Kraft Heinz Q3 2023 Earnings Call Transcript

Participants

Corporate Executives

• Anne-Marie Megela, Global Investor Relations
• Miguel Patricio, Chief Executive Officer and Chair of the Board of Directors
• Carlos Abrams-Rivera, President
• Andre Maciel, Executive Vice President and Global Chief Financial Officer

Analysts

• Andrew Lazar, Barclays PLC
• Peter Galbo, Bank of America Co.
• John Baumgartner, Mizuho Securities
• Stephen Powers, Deutsche Bank Aktiengesellschaft
• Ken Goldman, JP Morgan Cazenove
• Michael Lavery, Piper Sandler Companies
• Jason English, The Goldman Sachs Group, Inc.
• Matt Smith, Stifel Nicolaus
• Robert Moskow, TD Cowen

Presentation

[Operator]

Good day and thank you for standing-by and welcome to the Kraft Heinz Company Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Anne-Marie Megela, Global Investor Relations.

[Anne-Marie Megela, Global Investor Relations at Kraft Heinz]

Thank you, and hello everyone. Welcome to our Q&A session for our third quarter 2012 3 business update. During today's call, we may have forward-looking statements regarding our expectations for the future including items 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 this call, as well as our most recent 10-K. 10-Q and 8-K filings for more information regarding these risks and uncertainties.

Additionally, we may refer to non-GAAP financial measures, which exclude certain items from our financial results reported in accordance with GAAP. Please refer to today's earnings release and the non-GAAP information available on our website at ir.kraftheinzcompany.com under News and Events for a discussion of our financial measures and reconciliations to the comparable GAAP financial measures.

Before we begin, I'm going to hand it over to our CEO, Miguel Patricio for some brief opening remarks.

[Miguel Patricio, Chief Executive Officer and Chair of the Board of Directors at Kraft Heinz]

Thank you, Anne-Marie and thank you all for being with us today. Before opening the call for questions, I just would like to thank Kraft Heinz, my entire team for another great quarter. And again. I would like just to highlight some positive aspects about this quarter. We are generating accelerated profitable growth fueled by our three pillars. Our share and volume trends are improving as a result of the action plans that we are implementing. And we continue to strengthen our balance sheet heading our target net leverage of approximately 3 times. And we continue to invest in the future with another quarter of significant investments in marketing,, technology and R&D.

Well with that. I have here with me today. Andre and Carlos. And so let's open the call for the Q&A.

Questions and Answers

[Operator]

[Operator Instructions] Our first question comes from Andrew Lazar with Barclays. You may proceed.

[Andrew Lazar, Analyst at Barclays]

Great, thanks, good morning, everybody. In Slide 33 of the slide deck this morning, you call-out branded promotional activity is still below 2019 levels and Kraft's activity is below branded. So one clarification is the branded figure you highlight all food categories or just the branded players within Kraft Heinz as categories? And then I guess based on your plans for the remainder of the year and looking into '24, I guess, how would you anticipate these metrics shifting? Do you expect branded promo levels to return to historical levels? And would you expect Kraft Heinz to narrow the gap versus branded or how do you see those metrics moving from here? Thanks so much.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Thanks, Andrew. This is Carlos. Let me first address your point about clarification, what you see in the page, it is about those branded players that do compete with Kraft Heinz. The second part in terms of how do we think about our promotions as we go forward. First, I would tell you that I'm going to comment on what other companies may or may not do. But I would tell you is that, one, we're now going back to 2019 levels. We are going to -- at the same time as we go forward into Q4, we know there is a seasonality to our business. And as we have said earlier, we're going to make sure now as we go into the holiday season that we make the right investments to support our business.

Now, I would say that at the same time, we're going to continue with the same level of discipline that we have shown until now to make sure that our investment is at right levels of ROIs as we go forward. Thanks for the question, Andrew.

[Andrew Lazar, Analyst at Barclays]

Thank you.

[Operator]

Thank you. One moment for questions. Our next question comes from Peter Galbo with Bank of America. You may proceed.

[Peter Galbo, Analyst at Bank of America]

Hey guys, good morning. Thank you for taking the question.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Good morning.

