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spk14: Ladies and gentlemen, thank you for standing by, and welcome to the Kraft Heinz Company third quarter results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. So ask the question during the session lead to press star 1-1 on your telephone. I would now like to turn the call over to your host, Anne-Marie Magella, Global Head of Investor Relations. You may begin.
spk10: Thank you, and hello, everyone. This is Anne-Marie Magella, Head of Global Investor Relations at the Kraft Heinz Company, and welcome to our Q&A session, for our third quarter 2022 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 statement 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.crivetimescompany.com under News and Events for a 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.
spk13: Well, thank you, Anne-Marie, and thank you, everyone, for joining us here today. We are excited. We are proud. We delivered another quarter of strong results. And we see consumer demand remaining strong and elasticities, they continue to hold. We see our portfolio of iconic brands. strong and very adequate for the moment that we are living. And we continue investing in these brands and seeing that this investment is paying off. Yet at the same time, we realize, we know, that supply chain remains challenging, particularly with inflation and material shortages. I'm proud of the teams as they continue to anticipate and adapt to these challenges. where we improved capacity and were able to meet demands, we actually gained share. At the same time, we continue to advance our transformation, including modernizing our marketing and transforming our portfolio. As we look ahead, we continue cautiously optimistic. We are providing our consumers with solutions that they value, and we continue to unlock efficiencies, and reinvesting the business, all of which makes us stronger and positions us well for whatever challenges are still to come. With that, we are very happy to take your questions.
spk14: Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star 1-1 on your touchtone telephone. We'll pause for a moment while we compile our Q&A roster.
spk06: Our first question comes from Andrew Lazar with Barclays. Your line is open.
spk02: Great. Thanks so much. I guess maybe to start, the company had moderated its EBITDA expectations back in September 1st, third quarter, when you were already about two months into the quarter. Today, you not only beat those expectations, but came in above the initial guidance as well. So what came in better than you thought? Are there any timing issues to be aware of that might impact 4Q as a result? And maybe more importantly, do these fluctuations give you any pause with respect to visibility into the business with the understanding that it's obviously still a very dynamic environment?
spk13: Andrew, thank you for the question, and you may answer this one. Sure. Good morning, Andrew. Good morning from you. So, Andrew, first of all, we feel, as we got there at the beginning, we feel very excited and pleased with the results we achieved in the quarter, and I'll tell you that A lot of things happened in our favor towards the month of September. First of all, if you might remember, we have executed a new price increase in the month of August, and the last pieces turned out to be stronger than what we anticipated, which resulted in strong top line. Shipments were very good. I think our team did a great job in the month of September to be able to ship in a much better pace than earlier in the quarter, which also helped us. We end up spending less promotion also that we have initially anticipated, which is a sign as well that we're being very prudent to put all the promotions and expenses in our portfolio. And finally, we did have about $30 billion of on-time gains in the P&L, 80% in cost, 20% in SG&A, and those are mostly anticipations from Q4. Okay, that's what we're able to do in Q3. And obviously, we also had a little contingency, the number given, the volatility, right? But all in all, I think we're able to have a lot of those things playing our favor. I think there's a testimony here that the organization is moving with speed and reacting fast to diversities. And look at ourselves as we maintain the guidance for the year in Q3, right? And so I think we felt confident about the number that's put earlier. And I think we're just reinforcing that now by raising the floor. And you can count on us always to be maintaining a transparent dialogue and being in a very timely fashion, like we did back in September when we had the first news about new inflationary pressure. Great.
spk02: Great.
spk06: That's very helpful. Thanks so much. I'll pass it on. One moment for our next question.
spk14: Our next question comes from Ken Golden with J.P. Morgan. Your line is open.
spk05: Hi, thanks so much. You mentioned that your supply chain tightness is still mostly caused by factors from your upstream suppliers. This is not an uncommon refrain. We're certainly hearing this from many of your peers. I'm just curious, can you maybe help us better understand what the specific issues are? You mentioned disruptions, I guess, on ingredients and packaging. Does this suggest that the issues are somewhat temporary? They can fade when the disruptions have passed or Are there maybe some structural problems, I guess, that could take longer to fix? Thank you.
