Kraft Heinz Q2 2022 Prepared Remarks Earnings Call Transcript

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Provided by Quartr
July 27, 2022

Key Takeaways

  • Positive Sentiment: Organic net sales grew 10.1% driven by double-digit momentum across growth platforms, foodservice and emerging markets, reflecting robust consumer demand.
  • Positive Sentiment: Adjusted EBITDA of $1.5 billion surpassed expectations as pricing actions and supply-chain efficiencies offset record inflation.
  • Positive Sentiment: Raised full-year sales outlook to high single-digit organic net sales growth while maintaining adjusted EBITDA guidance at $5.8–$6.0 billion.
  • Negative Sentiment: Free cash flow was pressured by inventory rebuilds and tax payments related to divestitures, reflecting a deliberate strategy to improve service levels.
  • Positive Sentiment: Cost-efficiency program on track to deliver $400 million in gross efficiencies this year and at least $2 billion in variable-cost savings by 2024 through value engineering and waste reduction.
AI Generated. May Contain Errors.
Earnings Conference Call
Kraft Heinz Q2 2022 Prepared Remarks
00:00 / 00:00

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 Q2 2022 business update. During our review, we will make some forward looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our earnings release and our filings with the SEC.

Operator

We will also discuss some non GAAP financial measures during these remarks. These non GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non GAAP reconciliations within our earnings release and the supplemental materials posted at ir. Kraftheinscompany.com. Today, our Chief Executive Officer, Miguel Patricio, 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 2022 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 the question and answer session at ir. Kraftheinscompany.com. A replay of the question and answer session will be available following the event through the same website. With that, I will turn it over to Miguel.

Speaker 1

Thank you, Anne Marie, and thank you everyone for joining us today. We delivered yet another quarter of Strong results as we continue to successfully navigate a dynamic environment. It has been enabled by further advancements of our long term strategy. We are growing and we are strengthening our competitive position. In the face of these turbulent times, we are better anticipating market conditions, adapting to an environment that is constantly changing and we have continued to demonstrate our resilience to these waves of challenges.

Speaker 1

So let's take a deeper look into our results. In the second quarter, we generated Double digit organic net sales growth versus the Q2 of 2021 as a result of continued solid consumer demand for our brands. This growth was higher than expected And in the 5.2% compound annual growth rate compared to the Q2 of 2019. All three pillars of growth and that is our growth platforms, food service, and emerging markets contributed to these results. They are hitting on all cylinders.

Speaker 1

We see strong consumption in North America continuing with lower elasticity and improving market share trends. And we have delivered accelerated growth in emerging markets and foodservice. In developed markets, particularly in Europe, we delivered solid top line results Even though this region has been more affected by higher inflation and constrained resource availability. Looking to our adjusted EBITDA results, we generated $1,500,000,000 in the Q2 of 2022, slightly above our expectations. Compared to the Q2 of 2019, the compounded annual growth rate was a positive 1.9% on our ongoing business.

Speaker 1

Importantly, We are offsetting record level inflation through price realization and supply chain growth efficiencies. In the Q2, our free cash flow reflects both tax payments on our natural cheese divestiture as well as a rebuild of inventory, which is critical to improving our service levels and fully capturing market share improvement. As I mentioned, our top line acceleration is fueled by our 3 pillars of growth: Demand across growth platforms, particularly taste television, remains very strong. Our foodservice business It's growing faster than the industry and emerging markets accelerated their pace of organic net sales. Let's take a look at each one.

Speaker 1

We have generated solid growth across the portfolio With exceptional growth in our growth platforms. They make up more than 60% of our North America business And have grown at about 8% CAGR versus the Q2 of 2019. With the majority of the categories improving market share year over year, including our iconic brands Such as Heinz, Kraft Mac and Cheese, Philadelphia Green Cheese and Kraft Singles. As you can see, our consumer centric strategy is working and the pricing power of our brands are taking hold. Take a look for example at the relatively limited elasticity we are seeing in our North American business, where we grew organic net sales at 9.8% with pricing contributing approximately 13 percentage points And the volume mix decline of approximately 3 percentage points in the 2nd quarter.

