This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk13: Good day and thank you for standing by. Welcome to the Kraft Heinz Company third 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, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, and Marie Magella, Global Investor Relations.
spk15: Thank you, and hello, everyone. Welcome to our Q&A session for our third quarter 2023 business update. During today's call, we may have forward-looking statements regarding our expectations for the future, including items 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-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 remarks.
spk03: Well, thank you, Anne-Marie, and thank you all for being with us today. And before opening the call for questions, I just would like to thank Kraft Heinz, my entire team, for another great quarter. And again, I would like just to highlight some positive aspects about this quarter. We are generating accelerated profitable growth fueled by our three pillars. Our share and volume trends are improving as a result of the action plans that we are implementing. And we continue to strengthen our balance sheet, hitting our target net leverage of approximately three times. And then we continue to invest in the future with another quarter of significant investment in marketing, technology, and R&D. Well, with that, I have here with me today Andrea and Carlos. And so let's open the call for the Q&A.
spk13: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for questions. Our first question comes from Andrew Lazar with Barclays. You may proceed.
spk14: Great. Thanks. Good morning, everybody. in you know in in slide 33 of the slide deck this morning you call out branded promotional activity is still below 19 levels and crafts activity is below branded so one clarification is is the branded figure you highlight all food categories or just the branded players within Kraft Heinz as categories and then I guess based on your plans for the remainder of the year and looking into 24 I guess how would you anticipate these metrics shifting do you expect branded promo levels to return to historical levels? And would you expect Kraft Heinz to narrow the gap versus branded? Or how do you see those metrics moving from here? Thanks so much.
spk03: Thanks, Andrew. Carlos, let me first address your point about clarification. What you see in the page, it is about those branded players that do compete with Kraft Heinz. The second part in terms of how do we think about our our promotions as we go forward. First, I will tell you that, you know, I'm not going to comment what other companies might or may not do, but I will tell you is that, one, we're not going back to 2019 levels. We are going, at the same time, as we go forward into Q4, we know there's a seasonality to our business, and as we have said earlier, we're going to make sure now as we go into the holiday season that we make the right investments to support our business. Now, I'll say that at the same time, we're going to continue with the same level of discipline that we have shown until now to make sure that our investment with the right level of ROIs as we go forward.
spk04: Thanks for the question, Andrew. Thank you.
spk13: Thank you. One moment for questions. Our next question comes from Peter Galbo with Bank of America. You may proceed.
spk07: Hey, guys. Good morning. Thank you for taking the questions. Good morning. Good morning. I guess just in North America on the volume piece, there's a fair amount of discussion both in the prepared remarks around kind of meets being a drag this quarter. And you discussed a bit about how you're giving up maybe some volume to maximize profitability and gross margins. But then you also kind of discussed how service levels aren't where you want them to be. particularly in sliced meats, and you're expecting, you know, improvement on that going forward. So I guess the question is just what should we be taking away from those comments? Are you kind of continuing to scale back on volume and focus on the profitability there? Or should we think about, you know, a volume share recovery and maybe some headwinds to the margin mix that come with that, particularly as we think about, you know, North America volume? Thanks.
spk03: Well, thanks. First of all, I think that let me just put into context kind of the the volume question that you see in North America. First, I would say that what you see for us as a company, we continue to improve sequentially from what you saw in Q3, I'm sorry, Q2 to now in Q3. And that, you know, if I look holistically at the company first, you'll see that we continue to drive the things that are working for us. We are continuing to grow in emerging markets, where we grow in volume next year over year, now in Q3. that we continue to expand in our food service, and that we believe that it continues to drive opportunities as we go forward. And then specifically in the U.S. business, you see how the investments we have made in terms of improving our share of shelf, our investments in marketing, our investment in innovation, and our improvement in CFR have continued to improve our overall actions. Now, as we think about a total portfolio, there are some places in which we're going to remain focused and disciplined on how we invest back into the business. And I think you referred to in our mid-business, where we want to make sure that we are not going to be just following unprofitable growth, but that we're going to be rational and disciplined on how we invest in those businesses in order for us to drive the right consumer pool, but at the same time, not sacrificing the overall profitability of the business that we need to maintain. I'll just add that in our long-term algorithm, volume is important to us. So in our 2%, 3% growth, it comes from balance contribution between price and volume. So volumes matter, but as Carlos said, we are seeking profitable volume growth. We are not trying to maximize gross percentage margin. We are trying to deliver profitable, sustainable growth, ultimately translating to sustainable EPS growth.
spk05: Thanks for the question. Great. Thanks very much.
spk13: Thank you. One moment for questions. Our next question comes from John Baumgartner with Mizuho Securities. You may proceed.
