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

All right. Welcome back, everybody. For our next session, I'm thrilled to welcome back The Kraft Heinz Company. With us today once again are Chief Executive Officer, Carlos Abrams-Rivera; and Executive Vice President and Chief Financial Officer, Andre Maciel. Thank you both for joining us. Welcome back.

Pleasure to be here.

Thank you.

So we have some things to discuss without a question, how to throw out the old sort of fireside chat questions and come up with some new ones, but we appreciate you sort of being here even in the midst of all that you've got going on. Maybe to start off at sort of a basic level, right, yesterday morning, you announced you're going to plan to split the business into two separate entities, Global Taste Elevation Co., North American Grocery Co. So to start, why do you believe the separation will lead to improved performance?

Yes. Well, first of all, thank you, and I appreciate you being flexible and working with us. I'm sure you changed everything that you were going to ask us. Listen, I think ultimately, it all comes down to focus. And I think one of the things that it has -- we have seen and it has been proven now inside our company that when we can dedicate focus, it actually leads to improved performance that ultimately will unlock shareholder value. If I go back, Andrew, to what I commented back in May that as a Board, we were looking at strategic transactions opportunities because we believe the company's true valuation didn't reflect the potential of our company. I think part of the reason we were doing those exercises because we inherently understood that the more we can drive focus, the better performance we have -- will happen and then it will yield the kind of value that we want. And I think for us, it's not only a matter of us thinking about whether it's possible, it's a matter of fact that we have seen it work. Over the last 2 years, we have spent a lot of time and effort behind what we call the brand growth system, making sure that we are focused on driving improved performance in key brands. And when we have done that, it has paid off. We started this process working with our Heinz business in the U.K., with our Philadelphia business in the U.S., both of them as we focus on driving better quality, better marketing, improving the communications, both in package and online, it actually yielded a reverse of those trends -- negative trends that we have seen in those business. So we know that works. That gave us confidence for us to now do that broadly in our portfolio. Now today, if you look at, for example, our business like Lunchables, in which we have been able to through the Brand Growth System, make sure we have innovation, improve our -- with PB&J, improve our quality in our products with the best cookies and crackers we ever had, talk about the communication to our consumers in store by highlighting the 12 grams of protein that our products have, all that is actually has led now to seeing growth in that business as well, too. So we know that what we have been able to focus, it has driven growth. At the same time, the reality, I think that both the Board and I agree is that the complexity of the business today is a hindrance to be able to drive that kind of focus that we need in the business to drive better performance. So with this move, it allows us to do both. It allows us to reduce that complexity and increase the level of focus to drive better performance.

And sorry, there's also an aspect of the competitive landscape, right? Most of our competitors are very specialized. So you can argue somehow we are competing on even terms, right? Today, you have to spread too thin the time of CEO, Zone President, Head of Sales, Head of Quality, so on and so forth across a very vast amount of categories. We're now competitive about it, thinking about this day in, day out. So trying to really allow us to have a higher span of attention of senior people across the different functions and really have this focus and develop deeper expertise in certain domains should translate into better performance as well.

Got it. Got it. There are certainly plenty of investors that would say, hey, is this split really just essentially a reversal, right, of the original Kraft-Heinz merger from 10 years ago? And I guess why is this not just an unwinding, if you will, of what was done 10 years ago?

First, I would say, no, it is not. The reality is that we have done -- the moves that we have made and the perimeter that we have actually put in each company responds to two things: how consumers are today behaving, which is very different than it was 10, 12 years ago. But it's also about thinking about the future and where we want to be able to take these two companies going forward. So for me, even a fact is that both -- we have Kraft brands in both companies. We have Heinz brands in both companies. And what we're trying to do is what is the right thing to do for Kraft Heinz. And remember, Andrew, that a lot of these things were actually fitting into the strategy we laid out back in CAGNY in February 2024. This idea of us driving focus behind our ACCELERATE platforms, defining what the PROTECT platforms were and our BALANCE platform. That idea of us saying we want to continue to drive the growth through both Taste Elevation, ready-to-eat meals and snacking, those were the places that we identified back 1.5 years ago, and it actually has shaped how we think about the two companies. So it really is about how we are seeing consumers today, how do we continue to see the growth in the future and also the reality of who we are as a company that really led to the way we kind of decided two perimeters.

Great. And you've talked about, obviously, the desire for increased focus. I guess what does this increased focus allow you to do going forward that maybe you couldn't do in the current structure? Maybe there are even some examples that you can sort of point to.

