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

Good afternoon, everyone. It's my great pleasure to welcome Carlos Abrams-Rivera, who's the CEO of Kraft Heinz since December of last year. My name is Alexia Howard. I've been covering the U.S. packaged food group since, I think, August of 2006. For those of you in the audience this afternoon, if you have questions for Carlos, please feel free to use the Pigeonhole link. Hopefully, it will come up on my little iPad here, and we'll work those questions into the conversation as well.

So Kraft Heinz has undergone a remarkable transformation since 2019, in terms of the company's culture, the portfolio, rebuilding capabilities, including marketing, innovation and promotional optimization, and it's receiving accolades for the progress that the company has made. Now clearly, at the same time, the packaged food company, more broadly, has had a very tough time in 2023, and investors are kind of now waiting with bated breath to see if volumes will improve as we lap some of the headwinds from last year. So maybe to kick things off here, Carlos, you've been back at Kraft Heinz since early 2020, and congratulations on stepping into the CEO role at the start of the year, yet you were also with Kraft way back before the separation of Mondelez in 2012. So as you come back to the company over the last few years, what has changed in your view in the gap?

Yes. First of all, thank you for having me here. I appreciate the opportunity, and it's been a great day of connecting with a number of people throughout the day. And what I would say is I started with Kraft Heinz now 4 years ago. It's a completely different company than it was the moment I walked in. And I think that it's been a -- certainly the privilege of my life to be a CEO and a very humbling and appreciative opportunity. And I would say is, today, I think what I'm excited about the fact is that we're such a stronger company than we were 4 years ago. If you think of even just as basic as our balance sheet, right? We were junk-rated a few -- just a few years ago. We did that quickly. Within 2 years, we went back to investment-grade status. We're in a place now that we can control our destiny. We removed a number of things in our portfolio that didn't fit with -- because they were highly commoditized and exposed to private label, that we were able to sell at a good valuation because we had the discipline of how we approve it, how we win through it. So again, a very much different company than we were before. And I would say when -- while you're right that I started my career in Kraft Foods, it is a whole different company than we were. When we went through a separation, I went with Mondelez during that time. I will say one of the things that was interesting to me at the time was that the exposure that the Mondelez had into international markets, which was much stronger than what Kraft has. And when I come into this company, still today, about 25% of our business is outside of the U.S., and emerging market is only 10% of our company. And if I go back to some of the experience I've had over the years in my career is that there is an opportunity for us to continue to expand our portfolio geographically. And I feel blessed that we have a brand like Heinz that is such an iconic brand that has the opportunity for us to continue to drive growth in those emerging markets. So I think for me, that is something of the path that I have learned, that I think we're taking as we go forward as part of our 10-year strategy is how we diversify ourselves in more international markets, in more emerging markets. I think the other thing that probably have been a learning too through that process was that -- the importance of culture to drive the transformation of a company. And if I think about our company, one of the things we're very proud of is that we had a sense in Kraft Heinz of ownership and ambition, and for me was how do I take those things and evolve it in a way that can be true for a better company of today. So -- and I'll give you 2 examples. If I think about ownership, there was a sense of the culture that it was -- the ownership was about me, I own it. And we changed that over the last 4 years to say we own it together. And that has an implication of our incentive for our people, that has implication in terms of how we think about what -- how do we grow the company for the long term, not just for the now, a company that is not about just what's the next acquisition, but how do we actually grow organic growth, focusing our consumers. So that is a big shift. Still ownership, but a much more focused on the we and the future. The other piece that I think it was part of something that attracted me from the first place is a company with a lot of very ambitious people who wanted to win. The -- and I think the difference may have been, in terms of our culture, was that there was a sense of almost a arrogance organization to our culture that we wanted to do everything ourselves. We knew better. In fact, it will go at far say, when the company was created from the merger, there was explicitly said that we didn't want people who had full experience to come to our company. To me, the idea was it's important that we want to grow organically to have people who can fit with the capabilities we need to grow our food company, which has very unique kind of sense of what it takes to grow a company like ours. So we're still ambitious, but now more humble to be thoughtful about how do we actually learn from others and how do we partner better with other people in order for us to drive growth.

Makes sense. I'm sure we'll get on to the incentive question later to see how that's changed. Okay. So one of the things that struck me most about the company over the past few years is how much external recognition the company's received for many of the capabilities that I just mentioned, that were very much neglected during the 3G era, particularly things like marketing. Now how did you pull that off? Or how did you and Miguel pull this off over the last few years?