spk19: Good morning. Thanks for the question. Carlos, I just wanted to touch on the meats business again, coming back to Peter's question. You point out it's an energized business, but the category seeing price competition, private labels gaining share, that was not happening at the outset during COVID, during work from home. It just seems as though the ambition to rebuild or maintain profits It's hard to square that with what looks like a need to reinvest more given the declines. So how do you think about resource allocation, your willingness to continue reinvesting in that business relative to the point where you just say, you know, hey, these assets may be better suited to another owner, like what happened with the nuts business? Just curious about your willingness to stick with it, you know, given a very tough backdrop in the category. Thank you.
spk04: Andrew, why don't you start here and I can build. Sure.
spk03: So as we have said before, different parts of our portfolio, they have different roles, and these roles might change over time. The role for me right now is to rebuild the profitability, which has eroded 50% in the last five years, while continuing to invest in the brand, to improve, renovate, so then at some point, this brand can be in a position to grow in a profitable way again. And that's what we're doing. In Q3, for the second quarter in a row, this part of the portfolio declined significantly. mid to high single digits on the top line, but grew mid to high single digits on the bottom line. Not by nuking the brand, but by making the right type of investment and right type of actions that are appropriate for this portfolio right now. For us to be chasing volume with this in an unsustainable way only through promotion, that's not the game that we want this brand to play. The only thing I would add is that even in our, you know, if you think about our cocoa business within our meat business, you know, we have continued to improve our CFR, but that is the one area where we're still not at the right level of service that we want for the year. You will see that progression. At the same time, as we have improved our service, we have also begun to see improvement in our share, too. So if you look at month to date as well through October, we are seeing that, in fact, our cocoa business are beginning to gain gain share. So, we are just going to be looking at the category in a very disciplined way to make sure we're doing the right things, as Andrew said.
spk04: Okay. Thank you. Great question, John.
spk13: Thank you. One moment for questions. Our next question comes from Steven Powers with Deutsche Bank. You may proceed.
spk02: Great. Thank you. Good morning.
spk20: I wanted to shift gears, if I could, and talk about the momentum you have in both food service and emerging markets and just get your perspective on your confidence that momentum can continue and perhaps how the organizational changes that you announced today internationally might contribute to that momentum as we go forward. And also, Andrea, if you could, if I could tack on a second question, just now that leverage has dipped below that target threshold, level of three times um just wondering how how you're starting to think about prioritization of um of cash going forward um because the cash generation has been good i presume cash will build and just think about how you're how you're thinking about how allocating that cash going forward thank you thank you for the questions even um but andrew why don't you comment on the capital location then i'll talk about food service and emerging markets sure
spk03: So on capital allocation, our priorities remain unchanged. That means continuing to fund our very competitive dividend, maintaining investment grades, and prioritizing organic growth like we have been consistently doing during the past three, four years. We are very proud that we were able to get to this level of leverage one year ahead of our initial expectation, and that's very important. That shows that the business is strong, that the organization is is focused on delivering sustainable performance, not only on the EBITDA side, but also in cash conversion, which is a remarkable improvement for this organization. And now I think that puts us in a very good situation to assess options to deploy this cash, and we are looking at those. Thanks, Andrew. Let me comment first on food service. You know, I feel very optimistic about our plans in food service, and we have really been working on building a foundation for the future And if you think about the way we're thinking about building our business, it's basically three areas. You know, we continue to make the investments in our chaplet models and that's driving positive performance for us. We also are making sure we are competing in more attractive and better margin channels. You know, things like our independent and non-commercial channels versus traditional where we have been limited to. And then lastly, we are seeing much more powerful innovation that allows us to leverage the technology investments we have made and bring those into the product forefront, whether that is in things like our high-end remix machines and how that actually creates an opportunity for us to separate ourselves for the future. Now, if you look at the full year for a full service, our expectation is probably to grow somewhere in the low to mid-double digits versus last year, and we are I will point out that we're gaining share, too, in both North America and the international zone. And then let me just make sure also that it's clear that, you know, if we think about a long-term algorithm, food service is expected to grow about 5%, and we're going to be well above that level in 2023. Now, if I switch over to our emerging markets, You know, the one great thing that we also have been investing behind in emerging markets is kind of the discipline of our go-to-market model. And for us, the reason we feel so confident is because there is a data-driven go-to-market model that allows us to drive distribution, that then we can then build the press in the existing market and enter new ones. And we have done it that, you know, several nights, several occasions. In fact, we are on track to implement our model in 90% of emerging markets by the end of this year. And just to remind you, it seems like in the first phase of building the distribution, it would build the infrastructure, and then we go into the full structure in order to truly take advantage of our emerging business. I think in emerging markets, I would just add the comment that, you know, in Q3, we saw a, you know, a temporary headwind as we think about particularly in Asia, where we have a business in Indonesia that is more surrounding around Ramadan season, and where we saw some travel shifting, spending shifting from travel away from gifting, and we have a gifting business in Indonesia. So that was a temporary thing, but as we think about the year ahead, we believe that we'll get back to the right levels of performance also in our Indonesia business.
