Kraft Heinz Q3 2023 Prepared Remarks Earnings Report

Kraft Heinz EPS Results

• Actual EPS: $0.72
• Consensus EPS: $0.66
• Beat/Miss: Beat by +$0.06
• One Year Ago EPS: $0.63

Kraft Heinz Revenue Results

• Actual Revenue: $6.57 billion
• Expected Revenue: $6.70 billion
• Beat/Miss: Missed by -$134.92 million
• YoY Revenue Growth: +1.00%

Kraft Heinz Announcement Details

• Quarter: Q3 2023 Prepared Remarks
• Date: 11/1/2023
• Time: Before Market Opens
• Conference Call Date: Wednesday, November 1, 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 Q3 2023 Prepared Remarks Earnings Call Transcript

Key Takeaways

• Accelerated profitable growth: Q3 organic net sales rose 1.7% while constant-currency adjusted EBITDA grew 12.9% and adjusted EPS increased 14.3%, driven by margin expansion from productivity gains and pricing.
• Raised full-year guidance: Management now expects 5–7% constant-currency EBITDA growth and adjusted EPS of $2.91–$2.99, up from prior ranges, with gross profit margin expansion of 200–250 basis points.
• North America retail was pressured by a 1.2 pp volume decline in the meat business, leading to a 0.1% drop in total North America organic net sales in Q3.
• Strengthened balance sheet and cash flow: Net leverage fell to 2.9× (hitting the ~3× target), free cash flow conversion reached 68%, and the company exceeded its $500 million annual efficiency target while boosting investments.

Presentation

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

Hello, this is Anne-Marie Megela, Head of Global Investor Relations at The Kraft Heinz Company. I'd like to welcome you to our third 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, Head of Global Investor Relations at The Kraft Heinz Company]

Please refer to today's earnings release and the non-GAAP information available on our website at ir.kraftheinzcompany.com under News & 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, and President of Kraft Heinz, Carlos Abrams-Rivera, will provide an update on our overall business performance. Andre Maciel, our Global Chief Financial Officer, will provide a financial review of the third quarter 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, CEO and Board Chair at The Kraft Heinz Company]

Thank you, Anne-Marie, and thank you all for joining us today. I'm so proud of what the teams have accomplished. In the third quarter, we again generated accelerated, profitable growth. All three of our growth pillars, food service, emerging markets, and our U.S. retail growth platforms, contributed to the top-line growth. At the same time, we improved our productivity across our value chain. Our share and volume trends continued to improve versus the second quarter of 2023 as we execute our action plans and reinvest and lock in the efficiencies back into the business across marketing, R&D, and technology. Importantly, our Taste Elevation and Easy Meals platforms in the U.S. are not just seeing an improvement in market share, we are now taking share.

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

We continue to strengthen our balance sheet, hitting our target net leverage of approximately 3x, while at the same time, increasing investments to support the long-term growth of the business. Of course, we still have much to do and some headwinds to face, but our strategy is working, our balance sheet is solid, and we believe we are positioned to return more value to our stakeholders. I will now turn it over to Carlos, our newly appointed President of Kraft Heinz, to run through our quarterly results in more detail.

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

Thank you, Miguel. In the third quarter, we grew top line and improved profitability. Organic net sales increased 1.7%, with constant currency Adjusted EBITDA and Adjusted EPS growing at a much faster pace, 12.9 and 14.3, respectively. The increase in profitability was driven primarily by gross profit margin expansion, which was a result of unlocking efficiencies across our value chain and pricing to inflation. In line with our strategy, we are reinvesting unlocked efficiencies back into the business to grow organically. We are increasing year-to-date investments in SG&A across marketing, R&D, and technology, and CapEx by approximately $385 million versus last year. As Miguel mentioned, we are continuing to fuel organic net sales through growth across all three pillars. In the third quarter, food service sales grew approximately 9%.

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

Emerging markets organic net sales grew 10%, and our growth platforms in the U.S. retail organic net sales grew 3%. Our food service business gained market share as our consolidated 9% sales growth outpaced the industry, both in North America and international. For the full year, we expect food service to grow low to mid-double digits versus the prior year. As you may recall, our food service growth strategy consists of 3 levers. First, we drive sales through our chef-led model, leveraging our dedicated chef networks to create tailor-made menu solutions for our customers. Second, we are prioritizing higher margin spaces by expanding across attractive channels, like non-commercial, with higher growth and higher margins. And lastly, using food service as a flywheel for innovation allows us to better customize solutions for our customers and launch insight-driven innovation. Now, let's turn to emerging markets.