spk13: Okay, Carlos, I think that's related to what you asked. Go ahead, please. Yeah, what I would say, first of all, thank you for the question. You know, what I would say is that I think you can see that the environment continues to be challenging. And what I'm really proud of is the fact that our team is doing a terrific job of working through the wave of challenges. As we speak, we are both rebuilding inventory and improving service levels, and we have done that through the quarter, sequentially in this quarter. I think we continue to see that going forward. I think what, if I take a step back in terms of overall constraints, what I see is about 80% of those challenges are really due to upstream supply distribution upon ingredients and certain packaging materials. At the same time, what I'll say is it's very asynchronous the way they're recovering. So you'll see that in some cases we are moving quickly and recovering overall in our supply chain. There's a few ingredients that have been a little tighter for us. And, you know, I point to things like have affected us in the past and things like cold cuts and a lunchable, I'm sorry, and cream cheese. But at the same time, even in those categories, we now have recovered and feel good about kind of our position as we go towards the end of the year.
spk06: Got it. Thank you. Thank you. One moment for our next question. Our next question comes from Brian Splane with Bank of America.
spk14: Your line is open.
spk03: Thanks, Operator. Good morning, everyone. Maybe to build on the previous two questions, you're kind of looking at the current environment now, you know, dealing with what you're dealing with, you know, you know, seeing what you're seeing in the marketplace, is there any reason that we shouldn't expect that your long-term targets, which, you know, you laid out back in, or you talked a bit about back in September, are, you know, are targets that we should expect that those are achievable for 2023? Or is this environment still maybe too volatile to be in line with what your long-term targets would be?
spk13: That's amazing. I want to answer this question. Sure. Brian. As we said back in Cagney, when we unveiled our new long-term growth algorithm, we expect to get there over the years. So think of it in terms of three years or so. So we feel good in our continuing improvement in our performance, and we expect to continue to move towards the algorithm. the way that you have communicated back then. We are probably not ready to give any guidance around 23, but yes, the environment is too volatile. As you have been hearing from us and probably from others in the sector about supply chain volatility, which has consequences on availability and the speed of easing of costs.
spk06: Thank you. One moment for our next question. Our next question comes from Chris Groh with Stiefel. Your line is open.
spk07: Hi, good morning. I just had a quick question for you in relation to you showed in one of your charts in the slide deck, private label gaining more share in your categories. It also showed Kraft Heinz doing much better in its categories as well. And as we look across the store, private label share has been up at a lesser rate over the past few months, although it seems like it's gone up a little bit more so in your categories. I just want to get a sense of if you see incremental risk in your categories from private-level share gains as you take more pricing, where you have more pricing that's been put in place, and then just any change in your thoughts on elasticity in relation to your pricing, which has been very favorable for your business. Thank you.
spk13: Good morning, Chris. And, Dan, do you want to answer that question? Sure. Thanks for the question. On private labor, a few things. First of all, as you have been continuously reiterating, our exposure to private labor have reduced significantly after the two diversions we had made last year. So now the average market share in our portfolio is about 11%, when it's across food and beverage, 20%. So we are not protected. Second, during the past three years, as part of our transformation, we have been redirecting a lot of our effort and energy around the core. So resources have moved there. We have been renovating the court in a very systematic way, so our portfolio is stronger. Third, the private label has been increasing the price together with the rest of the players. So as recent as the last four weeks, including already three weeks of October, looking at sell-out data, our sell-out price is about 17% up, whereas private label is 16% up. So price gaps are widely preserved. You might have seen as well in one of the scans that we provided that comparing Q2 to Q3, the price gap for private label remained the same. So we did not see any category where our price gap expanded versus private label, except to catch short-term rentables, which honestly the interaction is limited, and we can't share in both of these categories. So, yes, I think we feel good about that. Obviously, we don't want to be naive and overly optimistic that depending on how consumers eventually shift behavior in a very drastic way, things can change. But there is no indication of that as of right now. And honestly, I mean, despite all the environment, food is proving to be very resilient. The brands are yet being very resilient. And with unemployment the way it is right now, when I was here back in 2008, 2011, we only started to see accelerated shifting behavior when unemployment started to go up, which is far from reality today. Yeah, and I think what I would say is, you know, we have continued to invest in the equity of our brands, which, you know, if we think about the fact that, you know, companies really don't have pricing power. Brands have pricing power. So the investment we have made with the quality of the marketing we have improved here at Kraft Heinz and the commitment we have to continue to invest in our brands going forward also gives us some confidence as we continue to manage through the current environment. So thanks for your question.