spk04: So thanks for the question. Thank you.
spk13: Thank you. One moment for questions. Our next question comes from Ken Goldman with JP Morgan. You may proceed.
spk08: Hi, thank you. Just a quick one. In your slide presentation from the prior quarter 2Q, you mentioned that you were expecting positive volume growth in 2024. I may have missed it, but did you reiterate that today in either the slides or any of your commentary?
spk03: Yes, we did, and that's the case. Nothing changed. So nothing changed in terms of volume expectations, as Carlos said. So we said, and it happened, that volume would improve in Q3 sequential to Q2, and it did. It did improve in Q4 versus Q3, and at some point in 2024, the volumes will turn positive. In fact, I think everything that we're seeing right now in the market in our actions are working, and, you know, just give us more confidence as we think about our 2024 plans.
spk08: Sorry, can I just quickly clarify that? I think people interpreted the commentary about positive volume as net throughout 2024. It will be positive, but I think the comment that was just made was at some point in 2024 it will turn positive. I guess I'm curious, do you expect at the end of the year your total 2024 volume to be positive? I just wanted to get a sense that people aren't over-modeling the year.
spk03: I'm not going to give guidance in 2024 right now.
spk04: What I just said is what you have been saying all along. Thank you. One moment for our next question.
spk13: Our next question comes from Michael Avery with Piper Sandler. You may proceed.
spk17: Thank you. Good morning.
spk11: I know we covered meat a little bit just on the volume and how to think about its role in the portfolio side. But I want to just come back to one specific piece. You've talked about your approach and being disciplined and rational. But in your prepared remarks, too, you also specifically said that in cold cuts, you're investing to hit the right price points. Can you just maybe unpack that a little bit and reconcile how those two go together and what exactly you mean by those investments on the price side? Yeah, good question.
spk03: Happy to clarify, Michael. What I would say is that we need to make sure that we are responding to the moments in which consumers are going to be looking for the right solutions for whether it's at the holiday seasons or all the points throughout the year. And as we go into Q4, for example, we'll make sure that we're making the right investment. However, we will be doing that with the right level of discipline to make sure we derive the right returns on that investment. So it's the idea that We have simply, like we stated earlier, we are not going to just be chasing volume. We're going to be looking for what is the way for us to drive profitable volume in a way that combines our ability to kind of continue to build our businesses through the right investments in marketing and using the full array of revenue management tools in order for us to be able to drive the right efficiency and effectiveness of our investments.
spk11: And so some of what you're saying would be the depth of the promotion is part of how you want to make the investments on price points, but the discipline is the depth of that and not to push it too hard. Would that be a right interpretation?
spk03: I think that would be one of the things that you could say, but I think on top of that, if you think about the full array of revenue management tools, you know, pricing, price architecture, other tools are disposed of that allows us to actually think about what is the right investments in order to us to maintain the level of improvement, level of profitability that we have seen deteriorate over the last few years.
spk13: Okay, thanks so much. Thank you. Thank you. One moment for questions. Our next question comes from Jason English with Goldman Sachs. You may proceed.
spk10: Hey, good morning, folks. Thanks for slot me in. So I guess congrats are in order. Congrats, Miguel, for a good run and the improvements you've driven well at the helm of the company. And congrats, Carlos, on the upcoming promotion responsibility. So on that topic, I guess the starting off question is what do you expect to do different? Should we be bracing and expecting any strategic shifts? Or given that you've been an architect of many of the plans that have been in place, is this going to be sort of business as usual?
spk03: First of all, Jason, thank you for the kind words, and I'm certainly very much humble and excited about the opportunity I have for me and for the company. What I would say is that, as you pointed out, I've been sitting next to Miguel for the last almost four years now, and I think a number of things that we have done as a company, we certainly have done together. And strategically, I think I am certainly committed to the three girls' pillars of that we have for going forward. That is, and think about us, how do we continue to drive our expansion in emerging markets? How do we continue to see food service as a great growth for us? And then the growth platforms within our US business. At the same time, you also probably read some of the changes we're making in our structure in order to actually help us accelerate some of those things that we have done. You know, for me, One of the critical aspects of this time where I have been transitioning and coming to the new role in January has been listening to the organization and making sure we have the clarity of our strategy. And our structure is going to follow that clarity. So some of the things you'll see in terms of us being able to have a bit of breaking down the international zone, which has worked in the past well for us, but now as we go into a new way of us growing allows us to be a little more focused on those emerging markets in which we're going to make some additional investments. That, I think, is part of us thinking differently about how we bring that strategy to life in our structure. So that's, I think, some of the things that you're going to see is what are the places that, with the length of the jobs to be done for the strategy of the company, that we can maybe arrange certain things where we can truly leverage the scale of the company, the scale that we have been investing behind our technology and our marketing capabilities, and to deploy them against the three pillars strategically that I'm very much aligned with.
