Kraft Heinz Q4 2022 Prepared Remarks Earnings Report

Kraft Heinz EPS Results

• Actual EPS: $0.85
• Consensus EPS: $0.78
• Beat/Miss: Beat by +$0.07
• One Year Ago EPS: $0.79

Kraft Heinz Revenue Results

• Actual Revenue: $7.38 billion
• Expected Revenue: $7.23 billion
• Beat/Miss: Beat by +$149.85 million
• YoY Revenue Growth: +10.00%

Kraft Heinz Announcement Details

• Quarter: Q4 2022 Prepared Remarks
• Date: 2/15/2023
• Time: Before Market Opens
• Conference Call Date: Wednesday, February 15, 2023
• Conference Call Time: 7:00AM ET

The Kraft Heinz (NASDAQ:KHC) (NASDAQ: KHC) is a global food and beverage company formed in 2015 through the merger of Kraft Foods Group and H.J. Heinz Company. The combination created one of the largest packaged-food companies in the world, built around well-known consumer brands. The merger was supported by major investors and established a multi-national platform for branded food products.

Kraft Heinz develops, manufactures, markets and distributes a broad portfolio of branded packaged foods and condiments. Its product assortment includes iconic household names in categories such as condiments and sauces, cheese and dairy, meals and sides, meats, coffee and other shelf-stable and refrigerated items. The company sells products through retail, foodservice and other channels, and operates across North America, Europe, Latin America and parts of the Asia-Pacific region, serving consumers in many international markets.

Kraft Heinz is headquartered in Chicago with historic operational roots in Pittsburgh and maintains global manufacturing, research and development, and sales operations to support its portfolio. The company emphasizes brand management, scale manufacturing and global distribution as core elements of its business model. Miguel Patricio has served as chief executive officer since 2019, leading efforts to refresh the company’s brand portfolio and improve growth execution while leveraging the company’s extensive marketing and supply-chain capabilities.

Kraft Heinz Q4 2022 Prepared Remarks Earnings Call Transcript

Key Takeaways

• For 2022 full year organic net sales of 9.8%, with Q4 organic net sales up 10.4% and adjusted EBITDA slightly over $6 billion at the top end of guidance.
• All three growth pillars—U.S. Retail, Foodservice, and Emerging Markets—delivered double-digit organic net sales growth in Q4, fueling overall momentum and market share gains.
• Pricing programs offset record inflation while consumption elasticities remained stable, leading to sequential quarterly improvements in market share against both branded competitors and private label.
• Operational efficiencies and cost-savings initiatives generated approximately $450 million in savings in 2022—surpassing the $400 million target—and Q4 case fill rates trended upward each month.
• The 2023 outlook calls for 4–6% organic net sales growth, adjusted EBITDA growth aligning with long-term targets, and continued investments in brands, capacity, and digital capabilities.

Presentation

[Anne-Marie Megela, VP and Global Head of 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 2022 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. 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 excludes certain items from our financial results reported in accordance with GAAP.

[Anne-Marie Megela, VP and Global Head of 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 & Events for a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP financial measures. Today, our Chief Executive Officer and Board Chair, 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 fourth quarter and full year 2022, and will discuss our 2023 outlook. We have also scheduled a separate live question-and-answer session with analysts. You can access our earnings release, supplemental materials, and audio of our question-and-answer session at 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 Miguel.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

Thank you, Anne-Marie. Thanks to all of you joining us today. Let me start by saying that our hard work has certainly paid off. In 2022, we delivered strong results with great momentum as we close the year. I am very proud of the entire Kraft Heinz team and our partners for making this happen. We did it while navigating a difficult environment with ongoing inflation and supply chain disruptions, keeping in mind the challenges our consumers are facing while never losing sight of the future. We have been transforming our company over the last few years, and I'm pleased to say that in 2022 we have made incredible progress. However, there's still much work to do. With the foundation that has been laid, I am very optimistic for what the future holds for us, our consumers, and our stakeholders.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

