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spk03: The conference will begin shortly. To raise your hand during Q&A, you can dial star 1 1.
spk02: Good day, and thank you for standing by. Welcome to the Kraft Heinz Company second quarter results conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. 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 Magella. Please go ahead.
spk03: Thank you, and hello, everyone. This is Anne Marie Magella, head of global investor relations at the Crown Times Company, and welcome to our Q&A session for our second quarter 2022 business update. During our remarks today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risk and insurgencies, and these are discussed in our earnings release and our filings with the SEC. We will also discuss some non-GAAP financial measures today during the call. And these non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliation within our earnings release and the supplemental materials posted at ir.craftheinscompany.com. Before we begin, I'm going to hand it over to our CEO, Miguel Patricio, for a few quick opening remarks.
spk04: Well, thank you, Anne-Marie, and thank you, everyone, for joining us today. I wanted to acknowledge the fact that we are living under a lot of uncertainty in what regards the external world. And in that sense, I want to thank my team and to congratulate my team for delivering another quarter of very solid results. First, we are mindful of the current inflationary environment and how it affects our consumers and our customers. But we continue to develop solutions that benefit our consumers and our retailers. Our relationships with retailers continue to strengthen, and we have improved inventory and service levels. So we can have now more optionality to execute more mutually strategic programs. Well, with that, we are happy to take your questions.
spk02: Thank you. And as a reminder, to ask a question, please press star 11 on your telephone. Please stand by while we compile the Q&A roster. And our first question will come from Brian Spillane from Bank of America, and your line is now open.
spk05: All right. Thank you, operator. Good morning, everyone. I had just one clarification question and then a second question. The first one just as a clarification, Andre, In the slide deck, I think it's slide 27, where you talk about there's a portion or a section in there about gross margin, and it shows gross margin at 30.3%. Just want to make sure, that is not adjusted, right? So that's just your gross margin. I think as we did the adjusted gross margin calculation, it was like 31.5%. So just wanted to clarify that that margin that you're that you put in the side deck is reported not adjusted.
spk04: Good morning, Brian. Thanks for the question. Very good, by the way. So, yes, you're right. So, this is the gap, gross margin. So, to get to adjusted, we need to increase this number by 110 basis points due to the change of unrealized hedge on commodities, okay? In fact, if we adjust for that, our margin in Q2 is pretty much in line with the margin in Q1. And if you compare to prior year, you would see an expansion of margin if we're not for the diluted impact of repricing to offset inflation.
spk05: Okay. Thank you for that. And then my question is just in the prepared remarks, Miguel, you talked a little bit about I think there's still being supply chain pressures in the back half of the year, and or, you know, currently, I suppose. And, you know, recalling last year where, you know, part of what happened in the U.S. was, you know, you had some supply chain issues and they affected service levels, especially around the holidays. I guess, does the guidance assume that there's still going to be some, you know, pressure there and that you won't be fully merchandised for the holidays? Or, Are you in a position where you can be more fully sort of supplied in merchandise at the holidays in the U.S.?
spk04: Okay, Brian, I think that since your question is addressing more of the U.S., I will pass it to Carlos. Thank you, Miguel. Yeah, same thing. I think, first of all, thank you for the question. You know, the reality is that we have continued to improve our production and our service levels, as you saw in the presentation, and And now that we are approaching kind of the low 90s in terms of service in Q2, it's going to allow us to continue to focus on driving the right kind of levels of both service and inventory with our retailers. So for us, it's important to see the continued progression that we have, and we don't anticipate that actually going against us as we go forward. In fact, what we're going to continue to see as we go into Q3 and Q4 is, They continue expansion of our service, and as a result, they continue improvement in terms of our performance. We saw that in Q2, where, in fact, we were able to kind of unlock opportunities within, for example, brands like Philadelphia or Heinz Ketchup, both of which had record shares, in fact, higher shares than ever had in both of those businesses. So I think that as we go forward, we're only going to continue to improve our position. Okay.
spk02: Thank you. And we'll take our next question from Ken Goldman from JP Morgan. Mr. Goldman, your line is open.
spk07: Hi, everybody. Thank you. You mentioned in the prepared remarks that you have the optionality now to execute more, I think I called it mutually strategic programs with retailers. You know, now that your service levels are in a better place, I just wanted to clarify, you know, number one, is there any major difference between you know, a mutually strategic program and just a really good promotion that's more than just a discount. Maybe it's just something more in-depth or creative than a usual promotion. I just wanted to kind of clarify that definition. And the second part of that is I wanted to ask if you're confident that these programs, you know, if you do implement them, that they're being driven from a position of strength, right, whereby you're doing them because you're able to versus, you know, maybe from a position where you're doing it because the consumer is in a position of weakness themselves is demanding it. Thank you.
