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

Listen, I think for us, we know that the right way for us to continue to build our brands is by driving superior products with better marketing and making sure that we have a full value formats for all consumers, which is why we have continued to drive renovation in our products while we continue to focus on expanding distribution, both in club channel, Dollar General as well as continue to expand our distribution in omnichannel. So that's number one. I think what the question behind your question might be in terms of us thinking through whether we need anything else that we need to do in terms of margin price. I guess what I would tell you is that there are moments in which it does make sense for us to promote more. What -- the way we kind of think through it is, let's make sure we do that in the right consumer location that ultimately leads to kind of better base growth for the brand. So we need to do that intentional so that we have the right investments returned on those promotions, so that we avoid areas like bargain hunting behavior that ultimately do not have real incremental sales for the brands. So -- but at the same time, there are two places where in fact, we have promoted more, and we see that it makes sense for us to continue to see positive returns. So areas like Mac & Cheese cups in which we're driving significant growth as we are now making sure we have the right price gaps and the right kind of attractive starting price points in the category. Areas like Cool Whip, where we know can also lead to better base growth for the future. So it is a combination, of again, making sure we grow the brand, leveraging a brand growth system, focus on innovation, renovation, better marketing and at the same time, be thoughtful about the places in which it makes sense for us to manage those price gaps in a way that lead to that base growth going forward.

What I'll add is our long-term algorithm contemplates continuous gross margin expansion. We feel very confident and proud about what we have done on the supply chain efficiency side. We have now 4 consecutive years of very strong delivery coming from there, and that's in this year, in particular, the highest ever for us. We feel confident about the pipeline to continue to sustain very good levels of productivity. And this productivity is critical to allow us to reinvest in the business. As Carlos said, look, our priority is really on improved trends on the base volume, that volume that happens agnostic of promotions. That's 90% of food and beverage sales. And people keep talking about promotions. Their focus is base volume. And base volume, you do it through continue to innovate, bringing news to consumers, renovate the portfolio like we have been doing, do more and great marketing. And that's what we want to do, and that's what we'll continue to do. So our priority is there. So look, we're not going to talk in detail guidance of '25. We're going to talk a lot about that in the next quarter. I think we said enough about '25 to give you just a flavor of how we are seeing big picture. But nothing changes in our strategy. Nothing changes in terms of our expectation to continue to expand gross margin in a prudent way.

Our next question comes from David Palmer with Evercore ISI.

I just want to build upon some of the discussions you're having, which has been helpful. Really, you've protected profitability pretty well in spite of inching up promotional activity in the U.S. Retail data that we see. And it sounds like from what you're saying that you're open to doing some tactical shifts in promotion spending from here as you -- if you see the returns. But I'm wondering, do you see more significant spending level investments potentially in the horizon might not be promotion, might be other marketing? And -- or conversely, are you seeing any sort of tactics or content that could be improved upon that could really improve the base trends as you're talking about? Is there anything in the pipeline that you think might cause one of your key platforms to materially improve? Just really good old-fashioned innovation and marketing improvements that you can make.

Let me start, thank you for the question. First of all, I would just say, if you put into context, again, we have three growth pillars. Two of them, we have put the effort and now are both growing and gaining momentum. And if you think about the U.S. business, we have kind of diagnosed the problem exactly to about 4 to 5 brands. And just to give you context, we have over 200 brands in our company. So for us, it's very much focused on those areas and [ we went ] to attack. And hopefully, you've got to see in our prepared information that we sent out, that already we are seeing how Capri Sun and Mac & Cheese, we are seeing the improvements in trends in sales as we have renovated, innovated and invested in both of those brands. We are seeing places like our Philadelphia business, Ore-Ida, Taco Bell, places where we have turned around those businesses and now driving significant amount of momentum as we go into the year. And we've seen that even outside of the U.S. as well. So that idea of us continue to understand how we play to our strengths by focus on renovating, innovating and investing is something that has been proven model for us, and we already see evidence of that. I mean -- and frankly, if you look at our Heinz business globally, today, it is a brand that globally for us is $4.5 billion and actually grew 4% in this particular quarter. So we know we have kind of the right replicable model for us to apply, and we will continue to do so, which is continue to make sure we have the right level of investments in marketing. Not only the levels but also continue to focus on the effectiveness of the marketing and then support them with the right investments in terms of technology, R&D in order for us to kind of fully completely drive the innovation and renovation that we want to see. So in terms of promotions that I mentioned, it has a role. It is something that actually supports the business in certain occasions in which can lead to that base growth. But frankly, our commitment to making sure that we invest in the things that will drive the brand strength over the long term is the #1 priority. Thank you for the question.

Our next question comes from Robert Moskow with TD Cowen.

I guess I would like to drill down on one of the product lines as well as Mac & Cheese. Carlos, you said that where you're making investments, it's really working, but it is showing up as one of the drivers of the declines in the quarter. And I want to know like there's a lot of elements of Mac & Cheese, and Kraft is really a big innovator. But what elements are you kind of struggling in, in Mac & Cheese? Because the data shows market share losses, and I see a lot of premium products being entered into the market by your competitors. Is that the part of it that is more difficult for Kraft to compete in?