As you can see here, we've accomplished a lot this year, and I'm excited to share the details with you. With that, well, let's dive in. For the full year, we delivered 9.8% Organic Net Sales growth versus prior year. We also came in at the top end of our Adjusted EBITDA guidance at slightly over $6 billion. Turning to our fourth quarter, we saw accelerated momentum on several key metrics. In terms of Organic Net Sales, we grew 10.4%, driven by our three pillars of growth and continued ongoing demand for our brands. Powerful brands that resonate with the consumer. For Adjusted EBITDA in the fourth quarter, we delivered 8.6% growth or 5.6% when removing the impact of divestitures and the benefit of the 53rd week.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

Our top line growth is coming from all three pillars: growth platforms in U.S. retail, food service, and emerging markets. Let me talk through our performance in each one of these areas. Our strategy is working. In the fourth quarter, total North America zone Organic Net Sales grew 9% versus the fourth quarter of last year. Our U.S. retail growth platforms have grown approximately 15% over the same time period. Our growth strategy has been working consistently since we began our transformation with our portfolio delivering elevated growth versus 2019. Total North America zone Organic Net Sales have grown at a 6% compound annual growth rate versus the fourth quarter of 2019. Our U.S. retail growth platforms have grown approximately 9% over the same time period.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

Our Organic Net Sales growth in North America continues to be driven by strong price execution, necessitated by record levels of inflation we saw in 2022 and relatively low elasticities. In the fourth quarter, Organic Net Sales was up 9%, reflecting a sequential decrease in pricing relative to the third quarter as we begin to lap pricing that was taken in the prior year. Our U.S. retail consumption continues to see quarter-over-quarter acceleration and increased to 10.5% in the fourth quarter. This reflects positive price of 16.3% and a volume mix decline of 5.8%. Looking at the consumption, elasticities are holding steady, and we continue to see strong consumer demand for our products. Moving on to market share performance. We saw further improvement in the fourth quarter.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

Mix adjusted share versus prior year improved by 20 basis points relative to the third quarter. Non-mix adjusted share had a slight improvement relative to the third quarter. I am pleased to say that we are on the right track with sequential market share improvement each month within the fourth quarter. We continue to compete very well against private label. Looking at the share performance in the fourth quarter relative to the third quarter year-to-date period, we had the most significant improvement in share when compared to branded competition and private label. Private label saw a slight increase while branded competition is down as private label continues to gain share from other branded players. Private label growth is not coming from us, rather from other brand competition, underscoring the strength of our brands.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

As we have highlighted before, our portfolio of iconic brands is balanced with our market share by consumer base, not over-indexed to any of the income levels. We saw year-over-year market share improvements for all income levels relative to the beginning of the year. In fact, the largest group of consumers of our products by income is growing the most with a 13% increase in consumption in the fourth quarter. Let's move to our second pillar of growth, food service, where we continue to see double-digit growth. Kraft Heinz food service grew over 20% in the year and in the fourth quarter with strong performances across North America and International. We gained share in both zones and significantly outpaced industry growth. In North America, we are focused on best-in-class execution to support category-leading brands.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

TDP were up in 2022 relative to 2019, despite purposely reducing our number of SKUs by approximately 50% to drive focus and profitability. In international, our chef model continues to be very successful. In 2022, it was responsible for 30% of new business wins. A result of our continued commitment and the strong growth we are seeing, we have invested in additional capacity that will come online in the second quarter. We are adding new assets for our Dip & Squeeze ketchup, which will enable 50% more production capacity and a new line for single-serve ketchup packets, which will enable 20% more production. Food service remains an attractive channel for us. We are very encouraged by the growth we have seen. We are under-penetrated. We expect to continue to see strong results in 2023.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

Now turning to our third pillar of growth, emerging markets. In 2022, emerging markets grew approximately 15%, ahead of our international zone growth of 12%. In those markets where the Go-to-Market Model has been implemented for at least 6 months, Organic Net Sales grew 25%. As we ended last year, we increased the percentage of emerging markets leveraging the Go-to-Market Model from approximately 30% in 2021 to over 70% in 2022. This 70% represents countries where the model implementation had either began or has been fully completed. We plan further expansion in 2023, targeting approximately 90% of emerging markets to be leveraging the Go-to-Market Model by the end of the year. As you can see, our three pillars of growth are delivering.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