spk10: And should we expect inorganic solutions to come into the fold a little bit more so now that your balance sheet's in a better situation?
spk03: As Andrew said earlier, you know, we continue to look at opportunities, but I would say, you know, that's something that is part of our ongoing thoughts about how do we continue to see the active view of our portfolio. But there's nothing today that I would say that we will be announcing. Andrew, anything to add? No, I think as a consistent shot, as I said before, I think our priority is organic business. And M&A, if it happens, it has to help us accelerate our organic strategy. It has to be fully consistent, like we have done. That's what acquisitions are. Safe elevation and pre-attending emerging markets have to be accretive to our top line, both on top of acquisitions. That's what we are focusing on.
spk09: Understood. Thank you very much.
spk13: Thank you, Jason. Thank you. One moment for questions. Our next question comes from Matt Smith with Stiefel. You may proceed.
spk18: Hi, good morning. Wanted to ask a question. Your productivity savings have been very strong this year and you already increased your target for the year. Those have in part been used to heavy, a stepped up level of investment behind marketing, R and D and innovation. But as we look forward, can you sustain this level of incremental savings into 2024? Or should we expect a return to the target of 500 million? And after this year of stepped up investment, do you believe you're exiting with the appropriate level of investment across the business? or do you plan to continue to invest at an elevated rate as we look forward?
spk03: Maybe, Andre, if you could speak to our efficiency plans. Sure. So, look, at this point, we still committed to deliver the 3% of COGS of $500 million on a go-forward basis, but as we have said before, our benchmark is really on the 4% level, which we are achieving this year. Can you keep in mind that this year as well, we had a lot of that's called gettables from inefficiency that were generated throughout the pandemic, that's also helping. But we feel good about how our supply chain organization today is operating at a completely superior level with very stable service levels and be a lot more forward thinking, which gives us confidence in delivering at least a 3% that we have talked before. From an investment standpoint, I think this also has been a great year because we have been able to deliver very solid bottom line growth while really resetting the investment level for the company for the future, which means that I think a lot of the reset has happened. There is still places that we want to invest more, but I think we took advantage of this year to really reset the level of investments to a very good level.
spk04: Thank you for that. I can pass it on.
spk13: Thank you. One moment for questions.
spk15: Operator, this will be the last question.
spk13: Thank you. And our last question comes from Robert Moscow with TD Cowan.
spk04: You may proceed. Robert Moscow, your line is now open.
spk06: Hey, can you hear me now?
spk13: Yes.
spk06: I'm sorry about that. Um, so, uh, this is kind of a, what if question, and maybe, uh, you might not want, want to ask, answer what if questions, but, you know, we're all watching top line growth kind of decelerate in the U S and the U S retail is such an important part of your, your, your mix. So I guess my question is if, if we're in a scenario where we're kind of in a zero to 1% kind of sales growth environment next year, just for your categories. what would your philosophy be on an EBITDA basis? Like, would you still drive to drop savings to the bottom line to hit, you know, the mid single digit EBITDA or would a slower top line environment necessitate a slower EBITDA growth kind of target?
spk04: Okay. Good morning, Robin. Good to hear back from you. Look, we,
spk03: We believe that for us to grow top line in a profitable, sustainable way is critical. So if in an event where industry is zero, I think that doesn't change the game that we're trying to play. Because I don't know if you are implying that we will start to go aggressive on promotions to try to get volume through market share in a productive and sustainable way. If that's what you're asking behind your question, although that's not the game you want to play. So... I will just say that our strategy continues the same. It's working, and I think we feel that we're heading in the right direction.
spk04: We don't want to make changes in direction because of temporary situations in the industry.
spk01: Okay. Thank you.
spk04: Thank you. Thanks, Robert.
spk13: Thank you. I'd now like to turn the call back over to Carlos Abrams Rivera for any closing remarks.
spk04: Thank you.
spk03: So, before, you know, we leave here, I just wanted to acknowledge and take a moment to thank Miguel for all the support and trust that he has shown to me personally. And for everything he has done for our company as he has built this tremendous and strong foundation. I can tell you that today Kraft Heinz is a much stronger company because in 2019, Miguel Patricio put this company on his back and carried us forward. And I am forever grateful for being part of his team as we all work together to transform Kraft Heinz. And, you know, as I take over as the next CEO of Kraft Heinz, I'm proud of where we have been as a company and even more thrilled about where we're going.
spk04: And thank you all for joining us today.
spk13: Thank you. This concludes today's conference call. Thank you for participating.
spk04: You may now disconnect. Thank you. Thank you. Bye.