Listen, that was a priority from day 1 for Miguel. I mean, I think that we cannot be growing a company in a competitive environment like food if we don't invest in the marketing and understanding our consumer better. And I think, again, if you had a philosophy that all the way you were going to grow is through inorganic acquisitions, then that -- you have to invest in those kind of capabilities. And you're right, we have been recognized. And I think at Cannes, we were the most awarded food company. Ad Age put us as a top kind of more creative company. And more recently, our -- we just won an award, a top 3 more effective marketers by Effie. And for me, that idea of both thinking about creatively, being recognized but also efficiency in our marketing is important. So we have come a long way, and it had been us being thoughtful about what we're actually going to recognize as the differentiator for us in a very competitive food environment. But I'll also tell you that we're not done. If I think about the changes we have just made over the last 6 months, we created a Chief Growth Officer at the company in order to make sure we invest behind a brand growth system that allows us to make sure that we are looking at what is the data-driven decisions of how we best deploy our marketing dollars so we have the right returns and also how do we make sure we have the right sustainability or sufficiency in terms of spending on marketing in our different businesses. So that allows us to now be looking our deploy of capital on marketing dollars across the company in a way that is not just giving more money to marketing but also be more effective in the use of the marketing dollars. So that's the journey we'll continue to go as we go forward.

Maybe we can pivot to innovation. You also got external recognition from Fast Company recently as one of the world's most innovative companies. Can you give us some examples of your more memorable big wins on the innovation side that you've seen since returning to the company?

I don't get tired of you saying that, by the way. I think that the fact that today we're already recognized as one of the most innovative companies, I think it's a huge amount of win in a very short amount of time. And it's because this is something that we have prioritized. And I would say, yes, there's 2 types of innovation. There's innovation that consumers get to see and the ones they don't see. So let me just break down a little more, too, Alexia. If I think about the things that consumers see, they'll see the renovation of our products. So whether that is cleaner ingredients, better packaging, less sugar, less nutrition and products -- and with the attributes that they care about. So that is -- whether that is a Jell-O 0 sugar that we launched last year and has developed -- driven a lot of growth for our dessert business, whether that is us continuing to drive improving in terms of the choices that we make for consumers at Mac & Cheese that go from plant-based to gluten-free products. That's the kind of innovation we're going to continue to see -- consumers will see from us. There's also the disruptive innovation. When I joined, I remember the first 60 days talking -- after 60 days talking to the Board of Directors and saying, Kraft Heinz, we didn't have an innovation problem. We had a good innovation problem, meaning we were throwing a lot of stuff out there, but the things are -- would only be lasting for about 6 to 9 months. And it created a huge amount of inefficiency in a factory. It's a huge amount of waste. We have improved that to focus on innovation that is truly new to the world, that is disruptive. So you'll see more IP-driven innovations for us, whether that is in away-from-home, in a thing like Heinz REMIX machine that hopefully you have seen that now we have deployed with restaurants, whether that is in technology like 360CRISP that we used first in a grilled cheese sandwich and you can put in microwave frozen, and it comes out like you actually did it yourself in the stove-top. And we're taking the same technology across our Taco Bell business now to make sure that you make quesadillas that you put in the oven -- I'm sorry, you put the microwave, and it tastes just like you were in the oven. But it's the same technology that we're bringing across our scale of our products. So that's what our consumers will see, that disruptive innovation and the renovation. What the consumer may not see is the innovation we're driving on how we actually produce some of our products, the amount of investment in technology to drive better efficiency in our factories, better efficiency in our logistics. We talked about Agile@Scale as a program that allows us to be more thoughtful on how we deploy our logistics in -- technology in logistics in order to be more efficient. And again, that's innovative thinking that consumers don't get to see but is a huge benefit for us as a company as well.

Let's turn to the emerging markets. Now the Heinz brand, I was actually fascinated to find this slide from a few years ago where we were told that the Heinz brand was about $4 billion in global sales all the way back in 2021, and it's really the backbone of the company's emerging market growth plans. Where are the biggest opportunities in emerging markets? And can you share some success stories from the go-to-market initiative?