[Peter Galbo, Analyst at Bank of America]

I guess, just in North America, on the volume piece, there's a fair amount of discussion both in the prepared remarks around kind of meats being a drag this quarter and you discussed a bit about how you're giving up maybe some volume to maximize profitability and gross margins. But then you also kind of discussed how service levels are and where you want them to be particularly in slice meats and you're expecting improvement on that going forward. I guess the question is just what should we be taking away from those comments? Are you kind of continuing to scale back on volume and focus on the profitability there or should we think about our volume share recovery and maybe some headwinds to the margin mix that come with that, particularly as we think about North America volume? Thanks.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Well, first of all, I think that, let me just put into context kind of the volume question that you see in North America. First. I would say is that you see for us as a company, we continue to improve sequentially from what you saw in Q3 -- I'm sorry, Q2 to now in Q3 and that if -- I look holistically at the company first, you will see that we continue to drive the things that are working for us. We are continuing to grow in emerging markets, we'll be growing volume mix year-over-year, now in Q3, that we continue to expand in foodservice and we believe that it continue to drive opportunity as we go forward. And then, specifically in the U.S. business, you see how the investments we have made in terms of improving the share of shelf, our investments in marketing, our investing innovation and our improvement in CFR have continued to improve our actions.

Now, as we think about the total portfolio, there are some places in which we're going to remain focused and disciplined on how we invest back into the business and I think you referred to in our meat business, where we're going to make sure that we are not going to be just following on profitable growth, but we're going to be rational and disciplined on how we invest in those business in order for us to drive the right consumer pull, but at the same time not sacrifice in the overall profitability of the business that we need to maintain.

[Miguel Patricio, Chief Executive Officer and Chair of the Board of Directors at Kraft Heinz]

I would just add to that. In our long-term algorithm, volume is important to us. So in our 2%, 3% growth, it comes from balanced contribution between price and volume. So volumes matter, but as Carlos said, we are seeking profitable volume growth. We are not trying to maximize gross percentage margins, we are trying to deliver profitable, sustainable growth, ultimately translating to sustainable EPS growth. Thanks for the question.

[Peter Galbo, Analyst at Bank of America]

Great, thanks very much.

[Operator]

Thank you. One moment for questions. Our next question comes from John Baumgartner with Mizuho Securities. You may proceed.

[John Baumgartner, Analyst at Mizuho Securities]

Good morning, thanks for the question. Carlos. I just wanted to touch on the meat's businesses again, coming back to Peter's question. You pointed out, it's an energized business, but the categories seeing price competition, private labels gaining share, that was not happening at the outset during COVID during work-from-home. It just seems as though the ambition to rebuild remains profit, it's hard to square that with what looks like a need to reinvest more given the declines. So, how do you think about resource allocation, your willingness to continue reinvesting in that business relative to the point where you just say, hey, these assets may be better suited to another owner like what happened with the nuts business? Just curious about your willingness to stick with it, given a very tough backdrop in the category. Thank you.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Andre. Why don't you start here and I can build.

[Andre Maciel, Executive Vice President and Global Chief Financial Officer at Kraft Heinz]

Sure. So, as we have said before, different parts of our portfolio, they have different roles. And these roles might change over time, the role for me right now is to rebuild the profitability which has been rolled at 50% in the last five years, while continuing to invest in the brands to improve, renovate, so then, at some point, this brand in a position to grow in a profitable way again. And that's what we're doing. In Q3, for the second quarter in a row, despite the portfolio decline, mid-to-high single-digits on the top line, but grew mid-to-high single digits on the bottom line, not by new kind of brands, but by making the type of -- right type of investment and right type of actions that are appropriate for this portfolio right now for us to be chasing volume with this in a non-sustainable way, only through promotion that's not again -- that this role this brand to play.

[Carlos Abrams-Rivera, President at Kraft Heinz]

The only thing I would add is, even in a. If you think about our total business within our meat business, we have continued to improve our CFR. But that is the one area where we're still not at the right level of service that we wanted for the year, you will see that progression. At the same time, as we have improved our service, we have also begin to see improvement in our share too. So if you look at most of days as well through October, we are seeing that in fact our cocoa business are beginning to gain share. So, we are just going to be looking at the category in a very disciplined way to make sure we're doing the right things as Andrew said.

[John Baumgartner, Analyst at Mizuho Securities]

Okay, thank you.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Good question, John.

[Operator]

Thank you. One moment for questions. Our next question goes from Stephen Powers with Deutsche Bank. You may proceed.

[Stephen Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Great. Thank you, good morning. I wanted to just shift gears if I could and talk about the momentum you have in both foodservice and emerging markets, and. Just to get your perspective on your confidence that momentum can continue. And perhaps, how the organizational changes that you announced today internationally might contribute to that momentum as we go forward. I'd also, Andre, if you could, if I could tack-on a second question just now that leverage has dipped below that target level of 3 times, just wondering how you're starting to think about prioritization of cash going forward, as the cash generation has been good, I presume cash flow build and just think about how you're thinking about allocating that cash going forward? Thank you.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Thank you for the question, Stephen. Andrew why don't you comment on the capital allocation. Then I will talk about foodservice and emerging markets.

