Kraft Heinz Q2 2023 Prepared Remarks Earnings Report

Kraft Heinz EPS Results

• Actual EPS: $0.79
• Consensus EPS: $0.74
• Beat/Miss: Beat by +$0.05
• One Year Ago EPS: $0.70

Kraft Heinz Revenue Results

• Actual Revenue: $6.72 billion
• Expected Revenue: $6.80 billion
• Beat/Miss: Missed by -$76.27 million
• YoY Revenue Growth: +2.50%

Kraft Heinz Announcement Details

• Quarter: Q2 2023 Prepared Remarks
• Date: 8/2/2023
• Time: Before Market Opens
• Conference Call Date: Wednesday, August 2, 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 Q2 2023 Prepared Remarks Earnings Call Transcript

Key Takeaways

• In Q2, Kraft Heinz delivered 4% organic net sales growth alongside a 6% increase in adjusted EBITDA and 12.9% growth in adjusted EPS, reaffirming its full-year outlook.
• All three growth pillars drove performance: Foodservice units grew ~15%, Emerging Markets rose 11% and U.S. Retail growth platforms expanded 1.3% in the quarter.
• The company lost 50 basis points of U.S. Retail market share, primarily in cold cuts, cream cheese and kids’ beverages, as pricing above the market against heavily promoting competitors tempered results.
• Kraft Heinz increased marketing spend by 23%, boosted R&D investment by 10% and achieved 180 basis points of gross margin expansion, funding further innovation and technology projects.
• For fiscal 2023, management expects organic net sales up 4–6%, constant-currency adjusted EBITDA growth of 4–6% (6–8% ex 53rd week) and adjusted EPS of $2.83–2.91.

Presentation

[Anne-Marie Megela, 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 second quarter 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, 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 and 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. Andre Maciel, our Global Chief Financial Officer, will provide a financial review of the second quarter and will discuss our 2023 outlook. We have also scheduled a separate live Q&A session with analysts. You can access our earnings release, supplemental materials, and audio of our Q&A session at ir.kraftheinzcompany.com. A replay of the Q&A session will be available following the event through the same website. With that, I will turn it over to Miguel.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

Thank you, Anne-Marie. Thank you all for joining us today. Let me start by sharing how proud I am of our team and the tremendous progress we have made. In the quarter, we grew profits and profitability over last year, with top line fueled by our three pillars of growth yet again. Yes, we lost share in the second quarter. This was a headwind we expected as we priced above the market. Here's the good news: the pricing is done, and even with elevated price gaps, we aren't losing incremental share to private label. This demonstrates a more resilient portfolio than in the past. We saw improvements in share each month in the quarter as we executed our action plan discussed in our last earnings call. More about that later. We are, however, losing incremental share to brands who are promoting more than we are.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

Meanwhile, we are taking a disciplined and surgical approach to protecting our profit dollars in certain categories. With this approach, and by continuing to unlock efficiencies across our value chain, we are generating margin gains. With these margin gains, and in line with our strategy to drive further growth, we are investing more in marketing, in R&D, and technology. Our results give me further confidence in our strategy and our business, and I'm pleased to reiterate our full year guidance. Let's take a closer look. In the second quarter, we increased top line, profits, and profitability. We grew organic net sales 4%, with adjusted EBITDA and adjusted EPS growing at a faster pace. We are driving growth across all three pillars. Foodservice grew approximately 15%, emerging markets grew 11%, and our growth platforms in U.S. retail grew 1%.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

Our foodservice business is growing and gaining market share. We delivered approximately 15% growth in the second quarter, outpacing the industry both in North America and International. We expect this pace of growth to continue in the second half of the year. As a reminder, our strategy to grow foodservice consists of three levers. First, continue to investing in our chef-led model. We are driving sales by bringing chefs into conversations with our customers to develop menu concepts and meet their specific needs. Second, competing in more attractive, higher-margin channels like mom-and-pop business and national accounts like hospitality and schools, where we are launching Lunchables for the first time ever in the fall. Third, innovation, both from a technology and a product standpoint. In North America, this includes introducing connected equipment such as the new Heinz Sauce Taps.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

These have adjustable portion control, which allows us to better customize solutions for our customers, as well as programs like Heinz Sauce Drops, where we can test new-to-the-world sauces. If they are successful, we can scale within foodservice and potentially launch at retail. We just did that very successfully in Brazil with smoked paprika mayo and bacon and onion ketchup. Let's turn into emerging markets. We continue to deliver double-digit growth in emerging markets. In the second quarter, we grew organic net sales by 11%. This is despite one-time impacts that reduced year-over-year growth by approximately 7 percentage points. The largest of these were delivery delays in Brazil, which impacted customer replenishment orders within the second quarter. In the third quarter, we are already seeing a return to the previous elevated sales levels.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

