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

Hello, and welcome to the Kraft Heinz 2022 CAGNY Presentation. In this presentation, we will make some forward-looking statements and discuss some non-GAAP financial measures. Please refer to the additional information in our safe harbor statement.

Hello, and thank you all for joining us. I'm so happy to be here today to share the tremendous advancements we have made so far and to review our path forward to accelerate profitable growth at Kraft Heinz. In addition to highlighting the tangible progress made against key areas of our strategy, we will paint a clear picture of how we intend to use digital solutions and purposeful agility across our business to drive impactful measurable outcomes. As a $26 billion global food and beverage company with powerful iconic brands, we are on an amazing journey, and we still see incredible opportunity in front of us. Two years ago, we set out to transform our business to unleash the full power of Kraft Heinz by transitioning from size working against us to our scale working for us. As you may call, the first 2 phases of our transformation were centered on resetting the foundation and fully deploying our operating model. By using our scale to power agility, we saw a path to deliver better higher quality results, greater efficiency across the company and more relevance with customers and consumers. The strategy is working. Since deploying our operating model, we have generated strong results compared to 2019. As you can see, we have carefully managed the escalating inflation, while simultaneously investing in the business and growing adjusted EBITDA. Our performance has been fueled by prioritization and investments in each area of our operating model. We have been investing in our most important resource, our people, and empowering them to deliver with purpose; establishing a consumer-centric platform approach and modernizing our marketing through much better creativity; focusing on continuous improvement to drive sustainable efficiency gains in our ops center; improving our omnichannel leadership globally through proven go-to-market models with our partners; and fueling our growth through disproportionately investing in our biggest growth opportunities in M&A. For instance, through recent divestitures, we have meaningfully reduced our exposure to private label and have improved our position relative to peers. We also entered 2022 with a portfolio of leading and challenger brands, with tremendous scale in 6 distinct consumer platforms that generate industry-leading margins. We see clear growth, return and investment opportunities in each platform and have set objectives for each by geographical zone. Almost 2/3 of our business is in platforms that have relatively attractive growth profiles and that we expect to carry higher-than-average profit margins into the future. We will invest to aggressively grow them. In 15% of the portfolio, we are investing to reenergize growth. And in the remaining 20% of our portfolio, we are investing selectively to stabilize sales, while generating significant cash flow to fuel our growth. Our biggest platform, Taste Elevation, is a true jewel in the industry. Today, it's a $7.3 billion global platform, with approximately 45% of the net sales in our international zone that generates strong margins across both retail and foodservice channels. But we have much bigger ambitions for this platform. We want to become #1 in Taste Elevation on a global basis, and we have 2 significant areas of opportunity to drive exceptional growth going forward, foodservice and emerging markets. In foodservice, we are investing to upgrade our supply chain and sales capabilities to improve and expand distribution, investing in [ chefs ] to go after growth in off-premise channels, focusing on winning with key host foods in QSR channel, all while developing sustainable solutions. In our international zone alone, we have already grown 14 percentage points ahead of the industry from '19 to '21, returning to prepandemic levels. Second, we see a path to drive consistent double-digit growth -- net sales growth in emerging markets. We have a proven repeatable go-to-market model. Today, we are live in this model in countries that represent 30% of our emerging market business, and those business have each grown organic net sales 30% or more since '19. We have plans to roll out to 5 more countries in 2022, and that will boost our coverage to 75% of our total emerging market business. All of this gives me great confidence and excitement as we embark on the next phase of our transformation, so much so that we are raising our long-term algorithm. We see the opportunity to accelerate profitable growth with a long-term trajectory of 2% to 3% growth in organic net sales, 4% to 6% growth in adjusted EBITDA, 6% to 8% growth in adjusted EPS and free cash flow conversion of 100% or more. We will do this by building further on our transformation to date and the momentum I have just described. The first 2 phases of our transformation were designed to bring scale and agility together. It had mainly been an internally focused process to get established best practices in place and bring us to industry standards. We focused on capabilities, processes and disciplines that, in many ways, were new to Kraft Heinz, but not necessarily new to the world. This has allowed us to close the gap against best-in-class standards of efficiency and execution across the value chain. It has also provided us with a better lens to identify consumer occasions that we previously did not appreciate. But we can be even better. In our next phase, you'll see us internally reengineering our company with agile principles and digital solutions. We are augmenting our expertise and capabilities through partnerships with technology giants and cutting-edge innovators to redefine best-in-class. We are also utilizing our improved financial flexibility to acquire capabilities that can be much more powerful when combined with scale of our portfolio. For example, we recently acquired a majority interest in Just Spices in Europe, expanding our direct-to-consumer reach and speeding our innovation and product customization capabilities. We call this AGILE@SCALE. AGILE@SCALE will enable us to accelerate our pace of innovation to get better, deeper, more meaningful consumer insight and to use our resources more efficiently, while we continue to actively manage our portfolio. In other words, we are building a more powerful engine to supercharge our operating model. So same transformational strategy, same proven operating model, better engine. AGILE@SCALE is how we will go about opening new growth opportunities and unlocking greater efficiencies. This will lead to generating meaningful free cash flow. Now let me turn it over to the 2 people on our team who have spearheaded our digital transformation and brought AGILE@SCALE to life over the past 18 months. Carlos will be overseeing this work across our recently announced North American zone. He will share more details about how we are operating with AGILE@SCALE and the meaningful tangible benefits we are seeing. Andre Maciel, our incoming CFO, will explain how this will translate into a stronger growth trajectory and financial algorithm in the years ahead.