Speaker 1

On a sequential basis, We saw roughly 4 percentage points of incremental pricing with only 1 percentage point of incremental impact to volume mix. This is encouraging by historical standards and reflective of a much stronger portfolio that we have today. Consumption in the U. S. Specifically continues to increase up to 6.9% in the Q2 compared to 2.9% in the Q1.

Speaker 1

Earlier this year, Carlo shared our strategies to improve market share performance and we continue to see consistent progress. Our year over year market share performance on a mix adjusted basis improved sequentially by approximately 10 basis points versus the Q1 of this year. On a non mix adjusted basis, Our share rebound is even more pronounced with a 50 basis points improvement versus the 1st quarter, resulting in nearly a flat market share in the Q2. For the one time challenges that we addressed in the Q1, We are seeing improvements, for example, in cream cheese, where our service levels have recovered and we have been gaining market share. For constraints that we have been addressing through the first half of the year, such as in lunchables, Production levels are improving and we expect these improvements to flow through into the Q3.

Speaker 1

And for the long term solutions, we have been making progress as well. With the contract signed with Simplot, which will not only boost production capacity, but will give us additional capabilities as we strengthen our O'Rider business. As a result of the great work supply chain team has done, as well as what we are doing to more Strongly connect with consumers, we expect to see market share results continue to rebound in the second half of the year. Let's now move to our 2nd pillar of growth, which is foodservice. In North America and international, Foodservice is growing at more than 20% clip and continues to gain share.

Speaker 1

Today, This channel is approximately 13% of our overall sales and we are continuing to invest aggressively in both sales and capacity to capture further white spaces. As I have said before, foodservice is a strategic channel for us. 1st, It provides a platform for us to test innovation, quickly making adjustments and prepare for retail launch As I described with Heinz Dip and Crunch last quarter. And second, it's a powerful vehicle to drive consumer trial for our brands, particularly in emerging markets where consumers may not be as familiar with them. Much of our current growth is coming from strong partnerships with QSR, many of which have global footprints that align well with our white space opportunities.

Speaker 1

And during these times of inflation, we expect Strong performance from QSRs with their relatively lower price points. We are also leveraging our Chef program to not only expand our sales with existing customers, but also to acquire new customers. Overall, we continue to expect foodservice to be a strong engine for our company. Turning to our 3rd pillar of growth, emerging markets. We have been expanding our presence through a sustainable and repeatable go to market model, which is delivering accelerated growth.

Speaker 1

As you can see, organic net sales for our international zone Grew 11% in the quarter. Within the international zone, emerging markets grew at a faster pace 16%. And for those countries where we have already activated our go to market model, organic net sales grew 29% over the same period, with this growth driven by a 12% increase in retail distribution points. And compared to 2019, organic net sales grew 74% with growth driven by a 77% increase in retail distribution points. With the opportunity we have on this front, we are investing aggressively to expand our go to market strategy.

Speaker 1

Those countries in which we have activated the go to market strategy represents about 35% of our emerging market business today, and we plan to increase this to about 75% by the year end. Let's now take a closer look That's how we are navigating today's headwinds. Without a doubt, it's tough on farmers out there. Inflation is still high, but we are seeing some costs beginning to recede from peak levels And others showing signs of leveling off. Service is still challenging, but we've made significant improvements.

Speaker 1

And while the great resignation persists, we have strong employee engagement. In this difficult environment, We understand that operational excellence and delivering relevant solutions for consumers is critical. Our teams have demonstrated an ability to anticipate and adapt across our supply chain and to work alongside Our retailers are developing impactful consumer solutions. On the supply chain front, Our evolving supply chain powered by agile at scale allows us to adapt to constantly changing conditions and better prepared us for what is to come. We have increased production, improved service levels and are continuing to unlock growth efficiencies.

Speaker 1

We are on track to deliver on our efficiency plan As we work to free up at least $2,000,000,000 in variable costs by 2024. Importantly, we are doing both improving service and unlocking efficiencies. We are not neglecting 1 or the other, and we are accomplishing all of this while we improve Safety will reduce water consumption, energy consumption and waste. On the consumer front, we are mindful of the current inflationary environment and how it affects consumers. Our portfolio is balanced with our market share by consumer base, but over indexed 21 income levels.