spk04: Okay. Ken, I will give you two examples of these programs that, you know, because we have now much better service levels, we can have. So I'll give you two examples. One is what we call the Arnold Burger. It has been a very successful program, especially now during summertime when people barbecue more. and when we can put together our sauces, our teas, together with the buns of supermarket chains. It has been very good and very well accepted by our customers. I'll give you another example in a moment like this, that we are exploring value propositions we together with with customers I'll give you example of grilled cheese you can have a grilled cheese for less than one dollar and we We do programs with our customers, putting together our cheese, our mayo, and with their bread as well. So these are just two examples of bringing value, a value proposition, and the customers are receiving this extremely well. And this is bringing a little bit of creativity that we had never used thinking about value or bringing the value of our products to life together with the customers.
spk06: And then the second part, thank you for that.
spk07: The second, doing this, I guess, from a position where you feel it's from strength rather than, you know, maybe because the consumer is demanding it a little bit. I just wanted to make sure about that. And maybe you answered that a little bit with the second part about talking about, you know, the value proposition promos. But just curious for your thoughts there.
spk04: The only thing I would say here, Ken, is that I'm speaking is we continue to have very productive conversations with our customers in a way that makes sense for both of us. Yeah, but, you know, sure it's from a position of strength. We feel very positive about it. We are excited with the momentum that we have with our customers and with our consumers.
spk07: Understood. Thanks very much.
spk02: Thank you. And we'll take our next question from Andrew Lazar from Barclays. And Mr. Lazar, your line is open.
spk00: Thanks very much. In the slide deck, you provided a breakdown of categories that are sort of more and less sensitive to to price gaps with private label. I think 15% of sales are in categories that are more sensitive where gaps are increasing. And I'm just curious, how do you approach these businesses in terms of balancing share and profitability? Do you take the necessary price to protect profit and deal with the short-term pressure on share or protect share and sort of take the short-term profit hit? And you talk about another 25% that are sensitive to private label gaps but currently stable. And I guess, you know, if those were to expand from here, I guess, what gives you confidence you can manage this bigger segment in the context of your sort of growth algorithm? Thanks so much.
spk04: Well, let me start it, I think, under the question specifically to the U.S., so I'll take a shot. You know, I think for us the reality is that even as we think about those differences, there may be, as you saw, a very small part of our portfolio that is more exposed to private labels. You know, one of the things that we're actually doing is working differently in terms of how we're offering consumer solutions in a moment in which they are looking for different choices across the spectrum of economic development of consumers. So one of the things we're actually looking at is how we actually allow consumers to stay in our iconic brands and because of the number of ranges of our products across our pricing ladder. Whether that is, and let me give an example, something like Oscar Mayer, in which we have from natural to Deli Fresh to original Oscar Mayer, that allows consumers actually to have an option in which to actually stay within our brands, knowing that over the last couple of years, we've actually been renovating many of our iconic brands and investing behind it. So we have improved the quality, we have improved the renovation of those brands, in a way now that makes those brands even more valuable to consumers. And frankly, we're seeing that already play out. We see that, for example, in a product like in a Kraft Achieve portfolio, in which we also have that kind of full array of products across pricing ladder that in Q2 you saw was gaining share as well. So for us, it's about being strategic about how we think about leveraging the entire portfolio that we have in a way that allows us to continue to offer consumers different approaches in terms of options. And it's really a category by category thing, right? So even in the 15% where the prices are expanding, the stories are very different. Like in sandwich cheese, similar to cold cuts, we do have a very good price ladder. We have the Govira slices at the floor, in fact, even priced at or below private label. We have the Kraft Seagulls and we have the Deluxe. And we're actually getting share in the last several months. So it's working quite well for us. In Orida, for example... We have the partnership with Simplon that is now starting, and that will unlock a lot of capacity later in the year, which will allow us to start to promote more this brand, which we haven't been able to do in a consistent manner for years. So it's really category by category. Monitoring is very close and makes sense that we are doing something that makes sense for both top and bottom line. Thank you. Thank you, everyone.
spk02: Thank you. And our next question will come from Chris Grow from Stiefel, and your line is now open. Mr. Grow, please make sure your line is not on mute.
