Kraft Heinz Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Good day, and thank you for standing by. Welcome to The Kraft Heinz Company First Quarter Results. [Operator Instructions].

I would now like to hand the conference over to Anne-Marie Megela, Head of Global Investor Relations. The floor is yours.

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

Thank you, and hello, everyone, and welcome to our Q&A session for first quarter 2023 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 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.krafttheheinzcompany.com under News & Events for 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.

[Miguel Patricio, CEO at Kraft Heinz]

Thank you, Anne-Marie, and thank you, everyone, joining us today. We are proud - proud and confident. Yes, I'm confident that we are raising our guidance on EBITDA and earnings. We are so confident that we are increasing our investments in marketing and in R&D by $100 to $150 million versus budget, which represent a solid double digit growth versus previous year. This result had not a coincidence. They are because of our confidence. We have been consistently saying that will grow through Emerging Markets and we grew 23% this quarter. We rose through Foodservice globally and we grew about 29% this quarter and we'll grow through our priority growth platforms in US using [Indecipherable], where we had double digit growth. The rest of the portfolio has to free up resources we vest in our strategy. These results are possible not only because of our strategy, but because of everything that is behind our strategy.

And to start with people, today we have a great team and very engaged team, speed, well agility is a big word for us and the pods that we have in place are transforming the company in innovation, in supply, manufacturing, procurement, in sales, in logistics and two good examples of that is innovation where we have now a much stronger pipeline for the future and we reduced the time of innovating from two years through a couple of months or in supply that through the pods plus the partnership with Microsoft and the usage of artificial intelligence, we are improving our planning, our service levels, reducing waste. We do see Heinz, we're getting a very different place today and finally efficiency. When we announced three years ago, a $2 billion in five years of gross savings - we - there were a lot of people that were skeptical that we presented $400 million per year. We not only delivered these numbers in three years in a row, but we are now increasing these by to $500 million a year. With - with that I have here with me today Andre, our CFO; Carlos Abrams-Rivera, our zone President for North America; and Rafael, our zone president for International, joining me. Please, we are ready for the Q&A.

Questions and Answers

[Operator]

Thank you. [Operator Instructions].

Our first question comes from Bryan Spillane with Bank of America. Please proceed.

[Bryan Spillane, Managing Director Equity Research at Kraft Heinz]

Hi, thanks, operator. Hey, good morning, everyone. I just wanted to ask I guess two questions related to the US. One is; I think as we kind of strip out the Foodservice piece and look at what's underneath. It looks like there's a bit of a dismatch or mismatch I should say between kind of what we were seeing in the Nielsen data and what would have been reported underlying, so just trying to understand if there is any - anything they are relative to timing of shipments or promotions that might have affected the cadence and then second if you can just talk a little bit about in the US specifically kind of how you're seeing the promotional activity or the promotional environment as we kind of head into some of the big summer holidays and was it intensified, is it kind of in-line with your expectations, just - just kind of how you're seeing those to summer holiday setup? Please.

[Miguel Patricio, CEO at Kraft Heinz]

Andre, please.

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

Okay. Good morning, Bryan. Good to hear from you, thanks for the question. When - when I look at the US performance, I don't think there is nothing abnormal happened [Indecipherable] the inventory load was - was immaterial given [Indecipherable] at the end of Q4 as I said before. So it's really a function of a Sell-out and the Foodservice, which performed very well in the quarter and there was also maybe people under appreciate a little bit of the impact of that, I believe had something to do also the fact that last year we only growing things, everything was shutdown, so that the impacted the sell-out in retail in across - in Vegas at the beginning of the quarter, but also helped a lot Foodservice, you have a very strong performance. When it comes to promotions as we have said all along - well it has all along we expect an increasing promotional year to growth, as that has been in the [Indecipherable] included in our plans from the beginning, so nothing changing there from the other guys, obviously in a prudent way and always emphasizing that well for 2019 levels and incentive pay remarks, how - how well we're doing there in continue to improve ROI with the tools that we have in place, and so I'll give some - to pass over to Carlos to give some color on the promotional environment.