Thank you, Miguel. As Miguel said, AGILE@SCALE will build on the efficiency and effectiveness of our transformation to date. We have built a strong foundation across our value chain, shifting from a category to a consumer mindset, established and standardized and disciplined manufacturing network, a more strategic long-term collaboration with suppliers and customers. AGILE@SCALE will build on this, enabling us to accelerate sustainable growth and unlock greater efficiencies. Today, we are implementing agile disciplines and digital solutions to create a cycle that is fueled by integrated initiatives to run the business and transform the business from the source of ingredients to the plant floor to the shopping cart to your kitchen table. Over the past 18 months, we identified and prioritized the most critical initiatives that needed overhauling to unlock and to win efficiencies across the entire value chain. We deployed cross-functional agile pods to pilot, learn and embed solutions back into the business. This includes training more than 300 employees in agile disciplines and ways of working, with another 1,000 team members being trained in 2022. And this is just a start, with more to come in future years. The goal is to have agile disciplines and ways of work and permeate across the entire organization, with 20% of our key initiatives delivered through fully agile teams. To scale the new solutions developed by our agile pods, we have flattened the organization to reduce layers and increase the span of control of our managers, empowering them to remove roadblock and focus on driving results. At the same time, we have established a company-wide capabilities group to take expertise to a new level, helping us become fit to compete and win, while also integrating agile mindset and disciplines across each function. We also made significant digital investments as a key enabler to drive organizational agility. We launched a digital factory, hiring over 100 tech talents, including data scientists and machine learning experts, to develop a tech ecosystem, partnering with leading-edge tech companies to create proprietary systems. Our tech ecosystem is designed to maximize value creation by upgrading and scaling existing partner solutions, co-creating and upgrading existing internal solutions and launching a digital lab to build new to the world solutions. Powered by digital, our more agile organization allows for faster response time to meet the needs of our consumers and customers, increasing our overall service response levels. To meaningfully transform our portfolio, we will continue to accelerate the pace of innovation to meet new and emerging consumer needs. A more agile organization will shorten the innovation cycle, significantly reducing time to market. This is not just about speed. We're striving for sustainable innovation that will meaningfully contribute to our market share. To push the envelope in innovation and R&D further, Just Spices brings a proven AI solution and differentiated approach to spices with a focus on recipes and target younger consumers through a fully integrated direct-to-consumer marketplace. The second area of focus is to leverage agility to increase consumer intimacy, using a multitude of insights powered by real-time data across internal and external sources. We are creating a much deeper and granular level of understanding of our consumers, who they are, their needs and their behaviors. From here, we can tailor our content and approach, so we reach consumers with the right message at the right time, all while deepening our connection to turn engagement into conversions and consumer loyalty. Today, we are evolving into a full funnel approach powered by data insights to drive brand relevance. Sustaining innovation and maintaining brand relevancy would allow us to build an advantaged portfolio equipped to drive growth. Creating a cycle between how we run and transform the business is the fundamental shift in how we will work, collaborate and go to market going forward. Our agile disciplines create the structure required to implement agility throughout the organization. This includes organize, embed and lead with agile values to identify opportunities with a bias for action, build a tech ecosystem and end-to-end capabilities that provide the ability to accelerate solutions, capture efficiencies and create a significant competitive advantage and scale up leverage proven solutions to maximize value creation. Let me share how AGILE@SCALE is already coming to life in our recently announced North America zone and how will we use the insights we have gained to broaden our efforts across our business. Being able to create the perfect shipments to deliver the right SKU mix at the right point of sale is extremely complex. A year ago, we were managing between 60% to 70% variability in our shipments. Having variability this size did not fully meet our customer needs as we would frequently run the risk of out of stocks. As a solution, we created a Kraft Heinz proprietary ecosystem to design the perfect shipment. The first step was to ingest approximately 50 data sources, aggregating internal data, like historical inventory turnover, trade promotions and sales activity, alongside external data, such as macroeconomic factors like weather, to create a demand planning view all the way down to the store and SKU level. Using this as our base, we then developed an AI power system to learn the patterns of inventory rotation, coupled with the internal and external factors that caused the rotation. The system then provides a recommendation of the optimal shipment at a granular level, providing each store with the product they needed, while accounting for availability and demand. As a result, we are now able to identify a specific SKU of Kraft Mac & Cheese storied in Illinois, but would go unused by the intended customer due to a demand change and quickly redirect that same SKU to a customer in Pennsylvania where the product was out of