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spk05: Good day, and thank you for standing by. Welcome to the Kraft Heinz Company first 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. To ask a question during the session, you will need to press star 11 on your telephone. You will hear a message advising your hand is raised. To withdraw the question, simply press star 11 again, and be advised that today's conference is being recorded. I would now like to hand the conference over to Anne-Marie Michela, Head of Global Investor Relations. The floor is yours.
spk03: Thank you, and hello, everyone, and welcome to our Q&A session for our first quarter 2023 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 risk 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. Before we begin, I'm going to hand it over to our CEO, Miguel Patricio, for some brief opening comments.
spk08: Well, thank you, Anne-Marie, and thank you, everyone joining us today. We are proud, proud and confident. We are so confident that we are raising our guidance on EBITDA and earnings. We are so confident that we are increasing our investments in marketing and in R&D, by $100 million to $150 million versus budget, which represents a solid double-digit growth versus previous year. These results are not a coincidence. They are because of our confidence. We have been consistently saying that we'll grow through emerging markets, and we grew 23% this quarter. We'll grow through food service globally, and we grew about 29% this quarter, and we'll grow through our priority growth platforms in U.S., Easy Meals, and Taste Elevation, where we had double-digit growth. The rest of the portfolio has to free up resources to invest in our strategy. These results are possible not only because of our strategy, but because of everything that is behind our strategy. Let me start with people. Today we have a great team and very engaged team. Speed. Well, agility is a big word for us, and the pods that we have in place are transforming the company in innovation, in supply, in manufacturing, procurement, in sales, in logistics. And two good examples of that is innovation. where we have now a much stronger pipeline for the future, and we reduced the time of innovating from two years to a couple of months. Or in supply, that through the pods plus the partnership with Microsoft and the usage of artificial intelligence, we are improving our planning, our service levels, reducing waste, reducing fines. We are in a very different place today. And finally, efficiencies. When we announced three years ago a $2 billion in five years of gross savings, there were a lot of people that were skeptical. That represented $400 million per year. We not only delivered this number in three years in a row, but we are now increasing this bar to $500 million a year. With that, I have here with me today André, our CFO, Carlos Abrams Bezera, our zone president for North America, and Rafael, our zone president for international, that are joining me. Please, we are ready for the Q&A.
spk05: Thank you. And as a reminder, that is star 1-1 if you have a question. One moment while we compile the Q&A roster. And our first question comes from Brian Spillane with Bank of America. Please proceed.
spk09: Thanks, Operator. Hey, good morning, everyone. I just wanted to ask, I guess, two questions related to the U.S. One is, I think, as we kind of strip out the food service piece and look at what's underneath, it looks like there's a bit of a mismatch, I should say, between kind of what we were seeing in the Nielsen data and what would have been reported underlying. So just trying to understand if there was anything there relative to timing of shipments or promotions that might have affected the cadence. And then second, if you can just talk a little bit about in the U.S. specifically, kind of how you're seeing the promotional activity or the promotional environment as we kind of head into some of the big summer holidays. You know, is it intensified? Is it kind of in line with your expectations, just kind of how you're seeing those summer holidays set up, please.