Great. Yes. For us, if you think about North America versus international, outside of North America, we really are a sauces Taste Elevation company. And for that Heinz, it's such an iconic brand that even in countries where we're not present, there is a latent demand for our products. I think part of it has to do, too, with the fact that whether it's Hollywood movies and TV shows, they always put a Heinz bottle in the restaurant in order to bring quality to the restaurant and credibility. So for us in emerging markets, what we have is the benefit of having an iconic brand that allows us to continue to drive growth and a go-to-market model that you alluded to. And for those of you who haven't heard about the go-to-market model is the idea of us first partnering with the right distributor in order for us to start building the scale of the business. Then we deploy our people, and then we actually bring our manufacturing in order for us to improve the gross margin. And that sequencing and discipline of how we're actually going to penetrate those businesses has been a successful way in which we can be able to grow emerging markets. The other thing I would say, Alexia, is that part of my learning over the year has been this idea was planting flags in different emerging markets for the sake of it does not work. So we have been disciplined to say there are 4 key emerging markets in which we're going to grow: Brazil, Mexico, Indonesia and China, and we're going to stay focused on those things. I think acquisitions could be a way to accelerate our path to emerging markets, but that is kind of the underpinning of our emerging market industry, is thinking about those key markets and make sure we deploy our go-to-market models in the right way. And I'll give you the last example, which is if I think a business like -- a country like Chile, so Chile today is a business that already we deploy the right distributors, and we put in ready the right people from our teams to be in the country. At the same time, we still are shipping product from the U.S. to Chile. So the next stage in our development market is how do we think about creating the manufacturing strategy within Southern Cone for us to support that business and continue to expand margins. So we'll be doing that in a disciplined way, and we have a couple of those markets that are upcoming, too. But until now, our key focus has been the big 4.

Makes sense. Okay. Can you talk about the Away From Home strategy? Because the foodservice channels, I think, represent about 15% of company-wide sales.

Yes. Listen, I mean, for us, if I -- let me, I guess, give you the context for you and the people in the room is that there are 3 key pillars for growth from us. There is emerging markets that I mentioned is about 10%. We want that to triple over the next 10 years. We have a North America ACCELERATE platform driving our growth. And at the same time, our Away From Home business that, as you pointed out, 15% of our business that also going to contribute 1/3 of our growth as we go forward. The benefit that we have as a company is that about half of our Away From Home business actually sits in the front of the store or the restaurants. So we are less of a -- maybe different than other company, we're not necessarily all in the kitchen. We're actually in the front in the area where it becomes also a way which we can develop marketing more like a Coke than other food companies that you may be able to see in there. So it is an opportunity for us to drive pool with consumers and continue to grow our brand through generating kind of the marketing dollar away -- because of the Away From Home business. It also is more and more becoming a source of innovation for the company. So I mentioned the Heinz REMIX machine. When you create 200 -- you have the ability to create 200 sauces combination, we get that data to understand what are consumers choosing to do? And then that allows us to actually use that combination to then launch into retail environment as well, too. And we're using that to not only in the Away From Home business within a company like a restaurant, but we're also doing more and more in things like travel and leisure environments. So when you go -- one of the things we're doing in -- with partnering with a company program we call Heinz Selection that we began in Central America and in Mexico, and the idea is we work with hotel chains to create custom solutions for them that allows us to see what are the things that consumers care about, what are the combinations that they like, do they like a particular sauce. The chef wants to create something unique for that particular restaurant, in the hotel environment, then there can be inspiration for us to take in the retail environment. So again, it's a marketing tool. It's an opportunity for us to grow in a different way, and it's also a source of inspiration for our innovation as well, too.

I'm not sure you're going to be able to answer this directly, but we've had a question come in on the Pigeonhole. If emerging markets M&A is possible, would you go after Unilever's assets again? I presume the answer is that you can't answer that directly but in that sort of general area.

Yes. Without speaking about any one particular company, what I would say is if you look at the last 4 acquisitions we have made in the last 4 years, 3 of them have been in Taste Elevation in emerging markets. So we -- our clarity of -- that we presented at CAGNY of us continue to go through Taste Elevation will remain that as we go forward. I've had the benefit of working with Miguel for the last 4 years. So the strategy that we laid out is a strategy that I believe, and there'll be continuity in that strategy. At the same time, we have a bias towards emerging market because we know that it can be a way for us to accelerate a path towards our goals. So whether -- any assets that are fit to those categories will be assets that we'll be looking at.

Makes sense. Okay. Now we already talked a little bit about the Heinz brand. It's obviously a juggernaut brand in the world of taste and flavor. How are you tapping into this global growth? And where do you see the longer-term opportunities?

Yes. Great question, Alexia. Again, I mentioned, for us, we still are -- I guess, let me give you some facts. Today, Heinz globally is about 19% penetration. When I compare that to other iconic brands, it's more in the 30%. So we have a huge amount of opportunity still for us to continue to grow our Heinz business. And again, I mentioned earlier, there's a latent demand for our brand. So we see opportunity for us to continue to drive that growth as we go forward. And it's for us, too, one advantage that we have with that focus on growth and flavors and enhancers is that we don't have to go in to teach consumers how to use our product. We actually can get the benefit that we elevate the product they have. So I'll give you an example. If you go to Brazil, you're actually going to put ketchup, Heinz ketchup in the pizza. Now we're not going to try to teach Italians how to put Heinz ketchup in their pizza if I want to go back to Italy at some point. But I will say is how do we make sure that we adapt to the local flavor, how consumers are using it. If you look at some of our QSR restaurant partners, if you look at the China, most of the sales on our QSR partners are actually in chicken, not in burgers. So how do we think about sauce as a better suite fit the consumer in that particular market based on the flavor profile. If you go to Egypt, they pull the actually Heinz ketchup in other combination of more cooking type of environment. So we have the advantage again that no matter what local cuisine is, we can actually enhance it and make it better through our products versus having to teach people how to use it.