Speaker 1

Plus, we have lower private label exposure relative to the industry and to our historical levels. We are tailoring our approach to consumers similar robust assortment and effective promotions, Comprehensive omni channel communication, optimization of channel mix and product innovation and renovation. The breadth of our portfolio provides us the ability to offer bundled affordable solutions. We also have the scale and insight to redeploy our programming resources in a strategic manner to provide solutions for both retailers and consumers. In other words, we can focus on traffic building products by shifting investment resources across our portfolio without needing to increase the overall spend.

Speaker 1

Such investments with retailers provide consumers solutions while driving the power of our brands And sustaining the consumption levels we have built. Let me provide you some examples where we are working with retailers to offer meal solutions. Take a look at our out of the burger campaign where retailers can pair their private label hamburger bands and patties with our condiments and cheese slices. Another great example is the $1 Grilled Cheese Sandwich Night, where we combine our Kraft Singles with private label bread and private label butter. These are examples of wins for our consumers with great value, Wins for the retailer to drive traffic and wins for Kraft Heinz.

Speaker 1

As our relationships strengthen with customers As we continue to improve inventory and service levels, we have more optionality to execute more mutually strategic programs Like this with retailers. In the second half of twenty twenty two, we will increase the level of these programs, particularly around key occasions, but not to the extent seen in 2019. Consumers continue to shop online and we continue to deliver solid results. We are growing this channel with E commerce retail sales increasing 18% versus the Q2 of last year and our messaging is resonating with consumers Across our various paths of engagement, we are working effectively across all channels to provide solutions that consumers need. For example, for those looking for lower absolute price points, We have developed smaller packs to fit their budget like our $1 Lunchables Or if they are looking for maximum value, we have multi packs offering such as our Kraft McEntee's 10 pack solution.

Speaker 1

We are anticipating and effectively navigating channel mix shifts in the comprehensive manner to make sure that the right product Is it the right channel and at the right time? We are also continually looking at Our portfolio to optimize our offerings, removing elements that consumers don't want or don't really care about, while at the same time reducing costs where possible to mitigate passing on inflation through price. A great example of this is our Capri Sun renovation, which is launching now. We have reduced sugar by 40% and are using monk fruit concentrate to provide sweetness. This is great for consumers, Especially parents who are looking to reduce sugar intake for their kids while maintaining the great taste that the kids love.

Speaker 1

And it also reduces our exposure to volatile commodity markets. We view it as our responsibility to help consumers in this environment and by leveraging our agility and scale that we are doing just that. We are also keeping our eye on the long term and making strides in our transformation. Over the past 2 years, we have been building a culture of creativity with agile execution. We have built a team with top notch talent and we are investing in systemic solutions and key partnerships.

Speaker 1

Today, our teams can faster access more robust insights through our partnership with Google and with our Craft Omatik Insights Generator. Craft Omatik is our in house proprietary software and data science model That analyzes consumer behavior across all our brands utilizing integrated point of sale, panel and marketing data. While our internal agency, the kitchen generates individualized content at scale. This artificial intelligence powered tool enables us to create more than 500 customizations for a single marketing asset. Today, we are onboarding internal media buying capabilities And are on track to be executing more than 30% of our e commerce search and display activity through Craftomatic.

Speaker 1

With the kitchen, we are now internally driving the social activity Of 16 brands in our portfolio, including Heinz, Kraft Mac and Cheese, Oscar Mayer and Philadelphia, our biggest opportunities. Our ability to connect with consumers is critical to drive our strategy forward. And while there is more work to be done in this area, we are on the right track. Using our scale, we can accelerate our growth and capture more white spaces. Let me give you an example.

Speaker 1

In 2019, we acquired Primal Kitchen. Since then, We have more than doubled the size of this business. We have similar opportunities through our acquisitions of Hammer in Brazil And Sun Foods in Turkey. Hemmer has a very strong footprint in the south of Brazil, while Kraft Heinz has a broader network With strong distribution in other areas of the country. As we bring the Hamburg brand to the Heinz network, We expect to see significant expansion opportunities.

