Kraft Heinz Q3 2022 [Q&A] Earnings Call Transcript

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Provided by Quartr
October 26, 2022

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by, and welcome to The Kraft Heinz Company Third Quarter Results. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to turn the call over to your host, Anne Marie Magella, Global Head of Investor Relations, you may begin.

Speaker 1

Thank you, and hello, everyone. This is Ann Marie Magella, Head of Global Investor Relations At The Kraft Heinz Company, and welcome to our Q and A session for our Q3 2022 business update. During today's call, we may 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 the risk factors contained in today's earnings release, which accompanies this call as well as our most recent 10 ks, 10 Q and 8 ks filings for more information regarding these risks and uncertainties.

Speaker 1

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. Kraftheinscompany.com. Under News and Events for a discussion of our non GAAP 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 comments.

Speaker 2

Well, thank you, Ed Marini, and thank you, everyone, for joining us here today. We are excited. We are proud. We delivered another quarter of strong results. And As we see consumer demand remaining strong and elasticities, they continue to hold.

Speaker 2

We see our portfolio of iconic brands Strong and very adequate for the moment that we are leaving. And we continue investing in these brands and seeing that This investment is paying off. Yet at the same time, we realize, we know that supply chain remains challenging, particularly with inflation and material shortages. I'm proud of the teams As they continue to anticipate and adapt to these challenges where we improved capacity and we're able to meet demands. We actually gained share.

Speaker 2

At the same time, we continue to advance our transformation including modernizing our marketing and transforming our portfolio. As we look ahead, We continue cautiously optimistic. We are providing our consumers with solutions that they value And we continue to unlock efficiencies and reinvest in the business, all of which makes us stronger and positions us well for whatever challenges are still to come. With that, we are very happy to take your questions.

Operator

Thank you. Our first question comes from Andrew Lazar with Barclays. Your line is open.

Speaker 3

Great. Thanks so much. I guess maybe to start, the company had moderated its EBITDA expectations back in September 1, Q3, when you were already about 2 months into the quarter. Today, you not only beat those expectations, but came in above the initial guidance as well. So what came in better than you thought?

Speaker 3

Are there any timing issues to be aware of that might impact 4Q as a result? And maybe more importantly, Do these fluctuations give you any pause with respect to visibility into the business with the understanding that it's obviously still a very dynamic environment?

Speaker 2

Andrew, thank you for the question. And you may answer this one.

Speaker 4

Sure. Good morning, Andrew. Good afternoon, Andrew. So Andrew, first of all, we feel as we got there at the beginning, I think we feel very Excited and pleased with the results we achieved in the quarter. And I'll tell you that a lot of things happened in our favor throughout the month of September.

Speaker 4

First of all, if you might remember, we have executed a new price increase in the month of August and the last pieces turn out to be stronger Then what is anticipated, which resulted in strong top line. Shipments were very good. I think our team did a great job in the month of September to be able to ship In a much better pace than earlier in the quarter, which also helped. We end up spending less promotion also that we have initially anticipated, Which is our final as well that we're being very prudent to put all the promotions and expense in our portfolio. And finally, We did have about $30,000,000 of onetime gains in the P and L, 80% in cost, 20% in SG and A.

Speaker 4

And those are mostly anticipations from Q4, okay? That's what we're able to do in Q3. And then obviously, we also had a little contingency But all in all, I think we're able to have a lot of things playing our favor. I think it's a testimony here that the organization It's moving with speed and reacting faster towards diversities and it's good. Remember that we maintain the guidance for the year in Q3, right?

Speaker 4

And so I think we felt confident about the number that's put in the river and I think we're just reinforcing that now by raising the floor. And you can count on us always to We maintain a transparent dialogue and being timely in a very timely fashion, like we did back in the September when we had the first news about the new inflationary pressure.

Speaker 3

Great. That's very helpful. Thanks so much. I'll pass it on.

Operator

One moment for our next question. Our next question comes from Ken Goldman with JPMorgan. Your line is open.

