$KHC Kraft Heinz Q2 2024 Earnings Conference Call

Well, thank you, Anne-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, convenient solutions that are 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 improvement. 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. 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 by how our focus on improving working capital is paying off. We increased free cash flow nearly $100 million, approximately 9% compared to last year, and maintain our targeted leverage ratio. 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 are 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.

Morning, Andrew.

Andrew, why don't you start? Sure. Morning again, Andrew. Thanks for the question. Look, as we said in our guidance, we're contemplating a step-up in trade investment level. You saw that in Q2 we already had a little more trade than what we had last year. The draw is 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's the way to grow the business, not through over-reliance on promotions, but rather continue to invest behind our renovation and our market investments. 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 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 investment in the US.

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. Our price is expected to be in the around 1% territory for the total portfolio. So if you think about the second half, what the guidance implies is sales declining 0.5%, so you can see that. The good thing is volumes in emerging markets, despite some headwinds in Brazil and China, continue to be positive. They were positive in the second quarter and continue to be so here to go. In the US, we expect to have volume continue to improve, but again, in our midpoint, we don't need the volumes to turn positive for us to achieve it. And what I would say to add is what gives me confidence when we think about that trajectory improving in the second half is that we are very much focused on delivering that value in a very sustainable way. It cannot just be value for the sake of value, but delivering value through innovation, renovation, and marketing for families that we know are spending more time cooking at home. When you see some of our innovation around things like mac and cheese, where we're bringing new shapes, new flavors, new pack sizes to consumers at different price points, when you see us bringing new Mexican solutions with Taco Bell and TGI Fridays that allows us to bring families solutions for their home when they're spending more time together, that is part of us bringing new ideas and ways in which we can bring value to families at this particular time. We've seen that also in our away-from-home business, where we continue to see improvements in 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 the away-from-home business that 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 helps us make sure that we continue to balance profitability and how we spend in a smart way.

Just a final comment: I think our guidance also reflects this philosophy and this approach. We have adjusted our net sales guidance down, but we largely kept our adjusted EBITDA growth and we fully kept our EPS growth. So that's what we are sticking to. 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.

Yeah, thank you for your question, Ken. I think frankly it depends a little bit on the region of the world. 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 already 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 markets is working, and we continue to build on the successes we've had in the past. In the away-from-home business, it really is about continuing to drive the improvements on our service given the plant closure that we had in Q2 and continuing to win new customers that we have already qualified for in the second half of the year. That is both globally in the US and outside the US. So we are not expecting a big improvement in the overall situation in away-from-home in the US, but what we do expect is that we continue to see the progress and our distribution gains as we go forward. In the US and North America retail, it is really driven by this balance between us driving this innovation and renovation of our brands to truly be more thoughtful about the value that we're creating with consumers in terms of the better products and better ideas that we bring to market, as well as being thoughtful on how we are going to spend on our revenue management tools in order for us to make sure that we are having the right price gaps in the intended fashion against the branded competitors. So that gives you a little bit of sense of how we're thinking about the overall portfolio. Anything you wanted to add?

Yeah, sure. Maybe starting with the UK. As we said last year in earnings, this is a place that suffered a significant amount of inflation, probably even more than other developed markets, and private label in that particular market started to get a lot of traction. 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 we need to be mindful about the utilization of those factories and protect volume for some of the strong brands we have 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 in the right direction, and we have been able to mostly protect even gross margin because of the amount of efficiency we have generated there. So the UK is moving in the right direction. When it comes to China, similar to what we have heard from others, the industry continues to be soft versus the expectations that we have about a country like China. We continue to gain market share in modern trade, so that's a good thing, but the industry is just not working. We set our expectations moving forward, at least 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 we feel good about that. The consumer has been demonstrating, similar to other parts of the world, fatigue and has been showing vulnerability. We saw some price gaps to branded players, while private label is negligible and also coming down, so we had to invest. But we faced a situation where the customers adjusted their inventories down. You have to understand that in emerging markets, retailers tend to carry more inventory than in developed markets. In a country like Brazil, you see inventories at the 45 to 50 days level, compared to the US where you see 20 to 25 days. So it's very different. What we have seen in a situation like we are right now with high interest rates, consumer traffic is with inventory down, and honestly we're not expecting that, and that created a challenge for us in Brazil in the first half of the year. We believe right now that inventories should be at the appropriate level, which should allow us to improve the situation. So that's a little bit of a snapshot.