stock. In a scenario of ongoing supply constraints and consistent demand changes, utilizing this sophisticated tool helped us get more of our products to more consumers in significantly less time, resulting in sales gain for both us and our partner. Another important result of this tool is our ability to raise the bar in customer service by anticipating potential risk to our supply chain and giving our partners visibility into this risk to help drive the best course of actions. For example, let's say that our delivery plan shows that the inventory of Heinz Ketchup in a store in Michigan will not be enough to service consumers. The perfect shipments system reviews our inventory positions, suggest a new ketchup shipments to this customer and sends a signal to our sales team, offering a contingency plan to fulfill that demand. Thanks to these efforts, we have already seen a 3- to 5-point improvement in shipment SKU mix accuracy and then on our way to achieving 8 percentage point improvement, which will result in $100 million in efficiencies as well as lower our inventory levels. But that's just the beginning. The perfect shipment tool will evolve to predict and anticipate future consumer and customer needs by constantly changing signals in the database, connecting our supply chain and recommended shipments that can drive incremental upside. We are now partnering with leading retailers to establish a more real-time view of the perfect shipment tool that we believe will unlock incremental joint value creation. Making sure the right product is in the right place is only half the equation. Once the product is on the shelf, we need to effectively use revenue management to execute promotions that drive trade efficiencies and consumer conversion. Our challenge was to develop a scalable solution to our 100,000-plus yearly events in more than 50 categories. We assembled a cross-functional agile pod to rethink our entire promotion cycle and envision what the future looks like if we were informed by a potential ROI as a decision-making data point when creating a promotion. First, we consolidated our knowledge base in one unified proprietary system, which we call Compass. Compass builds our knowledge base, while also providing a standard and automated solution to create scalable promotions across 100% of the business. The next step was to look back at our historical data and understand the ROI of our promotions. Rocket, our propriety ROI tool, helped us achieve optimal promotion on mix to drive consumer acquisition. We are now taking it to the next level. Using both historical promotion data and current sales data, our machine learning tool is able to project a return on investment per promotion all the way down to the store level. The results are very promising. Our recent pilot in the U.K. shows a 2% increase in profitability. We are currently scaling Rocket in 7 countries, and it will soon be implemented in the U.S. and Canada, but we want to take it even further. We are deploying a tool called Polaris, a solution that simulates an optimal retail promotional calendar and maximize a number of factors, including ROI, market share and profits, while minimizing cannibalization. Polaris is currently being scaled up to 6 countries and will be a continuous improvement tool powered by AI. The data capability will allow us to customize a promotional calendar to maximize upside for us and our retailers. The last example I will share today has to do with marketing. In marketing, our challenge was to understand our consumers more granularly and have the ability to reach them with the right content to offer the right products at the right time. We needed to increase consumer intimacy, but to do so at a scale. We partnered with Google, Lytics and LiveRamp to create a data platform to consolidate more than 400 unique attributes across 25 million unique consumer records from our own database. Powered by machine learning and the marketing tech ecosystem, we are able to qualify barriers to break up potential needs at a ground level, representative of 97% of our U.S. households with our Kraft-O-Matic. Kraft-O-Matic is our insight generator, proprietary software and data science model to analyze consumer behaviors across all brands, integrating POS, panel and marketing data. The real advantage was to build the bridge between identifying the needs and letting our consumers know we can meet these needs with our brands. That is where our content studio, The Kitchen, plugs in, offering individualized content at scale. This AI power asset creation enabled us to create more than 500 customization of one single asset. A great example is Kraft Candy Mac & Cheese launched as limited time offer last February with the goal of creating brand buzz and captivating new consumer targets. The simple activation captured risk data and led us to identify an incremental opportunity to target households without kids. As a result, when we launched Kraft Mac & Cheese Flavor Boosters online, we have data that led us to creating a direct-to-consumer website to supplement retailer activity, and we're much more targeted and efficient in our approach. We are seeing very promising results and continue to iterate in this expedited manner. We're currently bringing Kraft-O-Matic into full implementation in 2022 to connect insights from the consumer database at scale in real time to our digital factory teams to further enhance our speed in identifying and acting on these opportunities. As you can see, we are leveling up our ambition to add a new growth trajectory. As a result, you will see a stronger and faster Kraft Heinz, which creates a continuous improvement cycle for how we run and transform the business, leveraging our scale to maximize the impact of our current and future initiatives. We are leaning into AGILE@SCALE as the engine that unlocks growth and efficiency. I will now pass it on to Andre, who will explain how all of this translates into a stronger growth trajectory and financial algorithm.