spk10: Can you hear me now?
spk02: Yes, sir.
spk10: Thank you. I just had a quick question for you, if I could, around the revenue growth in the quarter outpacing consumption. I was just curious how much of that was food service strength, for example, and maybe the non-measured channels versus actual inventory rebuilding. I think this kind of, you know, fits with an earlier question around, you know, do you see product availability as a constraint to the third and fourth quarter performance in the second half, or is that behind us now, as I'm ultimately trying to get to? Thank you.
spk04: I think it's a combination of these factors. So, Food service, as you have seen in our presentation, is growing north of 20%, and that represents roughly 13% of our total revenue. In no-measure channels in the U.S., we have been doing very well in club and dollar, actually been getting share here today in those two channels because we were already prepared for a gradual shift towards those channels. And even though it was more pronounced in Q1, in fact, in Q2, it was very minor. So I think it is more attributed for the first two. Regarding service levels, as you have seen, we are still in the low 90s, where the ideal level is in the high 90s. So we still have work to do. Obviously, that's the average of the portfolio. In some categories, we are in great shape, back to the historical appropriate levels of services. So we're still working through it. And even if you look along shelf availability, we are much closer to the historical levels. So, if you think about potential availability, there's going to be an industry like 93, 94. We are now in the 91, 92. So, we're getting there. There's still some room to grow.
spk10: And would there still be some continued inventory build you'd expect at retail as you improve your service levels?
spk04: We might. Obviously, we cannot... comment on how we don't know how we're going to measure the inventories moving forward. If we were to look at historical levels, yes, there could be some room for further inventory buildup.
spk10: Okay. Thank you.
spk02: Thank you. And our next question will come from Steve Powers from Deutsche Bank. Mr. Powers, your line is now open. Yes.
spk09: Hey, good morning. Good morning. Thanks. You talk about You're out with contemplating greater price elasticity, negatively impacting volume and mix, I guess, over the balance of the year. Is there a way for you to help us think through the P&L impacts of lower volumes at this point? Clearly, there are many other moving parts, but all is equal. If volumes are to move lower in places where you anticipate, how material is that on margins in terms of fixed cost you leverage per unit sold? I'm really asking just how fixed versus variable the cost structure is at this point.
spk04: Thanks for the question. At this point, it's not really a drag because we're still building inventory. Remember, our service level is still in the low 90s. So to continue to produce more than what to sell is actually a little positive effect at this moment. And we are monitoring the demand very closely. So then we also adjust our labor accordingly to make sure that we don't have an overhang down the road when we start to step down on production to make sure that they don't have more labor than needed and have this effect that you're talking about. But that's all right now. This is not an issue.
spk09: Okay, great.
spk04: Thank you.
spk09: And if I could, you gave some good color on the cost outlook for the remainder of 22. I guess I'm just curious how you see, if possible, early positioning looking out to 23. On the one hand, you mentioned costs hopefully peaking and maybe starting to recede in some cases, but On the other hand, we're still obviously a lot higher year over year, and you presumably have some hedges rolling into the new year that will roll off both on commodities and currency. So just maybe a little bit of color if you have any on early positioning, visibility on cost and currency looking out to the first part of 23.
spk04: Very true, Dale. There's still a lot of volatility out there. Yes, the costs have receded. They are still very high. We are working with different scenarios for next year, but But I need to talk about that. You can see that we have been taking a price throughout the year that we wanted to have a carryover effect into next year, especially in the first half of the year. So that will help. That will help. But early to tell. Okay. Very good. Thank you.
spk02: Thank you. Our next question will come from Robert Moscow from Credit Suisse. Your line is now open.
spk06: Hi, thanks. Your income statement shows losses on your derivative hedges in 2Q. I imagine that's commodity inputs are now calling. And if that's right, should we assume at some point that this necessitates more counts in your thing on any specific products? And then a quick follow up.
spk04: Yeah, so thanks for the question. So a couple of things. First, maybe to answer the prior question, as I was mentioning a little bit to this one, we typically price on market changes, not on our hedging position, right? So it's important to know that. Hopefully this is clear. We price based on what we're seeing out in the market, not based on what our internal pricing hedging are. But the second thing is, regarding this effect, what we see in the P&L is a change in the unrealized hedge on commodities. Okay, so it doesn't mean that the hedge is positive or negative. It just means that there was a change period over period. So we're still having hedge gains. We had hedge gains in both Q1 and Q2, but because part of that materialized, we see this negative effect on the unrealized portion. But again, I think the important thing is we look at the market prices, and that's how we make our best decisions.