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

We continue to deliver double-digit organic net sales growth in emerging markets. In the third quarter, organic net sales grew 10%, outpacing overall international. We generated high double-digit organic net sales growth in two out of three of our business units, LATAM and East. However, we experienced temporary softness in Asia. We expect to return to normal level of growth in Asia in the fourth quarter, and we expect to continue to deliver double-digit growth in emerging markets. We plan to continue to drive growth in emerging markets through our differentiated strategy, consisting of three levers. First is data-driven, repeatable go-to-market model to drive distribution, designed to capture opportunities with the right products in the right market. By the end of 2023, we expect to have approximately 90% of our emerging markets go-to-market model designed and ready for implementation.

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

Second, is through the power of our Heinz brand, which extends well beyond ketchup. Local jewels complement Heinz across several of our international market. And third, our food service business, which we are under-penetrated with less than 5% share in global market of approximately $1.4 billion. And finally, let's look at the U.S. retail growth platforms in our North America zone. In the third quarter, our North America organic net sales declined 0.1% versus prior year, while our growth platforms in the U.S. grew 3.3%. Total North America results were primarily impacted by declining volumes in our meat business. As a reminder, the meat category is a part of our Energize platform, and we are focused on rebuilding profitability, acting rationally, and protecting our Adjusted EBITDA dollars.

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

This approach continues to work, as we generated higher Adjusted EBITDA on lower Organic Net Sales in meat in the third quarter. In the third quarter, the meat category had a negative 1.2 percentage point impact on total North America Organic Net Sales growth. Within U.S. retail growth platforms, Taste Elevation Organic Net Sales grew an impressive 7%, and Easy Meals Organic Net Sales grew 5% in Q3. Ketchup, mayonnaise, and Mexican sauces in Taste Elevation and frozen potatoes in Easy Meals led the year-over-year growth. Now, turning to market share. As Miguel had previously mentioned, our action plans are working. They are driving sequential improvement in both share and volume trends.

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

As a reminder, these plans consist of executing joint business plans with key customers to drive shelf space and quality merchandising, with a 1.5 percentage point year-to-date improvement in U.S. share of shelf index versus prior year. Increasing marketing investment 25% versus prior year, with a focus on growth platforms. Ramping up innovation throughout the year, supported by an increase of 8% versus prior year in R&D spend, and solving remaining isolated supply constraints. This is behind us in most categories, with a case fill rate in the high 90s at the end of Q3. As you can see, these investments are paying off. Looking at our U.S. dollar share, we have recovered from the low levels experienced earlier this year. As you recall, we faced expected headwinds after pricing 75% of our portfolio and the reduction of SNAP benefits earlier this year.

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

We have planned for the activity to return to more normal levels, and that's what we have seen. In July, at a point when volume losses in cold cuts were at the highest, we hit the lowest share levels of the year. Since then, we have improved volume as year-over-year price gaps have narrowed. In Taste Elevation and Easy Meals, which are represented by the light blue line, we have steadily improved and are now gaining market share from branded players. If you recall from last quarter, our share loss was concentrated in three categories: cream cheese, cold cuts, and kids' single-serve beverage. Across cream cheese and cold cuts, we have seen recovery in share, particularly in the month of September.

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

In cream cheese, upstream packaging constraints in the first half of last year impacted our ability to promote in key windows, and as a result, we lost display and considerable share to private label. We started recovering share in July as we worked with key retailers to rebuild display. Now, October month to date, we are growing approximately 50 basis points of share versus prior year in cream cheese. In cold cuts, we are investing to hit the right price points, which is helping to drive an improvement in our share performance. Additionally, we plan to continue to focus on improving service in our value portfolio, where case fill rates are still in the low 80s. We're expecting improvement by the end of the year.

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

In kids' single-serve beverage, our share continues to be pressured, primarily driven by the reduction in the SNAP benefits, as well as lapping competitive out-of-stock in the prior year. We have improvement plans in place, which include an increasing advertising support, as well as new consumer promotions and displays activations. As previously mentioned, to support our action plans and to continue building for the future, we are investing in SG&A across marketing, R&D, and technology. In the third quarter, we increased our spend in marketing by 25%, R&D by 8%, and technology by approximately 24% versus the third quarter in 2022. In the third quarter, we increased marketing spend by 25% year-over-year. By leveraging the power of iconic brands like Heinz, we continue to generate best-in-class marketing activations. We are embracing a holistic and sustainable approach to marketing, inserting ourselves into culture.

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

For example, our global Heinz creative approach is multidimensional. It's currently live in more than 16 countries, including the UK, Egypt, and China, with a multi-category approach across more than just ketchup, and also in categories such as beans, soups, and mayonnaise. It's working. At the 2023 Cannes Lions International Festival of Creativity, Heinz was the most awarded food brand and the 4th most awarded brand overall. At the same time, we are moving at the speed of culture. After the Ketchup and Seemingly Ranch sauce combination went viral, in under 24 hours, our teams jumped on that trend. Ketchup and Seemingly Ranch became an overnight sensation, sweeping the news online, even spreading internationally, with consumer clamoring to get their hands on the product. We were even able to get from idea to shelf as a limited release with a national customer in less than three weeks.