spk00: Thank you.
spk13: Good day and thank you for standing by. Welcome to the Kraft Heinz Company third 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, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. 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, Global Investor Relations.
spk15: Thank you, and hello, everyone. Welcome to our Q&A session for our third quarter 2023 business update. During today's call, we may have forward-looking statements regarding our expectations for the future, including items 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 8K 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-financial measures and reconciliations to the Comparable Gap financial measures. Before we begin, I'm going to hand it over to our CEO, Miguel Patricio, for some brief opening remarks.
spk03: Well, thank you, Anne-Marie, and thank you all for being with us today. And before opening the call for questions, I just would like to thank Kraft Heinz, my entire team, for another great quarter. And again, I would like just to highlight some positive aspects about this quarter. We are generating accelerated profitable growth fueled by our three pillars. Our share and volume trends are improving as a result of the action plans that we are implementing. And we continue to strengthen our balance sheet, hitting our target net leverage of approximately three times. And then we continue to invest in the future with another quarter of significant investment in marketing, technology, and R&D. Well, with that, I have here with me today Andrea and Carlos. And so, let's open the call for the Q&A.
spk13: Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. One moment for questions. Our first question comes from Andrew Lazar with Barclays. He may proceed.
spk14: Great. Thanks. Good morning, everybody. In slide 33 of the slide deck this morning, you call out branded promotional activity is still below 19 levels and Kraft's activity is below branded. So one clarification, is the branded figure you highlight all food categories or just the branded players within Kraft Heinz's categories? And then I guess based on your plans for the remainder of the year and looking into 24, I guess how would you anticipate these metrics shifting? Do you expect branded promo levels to return to historical levels? And would you expect Kraft Heinz to narrow the gap versus branded? Or how do you see those metrics moving from here? Thanks so much.
spk03: Thanks, Andrew. Carlos, let me first address your point about clarification. What you see in the page, it is about those branded players that do compete with Kraft Heinz. The second part in terms of how do we think about our our promotions as we go forward. First, I will tell you that, you know, I'm not going to comment on what other companies might or may not do, but I will tell you is that, one, we're not going back to 2019 levels. We are going, at the same time, as we go forward into Q4, we know there's a seasonality to our business, and as we have said earlier, we're going to make sure now as we go into the holiday season that we make the right investments to support our business. Now, I'll say that at the same time, we're going to continue with the same level of discipline that we have shown until now to make sure that our investment with the right level of ROIs as we go forward.
spk04: Thanks for the question, Andrew.
spk13: Thank you. Thank you. One moment for questions. Our next question comes from Peter Galbo with Bank of America. You may proceed.
spk07: Hey, guys. Good morning. Thank you for taking the question. Good morning. Good morning. I guess just in North America on the volume piece, there's a fair amount of discussion both in the prepared remarks around kind of meets being a drag this quarter. And you discussed a bit about how you're giving up maybe some volume to maximize profitability and gross margins. But then you also kind of discussed how service levels aren't where you want them to be. particularly in sliced meats, and you're expecting, you know, improvement on that going forward. So I guess the question is just what should we be taking away from those comments? Are you kind of continuing to scale back on volume and focus on the profitability there? Or should we think about, you know, a volume share recovery and maybe some headwinds to the margin mix that come with that, particularly as we think about, you know, North America volume? Thanks.
spk03: Well, thanks. First of all, I think that let me just put into context kind of the the volume question that you see in North America. First, I would say is that what you see for us as a company, we continue to improve sequentially from what you saw in Q3, I'm sorry, Q2 to now in Q3. And that, you know, if I look holistically at the company first, you'll see that we continue to drive the things that are working for us. We are continuing to grow in emerging markets where we grow in volume mix year over year and now in Q3. that we continue to expand in our food service, and that we believe that it continues to drive opportunities as we go forward. And then specifically in the U.S. business, you see how the investments we have made in terms of improving our share of shelf, our investments in marketing, our investment in innovation, and our improvement in CFR have continued to improve our overall actions. Now, as we think about a total portfolio, there are some places in which we're going to remain focused and disciplined on how we invest back into the business. And I think you referred to in our mid-business, where we want to make sure that we are not going to be just following unprofitable growth, but that we're going to be rational and disciplined on how we invest in those business in order for us to drive the right consumer pool, but at the same time, not sacrificing the overall profitability of the business that we need to maintain. I'll just add that in our long-term algorithm, volume is important to us. So in our 2%, 3% growth, it comes from balanced contribution between price and volume. So volumes matter, but as Carlos said, we are seeking profitable volume growth. We are not trying to maximize gross percentage margin. We are trying to deliver profitable, sustainable growth, ultimately translating to sustainable EPS growth.
spk05: Thanks for the question. Great. Thanks very much.