spk14: Thank you.
spk06: One moment for our next question. Our next question comes from Alexia with Bernstein.
spk14: Your line is open.
spk00: Good morning, everyone.
spk14: Morning, Alexia.
spk00: Okay. I look at the lineup of products on page 19 of the presentation, and they really do seem to be meeting the moment in terms of the consumer need for convenience and affordability. But I'm just wondering about your thoughts on the recent White House conference on hunger, health, and nutrition that happened last month for the first time in 50 years, I think. And there were a lot of initiatives coming out of that with respect to front-of-pack labels, a very tight definition of what a healthy food is, educating consumers and health professionals on the importance of good nutrition. And I wonder just how your – it may be too soon, but – how you're thinking about those types of developments in the industry over the coming months and years, and how that might shape your plans for innovation and the portfolio going forward. Thank you, and I'll pass it on.
spk13: Let me answer this question and then see if Carlos wants to complement. Nutrition is part of our long-term strategy. It's part of our agenda. It's a very important part of our ESG goals for the future. We've been renovating our portfolio throughout the years, you know, reducing or eliminating dyes and artificial ingredients. And we have, you know, a global agenda, a very specific agenda on reducing salt and sugar, which are two critical things in our portfolio that we have a responsibility to do. We are on the way to achieve the targets that we put in place until 2025. And just to give you an example, we changed the formulation of our cap recent this year. We reduced 40% of sugar content. And that, to put it in perspective, just that is 40 million pounds of sugar per year that we reduced. We continue committed to that for the short, the medium, and the long term to make our products more nutritious. But I will add to Miguel's point, which I think is right on, is the fact that this is a commitment we have for the long term. You know, every single time we are renovating our portfolio, we're putting in kind of the view of how do we continue to improve our products overall. not just because it's the right thing to do, but also because that's what consumers want us to do. So I think that is happening, and obviously you can see it very clearly in terms of commitment to sugar reduction, to cell reduction, how do we continue to work with communities and improve in the food insecurity situation. And this is something that as a company we are committed to and will continue to as we go forward. We are, you know, contagious. buyer of tomatoes and beans. And in the heart, we are an agricultural company. And we've been investing a lot in that sense in plant-based. I mean, you see what we are doing in Europe with our beans. with the project of launching new beans-based products with Heinz beans burgers, with Heinz beans hummus, protein pots, and a portfolio of innovation for the next five years related to that. Here in the U.S., we are very proud to announce this week that we are launching our plant-based cheese, which, by the way, is an incredible product, very different from what is in the market. It melts. It tastes like cheese. It smells like cheese and melts like cheese. And it's very different from everything that is in the market. So we're absolutely committed on the nutritional agenda. Wonderful.
spk06: Thank you very much. I'll pass it on. One moment for our next question. Our next question comes from Steven Powers with Deutsche Bank.
spk14: Your line is open.
spk01: Yes, hey, good morning. I wanted to ask on gross margin progression. Across the consumer goods space broadly, I think we're beginning to see more signs and evidence of gross margin stabilization, if not recovery, with results across many companies either coming in ahead of consensus expectations or improving sequentially or even starting to improve year over year. Every portfolio is obviously different, but you're not yet in that position. So I'm curious as to just how you're thinking about the progress of gross margin, what kind of framing of expectations we should have going into the fourth quarter, and the prospects for improvement as we build into fiscal 23. And there you may answer this question, please.