spk06: Okay, maybe I'll follow up. My follow-up is, I think you did ship above reconsumption in 2Q, and I think you said that you'd be refilling shelves in 2Q. Can you give us any number as to how much that might have been just in 2Q?
spk04: The inventory effect in 2Q is very small. So, yeah, 2Q is a very small number. And, again, we don't know how retailers are going to manage their inventories. If we were to look at the levels pre-pandemic, net-to-net, we would still have room to grow more inventory than retailers. And our shelf availability, as I said before, is still a little below the historical level, which might give further indication that this is a possibility.
spk06: Yeah, Andre, I get it. But you also said you're producing above your sales. So, I don't know, is it a material amount or are you just –
spk04: it is and you're are you refilling your own inventory then rather than retailers or it we have now refilling our own inventory because it's actually going to receive below the historical levels and eventually these will flow to the retailers i don't know how they want to add something else yeah i mean i would say if you look at the presentation and the fact that we're able to provide service from the you know low 80s to the to the low 90s is a result of us being able to actually leverage our entire supply chain in a way that now with the right inventory levels in many of our categories that we can provide that service. At the same time, as Andrew said, we're still in low 90s. So this is an opportunity for us to continue to drive that to the high 90s by pushing the right level of inventories internally so that we can actually be able to better service our customers.
spk06: Thank you for the clarification.
spk02: Thank you. And we'll take our next question from Alexia Howard from Alliance Bernstein. Good morning, everyone.
spk01: Thank you. Good morning, everyone.
spk04: Good morning, Alexia.
spk01: Can I ask about the comments you made in your prepared remarks about the international zone and the expansion of distribution points? It seems as though in the go-to-market areas, there's been a very material expansion of distribution points in some of those emerging markets. How do you ensure that you've got the critical mass in those new outlets to make money? I don't know whether you can give us data on how profitable you are in some of those regions, but we've seen some other companies kind of dig themselves a profit hole as they're trying to do that expansion, and I just want to find out how you're making sure that you've got guardrails on that expansion. Thank you very much, and I'll pass it on.
spk04: Rafael, it's really you. Yes. No, Alexa, thanks for the question. I mean, to be honest with you, we are extremely proud and happy with what's happening with our go-to-market model because it's a very comprehensive model that we actually start by analyzing starts by where we can make money. So it starts by looking at the gross profit of each individual either channel or sub-market, let's say traditional or modern trade, depending on the region in multiple countries. As you can imagine, if you pick Brazil where we started, Russia, China, they are very vast countries, so they have the profitability that you can achieve in different regions and different channels is significant. It can be significantly different. So we start by analyzing that, following through all the way to how we're going to execute in store. So it's a very comprehensive model of very detailed analytics with execution. So as you saw and you alluded to on the slides, we started this model in 18 in Brazil, copied, adapted and copied to Russia, then to China, And now we are scaling up to, by the end of the year, we expect to have 75% of our markets into this go-to-market model. And the numbers, the results speaks for itself. So everywhere that we implemented the model, the growth has been significantly above the other emerging markets that are also growing. So we will continue to roll that out. It's a model that, again, requires a lot of analytics to be profitable. but at the same time, a lot of discipline on execution to kind of keep expanding in those regions that still have a lot of distribution to begin. On the profitability side, which is obviously very important, right? We don't want to make sure that we don't put a lot of people out there and we cannot have a payback on that. We're also very disciplined on it, right? So to give an example, in Brazil, We have about, I don't know, 1 million points of sales that we could hypothetically serve. We are still in the $130,000, $140,000. And part of that is because the limits of our scale. So that's very important. We are halfway to exploring alternatives, potential partnerships to try to increase the penetration in some markets. So maybe there will be more to come in the future. But, yes, profitability is also an important consideration. Since we are talking about Brazil, I think that now with the acquisition of Hammer that is very strong in the south and Heinz is very strong in the southeast, it gives us even a bigger opportunity to expand our distribution and the strength of our brands. We are really now with great scale in Brazil that we are very happy with how this acquisition is going and the plans that we have in place for the business there.
spk01: Great. Thank you very much. I'll pass it on.
spk03: Operator, we have time for one more question.
spk02: Thank you. And we'll take our last question from David Palmer with Evercore ISI. Your line is open.