spk13: Thank you. One moment for questions. Our next question comes from John Baumgartner with Mizuho Securities. You may proceed.
spk19: Good morning. Thanks for the question. Carlos, I just wanted to touch on the meats business again, coming back to Peter's question. You point out it's an energized business, but the category seeing price competition, private labels gaining share, that was not happening at the outset during COVID, during work from home. It just seems as though the ambition to rebuild or maintain profits It's hard to square that with what looks like a need to reinvest more given the declines. So how do you think about resource allocation, your willingness to continue reinvesting in that business relative to the point where you just say, you know, hey, these assets may be better suited to another owner, like what happened with the nuts business? Just curious about your willingness to stick with it, you know, given a very tough backdrop in the category. Thank you.
spk03: Andrew, why don't you start here and I can build. Sure. So as we have said before, different parts of our portfolio, they have different roles, and these roles might change over time. The role for me right now is to rebuild the profitability, which has eroded 50% in the last five years, while continuing to invest in the brand, to improve, renovate, so then at some point, this brand can be in a position to grow in a profitable way again. And that's what we're doing. In Q3, for the second quarter in a row, this part of the portfolio declined significantly. mid to high single digits on the top line, but grew mid to high single digits on the bottom line. Not by nuking the brand, but by making the right type of investment and right type of actions that are appropriate for this portfolio right now. For us to be chasing volume with this in an unsustainable way only through promotion, that's not the game that we want this brand to play. The only thing I would add is that even in our, you know, if you think about our cocoa business within our meat business, you know, we have continued to improve our CFR, but that is the one area where we're still not at the right level of service that we want for the year. You will see that progression. At the same time, as we have improved our service, we have also begun to see improvement in our share, too. So if you look at months to date as well through October, we are seeing that, in fact, our cocoa business are beginning to gain share. gain share so we are just going to be looking at the category in a very disciplined way to make sure we're doing the right things as andrew said okay thank you great question john thank you one moment for questions our next question comes from stephen powers with deutsche bank you may proceed great thank you uh good morning
spk20: I wanted to shift gears, if I could, and talk about the momentum you have in both food service and emerging markets and just get your perspective on your confidence that momentum can continue and perhaps how the organizational changes that you announced today internationally might contribute to that momentum as we go forward. And also, Andrea, if you could, if I could tack on a second question, just now that leverage has dipped below that target threshold, level of three times um just wondering how how you're starting to think about prioritization of um of cash going forward um because the cash generation has been good i presume cash will build and just think about how you're how you're thinking about how allocating that cash going forward thank you thank you for the questions even um but andrew why don't you comment on the capital location then i'll talk about food service and emerging markets sure
spk03: So on capital allocation, our priorities remain unchanged. That means continuing to fund our very competitive dividend, maintaining investment grades, and prioritizing organic growth like we have been consistently doing during the past three, four years. We are very proud that we were able to get to this level of leverage one year ahead of our initial expectation, and that's very important. That shows that the business is strong, that the organization is is focused on delivering sustainable performance, not only on the EBITDA side, but also in cash conversion, which is a remarkable improvement for this organization. And now I think that puts us in a very good situation to assess options to deploy this cash, and we are looking at those. Thanks, Andrew. Let me comment first on food service. You know, I feel very optimistic about our plans in food service. And, you know, we have really been working on building a foundation for the future of And if you think about the way we're thinking about building our business, it's basically three areas. You know, we continue to make the investments in our chaplet models and that's driving positive performance for us. We also are making sure we are competing in more attractive and better margin channels. You know, things like our independent and non-commercial channels versus traditional where we have been limited to. And then lastly, we are seeing much more powerful innovation that allows us to leverage the technology investments we have made and bring those into the product forefront, whether that is in things like our high-end remix machines and how that actually creates an opportunity for us to separate ourselves for the future. Now, if you look at the full year for a full service, our expectation is probably to grow somewhere in the low to mid-double digits versus last year, and we are I will point out that we're gaining share, too, in both North America and the international zone. And then let me just make sure also that it's clear that, you know, if we think about a long-term algorithm, food service is expected to grow about 5%, and we're going to be well above that level in 2023. Now, if I switch over to our emerging markets, You know, the one great thing that we also have been investing behind in emerging markets is kind of a discipline of our go-to-market model. And for us, the reason we feel so confident is because there is a data-driven go-to-market model that allows us to drive distribution, that then we can then build the press in the existing market and enter new ones. And we have done it at, you know, several nights, several occasions. In fact, we are on track to implement our model in 90% of emerging markets by the end of this year. And just to remind you, things like in the first phase of building the distribution, it would build the infrastructure, and then we go into the full structure in order to truly take advantage of our emerging business. I think in emerging markets, I would just add the comment that, you know, in Q3, we saw a, you know, a temporary headwind as we think about particularly in Asia, where we have a business in Indonesia that is more surrounding around Ramadan season, and where we saw some travel shifting, spending shifting from travel away from gifting, and we have a gifting business in Indonesia. So that was a temporary thing, but as we think about the year ahead, we believe that we'll get back to the right levels of performance also in our Indonesia business.
