The Kraft Heinz Company (KHC) Earnings Call Transcript & Summary

It's a huge pleasure to be here with you today. Thank you for joining us. I know it's been several years since a company with either the Kraft or the Heinz name has presented at CAGNY. So well, allow me to start by reintroducing our company. The traditional view of Kraft Heinz is that we are a $26 billion global food and beverage enterprise with $6.7 billion in adjusted EBITDA. Our iconic brands hold #1 or #2 market share in most categories and countries where we compete, but we see ourselves differently through the eyes of our consumers. We have tremendous scale in 6 distinct consumer platforms or need states, where we understand consumer needs, can solve their pain points and win occasions better than anyone else. Our platform-based approach also gives us tremendous opportunity to grow and win, platforms such as Taste Elevation focused on enhancing the flavor and texture of food. The strategy we began implementing over a year ago and unveiled to investors last September combines our tremendous scale with unmatched agility. We are building agility in 2 ways: first, we set clear growth return and investment priorities and objectives for each platform by geographical segment. We have prioritized 50% of our business to grow aggressively. In roughly 30%, we are investing to reenergize growth. And in the remaining 20%, we are investing selectively to stabilize sales. The second way we are building agility is running the business through a simple, new operating model, one that is very different from the way we operated in the past. We have completed the first year of a multiyear transformation. We are making Kraft Heinz more relevant and efficient, bringing innovative products to consumers much more rapidly. We have been able to deliver better results that unlock higher gross profit, and we are reinvesting back into our business to fuel continued growth. We are extremely excited about our path forward. Our turnaround is happening much faster than we anticipated. We are already a very different company than we were 12 months ago. In 2021, we will further leverage our scale and extend our agility. And we are building greater financial flexibility to fuel long-term sustainable growth and consistently deliver leading returns to our shareholders. Last week, we reported very strong numbers for 2020, but we also made great progress in each area of our operating model. Starting with people, the key ingredient for our transformation. In the second half of last year, we continued filling our most critical roles with experienced industry leaders, adding to the great talent we brought in earlier. Our rate of turnover improved by more than 33%, and we saw very strong improvements in employee satisfaction. Our move from 55 individual product categories to 6 consumer platforms has simplified our business, expanded our opportunities to win and made us more focused and agile. We've reorganized our teams, we are leveraging new tools and approaches and have already increased our marketing budget by almost $100 million. Our new approach and our investment to fuel growth are paying off. Our Grow platforms expanded sales in retail channels by 15% last year. On the cost side, we delivered $400 million in gross productivity efficiencies last year by improvements in our ops center. And we significantly reduced our environmental impact while achieving very strong quality and safety performance. Last year, we also redefined and reorganized our sales teams to better align planning cycles and priorities with our customers. We more than doubled our e-commerce business, now more than 5% of our global net sales. There's still work to do, but we are excited for the opportunities that this foundation provides. This foundation enables us to create a positive virtuous cycle to fuel our future growth. Now it's time to use the agility we have developed to go out and win big in the industry. This agility will be critical as the world emerges from the pandemic with new priorities and preferences. We believe that those who win will be those who best anticipate evolving consumer preferences and are most agile in meeting those needs. For Kraft Heinz, this means leveraging our agility and scale to better anticipate consumer discovery or rediscovery; cooking at home; the globalization of flavors coupled with the importance of local and authentic food; consumers getting more comfortable buying groceries online; and increasing consumer preference for brands that align with their values and their evolving views of healthier, more sustainable products. In 2021, we'll accelerate our growth. Now we'll explain what this will look like on the ground in the markets we serve, so I have asked Carlos to detail our 2021 plans for the U.S. and Canada and Rafa to show you what we are doing to capture our opportunities around the world. Carlos, it's over to you.