spk08: Andrea, please. Okay. Good morning, Brian. Good to hear from you. Thanks for the question. Look, when I look at the U.S. performance, I don't think that it's nothing of the normal happening in the acquirer. The inventory load was immaterial, given we're already landed at the end of Q4, as I said before. So it's really a function of the sell-out and the food service, which performed very well in the quarter in the AY zone. So maybe people appreciated a little bit of the impact of that. I believe it had something to do also with the fact that last year with Omicron and things, everything was shut down. So that impacted the sell-out in retail in the industry at the beginning of the quarter, but also helped a lot the food service to have a very strong performance. When it comes to As we have said all along, we expect an increase in promotions year to go. That's what has been in the guidance from our plan from the beginning, so nothing changing from that regard. Always in a prudent way and always emphasizing that, well, for 2019 levels. And you saw how well we are doing in terms of continuing to improve our ROI with the tools that we have in place. And so not the episode. I'll give some to pass over to Carlos to give some color on the promotional environment. The one thing I guess I would add, Brad, to what Andrew just said is, as you mentioned, you know, the ROI has continued to improve. And let me give you a little more color as to what's behind that. You know, we have spoken about the Agile scale and how that has re-engineered kind of Kraft Heinz. And part of that is us creating ownable, agile revenue management tools that actually allows us to improve the returns of our promotion. So, like, for example, we have a trade management system that we created in-house, and it gives us real-time access to essentially over 10,000 promotional events. And then what we do is we actually create digital tools that leverage that large amount of data to provide insights and recommendations in a very simple way. Now, those solutions then help us to make sure that allows us to figure out what is the right depth of discount, what is the right time of the year, and what are the right promotional taxes we have seen. So, if you look at our Q1 numbers, we saw about a 10-point improvement in ROI in this particular quarter versus what we saw a year ago. And it's about 15 points if you compare that to 2019 Q1. So, again... our own level tools continue to help us make sure that we are driving that investment. So, you know, as we go forward, our continued focus is make sure that we invest in the business, that we are focused on the renovation of our business and marketing, driving a stronger quality with those event-based activities that really have the high ROIs. And, Rafa, I don't know if anything you wanted to comment on what you're seeing international promotions.
spk07: It's not very different than what you described, Carlos, I think, and what Andrea mentioned. We might see a bit of an increase. We'll see a bit of an increase in some marketing and promotional activities for the year to go, but nothing significant is included in our guidance.
spk08: Thanks, Brian. All right.
spk04: Thanks, guys.
spk05: Thank you for the question. One moment for our next question. And it comes from the line of Andrew Lazar with Barclays. Please go ahead.
spk02: Great. Thanks. Good morning. I think you outperformed expectations, obviously, in the first quarter on organic sales growth and maintained a fuller outlook, I guess potentially implying slower go-forward trends maybe than originally planned for. Is there something you're seeing in the market that necessitates this adjustment? or is this more a function of sort of conservatism? And I appreciate the FLIR outlook is already above your sort of long-term algorithm.
spk08: Hi, Andrew. Andrea, maybe you want to answer that question. Sure. Good morning, Andrew. We're here for you, too. And thanks for the question. So there is nothing that changed expectations. We are holding the guidance in pipeline. If I look at what I believe the market was expecting, we over-delivered quite a lot in the international zone, which I think people still don't fully appreciate the impact of emerging market growth in our portfolio and the food service portion of the international market in our portfolio as well. They've been performing extremely well, as Miguel indicated, and they continue to do so. Momentum is very solid. When it comes to the U.S., nothing changes in our internal expectations. We just think that at this moment it's good to be prudent, even microeconomic uncertainties about interest rates and how consumers might respond to that, but nothing special. Great.
spk02: Thank you so much.
spk04: Thank you. One moment for our next question, please. Any cons?
spk05: From the line of Ken Goldman with JP Morgan, please proceed. Hi.
spk00: You know, there's been some anecdotal evidence that consumers are beginning to trade down in terms of where they're doing their grocery shopping, either going from premium channel to more mainstream or mainstream to discount. I'm curious if this is something you're starting to see as well, even if it's just on the margin. And if so, is it in any way I guess, informing your decisions about product mix, new products, you know, things like that.