spk04: So thanks for the question. Thank you.
spk13: Thank you. One moment for questions. Our next question comes from Ken Goldman with JP Morgan. You may proceed.
spk08: Hi, thank you. Just a quick one. In your slide presentation from the prior quarter 2Q, you mentioned that you were expecting positive volume growth in 2024. I may have missed it, but did you reiterate that today in either the slides or any of your commentary?
spk03: Yes, we did, and that's the case. Nothing changed. So nothing changed in terms of volume expectations, as Carlos said. So we said, and it happened, that volume would improve in Q3 sequential to Q2, and it did. It did improve in Q4 versus Q3, and at some point in 2024, the volumes will turn positive. In fact, I think everything that we've seen right now in the market in our actions are working, and, you know, just give us more confidence as we think about our 2024 plans.
spk08: Sorry, can I just quickly clarify that? I think people interpreted the commentary about positive volume about as net throughout 2024, it will be positive. But I think the comment that was just made was at some point in 2024, it'll turn positive. I guess I'm curious, do you expect, you know, at the end of the year, your total 2024 volume to be positive? I just wanted to get a sense that people aren't over-modeling the year.
spk03: I'm not going to give guidance to 2024 right now.
spk04: What I just said is what you have been saying all along. Thank you. One moment for our next question.
spk13: Our next question comes from Michael Avery with Piper Sandler. You may proceed.
spk17: Thank you. Good morning.
spk11: I know we covered meat a little bit just on the volume and how to think about its role in the portfolio side. But I want to just come back to one specific piece. You've talked about your approach and being disciplined and rational. But in your prepared remarks too, you also specifically said that in cold cuts, you're investing to hit the right price points. Can you just maybe unpack that a little bit and reconcile how those two go together and what exactly you mean by those investments on the price side?
spk03: Yeah, good question. Happy to clarify, Michael. You know, what I would say is that we need to make sure that we are responding to the moments in which consumers are going to be looking for, you know, the right solutions for whatever, whether it's at the holiday seasons or other points throughout the year. And as we go into Q4, for example, we'll make sure that we're making the right investment. However, we will be doing that with the right level of discipline to make sure we derive the right returns on that investment. So it's the idea that We have simply, like we stated earlier, we are not going to just be chasing volume. We're going to be looking for what is the way for us to drive profitable volume in a way that combines our ability to kind of continue to build our businesses through the right investments in marketing and using the full array of revenue management tools in order for us to be able to drive the right efficiency and effectiveness of our investments.
spk11: And so some of what you're saying would be the depth of the promotion is part of how you want to make the investments on price points, but the discipline is the depth of that and not to push it too hard. Would that be a right interpretation?
spk03: I think that would be one of the things that you could say, but I think on top of that, if you think about the full array of revenue management tools, you know, pricing, price architecture, other tools are disposed of that allows us to actually think about what is the right investments in order to us to maintain the level of improvement, level of profitability that we have seen deteriorate over the last few years.
spk13: Okay, thanks so much. Thank you. Thank you. One moment for questions. Our next question comes from Jason English with Goldman Sachs. You may proceed.
spk10: Hey, good morning, folks. Thanks for slotting me in. So I guess congrats are in order. Congrats, Miguel, for a good run and the improvements you've driven while at the helm of the company. And congrats, Carlos, on the upcoming promotion responsibility. So on that topic, I guess the starting off question is what do you expect to do different? Should we be bracing and expecting any strategic shifts? Or given that you've been an architect of many of the plans that have been in place, is this going to be sort of business as usual?
spk03: First of all, Jason, thank you for the kind words, and I'm certainly very much humble and excited about the opportunity I have for me and for the company. What I would say is that, as you pointed out, I've been sitting next to Miguel for the last almost four years now, and I think a number of things that we have done as a company, we certainly have done together. And strategically, I think I am certainly committed to the three growth pillars of that we have for going forward. That is, and think about us, how do we continue to drive our expansion in emerging markets? How do we continue to see food service as a great growth for us? And then the growth platforms within our U.S. business. At the same time, you also probably read some of the changes we're making in our structure in order to actually help us accelerate some of those things that we have done. You know, for me, One of the critical aspects of this time where I have been transitioning and coming to the new role in January has been listening to the organization and making sure we have the clarity of our strategy. And our structure is going to follow that clarity. So some of the things you'll see in terms of us being able to have a little breaking down the international zone, which has worked in the past well for us, but now as we go into a new way of us growing allows us to be a little more focused on those emerging markets in which we're going to make some additional investments. That, I think, is part of us thinking differently about how we bring that strategy to life in our structure. So that's, I think, some of the things that you're going to see is what are the places that, with the length of the jobs to be done for the strategy of the company, that we can maybe arrange certain things where we can truly leverage the scale of the company, the scale that we have been investing behind our technology and our marketing capabilities, and to deploy them against the three pillars strategically that I'm very much aligned with.