Yes, absolutely. Listen, I think that we think about it in terms of how do you deploy your resources inside the company. When you have this greater focus, then allows you to make sure that from the CEO down to the more junior person are all aligned both in terms of their KPIs and incentive before what that company is supposed to do. So it allows us to make sure that a company like a North America grocery company that is going to be focused on good margins, stable shareholder -- cash return to shareholders. That allows us to make sure that all the incentives are aligned to that, that we make sure that we're investing in R&D are helping us drive efficiencies in that company. Today, we're having to then do both things. We're having to run a -- we're essentially having to run two companies inside this Kraft Heinz. So as we go forward, you'll see us then be more intentional of where we put those resources, expertise and capability in each of those companies. I'll give you another example. When we think about our Global Taste Elevation, 30% of the business will be in emerging markets. That means that we should also be thinking around how internally we have aligned ourselves to make sure that we support the emerging markets from our operations to our procurement, to our marketing to make sure we continue to drive that growth in the double digits that we have seen so far, but I think we can do even more. So that idea of us creating opportunity for us to be thoughtful about the resources investment, the expertise, the alignment of the internal organization behind those KPIs, along with the capital allocation as well, too. I think when you're seeing those two companies, each one will have its own principles of how to think about the capital allocations that allows us to also be successful.

Sort of their own reason for being...

A 100%.

Okay. You touched on this a bit on yesterday's call, but many pieces of the Global Taste Elevation business have had a challenging year, right, in terms of growth, even though historically, right, these assets have a much better track record. Maybe you could put some context around what the specific challenges have been this year and why you don't see them as sort of structural for the Growth Co., if you will, going forward?

No, great question. I guess maybe, probably just to ground it, if I think about -- and I'm glad you said it, historically, these are businesses in Global Taste Elevation that have been growing, I think, 8 of the last 10 years. Even if we think about this year, we've been growing about flattish. So I think some of the pressure have been mostly in the U.S. If you look outside the U.S., we actually are seeing already -- that most of that company is actually already a Taste Elevation company and are seeing kind of mid- to high single-digit growth and in Away From Home outside the U.S., 3% to 5% growth as well, too. So really, the pressures are been in the U.S. because even in Canada, we also have seen growth in our Taste Elevation business. And for me, what I would say is the U.S. has a particular situation, I think, that we have been facing over the last 1.5 years or so. And I think this affects many of us in food industry. If I -- I guess you have the context, too, Andrew, but just for the audience here, I would say, in the last 5 years, I think of it as three different eras in the United States. There's the COVID era, there's the high inflation era. And there's an era today where consumers are certainly trading down and more under pressure. Now we thought that era was going to be very short because interest rates were going to be going down. That hasn't happened. So what ended up happening is that consumers are under pressure for longer than we expected, and that trade down happened for longer than expected. People are having to do -- in families having to manage their cash flow differently. So there is more of that push on the trade down. Now what I would say, too, is that us companies are also adapting to that. So if you look at one of the things we're doing is, one, we would rather than playing defense and try to get just a short-term pop on volume, we actually investing back in our business. We have mentioned this in every quarter of the earnings that we will continue to make investment as we see opportunities in the Brand Growth System. So we are investing to make sure that our products are the best ever and always worth the price of the product. We are also making sure that we are giving more choices for consumers. So whether you see a $1 Mac & Cheese or $1 bottle of dressings or you also see a five-pack product of Mac & Cheese in club, that idea of us expanding number of price architecture options for consumer is part of us responding to this era that is taking longer. The other thing I would say, too, is that we also have to be judicious in terms of how do we actually make sure that as consumers are going through still in this situation that we continue to invest back in our brands. So we haven't shied away to say we're investing in the quality of our product. We are investing in promotional investment that have the right level of return and to make sure we get the best execution possible. The last thing I would say, too, is part of our response to this particular era has been how do we go into more channels where consumers are now shopping that maybe they were not shopping before. And let me give you an example of Dollar General. We're now -- we know consumers are looking for food now in the dollar channel. So if you go to the dollar channel today, and I don't know how many of the audience goes to shop at Dollar General, but I'll tell you, you'll find Oscar Mayer products today that weren't there 2 years ago. And it's a way for us to make sure that we're also providing options in new channel for consumers to make sure they -- as they are wrestling with how to manage their cash flow, that they have options, whether they're going into a grocery store or a club store or a dollar channel. So that's part of what we are adapting as well. I do think those are things that are cyclical in nature. And I think those are things that over time, we'll see consumers be more stable. The last thing I would say, though, is we're not sitting still. I think I mentioned that Global Taste Elevation in the U.S. is not where we want to be. We have been making investments that are not yet showing in the Nielsen data. But I'll tell you, that becomes a huge priority for us to continue to see the progress in that part of the business because we know what it can do. We know what it has done historically, and we know what it is doing outside the U.S., too.

