and in November, we announced the launch of NotMac&Cheese. We plan to scale into several more categories and begin international expansion in 2024. 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 us. Our employees are more engaged than ever. In 2023, we had the highest engagement score. Not only are we improving relative to ourselves, but we're also above the external benchmark for overall engagement. And we're in the top quartile of key cultural attributes, including growth, inclusion, and empowerment. The transformation in our company is being noticed outside as well.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

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 zero in 2019. With that, let me hand it over to Andre to provide more details on our fourth quarter financial results and to discuss our 2024 outlook.

[Andre Maciel, Global CFO at The Kraft Heinz Company]

Thank you, Carlos. For total Kraft Heinz, Organic Net Sales declined 0.7%. Price was up 3.7%, while volume mix declined 4.4%. We saw sequential in volume improvement relative to the third quarter, as expected. In North America, Organic Net Sales declined 3%, with price up 2.5% and volume mix declining 5.5%. The implied elasticity impact is outturned, but there are a couple of nuances here. First, on the price side, as Carlos noted, there is a trade timing impact as we lap the trade accrual released in the prior year. On the volume side, we saw a retailer inventory deload in the quarter. Accounting for these two 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%.

[Andre Maciel, Global CFO at The Kraft Heinz Company]

We continue to see strong performance here, with growth across both developed and emerging markets. 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%. And this was primarily driven by the trade timing and the inventory deload I just mentioned. Furthermore, our top line was impacted by the declining SNAP benefits that disproportionately impacted some of our categories where we over-indexed with SNAP consumers. The same dynamics hold true for our U.S. retail growth platform performance. Organic Net Sales declined 2.3%, while U.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%. This includes a -7% impact from a 53rd week in the prior year. Excluding this, we grew 2%.

[Andre Maciel, Global CFO at The Kraft Heinz Company]

We also experienced a couple of known recurring impacts in the fourth quarter, which we were not originally expecting, that negatively impacted our adjusted EBITDA performance by approximately $25 million. The primary driver here consisted of costs related to asset write-off as a result of refining our global approach to modernized technology assets. Despite these impacts, 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&A. In the fourth 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 million, generating nearly $700 million driven by continuous improvement throughout our supply chain, and in part by getting back to our more normalized operating environment.

[Andre Maciel, Global CFO at The Kraft Heinz Company]

Inflation continues to moderate, with approximately 3% inflation in the fourth 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 five percentage points in 2023 versus the prior year, a testament to the investment we have made in our revenue management team and technology. Our strategy here is working, with COGS efficiencies and revenue management fueling an adjusted gross profit margin of 34.8% in the quarter, a 260 basis points year-over-year improvement. In terms of adjusted EPS, in the fourth 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.

[Andre Maciel, Global CFO at The Kraft Heinz Company]

On a full-year basis, adjusted EPS grew over 7% or $0.20 versus the prior year. 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, reinvesting 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 million versus the prior year to 3.8% of net sales. About 50% of the increase was linked to spend on digital initiatives. And lastly, we have improved net leverage one year ahead of our initial plan, ending the year at our target ratio of approximately three times, even as we executed against our new share buyback program that was approved by the board in November.

[Andre Maciel, Global CFO at The Kraft Heinz Company]

We are prioritizing shareholder returns through disciplined capital deployment. For the full year, we returned approximately $2.4 billion to shareholders through capital returns. About $2 billion was through our competitive dividend. And we repurchased $450 million of shares through January, of which $300 million was in the fourth quarter and $150 million was in January. This leaves about $2.6 billion remaining against our $3 billion 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 we 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 pressured consumer with a retained focus on seeking value.

[Andre Maciel, Global CFO at The Kraft Heinz Company]

At the same time, their interest rate environment remains high. 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, driving an increasing level of accountability throughout the company. This also aligns to our profitability metric within our incentive KPIs. Now, let me take you through our 2024 outlook and some key assumptions. We expect organic net sales growth of 0%-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 food service, emerging markets, and U.S. Retail driven by our growth platforms.

[Andre Maciel, Global CFO at The Kraft Heinz Company]

Adjusted Operating Income is anticipated to grow 2%-4%. Within this, Adjusted Gross Profit Margin is expected to expand modestly between 25-75 basis points. Looking to SG&A, 2023 was a year of right-sizing investments. For marketing, we ended the year at healthy levels with marketing as a percentage of net sales at 4.5%. We plan to increase investments in SG&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%-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 expenses. In terms of taxes, we expect an effective tax rate on Adjusted EPS to be in the range of 20%-22%.

[Andre Maciel, Global CFO at The Kraft Heinz Company]

This represents an approximately 200 basis points or $0.07 headwind on Adjusted EPS. This is driven by an increase in statutory rates and fewer discrete items that were benefits in 2023. Within interest expenses and other expense income, we expect a $45 million headwind year-over-year or an approximately -$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 we have already repurchased in January. And finally, a little color on the shape of the year. 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.

[Carlos Abrams-Rivera, CEO at The Kraft Heinz Company]

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. 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 2024 sauce of the year. Thank you for your time and interest in.

Participants

Executives

• Andre Maciel, Global CFO
• Anne-Marie Megela, VP and Head of Global Investor Relations
• Carlos Abrams-Rivera, CEO