Speaker 3

Hi, thanks so much. You mentioned that your supply chain tightness is still mostly caused by factors from your upstream suppliers. This is not an uncommon refrain. We're certainly hearing this from many of your peers. I'm just curious, can you maybe help us better understand what the specific issues are?

Speaker 3

You mentioned disruptions, I guess, on ingredients and packaging. Does this suggest that the issues are somewhat temporary? They can fade when the disruptions have passed? Or Are there maybe some structural problems, I guess, that could take longer to fix? Thank you.

Speaker 2

Hey, Carlos, I think that's related to U. S. Go ahead, please.

Speaker 4

Yes. What I would say, first

Speaker 5

of all, thank you for the question. What I'll say is that I think you can see that the environment continues to be challenging. And what I'm really proud is the fact that our team is doing a terrific job of working through the wave of challenges. So As we speak, we are both rebuilding inventory and improving service levels, and we have done that from the quarter sequentially in this quarter.

Speaker 4

I think we continue to see that going forward. I think what if I take a step back in terms of the overall constraints, what

Speaker 5

I see is about 80% of those challenges And really due to upstream supply distribution on ingredients and certain packaging materials. At the same time, what I'll say is, it's very asynchronous The way they're recovering. So you'll see that in some cases, we are moving quickly and recovering overall in our supply chain. There's a few ingredients that have been a little tighter for us. And I point to things like have affected us in the past and things like cold cuts And a lunch I'm sorry, in cream cheese, but at the same time, even in those categories, we now have recovered and feel good about kind of our position as we go towards the end of the year.

Speaker 2

Got it. Thank you. Thank you.

Operator

One moment for our next question. Our next question comes from Brian Spang with Bank of America. Your line is open.

Speaker 6

Thanks, operator. Good morning, everyone. Maybe build on the previous two questions. You're kind of looking at the current environment now, dealing with what you're dealing with, sellers and Seeing what you're seeing in the marketplace, is there any reason that we shouldn't expect that your long term targets, which You laid out back in or you talked a bit about back in September our targets that We should expect that those are achievable for 2023 or is this environment still maybe too volatile to Be in line with what your long term targets would be?

Speaker 2

Brian, you may want to answer this question.

Speaker 4

Sure. Good morning, Brian.

Speaker 5

Look, as we said back

Speaker 4

in CAGNY, When we unveil our new long term growth algorithm, we expect to get there over the years. So think of it in terms of 3 Yes or so. So we feel good in our continued improvement in our performance and we expect to continue to move towards the algorithm The way that you have communicated back then, we are obviously not ready to give any guidance around 23, but yes, the environment is still volatile. As you have been hearing from us and probably from others in the sector about supply chain volatility, which has consequences on availability and

Operator

Thank you. One moment for our next question. Our next question comes from Chris Growe with Stifel. Your line is open.

Speaker 7

Hi, good morning.

Speaker 8

I just had a quick question for you in relation to you showed in one of your charts in the slide deck, Private label gaining more share in your categories, it also showed Kraft Heinz doing much better in its categories as well. And as we look across the store, private label share has been up at a lesser rate over the past few months, although it seems like it's gone up a little bit more so in your categories. I want to get a sense of if you see incremental risk in your categories from private label share gains as you take more pricing, where you have more pricing that's been put in place? And then just any change in your thoughts on elasticity in relation to your pricing, which has been very favorable for your business? Thank you.

Speaker 2

Good morning, Chris. And Ben, do you want to answer the question?

Speaker 4

Sure. Thanks for the question. I'm trying to read a few things. First of all, as you have been continuously reiterating, our exposure to private label have reduced significantly after the 2 divestures we made last year. So now the average market share in our portfolio is about 11%, where it's across food and beverage 20%, So that we are not protected.