Well, first of all, Rob, thanks for the question. In Mac & Cheese, remember, we have a brand that actually expands a number of formats. Like if you see our Mac & Cheese cups, already seen a significant amount of improvements as we have gone into Q3. So that particular part of the business now is growing and gaining momentum as well. At the same time, we just launched new flavors to attract millennials. So a ranch product, a jalapeno product, and expect us to see continue to work on those type of new flavors. We're also now bringing new shapes into the category. And I think again, the idea of also bringing properties like Super Mario Bros. will be an opportunity for us to continue to drive that in terms of attractiveness into the category. So I think for us in making sure that we are continuing to focus on what are those consumers and what are the right formats and flavors that we can bring into the category, and at the same time, making sure that we talk to consumers, we do it in a culturally relevant way. What I'll tell you is that one of the things that we're proud of is that a brand like ours at Mac & Cheese is a brand that is built for the many, not the few. So we know the role that we have in today's families in which we wanted to make sure that we provide affordable and approachable solutions that everybody can enjoy. So there's a role for us to continue to live in, at the same time that we're bringing new formats at different opening price points with different new flavors that attract a different type of consumers. So again, we're seeing the progress already in Mac & Cheese cups, and I can see us continue to build on this as we go into next year. I feel very good about the path we're taking.

That's a good example, Rob, of items that requires longer recovery, if you will, because innovation, you need to ramp up, consumers should try and need to repeat. So we feel great about the products that are there in the market, but they take time and we need to be patient. That's something that we have not been in the past is patient with our innovation, and we are changing that. But we feel good about what we're doing. And to your specific example, that's one of the core examples of just promoting more is not it. So thanks for the question.

And our last question comes from Chris Carey with Wells Fargo Securities.

As I digest the conversation in the call this morning, I think really what I'm trying to understand is this concept that I think Lunchables has been a headwind we have known about. Capri Sun was a headwind. And I think I'm trying to understand what your perspective is on sort of the underlying ex those items and whether that specific bucket or a large bucket has changed relative to a few months ago and perhaps how you see that going forward? And if it has -- if things have changed, what do you think are the core drivers, right? So I appreciate the focus on some of these items. But when you take a step back on the rest of the business, what are the things that are happening that are pushing you to feel one way or the other? If you could just maybe expand on that, I think it would be helpful to kind of understand the trajectory of the underlying business ex those items.

Sure. I think -- and it sounds like you're referring mostly to the U.S. Retail business.

Yes, that's correct, yes.

And what I would say is if you think about Capri Sun, this is a product that over the summer, we renovated the products. We are seeing now the momentum is starting to improve. We are seeing that the fact that we are bringing a new format into new channels, whether that is multi-serving club, new bottles, single bottles into retail, going into convenience, going into vending, that allows us to continue to build the momentum of the holistic part of the brand. So new formula, consumers are trying it. We are seeing that actually it's helping us continue to start growing base volume. And at the same time, our focus continues to be how do we actually build that brand beyond just the typical retail channel in the 10-pack that for a long time has been the core part of the business. Now in the case of Lunchables, I think the headwinds have really kind of offset some of the great work that is happening across Kraft Heinz. And I'll tell you that as we think about Q3, the back-to-school period proved to be more challenging than we had expected and why we're actually taking -- we recognize that it's going to take longer for us to do this, the recovery of Lunchables. Now that doesn't change the fact that we are completely committed to it. We have recognized that this idea of us making sure we continue to build the trust with parents and families, it is part of what our job has to be done. But as I mentioned earlier, we are -- as we go into first half of next year, we're bringing new products, renovating our quality, making sure that we have a new campaign that talks to both parents and kids. And at the same time, already in stores, we're launching nationwide new products for us to expand to a better -- a bigger audience. In this case, we relaunched kind of the spicy nachos, as we know that is an opportunity for us with bringing new kids into our franchise. So it is a short-term situation that is making what was a difficult headwind more challenging because of the supply ingredient that we have in Q4. But over time, you'll see us continue to invest behind this to make sure that, in fact, Lunchables be the overall tremendous brand that we have created and shaped into this category.

But just outside of those brands, how do you feel about the business on an underlying? Sorry to ask another, but it's just with respect to the rest of the business, excluding those 2 brands, have things materially changed? Or should we think about these really being the core headwinds on the relative trajectory from here? Sorry for interjecting again.

No. Thank you. I appreciate the question. Again, if I go back to what is it that we intended to do? What we intend to do is drive the growth of our company through three key areas, making sure we continue to drive global Away From Home superior than anyone else. We are doing that, and we're gaining momentum. We continue to drive Emerging Markets. We are seeing that beginning to -- the growth that we saw in the quarter, that give us confidence that we can continue to -- for us to drive that particular pillar. And in the U.S. Retail really is about those few brands that we know we can act on. And in fact, a couple of those brands already, whether that is our Capri Sun business, whether it's our Mac & Cheese business, we already are seeing improvements as we go through the quarter that we believe are in the right path for us to continue to gain into the future. So overall, I feel very good about the fact that we know where the situations that we have to address are, that we have the tools in-house by leveraging our brand growth system to actually build on the momentum of those businesses as we go into 2025, and also feel good that we can deliver the ACCELERATE platforms in growth that we expect as a third pillar of our overall growth for the company. And the last thing I would say is, this is also underlined by us continue to deliver great productivity that is helping us fuel the gross margin. So we're doing all this. As we are delivering world-class level of productivity, we're investing back in the business by investing marketing, R&D and technology and not compromising in the long-term growth of our company. And at the same time, also making sure that we are thoughtful about continuing to deliver great cash flow for our shareholders. Thank you so much for your question.

I would now like to turn the call back over to Anne-Marie Megela for any closing remarks.

Thank you very much, and thank you, everyone, for joining us today. We appreciate your interest in Kraft Heinz.

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.