We have gained momentum in each one of these areas despite the difficult, yet improving environment. With the supply chain still challenged and consumer wallets being squeezed, our teams are actively providing consumers with solutions while also improving service levels and delivering on efficiencies. Our efforts here are paying off, supporting top line growth. Specifically, the breadth of our portfolio uniquely position us to be there for all consumers. Last quarter, we shared some of the solutions we are providing as new trends emerge. Consumers are looking for convenient, filling, and nutritious meals while at the same time paying more attention to their price tag. Our consumers now more than ever are looking for choices that they can enjoy on the go, that are easy to prep, are feel good foods, and provide price point optionality.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

Within each one of these needs, we have multiple brands that consumers can turn to. The value we create through our brands is why we are confident that consumer demand for our products will remain strong. In fact, in the fourth quarter, many of these product solutions were gaining share, including Lunchables and Kraft Mac & Cheese Cups, showing further evidence that consumers are turning to our trusted brands in these tough times. Although the operating environment is getting better, we are not in the clear. The issues with upstream suppliers are stabilizing, but there are challenges that are arising from time to time, more sporadic in nature that we continue to address with agility. This is reflected in our case fill rate. Year to date through the third quarter, U.S. CFR was just below 90%.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

In the fourth quarter, we continued to see small improvements each month, ending December at the highest level we have seen all year. We are still not where we need to be with the goal of getting back into the high nineties. From an efficiency perspective, we delivered approximately $450 million of cross-savings in 2022, well ahead of our target of $400 million per year, and we are ahead of our plan to deliver $2 billion by 2024. Let me turn to our long-term strategy. Despite all the challenge last year, we continued to make advancements, and 2022 was an incredible year for Kraft Heinz for many reasons. Let me take you through a couple of key highlights. First, we continued to strengthen our portfolio, unleashing the power of our growth platforms.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

Following the divestitures of some of our non-core businesses, we have a portfolio that's less vulnerable to commodity volatility and trade-down risk. We continue to invest in our brands, renovating consumer favorites such as Philadelphia, Lunchables, Kraft Singles, Capri-Sun, and Deli Max. We have done so by leveraging our brand design to value framework, where we invest in what's important to consumers and remove what it isn't, in some cases, generating efficiencies to reinvest in the business. We also expanded Agile@Scale throughout the organization. We invested in dedicated talent, digital technology solutions, and trained the organization on the disciplined process of agile ways of working. Revenue management is one area where we have seen significant value creation through a proprietary digital solution. In this space, we've developed analytics to drive sales growth by optimizing our promotions.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

As an example, in the second half of the year, we analyzed the hot-dog and bacon categories for the key power windows, Labor Day, Thanksgiving, and Christmas. We found that by making an incremental investment in trade, we could execute promotions that would increase our market share while driving profit and increased sales for our retailers. A real win-win all around. All in, the projects we executed in 2022 contributed more than $100 million in EBITDA to our results and are poised to drive even more value in 2023 and beyond. We are connecting with consumers through disruptive marketing. It's being recognized more and more externally. In 2022, we won 11 Cannes Lions, the most in our history. Through data technology and our in-house agency, The Kitchen, we are driving amplified earned media and moving at the speed of culture.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

Last year, we drove more earned media coverage for our brands than ever before. Earned impressions more than doubled over the last two years with seven brand activations garnering one billion or more earned media impressions in 2022 alone. We built strategic partnerships to accelerate our strategy. These partnerships allow us to drive speed, quality, and capabilities across the entire value chain. To top off 2022, we are excited to announce a new multi-year partnership with IHOP. This is an example of how we are taking new and unexpected approaches within some of our product categories. In April, we'll launch IHOP-branded coffee in retail, leveraging the scale and capabilities of our existing coffee business and partnering with a fan-favorite brand like IHOP to reach new consumers.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