Thanks, Miguel. I'm excited to share the plans we have to further transform our business in the U.S. and Canada. Much of what I discuss today focuses on the year ahead, and each action builds on what we started in 2020. When consumers think about their favorite food brands, they think Kraft Heinz. More than 98% of U.S. and Canadian households have at least one of our iconic brands in their pantry or fridge. To capture more purchases more often, we will leverage all 6 of our strategic consumer platforms to create meal solutions. Using our collection of trusted, emerging and challenger brands, we will direct resources primarily to platforms classified as Grow and Energize. Last year, we rediscovered our agility and unleashed it by leveraging our scale. This year, we will extend our leadership and effectiveness and accelerate our advantage in 3 ways: first, by investing more in our consumer platforms and marketing to modernize Kraft Heinz; next, by improving our partner programs to create joint value and increase the visibility of our brands; and third, by investing to fully utilize our scale and unlock additional efficiencies to fuel our growth. We are confident that the on-trend product offerings, messages and campaigns we have locked in for 2021 will attract and retain today's consumers. Starting with our portfolio. We will improve product quality and relevance through broad renovation and targeted innovation. This year, we will renovate more than 40% of our portfolio, building on the focus work started last year. Further, our efforts will skew towards portfolios with Grow and Energize roles, which we believe will make the greatest impact on our top and bottom line. At the same time, we are building a pipeline of innovations to generate consumers' excitement and drive incremental purchases. By focusing our efforts, we're increasing the percentage of meaningful innovations while also delivering significantly more impact per project. To support our platform agenda, we will invest more total dollars while also working to increase the effectiveness of our work in media. To start, we're investing $100 million more in marketing support versus 2019, including a nearly 25% incremental investment in marketing our Grow platforms. We're also targeting greater efficiency, leveraging our media buying scale to reach consumers 30% more often this year. And we'll put nearly 2/3 of our media dollars against digital channel, which is industry-leading, including fueling our e-commerce business. One way we're doing this is through the creation of an internal digital arm focused on new content at the speed of culture. Let me give you a few examples of these efforts. Renovation in Oscar Mayer, part of our energized strategy, are well underway. In the first half of the year, we'll launch a master brand and omnichannel campaign backed by double-digit media investments. This builds on Oscar Mayer product superiority and the brand's legacy of making generation of people smile. A great example of innovation is the work we've done on Kraft Mac & Cheese packaging. Recently, we announced our first-ever fiber-based Mac & Cheese cup. Both microwavable and recyclable, the new cup is expected to launch later this year. This new packaging is a delivery towards our commitment to make 100% recyclable, reusable or compostable packaging by 2025. And turning to our creative. We are delivering relevant, highly engaging content in real time to consumers. Data-driven and personalized, we're able to shorten the time between idea and execution to insert our brands into conversations that consumers care about. For example, when Heinz anonymously asked consumers to draw ketchup, they drew the iconic Heinz bottle. Our Canadian team then activated to create customized bottle featuring fan illustrations. From Kraft Dinner Twitter banters with celebrities to a play on gaming consoles with Philly Series 5, these are all great examples of how we're moving with agility to generate meaningful buzz that drive brand awareness and purchase intent. Turning to our next priority, strengthening our omnichannel presence through partner collaboration. Last year, we began rebuilding trust with customers in our quest to become an indispensable partner and leader. This year, we're ramping up efforts by providing solutions that are mutually beneficial, like in-store destinations with everything a shopper needs from breakfast or creating a great burger. We're also bringing forward insights and shopper-based research to create plans that drive results for us and our customers. Unique retail solutions, along with improved speed and accuracy, is how we'll win with our partners. Becoming a leader in customer service require us to be more transparent. We're already improving our collaborative forecasting and increasing our transportation flexibility by implementing new technologies here that will amp up our demand planning capabilities, gain direct access to our customer plans and help us rapidly predict and solve for potential pinch points. Part of our partner strategy is to be available wherever and whenever our consumers shop. Today, we're bringing forward product innovation suited to e-commerce shopper plus testing and partnering on business model innovations. Our sharp focus on brand and product content in the last year has enhanced the online shopping experience and resulted in us frequently winning the first purchase, growing basket size and earning repeat purchases. We are delivering easy meal solutions with a consumer platform focus, like one-click shopping that adds everything a shopper needs from Kraft Heinz for a delicious sandwich. On the customer side, we're conducting pilot tests that have reduced lead times by 80%. This can greatly reduce inefficiencies and lead times, bypass warehouse constraints and increase product availability. And finally, we are driving efficiency to capture growth by simplifying where boosting productivity and improving our growth trajectory and product mix. Building on what we started last year, we expect to have 20% fewer SKUs by end of year. More importantly, we expect this simplification initiative to result in a 25% increase in net sales per SKU. Altogether, we are striving to reduce complexity and improving collaboration with our partners. We're also investing in future growth, going from double- to triple-digit CapEx investment to unlock constrained networks, increase format flexibility and solve for systemic shift in foodservice. By the end of 2021, we expect to have added 500 million pounds of capacity in 2 years. This is unprecedented for us. We're also being more efficient, having increased the output of our assets by 20% last year versus 2019, which is remarkable given the challenges of the pandemic. To further complement these efforts, we'll leverage our scale to drive advantage. We believe the implementation of digital procurement solutions like automation will be a game changer for our business. Once fully deployed, we project that we'll greatly improve productivity, increase yield, provide better service and reduce costs. This all adds up to our ability to streamline so we can do more better, all while using savings to reinvest in the business and improve our bottom line. So you can see why I'm so excited about our plans in the year ahead. We're investing in our business to drive growth in an agile way, investing more in our growth platforms and marketing, driving efficiencies in our working media and creating breakthrough content. At the same time, we're working to become an omnichannel leader by implementing insights, service solutions and technology. And finally, by increasing capacity and fully utilizing our scale to develop new cost modeling tools and standardized practices, we'll unlock savings that can be put back into fueling the business. With that, I'll turn it over to Rafa to discuss our international business.