We expect emerging markets growth to accelerate as we move past these one-time impacts, with the second half growing at similar rates as the first quarter. We plan to continue driving growth in emerging markets through our differential strategy, consisting of three levers. First, a repeatable and data-driven go-to-market model to drive distribution. Second, through the power of our Heinz brand, which extends well beyond ketchup. Local jewels, brands like Master and Hemmer, complement Heinz in several markets. Third, our foodservice business, which allows us to further drive brand awareness. Finally, let's look at growth platforms in U.S. retail. North America organic net sales grew 1.6% versus the previous year, and within that, growth platforms grew 0.8%. As you can see on the slide, consumption of growth platforms was higher than the organic net sales at 2.6%.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

Let me reinforce that we are not changing share in ways that are not sustainable. We are focusing our investments on growth platforms, with each part of the portfolio playing a specific role. For example, while Energize may be contributing to share loss in areas like bacon, we saw a meaningful high single-digit adjusted EBITDA growth in the second quarter. Overall, our growth platforms are growing. Taste Elevation organic net sales grew 6%, with 8% consumption growth, and Easy Meals organic net sales grew 1% with strong consumption up 6%. Now, turning to market share. You may recall last quarter, I presented a series of action plans to capture additional share across our U.S. retail business.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

These plans consist of executing joint business plans to improve shelf space and merchandising, increasing marketing investments by double digits year-over-year, ramping up innovation delivery throughout the year, and solving our remaining supply constraints. Looking at the share results for the quarter, we lost 50 basis points. Share loss was concentrated in the same categories as the first quarter, which were cold cuts, cream cheese, and kids' single-serve beverages. Meanwhile, Taste Elevation and Easy Meals outperformed U.S. retail. As you can see, our action plans began to take hold throughout the quarter, despite persistent elevated price gaps, with U.S. share trends rebounding and improving each month. In Taste Elevation and Easy Meals, we saw even better recovery. July year-over-year share trends through the week ending 23 July continued to improve, and Taste Elevation and Easy Meals have returned to share gains.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

In the second quarter, we faced expected headwinds after pricing 75% of our portfolio and the reduction of SNAP benefits. In the fourth quarter, we expect pressure when student loans repayments resume in the United States. We have planned for elasticities to return to normal levels, and that's what we are seeing. Across our portfolio, we expect that continued execution of our action plans and the lapping of previous pricing actions will drive further trend improvement. On the supply recovery front, we reached case fill rates of 97% in the second quarter, and we have already started increasing our market spend. Throughout the third quarter, we expect the impact of our joint business plans to take effect across many categories. In the fourth quarter, the net sales impact of innovation is expected to ramp up meaningfully.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

Looking into specific categories, we are expecting improvement in Philadelphia Cream Cheese by the end of the third quarter. For kids, single-serve beverage, and cold cuts, we are expecting improvements in the fourth quarter. We have generated positive momentum, and we are confident that we will continue to see this trend in the second half of the year as we invest for the future across marketing, R&D, and technology. In line with our strategy, we are funding these investments through adjusted gross profit margin expansion. In the second quarter, we increased our marketing spend by 23% year-over-year, and we continue to generate best-in-class marketing activations. Let me tell you about one great example. We recently launched our first-ever global campaign for Heinz, highlighting the rational, yet well-deserved love that consumers have for the brand.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

This campaign was born from actually consumer stories, a testament of the power of our Heinz brand. At the Cannes Lions International Festival of Creativity this year, we were recognized with 21 Lions for our marketing and advertising campaigns. This is the most ever for Kraft Heinz, and more importantly, the most of any food company in the world. In the second quarter, we boosted our investment in R&D 10% versus the previous year. We are continuing to build our innovation pipeline, enabled by our agile innovation engine. In the U.S., after conducting regional tests, we launched NotCheese, NotMayo, and plant-based filling nationally. We are launching with robust media support and plan to reach full distribution by the fourth quarter. We are also expanding into new aisles in the grocery store.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

Kraft Mac & Cheese is finally going into the frozen aisle, and with the addition of fresh fruit, Lunchables is being introduced into the produce aisle. There is so much excitement around HEINZ REMIX in the food service channel. Consumers can now personalize their own flavor creations in seconds. This is just one tangible result of our agile innovation engine, going from concept to working prototype in just six months. Following the success of Heinz Pasta Sauces, we just launched our Heinz Culinary Tomato line in the U.K.. It features 11 brand new products, including chopped tomatoes and tomato puree, and game-changing basic sauces for dishes like curry and pizza. As you can see, Heinz means a lot more than ketchup, with 60% of International Zone Heinz net sales in categories other than ketchup.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

Our Tingly Ted's hot sauce, launched in partnership with British megastar, Ed Sheeran, is doing very well. We are in the top 25th percentile in velocities with a category in the UK. We are already live in Europe and currently launching it in North America, and have a strong pipeline for 2024 launches around the world. Overall, we are expecting innovation to ramp up in the second half of 2023 and into 2024. Finally, through our investment in technology, combined with what we call agile at scale, we are delivering solutions across our value chain to accelerate our growth and drive efficiencies. We are investing across innovation, sales, revenue management, marketing, and supply chain. For example, in supply chain, we recently announced that we are partnering to develop one of the largest, most automated distribution centers in North America.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

This distribution center is expected to enable us to drive 2x the volume for our customers and reduce our environment footprint. The facility is expected to open in 2025 and bring 150 jobs to the Greater Chicago area. Through our investment in marketing, R&D, and technology, we are not only enabling our performance, but investing for the future. With that, let me pass it to Andre to discuss our financial results.