[Carlos Abrams-Rivera, EVP & President, North America Zone at Kraft Heinz]

The one thing, I guess, I would add Bryan to what Andrew just said is, as you mentioned the ROI has continued to improve and let me give you a little more color as to what's behind that. We have spoken about the Agile scale and how that has re-engineer kind of Kraft Heinz, and part of that is us creating ownable agile revenue management tools that actually allows us to improve the returns of our promotion. So lets for example, we have a chain management system that we created in-house and it gives us real-time access to essentially over 10,000 promotional events and then what we do is we actually create digital tools, the leverage that large amount of data to provide insights and recommendations in a very simple way. Now those solutions there help us to make sure that allows us to figure out what is the right depth of discount, what is the right time of the year and what are the right promotional taxes we have seen.

So if you look at our Q1 numbers, we saw about a 10 point improvement in ROI in this particular quarter versus what we saw a year ago and is about 15 points if you compare that to 2019 of Q1. So again all - all our tools continue to help us make sure that we are driving that investments, so as we go-forward our continued focus is make sure that we invest in the business that we are focused on and renovation of a business and marketing drive that stronger quality - quality with those event they activities that really have the high ROIs. And Rafael, I know if anything you wanted to comment on what you're seeing International promotions.

[Rafael Oliveira, International Zone President at Kraft Heinz]

This is not very different than what you described, Carlos. I think - I think that I mentioned that we might see a bit of an increase - we'll see a bit of an increase in some markets in promotional activity the year to go, but nothing just compared to not included in our guidance.

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

Thanks, Bryan.

[Bryan Spillane, Managing Director Equity Research at Kraft Heinz]

All right, thanks guys.

[Operator]

Thank you for the question. One moment for our next and it comes from the line of Andrew Lazar with Barclays. Please go ahead.

[Andrew Lazar, Managing Director at Kraft Heinz]

Great. Thanks, good morning. I think you outperformed expectations obviously in the first quarter on organic sales growth and maintain the full year outlook, I guess, potentially implying slower go-forward trends maybe than - than originally planned for. Is there something you're seeing in the market that necessitates this adjustment or is this more a function of sort of conservatism, and I - I appreciate the full-year outlook is already above your sort of long-term algorithm.

[Miguel Patricio, CEO at Kraft Heinz]

Hi, Andrew. Andre maybe you want to answer that question.

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

Sure. Good morning Andrew.

[Andrew Lazar, Managing Director at Kraft Heinz]

Good morning.

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

And thanks for the question. So there is - there is nothing that change expectation. We are holding the guidance in - in above the line and if I look [Indecipherable] market was expecting we - we over-delivered quite a lot in the International Zone, which I think people still, I think don't fully appreciate the impacts of Emerging Markets growth in our portfolio and the Foodservice portion in International Market and portfolio as well. We have been performing extremely well as Miguel indicated, and they continued to do so and momentum is very excited. When it comes to the US nothing changes in our internal expectations, we just think that at this moment is good to be prudent, given macroeconomic uncertainties about interest rates and [Indecipherable] on that, but nothing special.

[Andrew Lazar, Managing Director at Kraft Heinz]

Great, thank you so much.

[Operator]

Thank you. One moment for our next question please. And it comes from the line of Ken Goldman with JPMorgan. Please proceed.

[Ken Goldman, Managing Director at Kraft Heinz]

Hi. There has been some anecdotal evidence that consumers are beginning to trade down in terms of where they're doing their grocery shopping either going from premium channel to more mainstream or mainstream to discount. I'm curious if this is something you're starting to see as well even if it's just on the margin and if so, is it in any way, I guess, informing your decisions about product mix, new products, things like that.

[Miguel Patricio, CEO at Kraft Heinz]

Maybe Andre and Carlos can comment.

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

Good morning. As you have seen since last year the channel - the channel migration has started slow, we don't see that cannot be normal accelerate that trend, what we have seen consistently now for several months, there is a dollar channel and the - the merchandising gaining ground consistently and - and these are not the new phenomenon we have been prepared for that for a while, so our best - our best recovery which talk about the [Indecipherable] we are doing in those channels, but we don't see anything abnormal happening, is expected.