Hello, everyone. I'm Rafael Oliveira, President of Kraft Heinz International. I'm super excited to update you on how our international zone is a key engine of growth for Kraft Heinz. International encompasses 2 distinct regions outside the U.S. and Canada: emerging and developed markets. Emerging markets currently represent approximately 40% of our $5 billion international sales. We have a strong foundation in several of those larger countries, such as Brazil, China, Russia and Indonesia, which contribute meaningful revenue to international and give us the base to significantly accelerate our company's growth. Developed markets contribute approximately 60% of international net sales and serve as the base for brand and product development. Today, we are proud to share how we are taking advantage of the enormous expansion opportunities we have across the globe by deploying leverageable, proven best practice to lead market models. Our international team is focused on growth around our key platform, Taste Elevation, and in emerging markets. In 2021, we will live our strategy getting closer to undisputable market leadership in Taste Elevation, focused investments in emerging markets with an emphasis on go-to-market distribution and modernize our developed markets portfolio to make it better for consumers and for the planet with next-generation innovation. Within international, we prioritize one consumer platform, Taste Elevation. Over the last year, we grew 16% in Taste Elevation, gaining share in almost all our countries. Our success is founded on our iconic global brand, Heinz, and enhanced by our local jewel brands, which reflect local cuisines. In our larger markets, all our local jewels have an awareness close to 100%. Heinz is consistently above 90%. Our strategy is to double down on this platform, leveraging on our global capabilities and local distribution. Distribution gains are critical for our ambitions in emerging markets. Brazil has been our go-to-market superstar, where we have developed a very successful model which we call Cruzadas. As I explained during Investor Day in September, we developed a detailed mapping of consumption and execution to expand across the country using our global brand, Heinz, and our local jewel, Quero. We hired and trained the sales force and developed store-by-store KPIs. The sales force expands as KPIs are met and exceeded. We believe this model can now be applied in many other emerging markets across the world. Our go-to-market model was rolled out last year in Russia, leveraging our scale and agility. We are accelerating, moving East and improving in-store execution. The results have again been above expectations. We grew double digits, gaining more than 3 points of market share. Our ability to learn our lead market and refine the model in different countries is a key factor of our successful growth in emerging markets. All our emerging markets are about growth. In 2020, we grew organic net sales by 7% across emerging markets. In 2021 and beyond, we plan to repeat the success of this go-to-market model in more geographies, and we'll top it up with 30% additional investment in media. It will take our emerging markets penetration to the next level. In the medium term, we are looking to grow organic net sales double digits in each of our 3 focus markets, brazil, Russia and China, and to elevate our growth rate in all other emerging markets to high single digits. Combined, emerging markets are expected to grow double digits going forward. In developed markets, our key strategy is to uncover the taste of tomorrow. With the continued focus on health and wellness, our consumers are demanding innovative products that are better for them and for the planet. We are renovating our portfolio to deliver the products of the future. For example, we are now advancing from our iconic beans in the can to protein solutions like plant proteins, Beanz Burgerz and Beanz pot meals, which are attracting new consumers and showing encouraging numbers on incrementality. But we are not looking to grow alone. We are constantly working with our retail and distribution partners to renovate and modernize our portfolio. We have been collaborating with Loop and Tesco in the U.K. to transition to sustainable refillable glass bottles. And only 3 weeks ago, we launched our new eco-friendly sleeve multipack, a fantastic sustainability initiative expected to remove 550 tons of plastic foam source, using 50% less material than a fully enclosed wrap. We continue to deliver consumer-led on-trend innovations. Last month, within Taste Elevation, our core platform, we launched the Vegan Mayo. And last year, in the midst of the pandemic, we launched Heinz Street Food sauces across Europe to delight consumers that were missing the taste of street food. These are just a few examples how the scale of our international operations, combined