Yes. Great. Interestingly enough, oftentimes with separations like these, the asset that is less about growth maybe and more about consistent free cash flow and smart capital allocation can actually prove to be a significant value generator. On the call, you said scale for scale's sake perhaps isn't the right way to go, and I think many of us would agree with that. But scale that comes with focus does. I guess what exactly did you mean by this? And could North American Grocery Co. ultimately be a potential consolidator of, let's say, other more mature center store food categories that might benefit from a similar sort of reason for being, if you will?

Yes. And just to give you -- add to the context of the question, I would say I'm old enough to know that there was a point in which food companies were just buying scale, thinking that would be the answer for them to be able to have a stronger performance. And I think that those -- that has proven out not to be the case. I think that I do think the opportunity of us driving scale with focus can be opportunity. So for us, it was important that as we said, both of those companies that they will have the right balance sheet and flexibility to do transactions in the future that support the strategy of that company and the thesis of the company. So I believe that we'll do it in a way that we feel like it will have that -- in a way that if those opportunities come along and support the strategy, then we will continue to look at exploring opportunities that help us do that.

Got it. Great. Andre, maybe you talked about $300 million in expected dis-synergies. Do we have a sense yet where -- which -- where the split of that $300 million is in these two separate entities? And does the dis-synergy estimate include stand-alone sort of public company costs for the split entities?

Yes. So the $300 million, which I explained yesterday in the call, roughly 1/3 is COGS, 1/3 is technology and then the rest is split between sales, marketing and other SG&A. We expect that most of the dis-synergies should be on the Global company, okay? So 80% or so. And we -- that does not include one-off costs. We still are working through because now that this is public, we are working with certain vendors that will be supporting us along the way for certain specific tasks. And we're going to be providing disclosure on that during future earnings calls as there are numbers to report. Those will also be managed very tightly. But yes, that's the answer.

Okay. On yesterday's investor call, you also mentioned that Global Taste Elevation would likely post top line growth towards the upper end of the company's current 2% to 3% top line growth algorithm, while North American Grocery would be in the sort of very low single-digit range. How does this growth for each of these entities compare to the growth of the categories within each entity plays? Trying to get a sense of whether those outlooks sort of require consistent market share gains? Or is it more growing in line with your expectation for their respective categories?

Yes. What I'll say is, first of all, we are not yet providing obviously, long-term algorithm for either company. I'm just speaking in the context of our current Kraft Heinz algorithm. With that said, the Global company will have nearly 20% of exposure to emerging markets. So by growing double digits, like we have done for several years, that alone gives 2 points of growth to the company. Away From Home as well growing mid-single digits and being now also nearly 20% gives another very significant uplift. And then if you go to the U.S. Taste Elevation, as you said, historically, the industry grows a bit north of 2%. So we can be at flat market share and even you can argue, lose a little bit of share and still be within these ranges. And then on the North American company, the categories we play historically grow about 1.5% or so. So we can -- we could afford potentially even to lose 10, 20 bps of share and still be within that range that I described.

That's really helpful. In North America grocery, the company mentioned still significant margin opportunity going forward. Given the more recent performance, and it sounded like a disproportionate amount of the spend was going towards Global Taste Elevation, I guess, do you believe there needs to be sort of a onetime margin reset to sort of level set some of the brand investment spend that you may need? Or do you think the current sort of cost structure is sort of where you need that business to be and you can start with that margin ramp sort of sooner than later?

Yes. Listen, I think that there's two ways to answer that question. I think, first of all, if I think about what the investments we have made and in fact, all the incremental investments we have made, we have said disproportionately in this year have gone through to what is Taste Elevation and disproportionately have gone to the U.S. I do think there's some opportunity when I think about the broader sense of investments of us thinking about North America grocery company as a place in which we can invest different type of expertise and capabilities. So for example, in order for us to make sure we continue to drive efficiencies, there may be opportunity for us to say, how do we actually improve the expertise of -- from how we manage commodities to how we manage the operations that today, we are having to kind of make some choices across 55 different categories in the U.S. So us being able to then say, okay, given this is the type of thesis we have in this company, we're going to make sure that we bring the kind of expertise that we need in order to make sure we can deliver on the margin and the continued drive around efficiencies. Today, I think if you think about our company as a whole, Taste Elevation with the most global platform that we have. So all the efficiencies that we take from -- whether it's -- you're in Brazil, whether you're in the U.K., you can transfer easily across the company. A lot of the things in North America grocery company are only in the U.S. So we don't have the capability, scale in -- that we will need as we go forward. So those are the kind of investments that I see us making in the future.

Yes. I don't think -- maybe to complement that. So we don't necessarily see the need for any significant margin reset. Obviously, again, let's wait until both companies can articulate their algorithms. If you put as a reference marketing investment, for example, compare what we expect the peer set for both companies, you can argue that there is still more room for reallocation from the North American company into the Global company when it comes to marketing levels, given the baseline of current spend.