Speaker 4

2nd, during the past 3 years as part of our transformation, we have been redirecting a lot of our effort and energy around the core. So resources have moved there. We have been renovating the core in a very systematic way, so our portfolio is stronger. 3rd, the private label have been increasing the price together with the rest of the players. So as we've said in the last 4 weeks, including already 3 weeks of October, we're looking at sellout data, our sellout price is about 17% up, whereas private label is 16% up.

Speaker 4

So price gaps are widely preserved. You might have seen as well in one of the scans that we provided That comparing Q2 to Q3, the price gap for private label remains the same. So we do not see any category where our price gap Standard versus private label except to catch up and lunchables, which honestly the interaction is limited and we can share in both of these categories. So yes, I think we feel good about that. Obviously, we don't want to be naive and overly optimistic that depending on how consumers eventually shift Behavior in a very drastic way.

Speaker 4

Things can change, but there is no indication of that as of right now. And Honestly, I mean, despite all the environment, food is proving to be very resilient. The brands, IES being very resilient And with unemployment today, we did right now. When I was here back in 2008, 2011, we only thought to accelerate the shift in behavior But unemployment starts to go up, which is far from the attitude today.

Speaker 5

Yes. And I think what I would say is, we have continued to invest In the equity of our brands, which as we think about the fact that some brands really don't have pricing power brands, they're pricing power. So the investment we have made with the quality of the marketing we have improved the aircraft lines and the commitment we have to continue to invest in our brands going forward Also give us some confidence as we continue to manage through the current environment. Thanks for your question. Thank you.

Operator

One moment for our next question. Our next question comes from Alexia Hau with Bernstein. Your line is open.

Speaker 9

Good morning, everyone.

Speaker 4

Good morning, Alexia.

Speaker 9

Okay. I look at the lineup of products on Page 19 of the presentation and they really do seem to be meeting the moment in terms of The consumer needs for convenience and affordability. But I'm just wondering about your thoughts on The recent White House Conference on Hunger, Health and Nutrition that happened last month for the first time in 50 years, I think. And there were a lot of initiatives coming out of that with respect to front of pack labels, a very tight definition of what a healthy food is, educating consumers and health professionals on the importance of good nutrition. And I wonder just how you're it may be too soon, but How you're thinking about those types of developments in the industry over the coming months years and how that might shape your plans for innovation and the

Speaker 2

Let me, Alexia, start answering this question and then Carlos wants to complement. Nutrition is part of our long term strategy. It's part of our agenda. This is a very important part of our ESG goals for the future. We've been renovating our portfolio Throughout the years, reducing or eliminating dyes and artificial ingredients, and we have Global agenda, very specific agenda on reducing salt and sugar, which are 2 critical things Our portfolio that we have a responsibility to do.

Speaker 2

We are on the way to achieve the targets that we put in place Until 2025. And just to give you an example, we changed the formulation of our Capri Sun this year, we reduced 40% of sugar content and that's to put it in perspective, just that is £40,000,000 of sugar per year that we reduced. We continue committed to that for the short, the medium and the long term

Speaker 5

What I would add to Miguel's point, which I think is right on, is the fact that This is a commitment we have for the long term. Every single time we are renovating our portfolio, we're putting in kind of the view of How do we continue to improve our products overall, not just because it's the right thing to do, but also because that's what consumers want us to do. So I think that is happening and you obviously can see it very clearly in terms of commitment to sugar reduction, to salt reduction, We continue to work with communities in improving the food and security situation. And this is something that as a company, we are committed to and we will continue to as we go forward. We are

Speaker 2

the biggest buyer of tomatoes and beans. And in the heart, we are a good cultural company and we've been investing a lot in that sense in Plant based, I mean, you see what we are doing in Europe with our beans, With the project of launching new beans based products with Heinz beans burgers, with Heinz beans hummus, protein parts and A portfolio of innovation for the next 5 years related to that. Here in U. S, we are very proud to announce This week that we are launching our plant based cheese, which by the way is an Credible product, very different from what is in the market. It melts.

Speaker 2

It tastes like cheese. It smells like cheese and smells like cheese and is very different from everything that is in the market. So we're absolutely committed on the nutritional agenda.