with the agility we get from our local market presence, is enabling us to modernize our portfolio to the taste of the future. Finally, our Heinz To Home direct-to-consumer program in the U.K., Australia and Europe was built in record time to help consumers most affected by COVID-19. It is giving us valuable insights into consumer behavior, enabling us to quickly test and learn from innovations. We feel confident we can deliver sustainable top and bottom line growth in developed markets in the years to come. So you can see why we are so excited about the growth opportunity in international zone. Our strong Taste Elevation platform and expertise, combined with the expansion potential of emerging markets, give us confidence in the years ahead. In emerging markets, we will continue to build on our strong local footprint and our successful go-to-market model, supported by bold media investments to consistently grow organic net sales double digits. In developed markets, we are bringing innovations and renovations for the next generation. This combination will fuel an acceleration of international growth to mid-single digits in the years to come. We are quickly leveraging our learnings across the zone, taking advantage of our global scale with local agility. We are confident in a successful 2021, unleashing the full power of the international zone. Thank you for your attention. And now over to Paulo for the financial update.

Thank you, Rafa, and good afternoon, everyone. As we rapidly transform our operating model, we are also transforming our financial profile. We entered 2020 with 3 financial goals: to stabilize our profitability, lay the foundation for future growth and maintain our strong margins. We closed 2020 having accomplished all those goals and so much more. Organic net sales grew 6.5%. Constant currency adjusted EBITDA was up 10.5%, and free cash flow was more than $1.5 billion greater than in 2019. We are increasingly confident that 2021 will be another year in which our financial results are ahead of plan, driven by a combination of faster-than-anticipated transformation of the company as well as the continued market shift to at-home consumption due in part to the COVID-19 pandemic. To fuel this growth and help manage cost inflation, we remain on track to capture $2 billion of gross productivity efficiencies. In 2020, we delivered approximately $400 million of efficiencies. And in 2021, we plan to deliver at least another $400 million. We are using these savings to fund our growth. By the end of 2021, we will have increased our annual marketing spend by 14% versus 2019, putting us on track to reach our 30% target by 2024. We are investing these dollars strategically, with greater allocations to higher-growth categories and markets. To support our growth, we are also increasing our CapEx 17% versus 2019 levels. As we continue to transform our business, we are even more confident of our ability to deliver the long-term run rate we outlined in our strategy: consistent 1% to 2% organic net sales growth, 2% to 3% adjusted EBITDA growth and 4% to 6% adjusted EPS growth with at least 100% free cash flow conversion. And we expect additional upside as we continue to optimize our portfolio mix. In September, we announced the divestiture of our natural cheese business. And last week, we announced the divestiture of our nuts business. We believe these actions accelerate our long-term strategic plan by strengthening our portfolio. We are shifting our mix to consumer platforms where we believe we have greater competitive advantage. We are also reducing our exposure to areas with high and growing private label presence, improving our gross margin and reducing our exposure to more volatile commodity costs. In terms of leverage, we have consistently said that investment-grade credit status is strategically important to us. We are on track to maintain our net leverage below 4x adjusted EBITDA on a consistent basis, even prior to both divestitures. With the 2 divestitures, we can reduce our leverage further and pursue accretive actions, organic and inorganic, to accelerate our transformation. Importantly, we can do this with no change to our capital allocation priorities, including our ongoing commitment to the current dividend. With that, let me pass it back to Miguel for closing comments.

Thank you, Paulo. We are extremely excited for our future. We believe we are in a very strong position today. Our turnaround is happening faster than we expected. We are successfully leveraging our scale and plan to extend our agility in 2021 and beyond. We are proactively fueling our growth to create long-term shareholder value. Our team is experienced and energized, and we are excited for the year ahead, and we are confident that we will continue to deliver strong results. Thank you very much for your time and interest in Kraft Heinz.