Speaker 1

And with Ascent, we are already doing the same thing in a different way, Leveraging Assess' strong distribution network to grow the Heinz brand in Turkey. In fact, compared to the Q2 of last year, We have sold 59% more volume for the Heinz brand in Turkey. A deal making is no replacement for organic growth. Where we have acted, we have done so In a selective price disciplined way that has enhanced our organic growth potential. New partnerships are also key for us in our ongoing business transformation.

Speaker 1

We have a unique opportunity With our joint venture with NOSCO and I'm very excited about this opportunity for innovation and growth. Our management team is in place, moving with agility and already actively collaborating with the product Kraft Heinz team in a completely new way. With that all, I will now turn it to Andre to provide more detail on our 2nd quarter financial results and to discuss our outlook for the balance of the year.

Speaker 2

Thank you, Miguel. I am pleased with our performance in the Q2 as we balance our top line growth while protecting margin dollars. We generated organic net sales growth of 10.1% this quarter with the increase coming from all of our growth drivers, Our growth consumer platforms, food service and emerging markets. As you can see, elasticity remains relatively low with volume mix declining 2.3% on a 12.4% pricing, reflecting the ongoing demand for our brands. On a sequential basis versus the Q1, we saw price realization up over 3 percentage points from 9% to 12.4%, while volumemix was relatively flat, down 2.2% in the 1st quarter and 2.3% in the 2nd quarter.

Speaker 2

Adjusted EBITDA came in at $1,500,000,000 is slightly above our expectations. Pricing and gross efficiencies offset inflationary pressures seen in the quarter And we continue to invest in and support the business and future growth. The impact from divestitures was approximately $105,000,000 Looking to gross margin, the Q2 of this year was 30.3% compared to 34.6% in the 2nd quarter of 2021 for a 4 30 basis points decline. This decline is due primarily to the dilutive impact of pricing to offset the dollar inflation, which was approximately 4.50 basis points. We generated $0.70 in adjusted EPS, also above our expectation.

Speaker 2

2nd quarter results include approximately a $0.07 negative impact versus last year from the divestiture of our nuts and natural cheese businesses, the largest driver of the $0.08 year over year decline. Finally, our free cash flow generation in the 2nd quarter reflects our rebuilding of inventories that will be key to sustaining improved service levels and market share gains. Free cash flow also reflects payments of taxes in conjunction with the divestitures. As we have mentioned before, we are pricing to protect adjusted EBITDA dollars. By the end of the second quarter, 99% of our intended 2022 pricing actions have been announced with the vast majority already in the market.

Speaker 2

Much of this benefit was seen in the 12% price realization in the 2nd quarter, with additional benefit from these pricing actions Backed to come in the Q3. If it turns out that additional pricing is needed in the back half of the year, we will do it in a surgical way. At the same time, we are using solutions previously described by Miguel, including our broad assortment for value beyond price and price pack architecture to provide value to consumers. We have been careful to price in a way that doesn't disrupt our future And have been mindful of our pricing relative to private label, particularly in those categories in which such gaps could have more of an impact on our business. To provide some context, and as Miguel already mentioned, our portfolio today is significantly less exposed to private label share.

Speaker 2

The current private label price gap for total Kraft Heinz remains consistent with pre pandemic levels. We are managing these gaps, however, not in total, but based on the relative potential impact on our business. And as such, we see 3 clear classifications of price gaps versus private label. The first group consists of categories where demand has historically been less sensitive to price gaps. These are situations in which we are a meaningful share leader and price points are strategically driven by brand equity.

Speaker 2

And while our price gaps to private label tend to be higher, They do not typically impact our competitiveness. An example here will be Kraft Mac and Cheese. This group represents nearly 60% of our business. The 2nd group consists of categories in which demand is more sensitive to price gaps, But the size of those gaps are stable or contracting compared to private label. An example here will be cold cuts.

Speaker 2

This group represents approximately 25% of our business. And the final group consists of categories in which demand is sensitive to price gaps And our press recapture private label are expanding. Here, we evaluate each individual category to determine how to best protect our position. For example, within sandwich cheese, we have a robust price ladder offering the consumer choices from vivir slices to more premium Kraft Singles. And thus, despite an increase in price, we have been gaining share.