Speaker 9

Wonderful. Thank you very much. I'll pass it on.

Operator

One moment for our next question. Our next question comes from Stephen Powers with Deutsche Bank. Your line is open.

Speaker 7

Yes. Hey, good morning. I wanted to ask on gross margin progression. Across the consumer goods space Broadly, I think we're beginning to see more signs, and evidence of gross margin stabilization, if not recovery, with results across many companies either coming in ahead of consensus expectations or improving sequentially or even starting to improve year over year. And Every portfolio is obviously different, but you're not yet in that position.

Speaker 7

So I'm curious as to just how you're thinking about The progress of gross margin, what kind of framing of expectations we should have going into the 4th quarter and the prospects for improvement as we build into fiscal 'twenty three.

Speaker 2

Andrea, you may answer this question, please.

Speaker 4

Sure. Thanks for the question. Look, we have been as we said all along, we have been pricing to protect The dollar inflation, so dollar for dollar, and we have been doing that now for the Q2 in a row. So both in Q2 and now in Q3, Price was in line with inflation and price plus growth efficiencies was ahead of inflation. Given that we had in Q3, as we initially said back in September, some incremental pressure in selected places And we took action already on it.

Speaker 4

There is this continuous lagging effect. So we expect Q3 to be the bottom of our gross margin And you should expect to see a sequential improvement in Q4 in comparison to Q3.

Operator

Thank you. One moment for our next question. Our next question comes from David Palmer with Evercore ISI. Your line is open.

Speaker 3

Thank you. Just a follow-up on some of the supply chain stuff. Your case fill rates in your slide deck, you say They were in the low 90s in the 3rd quarter and that's better than the high 80s that it was in the Q1, but I was slightly surprised to see that that fill rate Same as 2Q. Is that a result of that upstream supplier effect that you're talking about? And I'm wondering How you're thinking about progress there?

Speaker 3

Is that some do you have visibility as to getting that fill rate back? I'm sure you want to get back to the high 90s and when could we expect bigger leaps and improvement in fill rates? Thanks.

Speaker 2

David, thanks for the question. Carlos, please.

Speaker 5

Yes. Listen, what I'll say is that exactly what you said, It is connected to the availability of certain ingredients in the upstream, but at the same time, our commitment With our customers, it continues to improve that. I'll tell you that as we continue to navigate the situation in terms of those capacity constraints, What I'll say is that we also are looking to see how to work differently with the capacity that we have available to us. And let me give you a couple of examples of how we're doing that. We actually are ingesting data directly from our customers in a way that allows us to better deploy our inventory to reduce out of stocks.

Speaker 5

We started that with a pilot with one particular retailer and that allows us to actually reduce the amount of inventory by 40% the out of stocks in their stores, but by 40% in a period of about 8 weeks. We now have expanded that program and now we're ingesting more data from different customers that allows us to then make sure that we are then putting the right Inventory in the right stores and bring the right signals into our production so that we can maximize the availability capacity that we have in our plants. So we're both working on strengths as a supplier, but it's also us being smarter and better capabilities internally to deploy our inventory to improve our overall service levels, which we're committed to do.

Speaker 4

Thanks for the question.

Operator

One moment for our next question. Our next question comes from John Baumgartner with Mizuho. Your line is open.

Speaker 10

Good morning. Thanks for the question. Miguel, wondering if you can touch on the nice reversal you had in Q3 regarding market shares relative to your branded competition. How would you break that down between the benefits from some of the supply chain constraints easing, The pricing differentials in the market as opposed to how much of that is derived from just underlying changes to your execution in the market on more of a like for like basis? And how sustainable do you think that performance will be in the share gains versus brands going forward?

Speaker 10

Thank you.

Speaker 2

Thanks for the question. So let me give you my perspective and then Carlos can go further on that answer, right? We are excited to keep the levels of market share even with the problems that we continue facing on supply. I mean, we would be gaining a lot of share if we would not be facing steel shortages on raw materials. A good proof of that is like Capri Sun and Lunchables, where in previous quarters we had Problems with supply, shortage of raw materials, we lost share.