spk08: Maybe Andre and Carlos can comment. Good morning. Look, as you have seen since last year, the channel migration has started. So we don't see like another normal accelerated trend towards that. We have seen consistently now for several months, the dollar channel and the mass merchandising gaining ground consistently. And this is not a new phenomenon. We have been prepared for that for a while. So I'll pass to Carlos if he can talk about the type of activities we are doing in those channels, but we don't see anything abnormal happening. And it's expected. Yeah, what I would add in terms of color, I guess first in retail, I mean, there have been some channels shifting, which we expected. And, you know, for the lower income consumers, this means kind of moving to more value focused retailers or in the dollar channel and and as andrew said we anticipated this now for higher income consumer that also means you know thinking about what are the places that they can go in instead of maybe the specialty retailers to more traditional grocery and club and and for us what we're looking to do is actually making sure that we have the right solutions for those that are specifically channels So whether that is more club-sized packagings and brands like Mac and Cheese and Jell-O and adding more dollar SKUs so that consumers who are stressed are actually able to stay within the category. And then, as we talked earlier, being savvy about how we go about our promotional activities in certain categories so that we can, in fact, be there with consumers with the right overall kind of meal solution. So if you think about what a you know, grilled cheese sandwich can do with Kraft singles, what Kraft mac and cheese can do in terms of families, what Oscar Mario hot dogs can do. Us being able to be there for those kind of meal solutions, it's part of our answer as well. You know, the one other thing I would say is if you look at that same channel shift within food service, we're also making sure that we are adjusting too for that. We are seeing how Our business continues to grow in QSR, and for us, it continues to grow in business. And we are doing that, and we're growing share of that business as well. So it's making sure that our consumers are shifting from certain restaurants to QSR. We are making sure that we are there for them, too, to continue to drive our products and continue to drive our growth, which is the way we resulted in Q1.
spk04: So thank you for the question, Ken. Thank you. One moment for our next question, please. And he comes from the line of Jason English with Goldman Sachs.
spk05: Please proceed.
spk10: Hey, good morning, folks. Thanks for spotting me in. Two quick questions. First, the gross margin outlook for the year. Great to see it moving up. It implies that your gross margin for the year is going to look a lot like your first quarter, which would, of course, mark an end to what has been like a sequential build with every quarter moving higher. I guess my question is why would that be the case, especially given that cost inflation appears to be moderating?
spk08: Go ahead. Sorry, Jason, could you repeat the question talking about the trajectory of the gross margin throughout the year?
spk10: Yeah, gross margin has been building sequentially, right? You even have a chart in one of your slides showing every quarter moving higher. Your full-year guidance implies that it kind of goes sideways, that you're going to finish the year at a margin rate very comparable to the first quarter. So my question is, why shouldn't we expect it to continue to grind a little higher as cost inflation moderates?
spk08: Yeah. No, the growth margin will increase a little bit throughout the next quarter, so we should see Q4 will be the highest one. Q2 goes a little bit sideways. There is a component of mix in our portfolio as well, given the type of projects that sell more during Q1 and Q4 in comparison to what sells in December. But beyond that, no, because the costs are continuing to ease. We put a lot of price in the middle of the quarter, so we have full reflection of that now in Q2. But remember as well, and then we're going to start to have something from last year, right? But no, the growth margin will gradually increase throughout the year. Okay, that's helpful. And the expectation that you're getting is because of product mix, which is mostly seasonality.
spk10: Yeah, that's helpful. I appreciate that. And then free cash, though. Can you tell us what your outlook is for the full year in terms of conversion or level, however you want to communicate that? Sure. And I know you talked about working inventory down. It built a lot last year, and obviously there's still a heavy usage of cash again in the first quarter. How much of that do you think we could get back out over the course of this year, or do we have to kind of bleed into next year before we can normalize those levels?
spk08: Yeah, so free cash flow, as we said last quarter, we expect this year to close in the 75% to 80% range, which is in line with our plan. We even talk about that. in Cagney, and then we expect by 2025 to go up to 100%. This has to do mainly with the CAPEX ramp-up that we have done this year and next year, which is close to 4%, and then expect to wind down. Working capital, yes, has been – was a drag last year, and in Q1 was also a negative hit. We prioritize service-level recovery because, I mean, the payback is obviously there. What I can tell is we have a very robust plan, very robust plan to bring the inventory down to level before. We have been working with buffers, I mean, as everybody in the industry does, given other incentives about supply chain volatility and resilience. But we have a very clear line of drive path to bring it down throughout the year. So the expectation for inventory is to land a year at similar levels to where it was at pre-pandemic level.
