Kraft Heinz Q2 2024 Prepared Remarks Earnings Call Transcript

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July 31, 2024

There are 3 speakers on the call.

Operator

Hello. This is Anne Marie Meguela, Head of Global Investor Relations at The Kraft Heinz Company. I'd like to welcome you to our Q2 2024 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 Q, 10 ks 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 that accompany these remarks, which are 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 Q2 and will discuss our 2024 outlook.

Operator

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

Speaker 1

Well, thank you, Ameri, and thank you all for joining us today. As many of you are aware, the consumer environment remains challenged and was worse than we anticipated in the Q2. Slowing income growth, dwindling savings and inflation concerns continue to weigh on consumer sentiment and increase value seeking behavior. These dynamics are now expected to continue for longer, which had led to a delayed recovery for growth across the industry. As a result, we are now expecting a more gradual top line improvement from the Q2 into the back half of the year.

Speaker 1

I am encouraged that we continue to unlock efficiencies and are well on our way to generating the highest levels of productivity since we reset our strategy. These productivity gains are being realized today and are a key reason for continued margin improvements. At the same time, we are generating increased profits and strong cash flow as we protect the bottom line while actively responding to top line headwinds. With these gains and aligned with our strategy, we are continuing to make accretive investments in our leading iconic brands to drive top line growth in 2025 and beyond. And importantly, we are confident in this strategy and the attractive categories in which we compete and have the right to win.

Speaker 1

We are committed to managing our business in a disciplined manner that preserves our ability to drive sustainable long term growth. In other words, we will not buy short term wins at the expense of long term success. Moving to our Q2 results. Organic net sales declined by 2.4% versus the prior year. This was lower than our original expectation and it's primarily a function of the continued consumer pressure and cautious sentiments, as well as the unexpected impact from launchable sales.

Speaker 1

Our teams are continuing to unlock efficiencies at a greater pace than inflation, contributing to adjusted gross profit margin expansion of 2 10 basis points versus the Q2 of last year. As we reinvest in the business through marketing, R and D and technology, we generated adjusted operating income growth 2% in the quarter. Meanwhile, as previously noted, adjusted EPS declined versus the prior year, primarily as a result of the lapping of the one time tax benefit in 2023. While top line growth is lower to recover, we firmly believe in our path forward to deliver consistent profitable growth. We are committed to our strategic pillars as the drivers of future growth, continuing to unlock growth efficiencies to drive margin expansion, investing in the areas that make sense for the long term growth of the business and powering brand superiority through innovation and renovation.

Speaker 1

Let's take a look at our performance across our 3 strategic pillars. We believe that recovery, while slower, begins in the Q3. In our accelerated platforms in North America retail, organic net sales declined 2.4%. This top line decline was primarily a result of the current U. S.

Speaker 1

Consumer environment, lower sales in Lunchables and the exit of our unprofitable bulk vinegar business. We have already taken steps to mitigate the situation for Lunchables as kids return back to school. Andrea and I will talk a bit more about that later. At the same time, the accelerated platforms continue to be attractive spaces. They generate margins substantially higher than the total company.

Speaker 1

With attractive historical industry growth rates and projected 4% annual compounded growth over the next 10 years, we are well positioned with our powerful iconic brands to drive profitable growth. We are pleased with the momentum we are seeing so far in the Q3, particularly across our Heinz, Oriada and Philadelphia brands. We expect this improvement to continue into the second half, fueled by a ramp up in innovation as well as selective investments in trade. Turning to Global Away From Home. We knew going into the quarter that lower U.

Speaker 1

S. Traffic, particularly in QSR, the temporary plant closure we highlighted during our last earnings call and the 2 planned exits from margin dilutive businesses were going to lead to a year over year decline. I'm happy to report that the plant is back up and running and the top line impact came in at the lower end of our expectations. Plus, other away from home team continues to add new business and expand penetrations across the non commercial channels that are driving industry growth. We do expect performance improvements in the second half as we increase distribution globally, led by our go to market strategy.