Well, first of all, thank you for the question. As you pointed out, we have a series of iconic brands across our portfolio in North America that we feel great about. You've seen that already. You've seen brands from Philadelphia to Ore-Ida where you are seeing growth as we have continued to renovate those businesses. The success that we have 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 businesses and brands to make sure they continue to resonate 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 their basket size and the cash flow that they have available to them. That's why in a business like mac and cheese, which is certainly something that can feed the entire family, we want to make sure we have different price points in which we can come in to consumers and allow them to continue to enjoy our products. 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 improvements in terms of distribution in the dollar channel, whether that is with our own businesses and making sure that we have the products 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 to find value for their family. So for us, it's applying the playbook that we have from renovating and innovating, and at the same time making sure we are providing the access to families as they're shopping in new spaces, whether they're going from a dollar store to grocery to club. Our brands continue to be there. Those are all things that you'll see us continue to add as we go forward into the second half of the year.

Yeah, and to your question about the equipment strategy, it is pretty comprehensive in terms of how we think about bringing innovation but also solving pain points for the operators in away-from-home. 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 it in a meaningful way in 2025. So far, we're hearing great feedback from operators. We're collecting a number of data from consumers, and we're seeing 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 would be using mostly in burgers. We actually are seeing them using it in other foods as well when they see it in their different QSRs. Now beyond the Heinz Remix, we also have been focusing on bringing new dispensers, tabs, and vending into the pipeline. Again, it's part of us thinking more comprehensively about how do we solve those pain points for operators. Our dispensers, for example, are much easier for operators to clean and allow us to 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 it's going to continue to improve the distribution as we go into the second half of the year. We are already beginning to get much more distribution than we had originally expected. So you see us continuing to drive some of the learnings that we began in the US globally as well, as we continue to bring more of those tabs and vending ideas into the marketplace.

Let me start. I will say we called those out because they were a meaningful headwind for us in our second quarter, and I think the teams have done an amazing job of making sure that we have the right plans as we go forward. It was meaningful to the point that in the case of Lunchables, we saw from a low point of down 17.7% in the worst weeks in the second quarter, we have actually seen a steady recovery since that particular point, and we're building that improvement. 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 equation for the consumers as we go forward. That includes innovation, some of which we included in the slides that you saw, but also we have other innovation that for competitive reasons we're not including yet, but they will be coming in the second half of the year as well. Plus, we continue to expand in the Lunchables with fruit in partnership with Del Monte in the second half of the year. So there is a meaningful amount of program supporting Lunchables, and you begin to see that really coming to fruition in our back-to-school program when we team up with the Transformers movie, something that we have been successful in the past doing movie tie-ins as we have done with the Heinz brand. We did point out Capri Sun as well because it was a meaningful headwind for us in the second quarter. The teams have been very much focused on driving a change in trajectory as we go into the second half of the year. They have renovated the original Capri Sun to better align with consumer taste preferences, invested twice the marketing as we go into 2024 versus 2023, secured strong back-to-school displays with customers, invested in the right promotional events, and expanded into new channels with Club. So again, both are places where we have seen some meaningful headway in Q2 that we now have as a meaningful reaction in terms of improving a trajectory going forward. 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 also gaining 8 basis points. Our Cream Cheese business sustained growth through the entire first half of the year. So those are businesses that we'll continue to see gain momentum as we go into the second half of the year.

Yeah, you know, I think if I think about how to round up the items in our accelerated platforms, there are 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 making sure that we are having the right brand price gaps against branded competitors, so we are investing in new flavors and making sure we are renovating the package design on our spoonable business. And in mac and cheese, as you saw from our slides, you saw us making sure that we bring in 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 and cheese business is part of us continuing to improve the momentum of that business as we go into the second half of the year, which we know is a product that families really care about in moments in which they're looking for value to feed their entire family.

The only thing I would build on, Rob, is this idea of us 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. This has now been embedded across the company. You see that with procurement, you see it in operations, but you also see it in marketing, with us being able to have more efficiencies in 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 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 strength for us as a company. I personally believe that having healthy gross margin is truly the key component of having a virtuous cycle of growth, and that is a big part of why we are so strong believers in the long-term algorithm for the company. The changes in operating model that we did a couple of 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, everyone in the company has two KPIs in common: market share and gross margin, because we want people to grow profitably. So I think that also contributes to that.

Thank you.