[Carlos Abrams-Rivera, EVP & President, North America Zone at Kraft Heinz]

Yeah, well, what I would add-in terms of color. I guess first in retail, I mean, there have been some channel shifting, which we expected and for the lower income consumers that means kind of moving to more value focused retailers or in the dollar channel and as Andre said we anticipated this. Now for higher income consumer, that also means, thinking about what are the places that they can go and instead of maybe the specialty retailers to more traditional grocery and club and for us what we're looking to do is actually making sure that we have the right solutions for those that TV channels. So whether that is more club size packaging in brands like Mac and Cheese and Jell O and adding more dollar SKUs, so that consumers who are stretched are actually able to stay within the category and then as we talked earlier being savvy about how we go about our promotional activities in certain categories, so that we can in fact be there with consumers with the right overall kind of meal solution. So if you think about what a Grow Cheese Sandwich can do, with Kraft Singles, what Kraft Mac and Cheese can do in terms of families, [Indecipherable] can do us being able to be there put those kind of meal solutions. It's part of the answer as well. The one other thing I would say is, if you look at that same channel shift within Foodservice, we're also making sure that we are adjusted too for that, we are seeing how our business continues to grow in QSR and for us is continue to grow that business and we are doing that and we're growing share of that business as well. So it's making sure that our consumers are shifting to from certain restaurants to QSR. We are making sure we're there for them too continue to drive our products and continue to drive our growth which is the way resulted in Q1. So thank you for the question, Ken.

[Operator]

Thank you. One moment for our next question please and it comes from the line of Jason English with Goldman Sachs. Please proceed.

[Jason English, Managing Director at Kraft Heinz]

Hey, good morning folks. Thanks for slot me in. Two quick questions. First, the gross margin outlook for the year, great to see moving up. It implies that your gross margin for the year is going to look a lot like your first quarter which would of course market in to what has been like a sequential build with every quarter moving higher. I guess my question is, why would that be the case especially given the cost inflation appears to be moderating?

[Miguel Patricio, CEO at Kraft Heinz]

To that. Sorry Jason, could you repeat the question talking about the trajectory of the growth margin throughout the year.

[Jason English, Managing Director at Kraft Heinz]

Yeah, gross margins have been building sequentially, right, you didn't have a chart in one of your slides showing every quarter moving higher, your full-year guidance implies that it kind of goes sideways, you're going to finish the year at a margin rate, very comparable to the first quarter. So, my question is, why shouldn't we expect it to continue to grind a little higher as cost inflation moderates?

[Miguel Patricio, CEO at Kraft Heinz]

So the gross margin will increase a little bit throughout the next quarter, so we should see Q4 will be the highest one, Q2 will go a little bit sideways. There is a component of mix in our portfolio as well given the type of product that sell month during Q1 and Q4 in comparison to last sales in December. But beyond that, no, because the costs continue to ease the price - price where we put a lot of price in the middle of the quarters. So, we'll have full reflection of that now [Indecipherable] but remember as well and that have been touch something from last year, right, but now the gross margin we gradually increased throughout the year.

[Jason English, Managing Director at Kraft Heinz]

Okay, that's helpful.

[Miguel Patricio, CEO at Kraft Heinz]

And it's should expect if that [Indecipherable] because of product mix which [Indecipherable].

[Jason English, Managing Director at Kraft Heinz]

Yes, that's helpful. I appreciate that. And then free cash flow. Can you - can you tell us what your outlook is for the full year in terms of conversion or level, however, you want to communicate that. And I know you talked about working inventory down it a lot last year and obviously there is still a heavy usage of cash again in the first quarter. How much of that do you think we could get back out over the course of this year or does it or do we have to kind of bleed into next year before we can normalize those levels?

[Miguel Patricio, CEO at Kraft Heinz]

Yeah so free cash flow, as we said last quarter, we expect this year to close-in the 75% to 80% range, which is in-line with our plan, we have even talked about that in CAGNY and we expect by 2025 to go up to 100%. This has to do mainly with the Capex of up that we have done this year and next year which is close to 5% and then expect to wind down. Working capital, yes, as the was a drag last year and in Q1 was also a negative hit, we prioritize the service level recovery. I mean, payback is obviously there. What I can tell is, we have a very robust plan, very robust plan to bring the inventories down to the level we brought. We have been working with buffers, I mean, everybody in the industry does - are they insensitive about supply chain volatility resilience, but we have a very clear line of like best to break it down throughout the year, so expectation for inventory is to land to similar levels to where it was the pre-pandemic level and the percentage of COGS.

[Jason English, Managing Director at Kraft Heinz]

Got it, thanks a lot guys. I'll pass it on.

[Operator]

Thank you. One moment for our next question please. And it comes from the line of John Baumgartner with Mizuho Securities. Please proceed.

