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

Okay. I think that's it. We'll get more detail in the coming months. And just more of a...

I think that already gives some good indication. I think by saying that we're targeting both companies to be investment grade, that should give you a decent sense of amount of debt that each entity could eventually have.

Okay. Okay. Fair enough. Just more of a strategic question. I think the original merger a decade ago was predicated on the concept of scale. What we're hearing this morning is perhaps there was a bit too much scale or too much complexity and yet the combined entity or the separated entities, you'd like to maintain a level of scale. So clearly, scale is important, but in the right level of scale, if you will. So how do you find the right balance of, well, we've got the appropriate size, but we're not too big. Can you give us a bit more sense of how that decision came to be today?

Yes. Happy to speak to that because as you can imagine, it's a topic that was worth -- that was thoroughly thought through. What I'll tell you is in your premise, which I agree with, scale does matter. And we were intentional making sure that we preserve the scale in those geographic situations, markets that we are competing in. So that's number one. Number two, what I will say is, was scale by itself is not enough. I think we need to be thoughtful and intentional of having a purpose with that scale. So I think what you see today as we are separating -- the announcement separate to 2 companies, it gives us that opportunity. It gives the opportunity to be intentionally focused on how we actually think about that scale. So this sense of us creating a Global Taste Elevation Company that is focused 75% focused on essentially sauces and spread, a company like North America Grocery, which is essentially one geographic kind of location, that actually allows us to make sure that we have that level of focus now as we go forward and at the same time, maintaining a level of scale that I think is important to compete in this marketplace. So we say, it is taking kind of what is intentionally a better strategy and now deploying in a way that I think is helpful for us to compete into the future.

Our next question comes from the line of John Baumgartner with Mizuho Securities.

I'm wondering if you could speak to future cost efficiencies. Andre, as you've noted, the underlying SG&A is already very efficient. But the business, as it is now, it's in the early stages of next steps. Back office consolidation, you're adding some headcount and marketing resources at the same time. To what extent does the split sort of reduce the opportunities for incremental cost savings relative to remaining as Kraft Heinz? Do you give up opportunities for future savings given how this portfolio is split across categories, channels, geographies? And then I'm also curious, in the dis-synergy guidance you provided, that $300 million, to what extent does that also include costs required to rebuild or build out marketing and retail resources where, again, maybe splitting in 2, you're giving up some efficiencies?

Thanks for the question, John. First, on the -- sorry, could you repeat the beginning of the question, again? Because I think it was a bit longer and I think there are 2 or 3 elements there.

Sure. Yes. The first question was, to what extent does this split sort of reduce the opportunities for incremental savings that you may have relative to staying as Kraft Heinz? Are you giving up future cost savings given how the portfolio is being split? And then secondly, in that dis-synergy guidance of $300 million, to what extent does that also incorporate marketing resources, trade resources that have been rebuilt that you're also sort of sacrificing in the split?

No. Okay. So the first part of the question is it should not preclude us from continuing to pursue savings. Remember, on the COGS side, if anything, that should help us to deliver more COGS savings because there will be a lot more focus today from our supply chain leadership on different chunks of the business. So I think actually, that should translate into efficiencies over time. On the SG&A front, we still have a lot of opportunities to increase the scope of our shared services organization and nothing should change on that regard. So we should continue to pursue those, so that there is more to come on that front. And then regarding the $300 million, as I mentioned before, there is a portion of that which is to add sales and marketing head count, which will be welcome in any scenario. I think as we are deploying the brand growth system, we have been saying that marketing now is our #1 priority. So adding more headcount we actually will help in the future with having more people that can help translate into better top line. So we don't have in this $300 million more marketing dollars, have more marketing headcount, but not marketing dollars. As Carlos mentioned a few minutes ago, we have been adding more marketing dollars and investing in the product as needed. And as we continue to deploy the brand growth system, if you see opportunities to do so, we will be agnostic of the separation.

