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

You recently discussed your expectation for 4% to 5% inflation as we look forward to next year. And the desire to offset as much of that as possible through productivity. Historically, how successful has Kraft been in doing that. And as the evolving cost outlook really change your confidence that 26 ultimately will prove to be the margin trough as you've suggested. .

We're going to get Andre in at some point, right.

For us, as Steve said, it's critical, and I'll not started all about the top line growth in a sustainable one. But we also understand that it is the importance for us also at some point have to grow earnings again. So if you think about the value creation of it will not only come from... .

Can everybody here, Andre, by the way, I want to make sure. Make sure that's green lights on, maybe it's flip the switch there. It's an important question. So we want to make sure we get to that. Okay. There you go. Give me now.

Yes. Okay. So maybe I'll start again. So for us, as Steve said, or not studies clearly drive top line volume-led growth. But for us, it's as important as well is to also grow earnings. And the equation of growing earnings will be led by top line, but also involves gross margin expansion. And over the years, we have been successful in expanding gross margin. Gross margin is still higher than pre-pandemic levels, despite all the investments we had in the business last year and this year. There is a path for that to continue to happen moving forward. Productivity has been the main driver for that. We have now for 5 years deliver north of 3.5% of COGS. In fact, the last 3 years, more than 4% of COGS. There is always some element of pricing there. But as the more it can do with productivity to drive the gross margin expansion, the more we're doing just conclude an extensive exercise to see how we can further step up productivity to 4.5% or so. I think there is -- there are a lot of opportunities ahead of us on the productivity front. And price, if required to be, we try to do as minimal as possible. But again, we understand that we need to deliver the top line growth with gross margin expansion over time as well.

Do you believe KHC has other levers, it's kind of what you just touched on a little bit, if need be to help bridge any gap between cost and productivity next year, whether it be pricing or others, and some of the food companies have been fairly explicit in their need for some pricing as we move forward. Obviously, you've been making some price investments as part of the $700 million of reinvestment. So there's some tension there, obviously, between those 2, given the rising cost environment.

So with aside from productivity, again, which is the #1 and price in selected places, price becomes like the optionality for us. And if you see the whole market moving because in some categories, there will be significant inflation pressure. We will just go along. But again, we are trying to prioritize on the productivity front. Now mix is another important driver as the business continues to grow more through sauces, cheese, Mac & Cheese, those business have all, pretty much everything that sits in the wind big part of our portfolio role. Those have much higher gross margin. So there is always a mixed component that contributes as well.

There are -- still seems to be this narrative, I think, among some investors that some of the company's legacy brands and large categories as well as some other food companies as well. are simply less relevant to consumers these days, almost no matter what is done to shift the product and the messaging. I guess what have you seen thus far that would help sort of maybe debunk this sort of thinking? .

Yes. I would personally push very which very hard on that type of narrative. There are certainly brands that come irrelevant. But in my experience, those brands become irrelevant because they've been not managed in the way that they need to be managed. -- right? There's certain histology that exists with brands, and I joke with people sometimes nostalgia might help you sell the T-shirt, but it won't get you into the pantry and the type of experience that you trying to drive. To do that, you have to drive relevance for the next generation of consumers. And so I already mentioned Heinz, but Heinz 0 in Brazil is a great example of that. But Heinz simply in many countries around the world. And Heinz organic are great examples of that, maintaining your relevance because you're investing in what consumers want, we'll keep brands alive and keep them vibrant. Another great example in our portfolio that I've told some people about is what's happened with CapriSun. And CapriSun is a really interesting brand. It's a great brand. But for many years, once a child turned 11 or 12, they were out of the CapriSun franchise because it's just not cool to have that pouch that you had when you're 8 years old and poke a little straw on it. And re-lift your glory days when you're 8 to 9 on the soccer pitch when you're at 12 and 13. But consumers, that young consumers still love the brand and moms and dads who were doing the shopping still love the brand. So the team innovated around a very simple resealable plastic bottle, which did a couple of things. It made it cool again, to have the brand that people love into their tween years and opened up all sorts of distribution in C-stores. tens of thousands of new distribution points. And the brand is growing nicely on the back of that. Then we've just innovated most recently this year with CapriSun hydrate, and so think about electrolytes and a new innovation that's not new to the world, but new to CapriSun that makes it more of like a junior level sports drink. Doing very well. You could make the argument that CapriSun was 1 of those brands that had seen its best days. But if you really keep the consumer insight the heart of everything, you build the right innovation platform around it. You invest in the brands and you believe in them, and you have the conviction, 20 years from now, the world is not going to be littered with just a handful of little brands and private label everywhere. That's just not going to happen. But it doesn't guarantee that a lot of the brands that are here talking over the course of the next couple of days are going to be around. There's absolutely no guarantee because you have nostalgia and salience that you're going to remain relevant. You have to turn that salience into relevance through innovation and other consumer connections that make you relevant to the next generation. And I firmly believe that. I think the history is shown that. It may be more difficult than it's been in the past. I would acknowledge that, but the same type of things, the fundamentals that drive people wanting to really try your product, desire your product and winning at the point of sale and delighting them when they take it home through absolute product superiority and performance remain the most key elements of what it takes to keep a brand alive generation to generation.

I guess regarding cash flow and the balance sheet, there's been maybe building concern around balance sheet flexibility and capital allocation sort of optionality in the broader packaged foods basically. Can you update us on where KHC is at this stage on cash generation, dividend policy and sort of capital allocation priorities?