Speaker 2

In Bacom, our price points remain high, But we are covering higher commodity costs and protecting our adjusted EBITDA dollars. With Voraida, the recently announced partnership with Simplot will allow us to increase our capacity, rebuild inventory and therefore improve our promotional flexibility. We monitor private label price gaps closely, keeping the long term at the forefront of our analysis. Even though we are not immune to price gap changes, the market dynamics and our competitiveness is playing out in line with our expectations. Having said that, I would like to reiterate that we will continue to take actions to protect our EBITDA dollars from inflation using pricing, revenue management tools and Supply Chain Efficiencies.

Speaker 2

Turning now to cost mitigation. We are managing our cost volatility through active portfolio management and our disciplined hedging strategy. As you can see, We started the year with commodity costs at a relatively lower percentage of total COGS as compared to COGS before the divestiture of our natural cheese and nuts businesses. And while some costs have started to recede from peak levels like transportation, overall costs remain high. It isn't clear how fast and to what extent they will decline.

Speaker 2

As a result, we continue to execute our hedging and cost management strategy in a disciplined manner. Looking to the second half of twenty twenty two, approximately 70% Total COGS are hedged or locked through contracts. At the same time, our teams are unlocking efficiencies with a continuous improvement mindset using levers such as value engineering and waste reduction to lower costs. We expect to free up at least $400,000,000 in gross efficiencies this year and are well on our way to at least $2,000,000,000 by 2024. Finally, in terms of our overall capital allocation policy, There are no changes in our 4 main priorities, which are to 1st, reinvest in the business to drive organic growth 2nd, to remain committed to our dividend 3rd, to maintain financial flexibility and our commitment to remain investment grade And 4th, to actively manage our portfolio in a patient and disciplined way.

Speaker 2

Looking to the rest of the year, We are raising our expectations for organic net sales from mid single digit to high single digit growth. This is primarily based on higher pricing and favorable elasticity to date, particularly in the U. S. Our outlook does contemplate greater price elasticity impacting volume and mix during the balance of the year as compared to the first half of the year. Also, we expect an improving but still challenging supply chain in the back half of the year.

Speaker 2

In terms of adjusted EBITDA, we continue to expect to deliver between $5,800,000,000 to $6,000,000,000 including the 53rd week as we leverage pricing and growth efficiencies to mitigate the higher inflation we are now expecting. The inflation for the full year is expected to be in the high teens, consistent with what we have seen year to date. And we will invest in our business transformation at levels consistent with our original plans. In other words, We will support our brands and make investments for our long term advancement and growth. We are anticipating roughly A forty five-fifty five split between the 3rd and 4th quarters for adjusted EBITDA this year.

Speaker 2

This includes the benefit of the 53rd week And a $400,000,000 divestiture impact versus 2021. With the recent strength of the dollar, We are now anticipating an approximate 1% foreign currency headwind

Speaker 1

in EBITDA. Below the line, We continue to

Speaker 2

expect our effective tax rate for adjusted EPS to be between 20% to 22%. With that, let me hand it back to Miguel for some closing comments.

Speaker 1

Thank you, Andre. We delivered another quarter of solid results while navigating to pace challenges enabled by continued advancements that we have made on our long term strategy. I'm very proud of the Kraft Heinz team because despite all of the challenges, our employees across the organization Continue to do a tremendous job. We are anticipating and adapting to changing market conditions while managing inflation, Surprising realization and gross efficiencies. And we are recovering market share by rebuilding inventories, Relieving supply constraints, improving service levels, elevating customer relationships and creating impactful disruptive marketing, all of which have been essential cornerstones in elevating our powerful brands and transforming our business.

Speaker 1

We are better positioned than ever before to manage whatever comes our way as we work to make life delicious for our consumers around the world. Thank you for your time and interest in Kraft Heinz. For the one time challenges That we addressed in the Q1, we are seeing improvements. For example, in cream cheese, where our service levels has recovered and we have been gaining market share. For constraints that we have been addressing Through the first half of the year, such as in Lunchables, production levels are improving and we expect these improvements to flow through into the Q3.

Speaker 1

And for the long term solutions, we have been making progress as well With the contract signed with Simplot, which will not only boost production capacity, but will give us additional capabilities as we strengthen our Oryda business.

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