spk08: Thanks. In your prepared remarks about gross margins, you talked about the fact that you're protecting profit dollars and not margin, and that was causing a 450 basis points of decline, and that math makes sense. But I'm sure there's more going on underneath the surface with regard to gross margins. Supply chain, I'm sure, is a friction cost, and maybe there's some timing with regard to pricing versus input. So anything that you would call out that was also a factor in gross margins that we can be thinking about even into 23 as a comparison?
spk04: Yeah, thanks for the question. Look, this is by very far the highest impact, but obviously underneath that you have the growth efficiency. Remember that you have the $2 billion plan that I've communicated and that we are on track to deliver. We delivered the first two years in line with the expectation, and year three, which is now, we continue to be on track. So that certainly contributes. It's a factor. It's relatively small. It's small in the quadrant, slightly positive, as we continue to accelerate the growth platforms where we have higher margin. But the number in the quadrant is not significant. So really in this quadrant, it's about the dilutive effects. But again, moving forward, we should expect to continue to deliver the growth efficiencies. And as we continue to price up inflation, if inflation eventually starts to ease, that may put us in a better position for us to continue to recover the margin.
spk08: Thanks for that. And then on food service, the very impressive growth there, the over 20% growth in North America does imply something's happening there, some big market share wins. What's driving that, and is that sustainable? And I guess you're just citing the big global QSRs as the momentum driver for international, and that does sound sustainable in your view?
spk04: Thanks for the question. I think there are two things. One thing that I want to highlight that was not in the prepared remarks, that our food service now in Q2 is 14% higher than Q2 2019, which is really remarkable. There is a component of We've been pricing that channel consistent to what we've been doing in retail, so price also has a lot to do with the growth that we're seeing here, too. But volume continues to grow as we expand distribution. We've been gaining market share where we have the information in developing markets in North America, Europe, and Central. Regarding QSI strategies, I'll let Rafa talk a little bit about what we are doing on the international zone. Before Rafa talks about the international zone, I just want to say that you know, since you, Andrea, compared with 19. In 19, food service was a very transactional area for the company. It was not really strategic and was a small part of the company that we didn't put a lot of attention. I think we have a great team today with a lot of ambition and really looking at this channel as a critical strategic channel that generates penetration of our brands across the globe. If we are having great momentum in emerging markets, in part, it's because our consumers are getting in touch with our brands in food service. So that's a very different change in mindset. And as a consequence, you know, the team changed, I think, entirely since 19. Rafael, please. Yeah, the only thing I would compliment, I mean, to build on what Miguel said, we have a say here. We use the model we define for food service. We own the chef, own the kitchen, own the customer. And that reflects the investments we made on chefs because chefs are extremely important, especially on QSR, global QSRs, as you alluded, because that's how you develop recipes or help your limited-time offers. with those customers. And this is the door into developing, into innovating products for them to put in their stores. So we've invested on this capability, and this is paying off big time because then you develop a relationship with those customers that takes you to a different level, that allows you to innovate, to price better, to get out of commodity competition. And with that, we continue to use the channel as well to build the brand. I mean, in terms of impressions, it's a fantastic channel to build brand impressions. So food service is a core pillar for our group, both across international but in the U.S. as well, and Carlos can complement that. But we've been very successful with this model of investing on chefs and partnering with the customers on product development. I would say, Rafa, the only thing I would add here is just the fact that the model that we have, we're also looking at it at the global basis. So the same concept of us being able to kind of, as Miguel and Rafa pointed out, leveraging our points of distribution and away from home in order for us to kind of build our iconic brands in retail. That type of virtual cycle is something we're going to continue, and we see that paying off for us. At the same time, over the last couple of years, not only have we reorganized ourselves and focused our team in having kind of the right expertise and capabilities with food service, but we have also simplified our portfolio quite a bit. I can tell you that since the last two years, we have reduced the number of SKUs in the U.S. food service by half. So that allows us to actually pivot to the things that really matter to our customers in a way that they can help us both in terms of providing the great service and great value in a way from home. And with that, let me pass it over to Miguel for some closing remarks. Okay. Well, thank you all for your questions today. You know, as you are seeing, we are a company in the midst of a transformation. We are proud of what we've done so far, very proud, but each day we continue to improve and to evolve. And we are just getting started. We have so many opportunities ahead of us, and we are all very excited about what's to come. Thank you very much, and thank you for the continued interest in Kraft Heinz.
spk02: Thank you. This concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.
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