spk13: Sure. Thanks for the questions. Look, we have been, as I said all along, we have been pricing to protect the dollar inflation, so dollar for dollar. And we have been doing that now for the second quarter in a row. So both in Q2 and now in Q3, price was in line with inflation and price plus growth efficiencies was ahead of inflation. Given that we had in Q3, as we initially said back in September, some incremental pressure in selected places, and we took action already on it, there is this continuous lagging effect. So we expect Q3 to be the bottom of our gross margin, and you should expect to see a sequential improvement in Q4 in comparison to Q3.
spk06: Thank you. One moment for our next question. Our next question comes from David Palmer with Evercore ISI.
spk14: Your line is open.
spk04: Thank you. Just to follow up on some of the supply chain stuff, your case fill rates in your slide deck, you say they were in the low 90s in the third quarter, and that's better than the high 80s that it was in the first quarter. But I was slightly surprised to see that that fill rate was the same as 2Q. Is that a result of that upstream supplier effect that you're talking about? And I'm wondering, you know, how you're thinking about progress there. Is that some – do you have visibilities to getting that fill rate back? I'm sure you want to get back to the high 90s. And when can we expect bigger leaps and improvement in fill rates? Thanks.
spk13: David, thanks for the question. Carlos, please. Yeah, listen, what I'll say is that exactly what you said. It is connected to the availability of certain ingredients of the upstream. But at the same time, you know, our commitment with our customers is continue to improve that. I'll tell you that as we continue to navigate the situation in terms of those capacity constraints, what I'll say is that we also are looking to see how we're differently with the capacity that we have available to us. And let me give you a couple of examples of how we're doing that. We actually are ingesting data directly from our customers in a way that allows us to better deploy our inventory to reduce out-of-stocks. We started that with a pilot with one particular retailer, and that allows us to actually reduce the amount of inventory by 40 percent, the out-of-stocks in their stores, but by 40 percent in a period of about eight weeks. We now have expanded that program, and now we're ingesting more data from different customers that allows us to then make sure that we are then putting the right inventory in the right stores and bringing the right signals into our production so that we can maximize the availability capacity that we have in our plants. So we're both working on strengths as a supplier, but it's also us being smarter and better capabilities internally to deploy our inventory to improve overall service levels. which we're committed to do. Thanks for the question.
spk06: One moment for our next question. Our next question comes from John Boutgarner with Mizuho. Your line is open.
spk08: Good morning. Thanks for the question. Miguel, wondering if you can touch on the nice reversal you had in Q3 regarding market shares relative to your branded competition. How would you break that down between the benefits from some of the supply chain constraints easing, the pricing differentials in the market, as opposed to how much of that is derived from just underlying changes to your execution in the market on more of a like-for-like basis, and how sustainable do you think that performance will be in the share gains versus brands going forward? Thank you.
spk13: Thanks for the question. So, let me give you my perspective, and then Carlos can go further on that answer. we are excited to keep the levels of market share even with the problems that we continue facing on supply. I mean, we would be gaining a lot of share if we would not be facing steel shortages on raw materials. A good proof of that is Capri Sun and and launchables, where in previous quarters we had problems with supply, shortage of raw materials, we lost share, and now we are in record share gains on these two brands. So I actually am optimistic that we can move further on market share. Carlos, please. Yeah, I would say to Bill Miguel's point, you know, this is a combination of the continuing investments that we have made in renovating our brands, investment in improving the quality of our marketing communication, and then, as you said, unlocking some of the capacity in some key brands. I think the example Miguel gave around launchable, the Capri Sun, in which we saw – the improvements on inventory and CFR and then our ability to actually then go into market and then drive event-based promotions that allow us to then continue to grow those particular categories during the back-to-school period, which was basically a phenomenal result for us in terms of performance. As we go forward, you know, when you see the places that we continue to have challenges in terms of capacity, we know that once we unlock those, we also have an opportunity to then continue to grow our consumption as we go forward. And those, as I said before, areas like our cocas and cream cheese that are slowly getting into better position in our inventory. And now as we go into the holidays, making sure we protect the ability to then go into those event-based promotions, we're doing the time of year that consumers are really looking for our brands. So, you know, when you take a step back, I will say it's a great combination of the work we have done over the last year and a half for us to improve internally the equity of our company and at the same time now see the benefit of us being able to now go back into the marketplace in a more aggressive way that allows us to then continue to drive consumption and whole penetration in our brands.