Got it. Okay. Can we talk about the way that you work with retailers?

It's your conference. We can talk anything you want.

Perfect. I like that. Excellent, all right. So let's talk about how the ways that you've worked with retailers have changed over the last few years, given the advancement of digital capabilities and the more data sharing that you now deal with them back and forth.

Right. Listen, that had been one of the maybe not as much publicized but has to be one of the biggest change we have seen in the company. I think part of that had been -- there was a sense that in our relationship with the retailers, it was a I-win-you-lose type of relationship. So we had to rebuild some trust and partnership with the retailers that now we're in a place much stronger than we've ever been. And I think part of that, what it had led to is that -- for example, today, you mentioned about digital tools. Today, we actually ingest data directly from our retailers in order for us to better service their own stores. And that started with one customer in which we build enough trust that they don't -- we don't have to -- we could get their real data directly into our systems. We can then see not only deploy our products directly, not just to their warehouse, but the actual stores that they may need the product. We can also better understand, based on how consumer patterns are doing, when in the month they need different type of products that we can better service it to. And then we have been able to then take the same program into other key major retailers across the United States. So that kind of partnership continues. But it also is using digital tools to better help them understand how to set up the shelf. So we have now programs in which we basically take photos of shelf and we can go to them to say, "Listen, based on how consumer are shopping the shelf, let me give you a better assortment of how the shopper is going to -- how better to set up the shelf." And we're also using virtual reality to better understand what will be the impact of how we bring new innovation into the category, how that going to be positioned into the experience of the consumer. So I give you an example that in Dollar General, for example, we are now -- we have grown the business in distribution this year about 10% from last year. And it came as a result of us working with Dollar General to show them, in a virtual environment, what do the shelves in stores will look like as consumers now not only go to that channel for merchandising but also for food. So that allows us to then work with buyers through virtual glasses to say, "Here's kind of how the environment of consumers are going to shop. Here's how you should set up the store if you wanted to do better." That then allows us to kind of increase distribution in that particular channel.

Certainly is very different from where we were 10, 15, 20 years ago, for sure. Okay. Let's...

But also think about the fact that it's so much more efficient, too. It used to be a lot of Excel file, a lot of planograms, a lot of people, which we now can deploy into more value-added type of services and work versus just simply having to kind of produce all the different materials that they were doing in the past.

Makes sense. Okay. Maybe just digging into the promotional strategy a little bit more. It seems as though the promotional strategy has been very disciplined with promotional levels lower than in 2019 but with higher returns on investment. I think Miguel talked a lot about that last year. How has this come about? And what can you do today that you couldn't do before the pandemic?

A lot. I think that it started with us thinking that -- I think there was a philosophy in the company back to 2019 of let's just cut cost and let's just cut the SG&A and reduce our way to success, which I don't think works. So we actually have made investments in SG&A in order to have better solutions, and revenue management has been one of the benefits of that. So we -- before the world was talking about AI, over the last 3 years, we've been actually investing in creating our own AI models. And we created partnership with people like Microsoft to develop solutions internally to better understand how to elevate the quality of the promotions. So when we talk about that we have discipline on the ROI or the returns of the program is because of the modeling that we have been doing over the last 3 years that allows us to be more science-based in terms of how we deploy our dollars to support our brands. And it used to be we have all these programs that were negative ROI, that we have able to clean not only that, but then we can get data right away on what works, what doesn't and better predict the programs that we'll need at different points of the year. We then share those things with the customers to better understand how to create those promotions throughout the calendar based on, again, the data science that our models are ingesting in order to, again, get better returns on those.

Makes sense. It's come a long way from using a single spreadsheet to try to optimize...

That's correct. And I think that will continue to evolve, too. I think there's -- we are doing very well compared to CPG, but I think there's still a lot of opportunity for us to be even getting them better so we go forward. Because sometimes,-- many times, you're still dealing with humans in the middle of all this. So they may have like, yes, I hear what the data says but I believe that I've done this is like -- so there's still a little bit of change management that we have to do with our partners to make sure they believe everything that we're predicting is going to happen.

Great. Can we turn to the kind of the elephant in the room in the industry and the short-term industry dynamics?

Okay.