[John Baumgartner, Managing Director at Kraft Heinz]

Good morning, thanks for the question. I wanted to come back to promotion in the US, Carlos. There were a few categories that drove the bulk of US share loss in Q1, but I think those are also categories where your promotion levels really seem below branded competitors. So is it fair to isolate the share losses to reduce promo and lingering supply chain issues or other factors in play outside of promo and supply chain?

[Carlos Abrams-Rivera, EVP & President, North America Zone at Kraft Heinz]

Listen John, I think there is - there is a - there is a fair assessment, but I guess let me start with the fact that as we think about growing the business, we have a very disciplined approach to how we're going to do that. So we are as Miguel mentioned we're going to focus on our growth platforms and the growth that have in our portfolio, we want to make sure we're building innovation that disruptive and that we continue to adapt the core to the consumer trends and we're going to manage the margin with efficiency to reinvest in the business, which with a double digit investments in marketing, technology and R&D. And as you said, there are few kind of categories where we saw a slowdown and let me remind you too that we took pricing in the middle of the quarter as we were catching-up to margins. So if you think about a couple of those categories, let me highlight, a couple of them; one, cream cheese for example, we did see some supply-chain challenges that we had in the quarter. Those are things that prevented us from really taken advantage of the eastern time period and will be and in fact we are now in a position that would be better-off as we go into the year to go. Another one, I'll tell you is cold cuts in which we began the year with a low inventory situation in our business and again as we think about cold cuts by the end of the summer, we should be in a much better place in terms of completed supply in the overall business, so that a sense of the short-term supply constrained is in assessment - well assessment of - of how we see the quarter as well. The one thing I would add to is that there are places where categories that we're simply not going to be chasing volume down. So if you think about Bacon, it is a category that - we're - that probably was about a point of headwinds when you look at the data and consumer data, but we are simply not going to be chasing volume that is not profitable, so that gives you a sense about how we are looking at business and what drove the first quarter.

[John Baumgartner, Managing Director at Kraft Heinz]

Okay thanks, Carlos. On the international side, your categories, I guess historically your category has been pretty defensive in terms of demands during economic weakness, and I'm curious you are doing a lot of good things ramping distribution, launching new products, but as you transform the business with growth in Foodservice, the new sauces, the BEES partnership with - with ABI, how do you think about the marginal structure, are these new outlets and products introducing greater volatility into the business or do they benefit you in that did reduce some of the impact of private label and price sensitivities in places like the UK and Europe. How do you think about the net resilience you're building outside the US? Thank you.

[Miguel Patricio, CEO at Kraft Heinz]

Rafael, do you want to answer that one?

[Rafael Oliveira, International Zone President at Kraft Heinz]

Yeah, no, happy to. I think we need to differentiate a bit what - how we're growing in Emerging Markets and in the Developed Markets of course internationally. I mean, what you described probably applies a lot to the developed markets because as - as you know, as we've talking about across the Emerging Markets, we are growing significantly and the go-to-market and the opportunity we have is execution of this go-to-market has been - continues to be. On the developed markets, I mean, it's a mix. I mean we've been renovating our portfolio significantly in all of especially mentioned Europe and - and then launching products there has been incremental, not only [Indecipherable] used categories like those are the two - the two platforms that been growing, especially [Indecipherable] innovation. So this has been the focus, I mean, right now is delivering the results that we expect and again providing the gains that we need them on the resourcing from the cost and the innovation growth that coming from on those - those introduction.

[John Baumgartner, Managing Director at Kraft Heinz]

Thank you very much.

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

And just to add to that - just to add to that, if you remember the International Zone we have developed margins in the Emerging Markets, like Emerging Markets 10% of our business, we expect to grow double-digits like we have been doing. [Indecipherable] about expanding distribution, but it has to be done in a profitable way and if you might have noticed in the prepared remarks that since we started to require from our Emerging Markets a certain level of minimum [Indecipherable] I think we're seeing a fairly healthy balance between top and bottom line and we saw very significant gross margin expansion in Emerging Markets across the box in that quarter and I think there is - with our expectation to progress and continue to improve. So we feel very good that part of the investments that Miguel has said about the $150 million, which is going across market R&D technology and in some cases sales headcount, but in the case of the Emerging Markets, we are accelerating the go-to-market expansion, again, we always keep up stability top of mind here. We don't want to grow without the [Indecipherable] returns and other developed markets, not only the US, but also in selected countries being developed as we are using positive incremental investments to step in marketing levels and [Indecipherable] in some cases where innovation agenda is so goods because that allows us to build - continues to build the future growth of the company.

[Miguel Patricio, CEO at Kraft Heinz]

Let me mention one thing, that you mentioned that entering new categories with innovation. You're right, I mean, we launched in UK Heinz pasta Sauce and in a couple of months we achieved 7% share and we continue growing, we just launched the Vodka Pasta Sauce with absolute that has been extremely successful in the market. But it's not only in Europe, I mean, if you look at the profile of innovation that we are having right now in the US, it is very different from the past. In the past, we had a lot of innovation, but really not incremental, very cannibalistic. I just think about what we've been launching like nautical. That's - it's going to be national during the summer time, it's - it's basically 80% incremental to the category or Just Spices that we just launched in the US through direct-to-consumer which is spices into the huge market where we don't play today or Tingly Teds that we are launching globally throughout the year and then using Hot Sauces that is a pretty growing category that we will not play or even Kraft Mac and Cheese frozen that we are launching that we are a leader in Kraft Mac and Cheese. I believe we have a very strong portfolio frozen but we didn't have an option of Kraft Mac and Cheese frozen and I can continue this list and tell you about Home Bacon and increased [Indecipherable] of really, really incremental innovation that - that will start to change the profile of innovation in our company.

[John Baumgartner, Managing Director at Kraft Heinz]

Great, helpful.

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

Operator we have time for one more question.

[Operator]

Thank you. One moment please and question comes from Stephen Powers with Deutsche Bank. Please go-ahead.

[Stephen Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Oh, great, thank you. I just wanted to follow-up on the supply topic. It sounds like you made good headway and have good visibility to improvements going-forward, but I guess just framing that is there a way to think about what the supply challenges in the first quarter cost to. And then as you move forward with those supplies supply - supply bottlenecks resolved, do you kind of resume a more normal growth, trajectory in those categories with that - with those issues behind you, do you - do you you sort of accelerate a catch-up over the next couple of quarters as you dig out of the hole or is there, is it more prudent for us to think about a more gradual ramp of recovery again, as - as those issues are big? Thank you.

[Miguel Patricio, CEO at Kraft Heinz]

Andre and maybe Carlos then.

_____

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

Okay, thanks for the question. Look, we always expect as - as some of the solutions, the pumps gets sold as Carlos indicated we expect over-time to be reducing the retailer and that should come together with some improvements in the topline performance. But again is all compensated in our guidance here. Remember that our priority in the US is to grow in the growth platforms and the priority growth platform have performed very well in the first quarter, particularly state innovation and easy meals. But we expect categories like beverages to improve the performance throughout the year as those problems get behind us. In other categories like in the midst, Carlos also said, not necessarily we're going be [Indecipherable] in growth, because we're also frankly to be prudent about having the profitability there, so it always about having the right balance, but yes.

[Carlos Abrams-Rivera, EVP & President, North America Zone at Kraft Heinz]

Yeah there is not much to add but what I would say is we continue to see improvements in service level. So just to give you a kind of a framework last year, I think, at this time of the year, we were kind of in the mid 80s, we are now in the mid 90s, actually closer to the high levels of 90s, so as we exit the first quarter. So I feel like we do have a couple of categories that I mentioned earlier there what, we have some isolated chances, but overall the business we are central in the right trajectory to continue to service the different, the right way as we go-forward.

[Stephen Powers, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you very much.

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

Operator that'll be it for the Q&A session. I'd like to turn it over to Miguel for some closing comments.

[Miguel Patricio, CEO at Kraft Heinz]

I just want to thank you for the time you spent with us and looking-forward to sharing more information and more results with you. Thank you so much.

[Operator]

Thank you. [Operator Closing Remarks].

Participants

Corporate Executives

• Anne-Marie Megela, Head of Global Investor Relations
• Miguel Patricio, CEO
• Andre Maciel, EVP and Global CFO
• Carlos Abrams-Rivera, EVP & President, North America Zone
• Rafael Oliveira, International Zone President

Analysts

• Bryan Spillane, Bank of America Co.
• Andrew Lazar, Barclays PLC
• Ken Goldman, JP Morgan Cazenove
• Jason English, The Goldman Sachs Group, Inc.
• John Baumgartner, Mizuho Securities
• Stephen Powers, Deutsche Bank Aktiengesellschaft