spk10: And should we expect inorganic solutions to come into the fold a little bit more so now that your balance sheet's in a better situation?
spk03: As Andrew said earlier, we continue to look at opportunities, but I would say that's something that is part of our ongoing thoughts about how we continue to see the active view of our portfolio. But there's nothing today that I would say that we will be announcing. Andrew, anything to add?
spk14: No.
spk03: I think as a consistent shot, as I said before, I think our priority is organic business. And M&A, if it happens, it has to help us accelerate our organic strategy. It has to be fully consistent, like we have done. That's what acquisitions, all safe elevation and pre-attending emerging markets have to be accretive to our top line, both on top of acquisitions. That's what we are focusing on.
spk09: Understood. Thank you very much.
spk13: Thank you, Jason. Thank you. One moment for questions. Our next question comes from Matt Smith with Stiefel. You may proceed.
spk18: Hi, good morning. Wanted to ask a question. Your productivity savings have been very strong this year and you already increased your target for the year. Those have in part been used to heavy, a stepped up level of investment behind marketing, R and D and innovation. But as we look forward, can you sustain this level of incremental savings into 2024? Or should we expect a return to the target of 500 million? And after this year of stepped up investment, do you believe you're exiting with the appropriate level of investment across the business? or do you plan to continue to invest at an elevated rate as we look forward?
spk03: Maybe, Andre, if you can speak to our efficiency plans. Sure. So, look, at this point, we still committed to deliver the 3% of COGS of $500 million on a go-forward basis, but as we have said before, our benchmark is really on the 4% level, which we are achieving this year. Can you keep in mind that this year as well, we had a lot of that's called gettables from inefficiency that were generated throughout the pandemic. That's also helping. But we feel good about how our supply chain organization today is operating at a completely superior level with very stable service levels and be a lot more forward thinking, which gives us confidence in delivering at least a 3% that we have talked before. From an investment standpoint, I think this also has been a great year because we have been able to deliver very solid bottom line growth while really resetting the investment level from the project company for the future, which means that I think a lot of the reset has happened. There is still places that we want to invest more, but I think we took advantage of this year to really reset the level of investments to a very good level.
spk04: Thank you for that. I can pass it on.
spk13: Thank you. One moment for questions.
spk15: Operator, this will be the last question.
spk13: Thank you. And our last question comes from Robert Moscow with TD Cowan.
spk04: You may proceed. Robert Moscow, your line is now open.
spk06: Hey, can you hear me now? Yes. I'm sorry about that. Um, so, uh, this is kind of a, what if question, and maybe, uh, you might not want, want to ask, answer what if questions, but, you know, we're all watching top line growth kind of decelerate in the U S and the U S retail is such an important part of your, your, your mix. So I guess my question is if, if we're in a scenario where we're kind of in a zero to 1% kind of sales growth environment next year, just for your categories. what would your philosophy be on an EBITDA basis? Like, would you still drive to drop savings to the bottom line to hit, you know, the mid single digit EBITDA, or would a slower top line environment necessitate a slower EBITDA growth kind of target?
spk04: Okay. Good morning, Robin. Good to hear back from you. Look, we...
spk03: We believe that for us to grow top line in a profitable, sustainable way is critical. So if in an event where industry is zero, I think that doesn't change the game that we're trying to play. Because I don't know if you are implying that we will start to go aggressive on promotions to try to get volume through market share in a productive and sustainable way. If that's what you're asking behind your question, I'll tell you that's not the game you want to play. So... I will just say that our strategy continues the same. It's working, and I think we feel that we're heading in the right direction. We don't want to make changes in direction because of temporary situations in the industry.
spk01: Okay. Thank you.
spk04: Thank you. Thanks, Robert.
spk13: Thank you. I'd now like to turn the call back over to Carlos Abrams Rivera for any closing remarks.
spk04: Thank you.
spk03: So before we leave here, I just wanted to you know, acknowledge and take a moment to thank Miguel for, you know, all the support and trust that he has shown to me personally. And for everything he has done for a company as he has built this tremendous and strong foundation. I can tell you that today Kraft Heinz is a much stronger company because in 2019, Miguel Patricio put this company on his back and carried us forward. And I am forever grateful for being part of his team. as we all work together to transform Kraft Heinz. And, you know, as I take over as the next CEO of Kraft Heinz, I'm proud of where we have been as a company and even more thrilled about where we're going.
spk04: And thank you all for joining us today.
spk13: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer