卡夫亨氏 (KHC) 2024 Q2 法說會逐字稿

Good day, and thank you for standing by.

Welcome to The Kraft Heinz Company second-quarter results conference call.

(Operator Instructions) Please be advised that today's conference is being recorded.

(Operator Instructions) I would now like to hand the conference over to your speaker today, Anne-Marie Megela.

Thank you, and hello, everyone.

This is Anne-Marie Megela, Head of Global Investor Relations at The Kraft Heinz Company.

And welcome to our Q&A session for our second-quarter 2024 business update.

During today's call, we may make forward-looking statements regarding our expectations for the future, including items related to our business plans and expectation, 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 non-GAAP financial measures and reconciliations to the comparable GAAP financial measures.

I will now hand it over to our Chief Executive Officer, Carlos Abrams-Rivera, for opening comments.

Carlos, over to you.

Well, thank you, Marie, and thank you, everyone, for joining us today.

Recognizing that it remains a difficult consumer environment, I am proud that we at Kraft Heinz are providing high-quality convenience solutions that are a great-value brand worth paying for, and we will continue to stay focused on renovating and innovating with new benefits, functionality, and accessibility.

At the same time, our teams have been relentless in unlocking efficiencies with a mindset of continuous improvements.

And as a result of greater productivity and efficiencies, we have been able to hold prices below inflation this year, while continuing to invest in innovation, marketing, and R&D.

And for our stockholders, through our dividends and share repurchases, we have returned over $1.5 billion in capital so far this year.

I am very encouraged on how our focus on improving working capital is paying off.

We increased free cash flow nearly $100 million or approximately 9% compared to last year and maintained our targeted leverage ratio.

And finally, it is hard to believe that it has only been four months since my leadership team came together.

We are on this journey together, all committed to driving improvements and achieving our company dream.

I see the ownership and grit with my direct reports and across the organization.

We're all embracing this new operating model and ways of working, and we are only getting stronger and stronger.

With that, I have Andre joining me.

So let's open the call for Q&A.

(Operator Instructions) Andrew Lazar, Barclays.

Great.

Thanks, for the question.

Good morning, everybody.

Carlos, you mentioned the need for selective promotion and trade spend activity in the second half just to drive better volume results for a more value-seeking consumer.

I'm curious if there's a way to dimensionalize the portion of the percentage of sales that are sort of in need of some adjustments.

And if there are any particular hotspots that require maybe more aggressive pricing actions or sort of a reset of sorts.

Basically, I'm just trying to get a sense for how broad the price point issue really is across the portfolio, with the understanding that, as you've talked about, promotional right now are still below those you saw in 2019.

Andre, why don't you start and I'll add, complement.

Sure.

Morning, Andrew, thanks for the question.

Look, as we said in our guidance, we are contemplating a step-up in trade investment level.

You saw that in Q2, we already had a little more trade than what we had in the last year, where those are still well below 2019 levels.

We believe that looking forward, we are more focused on those price gaps versus branded competitors and in places where it makes sense for the long term.

I think we have been saying all along, and we continue to stick to this, that we believe that the way we want to grow the business is not through over relying on promotions and rather continue to invest behind innovation, our renovation, and our marketing investments, and that's what we have been doing and we're sticking to that.

We are confident about that into the future.

But in the short term, we are seeing selected spots where it does make sense to add promotions to close those gaps.

I'm not going to give you, like, an overly precise number to your question, but I estimate in the 30% to 40% of the portfolio where those price gaps require some incremental level of investments in the US.

(multiple speakers)

It's really, really helpful.

And then just a really quick one.

Do you anticipate volume inflecting to positive in the back half?

Because I think by our math, it's still implied that that's the case even by the new guidance range.

And I guess how do you see volume progress playing out specifically in North America in the second half?

Thanks again.

We do expect revenue and volume to gradually improve throughout the quarters.

In our midpoint of the new guidance, we don't need volume to grow for us to achieve our guidance.

So our price expected to be in the around 1% territory for the total portfolio.

So if think about the second half, what's impacted the guidance is sales declining 0.5% and so that you can see.

Now it's good.

The good thing is volumes in emerging markets, despite some headwinds in Brazil and China, they continue to be positive, they are positive in the second quarter.

They will continue to be so a year to ago.

And in the US, we expect to have volume continue to improve.

But again, in our mid-point, we don't need the volumes to turn positive for us to achieve it.

And what I would say to add is it also give me confidence as we think about that trajectory improving in the second half is that we are very much focused on driving that value in very much in a sustainable way.

So it cannot just be value for the sake of value by delivering value in a sustainable way through innovation, renovation, and marketing, for frankly, families that we know are spending more time cooking at home.

So when you see some of our innovation around things like mac and cheese, where we're bringing new shapes, new flavors, new pack size to consumers at different price points, when you see us bring in new Mexican solutions with Taco Bell and Delimex, that allows us to again bring families solutions for their home when they're spending more time together.

That is part of us kind of bringing new ideas and ways in which we can bring value to families at this particular time.

And we're seeing that also in away-from-home business where we continue to see the improvements on the momentum of the business.

We are seeing the improvements that we are now servicing better going into Q3.

We are also getting new customers in away-from-home business that again help us make sure that we're building on the success we've had in the past.

And as Andre said, we are being selective in our investments in trade, but we're also committed to a disciplined approach to the RGM tools that we have used in the past.

And we know that help us make sure that we continue to make a balance on the profitability and how we spend in a smart way.

And thank you, Andrew.

Just a final comment is I think our updated guidance also reflects this philosophy in this approach because you see we have adjusted our net sales guidance down, but we largely kept our EBIT growth and we kept -- fully kept our EPS growth.

So that's what we are sticking for.

We have been very disciplined in being very thoughtful about the type of investments we make and what are the long-term implications of that, and we're going to continue to do so.

Ken Goldman, JPMorgan.

Hi.

Just sticking on the subject of the back half.

You provided a number of reasons for optimism.

I think you've cited more innovation, renovation, and marketing.

You've talked about expanded distribution in certain parts of the business.

And then, of course, those targeted promotions.

Just as we think about these drivers, plus the absence of the plant maintenance headwind, which are you counting on as being the most important and meaningful to hitting your updated outlook?

Do the promos have to work?

Is it really about innovation striking a note with consumer?

I just want to get a better idea of kind of your visibility and reliance on the factors you're talking about.

Thank you.

Yeah.

Thank you for your question, Ken.

I think, frankly, it depends a little bit on the region of the world.

I think if you think about our emerging markets, as Andre pointed out, we have been growing volume, we continue to see improvements as we go into the second half of the year, and we're ready.

We exited June in a much better way than we had for the whole quarter.

So we are seeing that, in that case, distribution gains that we have invested in our go-to-market strategy in emerging marketing is working, and we continue to build the success we've had in the past.

In away-from-home business, it really is us continue to drive the improvements on our service, given our plant closure that we had in Q2.

And those continue to start winning some customers that we, in fact, already have qualified for us in the second half of the year, and that is both globally in the US and outside the US.

So we are not expecting initially a big improvement in the overall situation in away-from-home in the US.

But what we do expect is that we are in fact continue to see the progress in our distribution gains as we go forward.

And in the US, in North America for all, is really driven by this balance between us driving this innovation, renovation of our brands, truly be more thoughtful about the value that we're creating with consumers in terms of the better products, the better ideas that we're bringing to market, as well as being thoughtful on how we are going to spend on our revenue management tools, spread our revenue management tools in order for us to make sure that we are having the right price gaps in the intended fashion across the branded competitors.

So that would give you a little bit of sense of how we're thinking about the overall portfolio.

Andre, you want anything you wanted to add?

No, I think you covered it.

Thank you, Ken.

Steve Powers, Deutsche Bank.

Great.

Thank you.

Good morning.

You called out a couple of overseas markets, specifically the UK, China, and Brazil, different dynamics in each of those markets.

But obviously, a lot of work is going on as you try to correct trade gap -- or sorry, price gaps in the UK and fight through in consumer demand softness in China and Brazil.

I guess, could you just expand on what you're seeing in those markets?

And maybe a bit more color on what your expectations are for the back half in terms of any kinds of sequential improvement?

Yeah, sure.

So particularly maybe starting with the UK, as we said last year in earnings, this is a place that suffer a significant amount of inflation, probably even less -- even more than other developed markets, and private label in that particular market has started to get a lot of traction.

And we decided in Q3 last year to start to step up investments to protect the volume.

We do have some factories in the UK that's also we need to be mindful about the utilization of those factories and protect volume for some of the strong brands that we over there.

We have put that in place since now almost a year ago, and we have seen the returns happening on the volume share side.

So I think we're moving the right direction and we are able to mostly protect even gross margin because of the amount of efficiency that we have generated there.

So UK, I think, is moving in the right direction.

When it comes to China, mean similar to what you have heard from others, the industry continues to be soft, I mean, versus the expectations that we do have about a country like China.

So we continue to gain market share in modern trade.

So that's a good thing, but the industry is just not working.

And I think we actually reset our expectation moving forward that it is for the short term about China industry growth.

In Brazil, the good thing is we continue to gain market share.

So that's been very consistent and feel good about that.

Consumer has been demonstrating, similar to other parts of the world, fatigue and has been showing also vulnerability.

So we saw some price gaps to branded players or private label that is negligible, also coming down, so we had to invest.

But we face a situation where the customers adjusted their inventories down.

You have to understand that in the emerging markets, the retailers tend to carry more inventory than in developed markets.

So in a country like Brazil, you'll see inventories at a 45-, 50-days level compared to the US where you see 20 days, 25 days.

So it's very different.

And what we have seen a situation, like we are right now, high interest rates, consumer tightness is retailers start to adjust their inventories down.

And honestly, we are not expecting that, and that created a challenge for us in Brazil in the first half of the year.

We believe that inventories -- we believe right now that they should be at the appropriate level, which should allow us to improve the situation.

But yeah, that's a little bit of snapshot.

John Baumgartner, Mizuho Securities.

Carlos, I wanted to come back to North America.

Your portfolio, in a lot of your categories, you're not the highest priced product.

And you'd think there should be some benefit from trade down into your brands.

But with the focus on managing price gaps to other brands, it also seems like the equation is still very much price based.

So at this point, how do you feel about the ability to redefine your portfolio through innovation, marketing where you can better compete on non-price factors?

Because it feels like there's already been a lot of work done with ingredient reformulations and so on.

How do you think about the non-price competition?

Yeah.

Well, first of all, thank you for the question.

And as you pointed out, we have a series of iconic brands across our portfolio in North America that we feel great about and you've seen that already.

I mean you've seen brands from Philadelphia to Ore-Ida where you are seeing the growth as we have continued to renovate those businesses, or the success that we've had in a brand like Jell-O where we have continued to renovate.

So we have a playbook on how we continue to renovate our business, our brands to make sure they in fact continue to be resonating with consumers today and for the future.

I think in places where we are seeing that consumers are making choices as they are trying to manage the cash flow of the family, we also have to be aware that we have to provide consumers options at different price points, so they can be part of the overall basket size of the cash flow that they have available to them.

That's why in a business like Mac & Cheese, well, it's certainly something that can fit the entire -- can feed the entire family.

We want to make sure we have different price points at which we can come in to consumers and allow them to make sure they continue to enjoy our products.

And it's also about us being able to be accessible in new places.

One of the things we find right now is that consumers are actually increasing the number of trips and locations in which they shop.

So for us, it's important that we continue to expand where consumers are going to find our brands and why we have been so much focused on driving our improvements in terms of distribution in the dollar channel, whether that is with our Oscar Mayer businesses and making sure that we have the product they're looking for at that particular venue.

But it's also us expanding our distribution in places like club where we know consumers are also looking for different ways in which they can find value for their family.

So for us is applying the playbook that we have from renovating and innovating, and at the same time, making sure we have -- providing the access to families as they're shopping in new spaces where they're going from a dollar store to grocery to club, and our brands continue to be there.

Those are all things that you'll see us continue to add as we go forward in the second half of the year.

Michael Lavery, Piper Sandler.

Just was wondering in away-from-home, maybe two things.

You called out that it had the 2.1% decline globally.

Obviously, you had the plant closure and some discontinuations.

Can you unpack maybe the components there and give a sense of how much the slower foot traffic was a headwind?

Or what the growth rate was excluding those kind of onetime things and maybe how much was from slower foot traffic?

And then also you've given an update in the past on the REMIX launch in BurgerFi the test.

And just curious how that's progressing there.

Andre, you want to start then I'll go?

Sure.

So our global away-from-home business declined 2.1% in the quarter.

And the impact from the plant closure is about 200 bps, so meaning that we will be flat without that effect.

That will put us in a situation of similar performance to Q1 if you remove the plant closure effect.

The plant exits that we had at the end of last year, they had an impact in the quarter of roughly 150 bps.

So we'll be then growing 1.5%.

So we're still gapped versus our long-term algo.

We have been gaining sustaining share.

Again, if you remove the effect from the plant closure, what we saw in Q2 in the industry is in the categories in where we play is that industry was worse in Q2 than in Q1, which I think we were not really expecting that.

So in the US, about 100 bps softer in Q2 versus Q1.

So I think the performance on our side helped to offset part of that headwind happening in Q2.

Yeah.

And then to your question about our equipment strategy is pretty comprehensive in terms of how we think about bringing innovation, but also solving pain points for the operators in away-from-home.

So the Heinz REMIX, today we have that already in market.

And the way I think about it is, it is really a moment for us to do the trial, making sure we get the learnings from that, so that we can scale that in a meaningful way in 2025.

And so far, we're hearing great feedback from operators.

We are collecting a number of data from consumers.

And we've seen how that actually allows us to even improve as we think about how we are going to deploy this further in 2025.

The interesting thing too, is that initially we thought this would be something that people will be using most in the burgers.

We actually are seeing them use it in other foods as well when they see that in their different QSRs.

Now beyond the Heinz REMIX, we also have been focusing on bringing new dispensers, tabs, and vending into the pipeline.

And again, it's part of us thinking about more comprehensive about how do we solve this pain point for operators.

So our dispenser, for example, that are much easier for operators to clean, and it allows us to actually make sure that they reduce the amount of labor involved in the collecting and changing of the dispensers.

They began shipping to customers now in Q2, and we believe that actually is going to continue to improve distribution as we go into the second half of the year.

And already beginning to get much more distribution than we had originally expected.

So you'll continue to now drive some of the learning that we began in the US, globally as we as well, as we continue to then bring more of those taps and vending ideas into the marketplace.

Thanks for the question.

David Palmer, Evercore.

Looking ahead in US retail, you're looking to stabilize things there, and thanks for the commentary earlier on volume and pricing, but how are you thinking about improvement across the portfolio and what we're going to be seeing in the scanner data?

You've called out Capri Sun and Lunchables as two areas that might improve, that are in turnaround situations, those are down certainly the most, but that doesn't necessarily mean those are the biggest areas of improvement that you're anticipating.

How are you thinking about which brands and which categories will improve the most in the second half?

Let me start.

And then what I will say is we called those out because they were a meaningful headwind for us in our second quarter.

And I think it's something that the teams have done an amazing job of making sure that we have the right plans as we go forward.

I mean, it was meaningful to the point that in the case of Lunchables, we saw from a low point of, I will say, down 17%, the worst weeks in the second quarter.

What we have actually seen a steady recovery since that particular point, and we're building with that improvement.

And the teams are getting ready, both in terms of renovating, innovating, doubling the marketing spend, improving the media mix, improving the targeting strategies, and increasing the value equation for the consumers as we go forward.

And that includes innovation.

Some of it, we included already in some of the slides that you saw, but also we have in other innovations that, for competitive reasons, we're not including yet, but they will be coming in the second half of the year as well.

For us, we continue to expand in the Lunchables within partnership with Del Monte in the second half of the year.

So there is a meaningful amount of program that is supporting our Lunchables, and you see that from -- and you begin to see that really come into fruition in our back-to-school program, when we're teaming up with the Transformers movie as something that frankly we have been successful in the past doing movie tie-ins as we have done with the Heinz brand.

And we did point out as well Capri Sun because, again, it was a meaningful headwind for us in the second quarter that, again, the teams have been very much focused on driving a change on trajectory as we go to the second half of the year.

They have renovated the original Capri Sun to better align with the consumer taste preference, invested twice the marketing as we go into 2023 -- versus 2023.

We have secured strong back-to-school displays with customers, we have invested in the right promotional events, and we have expanded into new channels with club.

So again, it had both places where we have seen some meaningful headway in the Q2 that we now have also adjusted a meaningful reaction in terms of improving that trajectory as we go forward.