Speaker 2

And now we are in Record share gains on these two brands. So I actually am optimistic that we can move further On market share, Carlos, please. Yes.

Speaker 5

I would say to Bill and Migos' point, this is a combination of the continuing investments that we have made In renovating our brands, investment in improving the quality of our marketing communication, and then as you said, unlocking some of the capacity in some key Good brands. I think the example Miguel gave around launch of both the Caprisson in which we saw the improvement on inventory and CFR And then our ability to actually then go into market and then drive event based promotions that allow us to then continue to grow those particular categories During the back to school period, which was basically a phenomenal result for us in terms of performance. As we go forward, when you see the places that we continue to have challenges in terms of capacity, We know that once we unlock those, we also have an opportunity to then continue to grow our consumption as we go forward. And those, as I said before, areas like our cold cuts and cream cheese that are slowly getting into better position in our inventory. And now as we go into the holidays, making sure we protect their ability to then go into those event based promotions, We're doing the time of year that consumers are looking for our brands.

Speaker 5

So when you take a step back, I will say it's a great combination of The work we have done over the last year and a half for us to improve internally the equity of our company and at the same time now See the benefit of us being able to now go back into the marketplace in a more aggressive way that allows us to then continue to drive consumption And hold penetration on our brands.

Speaker 2

Thank you.

Speaker 1

Operator, we have time for one more question.

Operator

One moment. We've reduced about

Speaker 5

half of our SKUs that we had in 2019. At the same time, we have improved quality. And then finally, we continue to Enhance our overall distribution overall. Now part of the point that you made around How do we continue to unlock some of the opportunities we have in QSR is, us continue to invest in the capacity of the business. So we're also making strong investments in CapEx in order for us to support the opportunity for us to continue growing in our foodservice channel.

Speaker 5

Over the last two years, that number is over $100,000,000 we have invested. So that allows us now the opportunity to have those conversations with QSR in a way that truly unlocks opportunities for us to continue growing. Now that's a view of North America. Let me pass it on to Raf to give you a view also of I mean, the national side.

Speaker 11

Yes. Look, it's not very similar to that. The opportunity Foodservice is significant, and you can see it has been a core pillar for our results in the last few years, and the quarter is no different. You can see that the numbers we released, we were growing actually very fast and twice the size of the industry, twice the rate of the industry. So you can attribute that part of it was the slowdown that happened during the pandemic.

Speaker 11

A lot of the across international, We do compete with some global players, but also with some local players and a lot of them specialize in food service That during the pandemic, they suffered a lot and some of them either went bankrupt or had to downsize significantly their operations. We didn't. We maintained the same level of investments. And consequently, coming out of the pandemic in most of the countries across the world, I mean, we are riding ahead of it. So we continue to be excited, and QSR is the core.

Speaker 11

Our products, especially within the sources environment goes very hand in hand with the QSR industry. We still have a long way to go. I mean, our estimate with the data available is that we are about Between 3% 4% market share of the sauces category of foodservice, so there is significant room ahead, And we are going to continue to do that, driving the our chef led model, where we have invested in chefs that partner with those customers, driving innovations that have been very well received. So it should be a continuous source of Growth, sustainable growth for us.

Operator

Okay, great. Thank you.

Speaker 1

Thank you, operator. I'm now going to hand it over to Miguel for some closing commentary.

Speaker 2

Well, I would like to finish with a quote. A quote from a famous legendary car racer on Formula 1 that once said, If it's raining, I can pass 15 cars. But when it's sunny, I cannot. Let me tell you, it's not raining, it's pouring. We are super excited at this moment because we are seeing this a great moment of opportunity.

Speaker 2

And we've been able to Navigate through the uncertainties of the short term and adapt and rebuild very fast at the same time that we are Continue building our future. We are excited with what we have ahead of us. Thank you very much.

Operator

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

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