Speaker 1

Finally, in emerging markets, we had originally anticipated year over year growth to accelerate from the Q1 to the Q2, with growth closer to mid to high single digits. We continue to capture share and grow organic net sales through both price and volume. However, consumer pressure in China and Brazil limited our ability to deliver on our expectations. We are anticipating gradual improvement in the back half of the year as consumption continues to come in at healthy levels. And on a positive note, we exited the quarter with top line growth in the high single digits.

Speaker 1

Moving to volume. The impact from the temporary plant closure and launchables contributed approximately 0.9 percentage point of volume decline in the quarter. Aside from these events, we have seen sequential improvements in an underlying business since reaching a low in the Q2 of 2023. Looking to our share performance, we are gaining more recovery share across our international developed and emerging markets compared to the Q1. We are seeing meaningful recovery in international developed markets with a 70 basis point improvement from Q1, and we are gaining share in Continental Europe.

Speaker 1

In the second quarter, we gained 60 basis points share in emerging markets as we continue to capture wide space through distribution gains. In U. S. Away from home, we lost 10 basis points of share, primarily driven by the temporary plant closure impact our ability to service. In North America retail, we lost 50 basis points driven by the continued value seeking behavior we are seeing from consumers.

Speaker 1

We are continuing to invest to support improvements across North America retail. 1st, for Capri Sun, we are reengaging consumers through our recent product innovation. We have also invested 2 times in media support and are investing in trade to incentivize trial. Turning to Lunchables. This is an iconic leading brand with the right to winning a very attractive category.

Speaker 1

Loncepa was a brand that I know well. It was the first brand I worked for when I joined Kraft Foods. Starting at the beginning of the quarter, we saw a decline in sales, but we feel good about the recent improved trajectory. And to build on that momentum, we are deploying a comprehensive strategy across marketing, renovation and innovation. We are investing in R and D and doubling our marketing spend while optimizing our media mix, targeting strategies and increasing our value equation.

Speaker 1

For example, in September, we are teaming up with the Transformers movie for the brand's first ever on park partnership, and partnering with movies is something we know how to do well. And we see a lot of opportunity for long term sustained growth in Lunchables from further penetration into existing channels and expansion into new channels and occasions. Beyond these two core brands, we're also increasing investments in marketing and innovation across our portfolio to reinforce our product differentiation to compete with private label. At the same time, we are promoting to preserve intended price gap versus branded competitors. This spend is more than offset by productivity gains expected in the year, which we believe will offer incremental value that a consumer is seeking.

Speaker 1

Now taking a closer look at this productivity gains, our new ways of working through agile scale and our approach to a strategic partnerships are key ingredients in our success. In the first half of the year, unlock efficiencies contributed to 190 basis point increase in adjusted gross profit margin. This includes increased investment in trade as we are mindful of the consumer situation and are being selective in our investments. Year to date, with the gross margin dollar gains, we increased SG and A by approximately $100,000,000 or 6% versus the prior year, driven by investments in marketing, technology and R and D. We are also increasing our CapEx spend by $35,000,000 or 7%, as we focus our investment on generating growth as well as digital advancements.

Speaker 1

We know that value is top of mind right now for the consumer, and Slide 12 highlights how our innovation continues to resonate and provide them value in their everyday lives. Whether it's through our high quality convenient solution like 360 Crisp platform or our Taco Bell craving kits, which make it easier for Taco Bell fans to recreate their favorite menu items right in their own kitchens. We are also satisfying changing consumer desires by evolving our core offerings to stay relevant to consumer trends. For example, our pickled ketchup is the latest Heinz innovation designed to deliver our fans' hunger for unique and elevated flavor experiences. It also marks the 1st high innovation to launch globally, following the brand's unification under 1 global creative platform.

Speaker 1

With Pure JL Craft, we have created a line of dressings and marinade that use simple ingredients and provide the homemade taste that consumers are looking for. They offer both globally inspired flavors often found in restaurants now in the convenience of the grocery aisle. Expanding options and functionality is more important today than ever, as consumers want choices that provide unique benefits, such as dairy free, plant based and immunity support. Our partnership with Noveco has allowed us to expand those options while using AI technology to deliver delicious taste and texture. Additionally, earlier this year, Crystal Light introduced its first innovation in over a decade with the launch of its mixology, immunity and energy product lines.

Speaker 1

And finally, we continue offering accessible solution for every budget by unlocking new formats and usage occasions like we did with Dolby's first ever jar, Queso. We also expanded our offerings in club channels with the launch of Capri Sun Multi Serve, as well as providing more entry level price points and offerings in dollar channels, including doubling our store count on Moskamari SKUs in Dollar General. I am proud of what our teams have accomplished in such a short amount of time. Our innovation pipeline is gaining momentum and as expected increasing as a percentage of organic net sales to a pace of 2.4% year to date. As part of our Mexican food strategy, we have expanded our Taco Bell partnership, delivering at home restaurant experience for our consumers.

Speaker 1

We are extremely pleased with the initial results of our Taco Bell craving kits and dips that together have exceeded our expectations on distribution by over 30%. I am looking forward to the launch of our new 360 deli mix quesadillas hitting stores now in August. And as I just mentioned, we've had great success growing in the dollar channel. For example, our year to date sales in Dollar General increased 47% versus the prior year across Oscar Mayer cold cuts, hot dogs and lunchables. And finally, also from Oscar Mayer, we recently introduced its latest innovation, StopDollars.

Speaker 1

They started rolling out in retailers nationwide in May and already have garnered the highest distribution for any Oscar Mayer innovation in the last 5 years. I'm very pleased to see our innovation pipeline building momentum, which gives me confidence for what is coming, particularly as we head into the second half. As I frequently mentioned, our Capri Zone renovation is shipping now, with 2 times the marketing spend to support trial and summer initiatives. And our Caprisso multi serve bottle highlights another example of shifting our product offering to meet the needs of our consumers today and in the future. We are also ensuring that we bring in new and relevant items to our consumers to keep them excited.

Speaker 1

In the second half, we are launching new shapes, variety packs and flavors across mac and cheese. Our new Super Mario shapes are rolling out now in major retailers nationwide, and we have new exciting flavors coming soon. And finally, I'm looking forward to what is coming for Lunchables, where we are giving up for the back to school season. Not only are we teaming up with TRANSFORMERS, as I mentioned earlier, we have a lot of exciting innovation, including new combinations that are expected to hit shelves this fall. They will expand Lunchables into the snack space that consumers have never seen before.

Speaker 1

Our investment across marketing and technology are paying off. On the creative front, our global Heinz brand strategy has been amazing, resulting in several creative ideas that have generated sustained business impact. Ultimately, our collection of campaigns within this strategy helped generate double digit guided net sales growth in 2023 across the global Heinz brand and also achieved Cantor's coveted iconic status. In recognition of this strategy impact, our team was awarded the Grand Prix for creative effectiveness in sustained success at the Cannes Lions International Festival of Creativity this year. With recent investments in technology, our agile teams have built a digital platform that enable us to rapidly create media campaigns and content for all of our brands across web, social and mobile apps.

Speaker 1

This new platform was filled with our agile ways of working and has achieved a 28% increase in customer satisfaction, a 30% increase in engagement and an impressive 78% increase in conversion rate. Importantly, it provides us with the capabilities to create digital campaigns faster and at a lower cost and was honored by MAC Alliance with its Grand Prix award for best digital experience. So you can see, while this quarter has been challenging for the industry, we are actively responding to drive our own recovery. We are managing the business in an anticipated manner to protect profitability and investing for growth. Today, we are creating solutions for our consumer and selectively investing in trade to drive volume recovery.