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

This launch demonstrates our powerful agility and how our teams are using Agile at Scale to move at the speed of culture. Turning to R&D, we continue to build our innovation pipeline enabled by our agile innovation engine. First, we are utilizing intellectual, patent-protected technology to create disruptive platforms with our new grilled cheeses, the first product of many expected to come out of our exclusive 360 Crisp platform. Second, we are expanding into new aisles across multiple locations and host foods through innovation launches such as frozen Kraft Mac & Cheese and our Heinz Culinary Tomatoes line in the UK. Third, we are leveraging our iconic brands to meet evolving consumer trends such as wellness, snacking, and plant-based to compete in priority growth spaces.

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

Lastly, we are adapting to local taste and creating unique flavor combinations across the world, particularly in international, where our goal is to become the number one in Taste Elevation. In fact, this year, we are honored to announce that both Heinz Remix and 360CRISP were named to Time Magazine's Best Inventions of 2023 list. For over two decades, Time has developed an annual list dedicated to the year's top inventions, which are evaluated based on criteria including originality, ambition, and impact. Kraft Heinz is the only large food company to make the 2023 list, and we are the only company to have more than one invention featured in the food and drink category. Finally, through Agile at Scale and strategic partnerships, we are delivering solutions across our value chain to accelerate growth and help drive efficiencies.

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

As part of Agile at Scale, our teams are building digital-first solutions to power Kraft Heinz to get to better insights faster. These digital solutions are helping to contribute to our annual growth efficiency target, which have accelerated to $500 million for 2023. Our investments in capabilities and technology are helping us drive transformation across several areas of the business. Importantly, we're not the only ones benefiting from these improvements. Our customers and suppliers are as well. Our U.S. Kantar scores are improving each year, and we have been recognized with our first-ever World Procurement Award for Supplier Collaboration and Innovation. Not only are we stepping up our investments in 2023 to unlock new growth and efficiency opportunities throughout our business, but we are also investing for the future through our ESG goals and our responsibility to consumers, our employees, and the planet.

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

We released our 2023 ESG report, Together at the Table, on October 16. It reflects key progress across each of our three ESG pillars: healthy living and community support, environmental stewardship, and responsible sourcing. Now, I would like to give credit to our employees, as they are the key to our success. I'm incredibly inspired by the passion and commitment to making Kraft Heinz a place we all want to be and a place others want to join. Each year, we are being certified as a great place to work in more and more countries, including being named as one of the 100 most loved workplaces in America in 2023 by Newsweek. These are a testament to how far we have come and a benchmark for all who dare to do better.

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

Before I hand it off to Andre, I would like to start by saying that I'm so proud of what we have been able to achieve across the business as we have executed our strategy, delivering results in 2023, and building momentum for 2024. I also would like to highlight that this morning, we announced three changes to our leadership and organizational structure to best support accelerated profitable growth and to lead the future of food. First, we name our new EVP and President of North America, Pedro Navio. Pedro is a consumer goods veteran and currently our President of Taste, Meals, and Away from Home for the North America zone. Second, we have elevated our growth and omni-channel functions to a global level, providing the structure and support to leverage centralized expertise and resources.

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

The goal of this structure and these investments is to drive growth and disruptive innovation across the business, where we provide optimal service to our customers and put our consumers first. Third, we have divided our international zone into three zones. They are Europe and Pacific Developed Markets, which include Europe, Australia, New Zealand, Japan, and South Korea. West and East Emerging Markets, which include Latin, Eastern Europe, and the Middle East. And Asian Emerging Markets, which include the rest of our Asian business outside of Japan and South Korea. We recognize these markets require different sets of strategies and skills, and this new structure provides the necessary focus and resources to optimize our growth potential. I am proud to say that every single one of these leadership appointments supporting these changes have been sourced internally.

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

This speaks to the exceptional quality of the talent at Kraft Heinz and the focus and value we place on people development and growth. Let me now hand it over to Andre to provide more details on our third quarter financial results and to discuss our outlook for the remainder of the year.

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

Thank you, Carlos. For total Kraft Heinz, organic net sales grew 1.7% in the quarter, fueled by our three pillars of growth. Price grew 7.1 percentage points over the same period, partially offset by a 5.4 percentage point decline in volume mix. Our volume trends have improved on a sequential basis as the impact of pricing wanes and our action plans have started to take shape. We expect volume trends to continue to improve. In North America, organic net sales declined 0.1%. This was driven primarily by our meats business, which had a negative 1.2 percentage point impact on total North America organic net sales growth.