[Andre Maciel, Executive Vice President and Global Chief Financial Officer at Kraft Heinz]

Sure. So, on capital allocation, our priorities remain unchanged. That means continue to fund our very competitive dividend, maintain investment grades and prioritizing organic growth like we have been consistently doing during the past three, four years. We are very proud that we were able to get to this level of leverage one year ahead of our initial expectation and that's very important that the show that the business is strong and the organization is focused on delivering sustainable performance, not only on the EBITDA side, but also in cash conversion, which is a remarkable improvement for this organization. And now, I think that puts us in a very good situation to assess options to deploy this cash and we are looking at those.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Thanks, Andrew. Let me comment first on foodservice. I feel very optimistic about our plans in foodservice and we have really been working on building a foundation for the future. And if you think about the way we are thinking about building our business in basically three areas. We continue to make the investments in our chocolate models and thus driving positive performance for us. We also are making sure we are competing in more attractive and embedded margin channels, things like our independent and non-commercial channels versus traditional where we have been limited to. And then lastly, we are seeing much more powerful innovation that allows us to lever the technology investments we have made and bring those into the product forefront whether that is in things like our Heinz Remix machines and how that actually creates an opportunity for us to prepare ourselves for the future.

Now if you look at the full year for foodservice. Expectations probably to grow somewhere in the low-to-mid double digits versus last year. And we are -- I would point out that we are gaining share too in both North America and the international zone. And then let me just kind of make sure also that it is clear that if we think about our long-term algorithm, foodservice is affected to grow about 5% and we're going to be well above that level in 2023.

Now if I switch over to our emerging markets, the one great thing that we have also have been investing behind in emerging markets is kind of a discipline of our go-to-market model. And for us, the reason we feel so confident is because there is a data-driven go-to-market model that allows us to drive distribution that then we can then build a pressing into existing market and enter new ones. And we have done that several locations. In fact, we are on-track to implement the model in 90% of emerging markets by the end of this year. And just to remind you it seems like in the first phase of building distribution, it would build the infrastructure and then we go into the full structure in order to truly take advantage of our emerging business.

I think in emerging markets, I would just add the comment that in Q3, we saw a temporary headwind as we think about particularly in Asia where we have a business in Indonesia, the remote surrounding around Ramadan season and what we saw some travel shifting -- spending shifting from in the travel away from gifting. And we have a gifting business in Indonesia. So, that was a temporary thing, but as we think about the year ahead, we believe that we'll get back to the right levels of performance also in our Indonesia business. Thanks for the question.

[Stephen Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you.

[Operator]

Thank you. One moment for questions. Our next question comes from Ken Goldman with JP Morgan. You may proceed.

[Ken Goldman, Analyst at JP Morgan Cazenove]

Hi, thank you. Just a quick one. In your slide presentation from the prior quarter 2Q, you mentioned that you were expecting positive volume growth in 2024, I may have missed it, but did you reiterate that today in either the slides or any of your commentary?

[Andre Maciel, Executive Vice President and Global Chief Financial Officer at Kraft Heinz]

Yes we did. And that's the case, nothing changes. So, nothing changed in terms of volume expectations as Carlos said, so we said and it happened that volume would improve in Q3 sequentially to Q2 and it did, it will improve in Q4 versus Q3. And at some point in 2024 the volumes will turn positive.

[Carlos Abrams-Rivera, President at Kraft Heinz]

In fact. I think everything that we've seen right now in the market, our actions are working. And just give us more confidence as we think about our 2024 plans.

[Ken Goldman, Analyst at JP Morgan Cazenove]

Sorry, can I just quickly clarify that. I think people interpreted the commentary about positive volume about as net throughout 2024, it will be positive, but I think the comment that was just made was at some point in 2024, it will turn positive. I guess I'm curious, do you expect at the end of the year, your total 2024 volume to be positive. I just wanted to get a sense that people aren't over modeling the year?

[Carlos Abrams-Rivera, President at Kraft Heinz]

I'm not going to give guidance for 2024 right now, what I just said is what we have been saying all along.

[Operator]

Thank you. One moment for our next question. Our next question comes from Michael Lavery with Piper Sandler. You may proceed.