spk10: Got it. Thanks a lot, guys. I'll pass it on.
spk05: Thank you. One moment for our next question, please. And it comes from the line of John Baumgartner with Mizuho Securities. Please proceed.
spk01: Good morning. Thanks for the question. I wanted to come back to promotion in the U.S., Carlos. There were a few categories that drove the bulk of U.S. share loss in Q1, but I think those are also categories where your promotion levels really seem below branded competitors. Is it fair to isolate the share losses to reduce promo and lingering supply chain issues, or are there other factors in play outside of promo and supply chain?
spk08: This is John. I think that's a It's a fair assessment, but I guess let me start with the fact that as we think about growing the business, you know, we have a very disciplined approach to how we're going to do that. So we are, as Miguel mentioned, we're going to focus on our growth platforms and the growth they have in our portfolio. We want to make sure we're building innovation that's disruptive and that we continue to adapt the core to the consumer trends. And we're going to manage the margin with efficiency to invest in the business with you know, were the double-digit investments in marketing, technology, and R&D. And as you said, there are a few kind of categories where we saw it slow down. And let me remind you, too, that we took pricing in the middle of the quarter as we were catching up to margins. So if you think about a couple of those categories, let me highlight a couple of them. One, you know, cream cheese, for example. We did see some supply chain challenges that we had in the quarter. Those are things that prevented us from really taking advantage of the Eastern time period and will be, and in fact, we are now in a position that we'll be better off as we go into the year to go. Another one I'll tell you is cold cuts, in which we began the year with a low inventory situation in our business. And again, as we think about cold cuts by the end of the summer, we should be in a much better place in terms of completely supplying the overall business. So that a sense of the short-term supply constraint, it's an assessment, well assessment of how we see the quarter as well. The one thing I would add too is that there are places where in categories, we're simply not gonna be chasing volume down. So if you think about bacon, It's a category that probably was about a point of headwinds when you look at the data and consumer data, but we're simply not going to be chasing volume that is not profitable. So that gives you a sense about how we're looking at business and what drove that first quarter.
spk01: Okay. Thanks, Carlos. And on the international side, your category, I guess historically your category has been pretty defensive in terms of demand or economic weakness. And I'm curious, you're doing a lot of good things, ramping distribution, launching new products. But as you transform the business with growth in food service, the new sauces, the bees partnership with ABI, how do you think about the marginal structure? Are these new outlets and products introducing greater volatility into the business, or do they benefit you in that they reduce some of the impact of private label and price sensitivities in places like the U.K. and Europe? How do you think about the net resilience you're building outside the U.S.? Thank you.
spk08: Rafael, do you want to answer that one?
spk07: Yeah, no, happy to. I think we need to differentiate a bit how we're growing in emerging markets and the developed markets across internationally. I mean, what you described probably applies a lot to the developed markets because, as you know, as we've been talking about, across emerging markets, we are growing significantly, and the go-to market and the opportunity we have is execution of this go-to-market has been significant and continues to be. On the developed market, I mean, it's a mix. I mean, we've been renovating our portfolio significantly in all the places, especially you mentioned Europe, and then launching products that have been incremental, not only in sources, but in the news category. Like, those are the two platforms that we've been growing, especially the sources that take innovation. So this has been the focus. I mean, right now is delivering the results that we expect. And again, providing the gains that we need and the resources from the core and the innovation growth that comes from those introductions.