In 2022, we continued to unlock the value of Primal Kitchen, which has doubled net sales since we acquired the business. We integrated our four recent acquisitions, expanding our footprint to new geographies, gaining new distribution points, as well as leveraging Kraft Heinz's existing distribution network to drive sales of our new brands. Through these acquisitions, we have also gained new capabilities to allow us to explore new channels such as direct-to-consumer. We continue to unlock efficiencies over-delivering on our gross saving plans for the year, with approximately $450 million of variable cost efficiencies. We strengthen our balance sheet and return to investment-grade rating in about two years. None of these accomplishments would have been possible without our incredible Kraft Heinz team. We have made investments in our people, and it shows. We've significantly improved employee engagement.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

With that, I will pass it to Andre to walk you through our fourth quarter results and 2023 outlook.

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

Thank you, Miguel. In the fourth quarter, I am very pleased that we finished the year with strong momentum and are well-positioned for 2023. Q4 Organic Net Sales growth was 10.4%, with both zones delivering strong performance. North America grew 9.2%, and International zone grew 14.3%. As you can see, both zones delivered robust price with elasticities below historical levels. Looking at Constant Currency Adjusted EBITDA, Kraft Heinz grew 10.7% in Q4. This includes a negative impact of 4.9% due to divestitures and acquisitions, and a positive 7.4% impact from the 53rd week. At the segment level, North America and International grew Constant Currency Adjusted EBITDA 7.8% and 28%, respectively.

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

Reported net sales was up 10%, with strong price realization of 15.2% despite lapping the first round of price at the end of 2021. Volume was down 4.8%, with elasticities is still below historical levels. We experienced headwinds from 2021 divestitures and currency, and a tailwind from the 53rd week. We generated over $1.7 billion in Adjusted EBITDA in the fourth quarter. Price offset inflationary pressure in the quarter, but not on a full year basis. This is due to the lag between when we realize inflation and when we priced. The impact from divestitures in the quarter was approximately $70 million, and the impact from the 53rd week was stronger than initially expected, coming in at approximately $120 million.

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

Looking to Adjusted Gross Profit Margin, the fourth quarter came in at 32.2%, which as expected, was a sequential improvement versus the third quarter and the highest achieved in the year. Fourth quarter Adjusted Gross Profit Margin was in line with 2019 levels, and we have made significant progress in narrowing the year-over-year margin gap. We're still 60 basis points below Q4 2021, driven entirely by the dilutive impact of pricing in the P&L. Moving to private label. As we have said before, our portfolio is significantly less exposed to private label than in the past. Following the divestiture of our nuts and natural cheese businesses in 2021, we have lower private label exposure relative to the industry.

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

As we look at our price gaps to private label, remember that sensitivity is low for approximately 60% of our U.S. retail business. For 35% of our business, price gaps are more relevant, but these gaps have been preserved throughout Q3 and Q4. Coffee is the only sensitive category where price gaps have increased, but dollar market share is stable. We continue to actively monitor the competitive landscape very closely, and we'll continue to take necessary actions to protect our Adjusted EBITDA dollars. Total sell-out volume in the U.S. were up 1% in the fourth quarter 2022 versus 2019. More importantly, base volume, which highly correlates with brand equity, grew 8% when adjusted for a -2% impact from a strategic SKU rationalization. Inventory volumes contributed -5% to overall volume.

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

This is driven in part by ongoing service level constraints. In our case, it's mainly a consequence of our revenue management execution, as we have been investing significant resources during the last three years to improve the way we spend trade for both ourselves and retailers. As you can see in the chart on the right, we have reduced volume sold on promotion more versus our branded competitors. This is coming from a higher base. We feel confident that we'll not go back to 2019 levels. Turning to Adjusted EPS, we generated $0.85 in the fourth quarter, up 7.6% versus prior year. These results include a $0.05 negative impact from lapping divested business and a $0.06 benefit from the 53rd week in 2022.