Speaker 1

We are not losing sight of our long term strategy to drive profitable growth, generate strong cash flow and return capital to our stockholders. Our team have the highest engagement scores to date, and we are leveraging the power of our competitive advantage, including agile scale, our ownership centric culture and our unique approach to strategic partnerships. And with an eye towards fueling growth, we are accelerating innovation and renovation across our iconic brands. We are deploying our brand growth system to drive brand superiority and marketing excellence. By leveraging our brand growth system, we can prioritize our largest opportunities and optimize our returns in marketing and other investments.

Speaker 1

With that, let me hand it over to Andrew to provide more detail on our Q2 financial results and to discuss our 2024 outlook.

Speaker 2

Thank you, Carlos. In the Q2, organic net sales declined 2.4% for total Kraft Heinz, with price up 1 percentage point and volumemix down by 3.4 percentage points. As Carlos noted, we continue to manage our business in a disciplined manner that preserves our ability to drive sustainable long term growth. In North America, organic net sales declined 2.9%. The volume declines were primarily driven by increased value seeking behavior across U.

Speaker 2

S. Retail and away from home channels. And as a reminder, lower lunchable sales and a planned closure further impacted the top line. In our international developed markets, organic net sales declined 3.9%. Price was down primarily as a result of increased trade in the UK to selectively lower our price gaps.

Speaker 2

Volumes declined in part as we work through our customer negotiation. In Emerging Markets, organic net sales was up 3.4% in the quarter, with growth coming from both price and volumemix. Our China business had a negative impact on Emerging Markets top line due to worsening consumer sentiment. To a lesser degree, Brazil had challenges with both the consumer environment, resulting in negative price from value seeking behavior in commodity categories and the customer environment, where retailers reduced their inventory levels. In the Q3, we do expect to lap the inventory buildup by retailers that occurred in the prior year, which will result in further expected top line pressure.

Speaker 2

Turning to the next slide. Total Kraft Heinz adjusted operating income grew 2% and our adjusted operating income margin increased 120 basis points, as the expansion in adjusted gross profit margin more than offset increased investments in SG and A. In North America, adjusted operating income grew 7.5% versus the prior year, with growth primarily driven by productivity gains. In International Developed Markets, adjusted operating income declined 10%. As we discussed on the last earnings call, the 2nd quarter included an approximate $8,000,000 headwind or 5.7 percentage points.

Speaker 2

This was due to fixed COGS absorption benefits in the prior year as a result of Cyclone Gabriel. As anticipated, year to date adjusted operating income for International Developed Market is in line with expectations, increasing 6.4% compared to last year. In Emerging Markets, adjusted operating income declined due to the lower than anticipated organic net sales growth, while we ramp up our investments across people, logistics and product development in the first half of the year to support our go to market strategy. In the second half of the year, we expect the top line to gradually improve, and we should expect to see bottom line growth in the Q4 as we fully lap these elevated investments. Being mindful of the consumer environment, we are funding increased trade with supply chain efficiencies to preserve our price gaps versus branded competitors.

Speaker 2

As you can see, our promotion levels have increased compared to 2023, while remaining below 2019 levels. At the same time, we are being selective in these investments and working alongside our retail partners to come up with solutions that work for both parties. We are not using tactics that undermine long term profitability. We leverage different strategies beyond promotions to compete against private label, such as innovation, renovation and marketing. Moving down the P and L, we are expanding gross margins through continuous supply chain efficiencies.

Speaker 2

This allow us to invest more in the business and drive long term growth. Year to date, adjusted gross profit margin expanded 190 basis points versus last year, primarily driven by approximately $375,000,000 in gross efficiencies. This gave us the flexibility to increase year to date investments in marketing by 9%, R and D by 13% and technology by 17% versus 2023. Now turning to cash flow and profitability. We generated year to date free cash flow conversion of 65%, a 6 percentage point increase versus the prior year, primarily driven by working capital improvement.

