The Kraft Heinz Company (NASDAQ:KHC) Q3 2023 Earnings Call Transcript

The Kraft Heinz Company (NASDAQ:KHC) Q3 2023 Earnings Call Transcript November 4, 2023

Operator: Good day and thank you for standing by. Welcome to the Kraft Heinz Company Third Quarter Results Conference Call. At this time all participants are in a listen-only mode. [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: Thank you, and hello, everyone. Welcome to our Q&A session for our third quarter 2023 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 excludes 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 non-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: Well thank you, Anne-Marie, and thank you all for being with us today. And 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, hitting our target net leverage of approximately 3x. And then 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.

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Q&A Session

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

Andrew Lazar: Great, thanks. Good morning, everybody. In Slide 33 of the slide deck this morning, you call out branded promotional activity is still below ‘19 levels, and Kraft activity is below branded. So one clarification, Is the branded figure you highlight all food categories, or just the branded players within Kraft Heinz’s 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: Thanks, Andrew. It’s 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 will tell you that I’m not going to comment on what other companies may or may not do. But I will tell you is that, one, we’re not 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’ll 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 with the right level of ROI as we go forward. Thanks for the question Andrew.

Andrew Lazar: Thank you.

Operator: Thank you. [Operator Instructions] Our next question comes from Peter Galbo with Bank of America. You may proceed.

Peter Galbo: Hey, guys. Good morning. Thank you for taking the question. I guess just in North America, on the volume piece, there is 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 aren’t where you want them to be, particularly in sliced meats, and you’re expecting improvement on that going forward. So 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 a 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: 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 what 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 Q2 – in Q3. And then, if I look holistically at the company first, you’ll see that we continue to drive the things that are working for us. We are continuing to grow in Emerging Markets where we’re growing volume mix year-over-year now in Q3, that we continue to expand in our Foodservice and that we believe that it continues to drive opportunity as we go forward. And then specifically in the U.S. business, you see how the investment we have made in terms of improving our share of shelf, our investments in marketing, our investing in innovation and our improvement in CFR have continued to improve overall 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. I think you referred to in our meat business, where we want to make sure that we are not going to be just following unprofitable growth, but that we’re going to be rational and disciplined on how we invest in those businesses in order for us to drive the right consumer pull, but at the same time, not sacrificing the overall profitability of the business that we need to maintain.

Andre Maciel: I will just add that in our long-term algorithm, volume is important to us. So in our 2%, 3% growth, it comes from a balanced contribution between price and volumes or volumes there, but as Carlos said, we are seeking profitable volume growth. We are not trying to maximize gross percentage margin, we are trying to deliver profitable, sustainable growth, ultimately translating to sustainable EPS growth. Thanks for your question.

Peter Galbo: Great. Thanks very much.

Operator: Thank you. [Operator Instructions] Our next question comes from John Baumgartner with Mizuho Securities. You may proceed.

John Baumgartner: Good morning. Thanks for the questions. Carlos, I just wanted to touch on the meats business again, coming back to Peter’s question. You point out it’s an energized business, but the category is seeing price competition, private label is gaining share, that was not happening at the outset during COVID, during work from home. It just seems as though the ambition to rebuild or maintain 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: Andre, why don’t you start here, and I can build.

Andre Maciel: 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 enrolled at 50% in the last 5 years while continuing to invest in the brands to improve, innovate, so then at some point, this brand can be 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, this part of the portfolio, declined mid to high single digits on the top line but grew mid to high single digits on the bottom line, not by milking the brand, but by making the type of – the right type of investment and the right type of actions that are appropriate for this portfolio right now. For us to be chasing volume with this in an unsustainable way, only through promotion, that’s not the game that this – that we want this brand to play.

Carlos Abrams-Rivera: The only thing I would add is that even in – if you think about our cold cut 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 want for the year. You’ll see that progression. At the same time, as we have improved our service, we have also began to see improvement in our share, too. So if you look at month to date as well through October, we are seeing that, in fact, our cold cuts 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 Andre said.