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

Pension income continues to be a headwind, contributing a $0.03 negative impact due to the higher interest rate environment and decline of equity markets. We currently see this headwind also impact in 2023. It's important to note that this is a non-cash impact in our pension plans remain overfunded, with relative funding levels being fully preserved. For the full year, Adjusted EPS was $2.78, down 5.1% versus prior year. This includes a negative $0.26 impact from divested businesses, a negative $0.06 impact from a higher effective tax rate, and a negative $0.05 impact from the reduction in pension income. Although the tax rate was a headwind for the year, it was still significantly lower than our ongoing tax rate, as we recognized approximately 200 basis points of favorable discrete items in the year.

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

These negative drivers were partially offset by lower interest expense, contributing a $0.13 benefit and the 53rd week contributing a $0.06 benefit. Our 2022 Free Cash Flow conversion of 45% reflects a rebuilding of inventories that will be key as we continue to improve service levels. Free Cash Flow also reflects the payment of taxes in the second quarter in conjunction with the divestitures. These two items together brought down full year Free Cash Flow conversion by 31 percentage points. For the fourth quarter, Free Cash Flow conversion is more in line with historical levels at 64%. We ended 2022 with a Net Leverage ratio of 3.2x, a significant improvement over the past couple of years. We remain focused on our target ratio of approximately 3x and believe this level provides us with sufficient financial flexibility.

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

For 2023, we expect Organic Net Sales to grow between 4%–6% compared to 2022, above our long-term algorithm of 2%–3%. The growth is anticipated to be price driven, with elasticity increasing relative to prior year, but not to the magnitude of historical levels. Nearly 95% of the pricing contemplated in our 2023 outlook has already been accepted and about 90% is implemented. We expect high single-digit inflation for the year, with pricing and growth efficiencies contributing to Adjusted Gross Profit Margin recovery. Half of the inflation we are seeing in 2023 is carryover from 2022, and the other half is new. Of the inflation that is new, approximately one-third is from conversion costs and two-thirds is from input costs.

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

Inflation in the first half of the year is expected to run in the low double digits and then taper to high single digits in the back half of the year. Adjusted Gross Profit Margin expansion is expected to fund incremental investments across marketing, technology and people. As we outlined in our long-term algorithm, we are investing for growth, funding these investments while preserving our top-tier Adjusted EBITDA margin. Constant Currency Adjusted EBITDA is expected to grow between 2%–4% or 4%–6% when excluding the impact from the 53rd week in 2022. Based on our current foreign exchange rates, we expect a 1 percentage point headwind from currency. This step-up in performance demonstrates that our growth transformation is working. As you may recall, our long-term algorithm calls for Adjusted EBITDA growth of 4%–6%.

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

We expect Adjusted EPS to be in the range of $2.67–$2.75, which includes approximately a $0.04 negative impact from expected unfavorable changes in non-cash pension and post-retirement benefits, and a negative $0.04 currency headwind at current foreign exchange rates. Our Adjusted EPS outlook contemplates a tax rate of 21.5%, which is under the assumption that none of the discrete benefits we received in 2022 will repeat. The expected 2023 year-over-year Adjusted EPS also includes a negative $0.06 impact from lapping the 53rd week in 2022. With that, let me hand it over to Miguel for closing comments.

[Miguel Patricio, Chair of the Board of Directors and CEO at The Kraft Heinz Company]

Thank you, Andre. I'm very proud of our results, not only because they were strong, but because of what they show about our transformation. Even with the dynamic environment we are facing, we grew Organic Net Sales, grew Adjusted EBITDA, and began to recover our gross margin in the fourth quarter, all while continuing to invest in our brands and to provide value to our consumers. Today, we are a better company with better results and making the right strategic investments in the business. We are accelerating profitable growth and are on the right path to a strong Adjusted EBITDA and cash generation. This momentum gives me even more confidence that we are on the right path in our journey to greatness. To hear more about this path forward, please join us next week at CAGNY. Well, thank you for your time and your interest in Kraft Heinz.

Participants

Executives

• Andre Maciel, EVP and Global CFO
• Anne-Marie Megela, VP and Global Head of Investor Relations
• Miguel Patricio, Chair of the Board of Directors and CEO