Speaker 2

This year, we realigned our company's incentive structure to reward working capital performance, and we are starting to see this payoff in our results. Keep in mind that our free cash flow conversion tends to be higher in the second half of the year due to seasonality. At the same time, we have been increasing investments for growth with CapEx spend increasing by $35,000,000 or 7% versus the prior year. In terms of adjusted EPS, we declined 1.3%. This was driven by lapping a one time tax benefit in the prior year, partially offset by a positive impact from results of operations, share repurchases and other income.

Speaker 2

We continue to strengthen our balance sheet while returning capital to stockholders. In the first half of the year, we returned approximately $1,300,000,000 while maintaining our net leverage target ratio of approximately 3x. Of this, 9 69,000,000 was through our competitive dividend and $350,000,000 was through share repurchases under our announced program. This leaves us about $2,400,000,000 remaining of our $3,000,000,000 authorization. As a reminder, our share repurchase program is non programmatic and a function of excess cash.

Speaker 2

As we look ahead to the remainder of the year, we are lowering our organic net sales outlook from flat to 2% growth to a range of down 2% to flat. This change contemplates a slower recovery than originally anticipated in the U. S. And Emerging Markets. Adjusted operating income growth is now expected to be in the range of 1% to 3% as compared to the previous expectation of 2% to 4%.

Speaker 2

For adjusted gross profit margin, we are increasing the expected year over year expansion to a range of 75 basis points to 125 basis points from a prior range of 50 to 100 basis points. This revised expectation is driven primarily by gross efficiencies coming in higher than anticipated, more than offsetting incremental investments in trade. We are reiterating our adjusted EPS outlook of 1% to 3% growth. The guide down in adjusted operating income is offset by year to date share repurchases and lower interest expense as we refinance debt at a lower rate than originally anticipated. As a reminder, our outlook does not include any potential additional share repurchases in the second half of the year.

Speaker 2

Now let me go into more detail regarding our sales outlook for 2024. There are many drivers giving us optimism for improved trends in the second half. However, given the uncertain consumer environment, the ultimate impact of these drivers can be quite broad. As these drivers take hold and build upon one another, we believe that there is potential for the top line to improve sequentially throughout the second half of the year. We are anticipating a continued ramp up of innovation and renovation to help improve the top line, particularly in North America retail.

Speaker 2

We are increasing our marketing spend above what we originally planned to continue to drive brand superiority across our portfolio. In Away From Home, we are not assuming any industry growth given the current pressure, particularly in U. S. Restaurant traffic. In the U.

Speaker 2

S, we do, however, continue to win new business, particularly outside of catch up and in non commercial channels. We will begin servicing these contracts starting in the Q3. In emerging markets, our away from home improvement will be primarily driven by increasing distribution through our go to market strategy and global activations, such as our high end selection program. And finally, understanding that the consumer is looking for value and propensity to trade down is high, we are also increasing selective investments in trade above our original expectations as we head into the back half of the year. At the same time, we remain committed to our disciplined approach to drive sustainable long term profitable growth.

Speaker 2

With that, I will pass it back to Carlos for some closing comments.

Speaker 1

Thank you, Andre. You can see that like many companies, we continue to navigate through short term turbulence. Despite this evolving environment, Kraft Heinz is well positioned to address these challenges, and we remain confident in our ability to execute on our strategic agenda. We have a portfolio of leading iconic brands that provide value across multiple price points and channels. Our brand, setting attractive categories that play in consumer spaces where we have the right to win, and our investments in agile scale help us to continue to unlock end to end efficiencies, mitigating volatility and unpredictable changes.

Speaker 1

We also have a disruptive innovation engine that is gaining momentum and driving incrementality. And our effective marketing continues to engage consumer at the speed of culture. We've had great success in marketing and now we are institutionalizing our philosophy of building superior brands on a global basis through our brand growth system. And finally, our enhanced structure enabled us to move globally and with agility. This is why I'm confident in and excited about the future of Truck Hunt.

Speaker 1

Thank you for your time and interest.

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