[Michael Lavery, Analyst at Piper Sandler Companies]

Thank you and good morning. I know we covered meat a little bit just on the volume and how to think about its role in the portfolio side, but I want to just come back to one specific piece. You've talked about your approach and being disciplined and rational. But in your prepared remarks, you also specifically said that in cold cuts, you're investing to hit the right price points. Can you just maybe unpack that a little bit and reconcile how those two go together and what exactly you mean by those investments? On the price.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Yeah, good question. Happy to clarify, Michael. What I would say is that we need to make sure that we are responding to the moment in which consumers are going to be looking for the right solutions for whatever -- that the holiday seasons for all the points throughout the year. And as we go into Q4, perhaps, we'll make sure that we're making the right investments. However, we will be doing that with the right level of discipline to make sure we drive the right return on that investment. So, with the idea that we have simply, like we stated earlier, we are not going to just be chasing volume, we're going to be looking for what is the way for us to drive profitable volume in a way that combines our ability to kind of continue to build our businesses through the right investments in marketing and using the full array of revenue management tools in order for us to be able to drive the right efficiency and effectiveness of our investments.

[Michael Lavery, Analyst at Piper Sandler Companies]

And so some of what you're saying would be the depth of that promotion is part of how you want to make the investments on price points, but the discipline is the depth of that and not to push it too hard, would that be a right interpretation?

[Carlos Abrams-Rivera, President at Kraft Heinz]

I think that would be one of the things that you can say, but I think on top of that, if you think about the full array of our revenue management tools, pricing, price pack architecture, other tools are disposed that allows us to actually think about it, what is the right investments in order to us to maintain the level of -- improving level of profitability that we have seen deteriorate over the last few years.

[Michael Lavery, Analyst at Piper Sandler Companies]

Okay, thanks so much.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Thank you.

[Operator]

Thank you. One moment for questions. Our next question comes from Jason English with Goldman Sachs. You may proceed.

[Jason English, Analyst at The Goldman Sachs Group]

Hey, good morning folks. Thanks for slotting me in. So I guess congrats are an order. Congrats, Miguel, for a good run and the improvements you've driven while at the helm of the Company, and congrats, Carlos on the upcoming promotion responsibility. So, on that topic. I guess the -- starting of question is what do you expect to do different. Should we be bracing and expecting any strategic shifts or given that you've been an architect of many of the plans that have been in place, is this going to be sort of business as usual?

[Carlos Abrams-Rivera, President at Kraft Heinz]

First of all. Jason, thank you for the kind words and I'm certainly very much humbled and excited about the opportunity ahead for me and for the company. What I would say is that, as you pointed out, I've been sitting next to Miguel for the last almost four years now and I think a number of things that we have done as a company, we certainly have done together. And then strategically, I think I am certainly committed to the three growth pillars that we have for going forward. That is and think about how do we continue to drive our expansion in the emerging markets. I think we can begin to see foodservice as a great growth for us and then the growth platforms within our U.S. business.

At the same time you also probably read some of the changes we're making in our structure in order to actually help us accelerate some of those things that we have done. For me, one of the critical aspect of this time, we have been transitioning and coming to the new role in January has been listening to the organization and making sure we have the clarity of our strategy and our structure is going to follow that clarity. So some of the things you'll see in terms of us being able to have a breaking down the international zone, which had worked in the past well for us, but now as we go into a new way of us growing allows us to be a little more focused on those emerging markets in which we're going to make some additional investments.

That. I think is part of us thinking differently about how we bring that structure and that strategy to life in our structure. So that I think some of the things that you're going to see is what are the places that with the length of the just to be done for the strategy of the company that we can maybe arrange certain things where we can truly leverage the scale of the company. The scale that we have been investing behind on technology and our marketing capabilities and to deploy them against the three pillars strategically that I'm very much aligned with.

[Jason English, Analyst at The Goldman Sachs Group]

And should we expect inorganic solutions to come into the fold a little bit more so, now that your balance sheet is in a better situation?

[Carlos Abrams-Rivera, President at Kraft Heinz]

As Andre said earlier, we continue to look at opportunities, but I would say that's something that is part of our ongoing thoughts about how do we continue to see the active view of our portfolio. But there's nothing today that I would say that we would be announcing. Andre anything else you would add.

[Anne-Marie Megela, Global Investor Relations at Kraft Heinz]

No.