spk06: Thank you.
spk11: Operator, we have time for one more question.
spk06: Or one moment. Our next question comes from Michael Lavery with Piper Stanley. Your line is open.
spk09: Thank you. Good morning. I just wanted to come back to the food service opportunity you called out. And I think specifically you said Roughly half of the top 50 QSRs are distribution opportunities for you. Can you just give us a sense of maybe what's kept you from already being in some of those accounts? How sticky are those relationships? And what's sort of realistically the expectations for how many of those could come your way?
spk13: I would ask Carlos to answer that question and then Rafael that is with us on this call, the President for International Zone. where we have a great momentum on food service, by the way. Yeah, listen, I think let me start with the comment Miguel just made. I think if you look at our business in the North American here today, you know, we're growing and growing market share. So we feel very good about our performance so far. But I guess I'll tell you is for us it's a critical channel as we go forward. It is one that we really have thought about. How do we continue to transform the organization internally? So we have done things like changing the leadership and reoriented our focus from operators to advanced distributors. We have done things like making sure that our food service now has a different role within North America's zone that is from what we used to see as basically a stable contributor to now a growth driver. We have simplified and renovated the portfolio. I'll tell you that we have reduced about half of our SKUs that we had in 2019. At the same time, we have improved quality. And then finally, we continue to enhance our overall distribution overall. Now, part of the point that you made around how do we continue to unlock some of the opportunities we have in QSR is us continue to invest in the capacity of the business. So we're also making strong investments in CAPEX in order for us to support the opportunity for us to continue growing in our food service channel. Over the last two years, that number is over $100 million we have invested. So that allows us now the opportunity to have those conversations with QSR in a way that truly unlocks opportunities for us to continue growing. Now, that's a view of North America. Let me pass it on to Rafa to give you a view also of our international side.
spk12: Yes, look, it's not very similar to that. The opportunity in food service is significant, and you can see it has been a core pillar for our results in the last few years, and the core is no different. You can see that the numbers we released, we were growing actually very fast and twice the size of the industry, twice the rate of the industry. So you can attribute that part of it was the slowdown that happened during the pandemic. A lot of the across international, we do compete with some global players, but also with some local players. And a lot of them specialize in food service that during the pandemic, they suffer a lot. And some of them either went bankrupt or had to downsize significantly their operations. We didn't. We maintained the same level of investments. And consequently, coming out of the pandemic, in most of the countries across the world. I mean, we are riding ahead of it. So we continue to be excited. I mean, QSR is the core. Our products, especially within the sauces environment, goes very hand-in-hand with the QSR industry. We still have a long way to go. I mean, our estimate with the data available is that we are about between 3% and 4% market share of the sauces category of food service, so there's significant room ahead, and we're going to continue to do that, driving our chef-led model where we have invested in chefs that partner with those customers, drive innovations that have been very well received. So it should be a continuous source of growth, sustainable growth for us.
spk06: Okay, great. Thank you.
spk11: Thank you, operator. I'm now going to hand it over to Miguel for some closing commentary.
spk13: Well, I would like to finish with a quote. A quote from a famous legendary car racer on Formula One that once said, if it's raining, I can't pass 15 cars, but when it's sunny, I cannot. Let me tell you, it's not raining, it's pouring. But we are super excited at this moment because we are seeing this as a great moment of opportunity. And we've been able to navigate through the uncertainties of the short term and adapt, and we build very fast at the same time that we continue building our future. We are excited with what we have ahead of us. Thank you very much.
spk14: Ladies and gentlemen, this has concluded today's presentation. You may now disconnect and have a wonderful day.
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