[Andre Maciel, CFO at The Kraft Heinz Company]

Thank you, Miguel. In both North America and International, we grew top line profits and profitability. For total Kraft Heinz, organic net sales was up 4% in the quarter, fueled by our three pillars. In North America, we grew organic net sales 1.3%, driven by strong price execution, with elasticities approaching more normal levels as expected. In International, we saw higher growth at 13.2%, driven by pricing executed to offset inflation. From adjusted EBITDA perspective, we grew 6% globally, and we saw adjusted EBITDA margin expansion across both zones. Pricing and efficiencies drove improving adjusted gross profit margin, increasing 180 basis points versus the prior year. Margins are approaching 2021 levels and are enabling our double-digit investment in marketing, R&D, and technology.

[Andre Maciel, CFO at The Kraft Heinz Company]

We increased R&D spend 10% versus the prior year. Market investment was up 23%. In terms of adjusted EPS, we grew 12.9% versus prior year, driven by our strong adjusted EBITDA performance, contributing $0.06. Below the line impact totaled $0.03, driven by a positive $0.06 one-time tax impact. This was partially offset by unfavorable impacts in non-cash, pension, post-retirement, medical, and other expense, other income. We continue to strengthen our balance sheet, generating free cash flow conversion of 59%, while improving inventory levels. We also reduced net leverage to 3.1x, approaching our long-term target.

[Andre Maciel, CFO at The Kraft Heinz Company]

From a pricing perspective, as Miguel mentioned earlier, our expected pricing for the year has all been announced. In the U.S., price gaps have expanded relative to both private label and branded competition. We have seen branded competition increase the levels of promotion while we have remained more disciplined. In the second quarter, branded saw 35% of volume of promotion, while we were at 29%. The returns on our promotion activity continued to improve. Our average ROIs increased approximately 15 percentage points as compared to 2019, and approximately 5 percentage points as compared to prior year. Looking to volume, we have seen elasticities revert to more normal levels, and for the remainder of the year, we expect volume declines to moderate.

[Andre Maciel, CFO at The Kraft Heinz Company]

The moderation comes from lapping prior year pricing, the plans Miguel laid out in U.S. retail, continued market share gains in food service in North America International Zone, and the re-acceleration in emerging markets from Q2 levels. We expect volume to turn positive in 2024, with future top-line growth balanced between volume and price.

[Andre Maciel, CFO at The Kraft Heinz Company]

In order to fund the investments necessary to fuel top-line growth, we are strengthening our PNL by unlocking efficiencies. At the same time, inflation continues to moderate. In supply chain, we are on track to meet our gross efficiency target of $2.5 billion by 2027. We closed the second quarter, pacing ahead of our $500 million annual target. We now expect mid to high single digit inflation for the year and low- to mid-single digit in the second half of the year. The timing of inflation here in the PNL continues to be impacted by timing of hedges and contract expiration. Turning to our outlook for the year, organic net sales growth for fiscal year 2023 is expected to be up 4%-6%, with second half growth pacing more in line with our long-term algorithm.

[Andre Maciel, CFO at The Kraft Heinz Company]

On the gross margin front, we are now expecting year-over-year expansion for 2023 to be between 150 and 200 basis points. Gross margin levels in the second half of the year are expected to be roughly in line with first half as inflation eases and promotion increase. Q4 margins are typically higher than Q3 due to seasonality. Constant currency adjusted EBITDA is still expected to grow between 4%-6% or 6%-8% when excluding impact from lapping the 53rd week in 2022. Based on the current effects rates, we expect a 0.5 percentage point adjusted EBITDA headwind from currency on the full year. We expect adjusted EPS to be in the range of $2.83-$2.91.

[Andre Maciel, CFO at The Kraft Heinz Company]

This includes a negative currency impact of approximately $0.02 at currency effect rates, approximately a $0.04 negative impact from non-cash pension and post-retirement benefits, and a negative $0.06 impact from lapping the 53rd week in 2022. Our outlook contemplates an effective tax rate on adjusted EPS of 19%-21%. Overall, we had a solid quarter, and we expect the improved momentum from the end of the quarter to carry into the second half of the year. As you can see, we are building a virtuous cycle of growth enabled by disciplined revenue management, continuing to unlock efficiencies, and actively reinvesting back in the business across marketing, R&D, and technology to drive future growth. With that, let me pass it to Miguel for some closing comments.

[Miguel Patricio, CEO and Chairman at The Kraft Heinz Company]

Thank you, Andre. It's an exciting time to be at Kraft Heinz. Yet again, we improved profit and profitability. We are reinvesting these margin gains back in the business, and our action plans are working and gaining momentum. All of this gets me very excited about the future. You know what I'm also very excited about? About our people. Our people engagement is the best it has ever been. Thank you for your time and for your interest at Kraft Heinz, and thank you to every member of the Kraft Heinz team.

Participants

Executives

• Andre Maciel, CFO
• Anne-Marie Megela, Global Head of Investor Relations
• Miguel Patricio, CEO and Chairman