Thank you, Carlos. Before we dive into the numbers, I want to start by saying that it's truly a privilege to take on the CFO role at Kraft Heinz. I have been with the company for 9 years, and the last 2 have been by far the most exciting, working with Carlos to develop the roadmap for our agile and digital transformation and working with Paulo to build and develop an incredibly talented finance team. As Miguel mentioned earlier, our turnaround is happening much faster than what we anticipated. And therefore, in 2022, we expect to deliver adjusted EBITDA for our ongoing business that is consistent with our long-term growth algorithm previously communicated. This is despite the precedent inflation and the supply chain stress we never could have envisioned 2 years ago. At the same time, I'm even more excited about what's ahead of us. Based on everything we have accomplished to date, and everything Miguel and Carlos have outlined, we have improved our trajectory and can accelerate profitable growth in the years ahead. With AGILE@SCALE energizing every aspect of our operating model, we will open new growth opportunities and unlock greater efficiencies to generate meaningful free cash flow. As Miguel said, we are increasing our long-term organic net sales growth expectation to 2% to 3%; adjusted EBITDA to 4% to 6%; and adjusted EPS to 6% to 8%, while continuing to generate at least 100% free cash flow conversion. This does not include any future material acquisitions or divestitures. So how are we achieving this? First and foremost, we have to improve our portfolio mix and continue to expand our avenues for growth. Our Taste Elevation platform is poised for rapid expansion, with consistent double-digit net sales growth in emerging markets and further share gains in foodservice around the world. At the same time, with the benefits from AGILE@SCALE, such as personalized marketing driving higher ROI, better returns on promotions and faster time to market with innovation and renovation, we expect improved consumption trends in the rest of the portfolio. As for adjusted EBITDA growth, because of everything we have outlined today, I am confident that we will continue to operate at industry-leading levels of efficiency. We will also continue to focus on growing EBITDA dollars. As we do, we expect that this will result in sustaining our industry-leading margins. Building on better top line growth, the AGILE@SCALE initiative we have planned should allow us to deliver at least $2 billion of efficiencies we have previously committed. Even though the recent divestitures we have made removed approximately 15% of our addressable cost base, AGILE@SCALE is cost neutral, and we do not expect any material restructuring charges associated with it, allowing us to hold overhead flat. In terms of marketing, we expect to continue to increase our rate of spend from 2019 levels. And below the line, we will benefit from the successful refinancing we have recently completed, bringing net debt down to $18 billion from $27 billion, with only $4 billion coming due over the next 5 years and with 99% of it fixed at attractive rates. We also expect to maintain our working capital at industry-leading levels, having made significantly more progress than anticipated in the first 2 years of our transformation. And capital expenditures will decline over the next few years, allowing us to continue generating free cash flow conversion at a rate at least 100%. We will also have a higher mix of automation and AI projects, which tend to bring faster breakevens with a better ROI profile. Finally, in terms of our capital allocation policy, there are no changes in our forming priorities. I would note that investment-grade credit status remain strategically important to us. We have successfully reduced our leverage to investment-grade levels and are well positioned to consistently maintain our net leverage below 4x. As a result, our emphasis can be in the other 3 areas, utilizing our capital to plant seeds that can improve our trajectory even further over time, while maintaining a strong payout to stakeholders. With that, I will pass it back to Miguel to close.

Thank you, Andre. Well, as you can see, we are a very different company than we were just 2 years ago. We have completed the first 2 phases of our transformation ahead of our expectations and with foundations built for the next phase. As we transition to accelerate profitable growth, our operating model will continue to drive us forward with the power of AGILE@SCALE. And this combination is already generating early wins. As a result, we have increased our long-term algorithm, generating profitable growth, coupled with an attractive dividend to deliver meaningful stakeholder value. Thank you for your interest in Kraft Heinz.