And that will continue with the other things that are working for us.

We do have some positive momentum in parts of our accelerated platform.

I mentioned Ore-Ida, which is gaining almost a share point.

Our Mexican business, we're also gaining 80 bps.

Cream cheese business has sustained growth through the entire first half of the year.

So those are business that we'll continue to see gain that momentum as we go into the second half of the year.

Yeah.

Thanks for that.

I think I'll only add, I think we should expect Mac & Cheese as well.

There is a lot going on the Mac & Cheese in the second half that might be worth.

Yeah.

I think that if I think about how do I round up the items at accelerated platforms, there's probably two areas in which we feel like we also have to be focused on, and we are.

One is on our spoonable business in which we are in fact making sure that we are having the right brand price gaps against our branded competitors.

So we are investing in new flavors and making sure we have renovated the package design on our spoonable business.

And in Mac & Cheese, as you saw from our slides, you saw us making sure that we bring in, again, new innovation, new shapes, new flavors, tie-in, now with Super Mario Brothers.

So that idea of us being able to bring innovation and excitement into the Mac & Cheese business is part of us continue to see us improving the momentum of that business we go into the second half of the year, which we know is a product that the families really care about in moments in which they're looking for value to feed their entire family.

Great.

I was going to follow up and ask you about condiments and sauces, and in particular the spoonables area like you discussed it, but you covered it.

I'll pass it on.

Thanks so much.

Operator, we have time for one more question.

Robert Moskow, TD Cowen.

Andre and Carlos, I think one of the concerns on Kraft Heinz's stock is that all this great progress you've made on gross margin recovery might come under pressure over the next 12 months because you have to make some of these price investments and because volume has been weak.

So maybe to address those, can you talk to what would gross margin have been in 2Q, excluding some of these one-time issues like the plant closure and the other elements that maybe are more transitory?

Could this have been an even higher number?

And would that kind of give us confidence therefore that there's more room for gross margin expansion into 2025?

Look, in both Q1 and Q2, we did have a few situations that negatively impacted gross margin, like very one-time in nature.

I'll be reluctant to give you a precise percentage points, but we did have quite a few substantial events in Q1 and Q2.

And despite that, we were able to expand the way that we did.

As you head into the second half, last year, we had a big step-up in gross margin in the second half.

So you're going to see a more muted year-over-year impact from gross margin, but that's part of the plan since the beginning, so we're not really worried about that.

As we head in '25, I mean, I'm not going to give guidance obviously, but if you remember our long-term algorithm, we do contemplate continuous gross margin expansion, not to the levels that you're seeing right now, but in the 25, 75 bps ish.

But as a consequence of the very strong efficiency that we have, I think we were able to fix the supply chain now a few years ago and we have now, for four consecutive years, very strong delivery coming from the team.

We feel very good about the pipeline that we have.

We have been able this year to not only -- remember, we had a 3% inflation this year.

We're only pricing 1%, and we were able to offset that with efficiencies and still expand gross margin should we invest in the business.

So we do expect that this equation might continue to work into the future.

So we should expect a more gradual, but continuous gross margin expansion.

The only thing I would build, Rob, is this idea was really changing the rewiring of the company, where we are all focused on driving efficiency because it's the fuel for us to drive profitable growth, has now being embedded across the company.

You see that with procurement, you see it in operation, but you also see in marketing on us being able to have more efficiencies of how we go to market, improving the return on investment.

You see that in trade on how we apply AI to have better tools on how we actually have profit, better investments and profitable ways, in which we can embed our trade as we go into the marketplace.

So it is not a one and done.

It is something that we believe can be a sustainable trend for us as a company.

And personally, I believe that having healthy growth margin is truly is the key component of having a virtuous cycle of growth.

And that is a big part of why we are so strong believers on a long-term algorithm for the company.

The changes in operating model that we have done a couple years ago to really reintegrate commercial and supply chain, I think, is really paying off big time and the incentive alignments that we have done, we mentioned this before, like everyone in the company has two KPIs in common, which market share and gross margin, because we want people to grow profitably.

So I think that also contributes to that.

Thank you, everyone.

Thank you for your interest in Kraft Heinz.

Thank you.

This concludes the conference.

Thank you for your participation.

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