spk08: And just to add to that, if you remember, again, international zones have developed as emerging markets, right? Emerging markets, 10% of our business. We expect to grow double digits like we have been doing. It's a different gameplay. It's about expanding distribution, but it has to be done in a profitable way. And you might have noticed in the preparing marks that since we start to require from our emerging markets a certain level of minimum ROIC or EVA, I think we're seeing a very healthy balance between top and bottom line. And we saw very significant growth margin expansion in emerging markets across the board in the quarter. And I think we have an expectation to continue to improve. So we feel very good that part of the investments that Miguel has said about $100 and $150 million, which is going across marketing, R&D, technology, and in some cases, sales headcount. But in the case of emerging markets, we are accelerating the go-to-market expansion. Again, we always keep our stability top of mind here. We don't want to grow without delivering returns. And on the development markets, not only in the U.S., but also in selected countries being developed, we are using positive incremental investments to reset the marketing levels and accelerate, in some cases, the innovation agenda. So it's very good because that allows us to build the future growth of the program. Let me mention one thing that you mentioned, that entering new categories with innovation. You're right. I mean, we launched in the U.K., Heinz pasta sauce, and in a couple of months, we achieved 7% share, and we continue growing. We just launched a vodka pasta sauce with Absolute that is being extremely successful in the market. But it's not only in Europe. I mean, if you look at the profile of innovation that we are having right now in the U.S., it's very different from the past. In the past, we had A lot of innovation, but really not incremental. It's very cannibalistic. Just think about what we've been launching, like Nordco, that is going to be national during the summertime. It's basically 80% incremental to the category. Or just spices that we just launched in the U.S. through direct-to-consumer, which is spices, which is a huge market where we don't play today. Or TiddlyTabs that we are launching globally throughout the year, that is in hot sauces, that is a pretty growing category that we were not playing. Or even Kraft Mac and Cheese Frozen that we are launching, that we are leader with Kraft Mac and Cheese. We have a very strong portfolio of frozen, but we didn't have an option of craft machines frozen. And I can continue this list and tell you about home-baked and increased from micro-web, really, really incremental innovation that will start to change the profile of innovation in our company.
spk03: Operator, we have time for one more question.
spk04: Thank you. One moment, please.
spk05: And a question comes from Steven Powers with Deutsche Bank. Please go ahead.
spk06: Oh, great. Thank you. I just wanted to follow up on the supply topic. It sounds like you've made good headway and have good visibility to improvements going forward. But I guess just framing that, is there a way to think about what the supply challenges in the first quarter cost you? And then as you move forward with those supply challenges, supply bottlenecks resolved, do you resume a more normal growth trajectory in those categories with those issues behind you? Do you accelerate a catch up over the next couple of quarters as you dig out of the hole? Or is it more prudent for us to think about you know, a more gradual ramp of recovery, you know, again, as those issues abate. Thank you.
spk08: Andre, maybe Carlos then. Okay. Thanks for your question. Look, we obviously expect as some of the solutions, as Carlos indicated, We expect over time to be reducing the inventory of the retailer and that should come together with some improvement in the top line performance. But again, it's all contemplated in our guidance here. Remember that our priority in the U.S. is to grow in the growth platforms, and the priority growth platforms have performed very well in the first quarter, particularly based on innovation and easy moves. But we expect categories like green cheese to improve their performance throughout the year as those problems get behind us. In other categories, like in meats, as Carlos also said, not necessarily we're going to be strong acceleration in growth because we're also trying to be prudent about having the profitability there. So it's about having the right balance. But, yes. Not much to add. What I would say is we continue to see improvements in service levels. So just to give you a you know, kind of a framework last year. I think at this time of the year, we were kind of in the mid-80s. We are now, you know, in the mid-90s, actually closer to the high levels of 90s. So as we exit the first quarter. So I feel like, you know, we do have a couple of categories that I mentioned earlier where we have some isolated challenges. But overall, the business, we are settling in the right trajectory to continue to service the business the right way as we go forward.
spk04: Thank you very much.
spk03: Operator, that will be it for the Q&A session. I'd like to turn it over to Miguel for some closing comments.
spk08: I just want to thank you for the time you spent with us and looking forward to sharing more information and more results with you. Thank you so much.
spk05: Thank you. And with that, we conclude today's conference call. Thank you for your participation. You may now disconnect.
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