Let me add to the first part of your question, John, which is this idea of -- I think as we go forward, if you think about what we have been able to do for the last few years, which is we have deployed agile scale against our biggest priorities to help unlock a huge amount of efficiencies. I think as we go forward, it would only allow us to actually focus further on also making sure we have the right capabilities internally to deploy those efficiencies that create both companies. So that idea of us embedding agile scale as part of the DNA of our company, will continue even as we think about the separation of the 2 companies.

Our next question comes from the line of Robert Moskow with TD Cowen.

The margin structure of Global Taste Elevation is a lot higher than North American Grocery, and it's in the high 20s, so it's high in general. Where is the opportunity for more margin expansion ahead between these 2? Is it -- is there a bigger opportunity in Grocery than in Elevation? And maybe you can put in context how the margins changed over time in these 2? Has one been going down and one going up? Or is it pretty similar?

Thanks for the question, Rob. So on the first question. If you take all factors combined, we probably see more opportunity on margin expansion on the North American Company than in the Global Taste Elevation Company. Just remember that we have a significant opportunity on Global Taste Elevation to continue to expand into away-from-home and emerging markets. And those have, in average, a lower margin than our Taste Elevation margins in the U.S. So there is a mixed component here. On the other hand, there is still opportunities a lot in COGS and there are a number of things that we are working even to further improve our margins on the emerging markets, which we can talk about in other occasions. And then regarding trajectory of margins, we have seen in the last 5 years, there was a relevant margin expansion on the Global Taste Elevation Company. And then in the Global -- in the North America Grocery Company, it has been mixed. You see parts of -- it depends on the commodity cycle as well, right? Now we are in a commodity cycle that the commodities are quite high, which typically compresses margin. If you were to isolate the effect of commodity cycle, you would see as well parts of the North America business expanding margin. Remember that when we established the balanced portfolio, it was a lot about rebuilding the profitability in some cases like [ meals ] be probably the most relevant one and a lot of opportunities on the productivity front on COGS that we have been capturing. So yes, that's what I'll tell you.

Our next question comes from the line of Alexia Howard with Bernstein.

Can I, first of all, ask about the opportunities for foodservice expansion for the North American Grocery Company? I think those were mentioned in the prepared remarks. Specifically which brands, which channels, where do you see that opportunity from here?

Yes. Alexia, thanks for the question. What I would say is today, when you look at our total company, the reality is that when you do the Pareto analysis of the business, we tend to focus on Away From Home business in those sauces business because those are places that we historically have had a greater presence and we have had great capabilities to drive that growth in Away From Home. I think as we go forward, the reality is that there is a huge opportunity in not only Away From Home, both in other channels, convenience and so forth in the North America Grocery that until now, we haven't been able to put the right level of resources and capabilities to drive that business forward. So I see that as a great place for us to think about as white space that can potentially look at how well we can take some of those loved brands into new spaces now into the future. So I'm very excited what it can be. And I think we are just going to be scratching the surface with the potential of us taking into new spaces now.

And then you mentioned in the prepared remarks that the North American Grocery Company is also expected to have the capital structure that will allow them to consider strategic transactions. I presume that includes acquisitions. That can supply in the face of the focused motivation for the split. What kind of transactions would you be looking for? How would that square with this idea that you're separating the 2 companies today?

For us, Alexia, the important thing is, as Andre said earlier, for us, first of all, to aim to be where the credit rating -- credit investment grade. So that was important for us to be able to make sure that we have the flexibility of transactions in either way. What I would say is anything we would do would be consistent with what we just said today, which is any changes in transactions will be with the focus with how do we actually drive further focus. So I mentioned in an earlier question that I actually believe the scale does matter, but that still has to be linked to focus. So to the extent that there are areas that can help us drive further focus, that could be a transaction that will also be entertaining for -- that we can entertain into the future.

Our next question comes from the line of Max Gumport with BNP Paribas.