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

From an Adjusted EBITDA perspective, total Kraft Heinz grew 11.9% versus prior year, and our Adjusted EBITDA margin increased 2.3 percentage points, driven by Adjusted gross profit margin expansion and partially offset by increased investments in SG&A. Adjusted gross profit margin increased approximately 400 basis points versus the third quarter of 2022. This expansion was driven by pricing previously executed to offset inflation, a strong gross supply chain efficiencies, and positive mix in North America as growth platforms outpaced our lower margin meats business. When comparing to the third quarter of last year, it is important to note that Adjusted gross profit margin was the lowest quarterly margin of the year, as we experienced peak dilutive impact of pricing to offset inflation.

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

Compared to pre-pandemic levels in third quarter 2019, our third quarter Adjusted gross profit margin increased approximately 160 basis points. This increase was primarily driven by the divestiture of our lower margin nuts and cheese businesses, as well as improved productivity. In terms of Adjusted EPS, we grew 14.3% or $0.09 versus the third quarter of 2022, primarily driven by strong Adjusted EBITDA performance, partially offset by a higher effective tax rate. We have continued our disciplined approach to promotions, maintaining structurally lower levels relative to 2019. In the third quarter, we reduced our volume sold on promotion in the U.S. by 7 percentage points versus 2019, compared to a 4 percentage point reduction by branded competition. Our returns on investment have improved 15 percentage points over the same period.

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

This demonstrates that investments in our revenue management team and technology are paying off. In the fourth quarter, we're expecting a higher level of promotions, which is consistent with our strategy to promote around key occasions and is contemplated in our guidance. We continue to generate higher gross efficiencies as we drive continuous improvement throughout our supply chain. We remain on track for our gross efficiency target of $2.5 billion by 2027. We closed the third quarter pacing well ahead of our $500 million annual target, surpassing our 4% of COGS benchmark, a material improvement from approximately 3% of COGS in 2022. Turning to inflation, we see moderation, but are still experiencing pockets of persistent inflation, including in labor, tomatoes, and sugar. We are now expecting mid-single-digit inflation for the full year.

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

We continue to strengthen our balance sheet, generating year-to-date free cash flow conversion of 68%, while at the same time increasing investment in CapEx by approximately $150 million over the same period versus 2022, supporting long-term growth of the business. The majority of the improvement in free cash flow conversion versus the prior year is related to the lapping of the $620 million tax payment on divestiture proceeds in 2022. We also reduced net leverage to 2.9x, reaching our long-term target of approximately 3x. Turning to our outlook for the year, we now expect organic net sales for the fiscal year 2023 to be at the low end of our 4%-6% range, at approximately 4% versus 2022.

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

We are raising our constant currency Adjusted EBITDA guidance to 5%-7% growth versus 2022 from the prior range of 4%-6% growth. Our constant currency Adjusted EBITDA outlook includes a negative 2 percentage point impact from lapping the 53rd week in 2022. Based on current exchange rates, we now expect a 1 percentage point Adjusted EBITDA headwind from currency on the full year. For Adjusted gross profit margin, we are increasing our expected year-over-year expansion to a range of 200-250 basis points from a prior range of 150-200 basis points.

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

Turning to Adjusted EPS, we are raising our guidance to a range of $2.91-$2.99, reflecting 5%-8% growth versus 2022, from our previous range of $2.83-$2.91. Our Adjusted EPS outlook includes negative currency impact of approximately $0.04 at current exchange rates, approximately a negative 3-cent impact from non-cash pension and post-retirement benefits, and a negative 6-cent impact from lapping the 53rd week in 2022. Our outlook also contemplates an effective tax rate on Adjusted EPS of 19%-20%. With that, let me pass it to Miguel for some closing comments.

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

Thank you, Andre. I would like to reiterate that I'm so proud of what we have achieved. We are generating accelerated profitable growth fueled by our three pillars. Share and volume trends are improving as a result of the action plans we implemented, and we continue to strengthen our balance sheet, hitting our target net leverage of approximately 3x. On a more personal note, this is my last earnings call as CEO of Kraft Heinz. It's been an honor and a privilege to lead this great, iconic company and to play a role in this chapter of our transformation story. I'm absolutely thrilled and so excited about where Carlos will take this company. I could not be prouder to continue partnering with him next year as I continue in my role as the board chair.

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

I thank those of you in the investment community for always asking me the hard questions, for challenging us, for provoking us to think even more strategically about the business that we are so fortunate to lead. But most of all, I want to say thank you to our people, the 37,000 employees of Kraft Heinz, who get up day in and day out, working so hard to bring our company purpose, "Let's make life delicious," to life. I can honestly say that each one of you has made my life more delicious, and I cannot wait to see how you and this company will further succeed under Carlos' dynamic leadership. Thank you for your time and interest in Kraft Heinz.

Participants

Executives

• Andre Maciel, Global CFO
• Anne-Marie Megela, Head of Global Investor Relations
• Carlos Abrams-Rivera, President
• Miguel Patricio, CEO and Board Chair