[Carlos Abrams-Rivera, President at Kraft Heinz]

I think as we consistently have said before, I think our priority is organic business and M&A. If it happens, it has to help us to accelerate our organic strategy, it essentially be fully consistent like we have done [Indecipherable] in emerging markets, has to be accretive to our top line, bolt-on type of acquisitions that's what we are focusing on.

[Jason English, Analyst at The Goldman Sachs Group]

Understood. Thank you very much.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Thank you, Jason.

[Operator]

Thank you. One moment for questions. Our next question comes from Matt Smith with Stifel. You may proceed.

[Matt Smith, Analyst at Stifel Nicolaus]

Hi, good morning. Wanted to ask a question, your productivity savings have been very strong this year and you already increased your target for the year. Those have in-part been used to heavier stepped-up level of investment behind marketing, R&D and innovation. But as we look forward, can you sustain this level of incremental savings into 2024 or should we expect to return to the target of $500 million and after this year have stepped-up investment. Do you believe you're exiting with the appropriate level of investment across the business? Or do you plan to continue to invest in an elevated rate as we look forward?

[Carlos Abrams-Rivera, President at Kraft Heinz]

Maybe, Andre, if you could speak to our efficiency plans.

[Andre Maciel, Executive Vice President and Global Chief Financial Officer at Kraft Heinz]

Sure, so look at this point, we're still committed to deliver the 3% of COGS in $500 million on a go forward basis. But as we have said before, our benchmark is really on the 5% level, which we are achieving this year. Can you keep in mind that this year as well we had a lot of let's call gap bubbles from inefficiency that we raised throughout the pandemic that's also helping, but we feel good about how our supply chain organization today we're at completely superior level, with very stable service levels and be a lot more forward thinking which give us confidence in delivering at least a 3% that we have talked before.

From an investment standpoint, I think this also has been a great year because we have been able to deliver very solid bottom-line growth while really resetting the investment level from the public company for the future, which means that I think a lot of that we said that has happened, there is few places that we want to invest more, but I think we took advantage of this year to really reset the level of investments to a very good level.

[Matt Smith, Analyst at Stifel Nicolaus]

Thank you for that.

[Operator]

Thank you. One moment for questions.

[Anne-Marie Megela, Global Investor Relations at Kraft Heinz]

Operator. This will be the last question.

[Operator]

Thank you. And our last question comes from Robert Moskow with TD Cowen. You may proceed. Robert Moskow, Your line is now open.

[Robert Moskow, Analyst at TD Cowen]

Hey, can you hear me now.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Yes.

[Robert Moskow, Analyst at TD Cowen]

I'm sorry about that. So, this is kind of a what if question and maybe you might not wanted to ask to answer what if questions, but we're all watching topline growth kind of decelerate in the U.S. and the U.S. retail is such an important part of your mix. So. I guess my question is, if we're in a scenario where we're kind of in a 0% to 1% kind of sales growth environment next year, just be your categories. What would your philosophy be on an EBITDA basis? Like would you still drive to drop savings to the bottom line to hit the mid-single-digit EBITDA or what a slower topline environment necessitates a slower EBITDA growth kind of target?

[Carlos Abrams-Rivera, President at Kraft Heinz]

Okay, Good morning, Robin. Good to hear back from you. Look, we believe that for us to grow bottom line in a profitable, sustainable way is critical. So, if in an event where the industry is zero, I think that doesn't change the game that we are trying to play because I don't know if you are implying that we will start to go aggressive on promotions to try to grab the volume through market share in productive and sustainable way, if that's what you're asking behind your question, I will say that that's not the game we want to play. So. I will just say that our strategy continues the same, it's working and I think that we're heading in the right direction. We don't want to make change in direction because of temporary situations in the industry.

[Robert Moskow, Analyst at TD Cowen]

Okay, thank you.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Thanks Robert.

[Operator]

Thank you. I'd now like to turn the call back over to Carlos Abrams-Rivera for any closing remarks.

[Carlos Abrams-Rivera, President at Kraft Heinz]

Thank you. So before we leave here, I just wanted to acknowledge and take a moment to thank, Miguel, for all the support and trust that he has showed to me personally. And for everything he has done for our company as he has built this tremendous and strong foundation. I can tell you that today, Kraft Heinz is a much stronger company because in 2019, Miguel Patricio, put this company on his back and carried it forward. And I am forever grateful for being part of his team as we all work together to transform Kraft Heinz. And as I think of as the next CEO of Kraft Heinz, I'm proud of what we have been as a company and even more thrilled about where we're going. And thank you all for joining us today.

[Operator]

[Operator Closing Remarks]