Carlos, with regard to the North America Grocery business, you described it as operating in stable growth categories and with the loved brands, I think it's fair to say that the volume situation over the last several years would paint a very different picture. So I want to get a better sense for what are your top priorities to get organic sales growth back on track for this business? How does being a separate company unlock those priorities and those initiatives? And then what do you see as the biggest challenges that you will be facing when you're running this stand-alone company?

There's a number of questions that I'm sure we'll have plenty of time for us to discuss into the future. But let me just give you a little bit of a high-level view of how I see the North America Grocery Company. First of all, it has $3 billion brands. They have 90% household penetration and in fact, 75% of the sales are coming from market-leading brands that either have #1 or #2 positions in the category. So these are attractive brands, highly relevant with consumers in a place that actually, we believe that we can continue to drive improved performance. And I think that combined with that, I want to make sure you also know that one of the things that we also distinguish ourselves as a company is that we are very much an efficient operator. And I think you should expect us to continue to drive the level of efficiency and continue to drive high operating margins that we think about to the future. In terms of areas of continued focus, I'll give you a couple of things that I see. Earlier this year, we talked about how we have deployed the brand growth system against some of our areas that we feel require a level of focus Capri Sun Lunchables. Both of those businesses that are going to be in North America Grocery Company and actually driving now growth for the last few weeks. And I think it is a testament to the fact that when we make direct investments that we put the right support and focus, it actually yields the kind of positive results that we want to see. So I think the company is very much excited about what the future would be as we continue to also drive the level of focus and intention behind those businesses. So I think -- and I mentioned earlier to the question from Alexia, the reality is that there's places in channels that we haven't quite pursued with the level of focus that we would need. And I think Away From Home is a perfect example for us that as a company, it certainly is producing the kind of results we want. But if I just look at it from the lens of the North America Grocery, there clearly is an opportunity for us to continue to expand on that. So I think there's a lot of exciting things ahead. And again, I think that we'll have opportunity for us to talk about priorities and how do we think about continuing to drive this business forward. But thanks for the question.

Operator, we have time for one more question.

Our final question this morning comes from the line of Scott Marks with Jefferies.

Wanted to ask just about innovation across these 2 portfolios. I think there's been some questions just across the broader industry about innovation and driving some exciting new products for consumers to generate incremental engagement given the current backdrop. So just wondering if you can kind of share your thoughts around innovation capabilities across these 2 different businesses, what you think they need that's either similar or different? And how you think about prioritizing that?

Thanks for the question. And for me, I think that's one of the critical things that we have done as a company is making sure that as we deploy the brand growth system, it allows us to identify with a larger frame of reference, spaces in which we can take our brands to drive new innovation. As we sit today in the company, we have doubled the rate of innovation over the last 3 years, and we feel good about that, but I think there's a lot more that we can do. And I'll tell you, I think that as we think -- the way we think about innovation, and I think maybe something that externally you may not see as much is that innovation with both the things that we are going to be driving new to the marketplace like we're doing right now with things like Lunchables PB&J, like we're doing with our Taco Bell meals that continue to drive double-digit growth in the marketplace that we are now expanding into new geographies that like we're doing with our Heinz business and how we're taking now to other space in adjacency categories like pasta sauce. All those things are, yes, part of innovation. But another part of the innovation equation is the renovation that we're doing in our business. So when you think about our Mac & Cheese business, in which we are now deploying the best formula we have ever had, that we are making sure that our products continue to have reduction on sugar, reduction on sodium across our portfolio. That also is part of the renovation that drives us to have a better component of innovative solutions to consumers. So from the consumer lens, the idea that we're bringing new things to the world and making the process a lot better is part of how we're thinking about innovation. And you will see that as we go into 2 separate companies, it will give us the opportunity to actually further invest in both of those in a way that actually allows us to capture even further growth into the future. Thanks for the question, Scott.

Thank you, operator. Appreciate all the questions today.

Thank you. This concludes our question-and-answer session, and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.