Sure. So look, our cash flow generation continues to be very strong. There's a lot of effort we have put into it. the past -- especially in the past 3 years, we adjusted the incentive structure. So the organization as part of the short-term and long-term incentive linked to cash flow. We have invested a lot in technology in the past years to continue to unlock working capital efficiencies. So -- and we have done a good job there. There is still much to do, especially on the inventory front, and we feel confident about the path there. We have taken advantage of the excess cash and being able -- despite investing $700 million in the business continue to generate that solid free cash flow after dividends, which has allowed us as well to continue to pay down debt. So we paid this year $2.9 billion of that, including $1 billion that was maturing next year, we're able to refinance part of our expensive debt maturities that were in the future to cheaper that like $1 billion of refinancing that save us $250 million, interest expense over 10 years. So there is a lot of activities that we continue to do that really put us in a different spot compared to a lot of other -- specialty center of store companies in terms of having a robust cash flow generation, being able to comfortably protected a strong dividend that we provide, and I think the ability to maintain so.

You talked about emphasizing fewer bigger bets. Where are the bigger bets being placed? And what kind of discipline and information maybe have you built around your internal processes to make sure that where you're making those investments is the right place.

So we look at the returns for all our investments vigorously in doing that before I arrived. So I think we have the internal capability to really understand returns against investment very well. Critically important when you invest in an incremental $700 million because that money will be fungible. Right? And so we'll measure where it's working, where it's working very well and where it's not working so well. And we won't be cutting the $700 million. Where it's working well, we'll reinvest in areas with a higher ROIC and so; that's an important discipline that we will continue to build and bring forward. In terms of the biggest bets, you should see us continue around our biggest brands. And so I've mentioned a number of times, Heinz and the Heinz innovations but Heinz outside of tomato catch-up as well. So Heinz, we know plays in sauces very well and even beyond sauces. And so Heinz Mayo is a big opportunity around the world. Heinz Pasta sauce has shown that it's a good opportunity around the world. Heinz beans in the U.K., obviously, for generation, very successful. So innovating and expanding around Heinz and what Heinz can be, will be really important. Philadelphia is another great brand for us. Ultimately, we can get out of cream cheese into other kind of cheeses. Our initial innovation this year is lactose-free Philadelphia cream cheese. There's a huge lactose-intolerant population in the U.S. that we were not addressing and we're addressing that now. So that's out now. I mentioned CapriSun, big innovations around that. Oscar Mayer, where we need to get it fixed and get it right. There's a whole protein movement out there right? And so we've got a lot of protein forward opportunities in our portfolio. Convenience and affordability are 2 other areas where we will be investing very heavily because nutrition, convenience and affordability are important elements. But think about our big brands, Kraft Mac & Cheese, another one, a fairly straightforward innovation, Kraft power Mac & Cheese out earlier this year, 17 grams of protein, 6 grams of fiber affordable, more affordable than some of its competitors off to a great start. We got really 100% distribution where we pitched it because retailers saw the value in the brand. I mean we own Kraft Mac & Cheese and Kraft go together and doing that craft in Kraft in Canada and Kraft Raman big opportunities there. So think about our big brands and areas where they're not in where they can comfortably travel with the right level of innovation and investment behind it.

I know a year ago, there were a number of brands that were sort of, as you mentioned, losing share simultaneously. I guess as you sit here today, how much smaller is that list? And is the challenge increasingly concentrated in really just a handful of businesses rather than maybe what was more broad-based across the portfolio at 1 point? .

So that list is much smaller than it was this time last year. I mean I already mentioned last year, we were even losing share of Heinz catch-up. And so that's clearly something that is shouldn't be, and we've fixed that in the right direction. If I'll get back to the U.S., but if I look outside the United States, our international developed markets are back to consumption and share performance, which is really good. I already mentioned our emerging markets a number of times. And so you come back to -- and Canada has proved terrific performer over a number of years or having another good year this year, growing consumption and share on the back of the right level of investments behind big brands like Heinz and Kraft, so then you zero on in the United States and say, okay, so how is the U.S. doing? And I already mentioned Oscar Mayer being 60% of the issue that we have, and we have a path towards fixing that. and we need to get that fixed. And then we look at frozen, and we've got some opportunities to do better and fix our frozen business. So the list is much shorter. While we do that, we'll also be investing in the big brands -- but the other interesting thing in our portfolio that we have to remind ourselves of and we have, and we're putting capabilities in some of the head count we're investing is in some of these small gems that we have, you think about Lean parents think about A1 steak sauce, you think about Gray coupon. These are little gems of brands that with the right level of investment that we've been -- are doing do very, very well. And so the list of brands that are doing well, we want to make that bigger and bigger. And we've isolated the areas of subpar performance to areas that need to get fixed. And encouragingly, we more and more have the right insights into why the brands are declining, what the issues are. I already talked about Oscar Mayer and resealability to be in Deli Fresh. So part of fixing a problem is acknowledging it, number one; and then number two, understanding it very well, so that you can put together a robust plan to make the turnaround. And I think that's the path that we're on right now.

Oscar Mayer meals have been areas of greater pressure as you've talked about, whether it's resealable packaging and Deli Fresh or innovation like Power Mac, I guess what have you learned about how much renovation can sort of move the needle versus situations where maybe more fundamental changes are required?

I think renovation in this day and age is incredibly important, right? I mean you look at where the consumer is going and the consumer is increasing going towards better for you, whether it be protein, fiber and that type of thing. They want cleaner label. There's no question about that. And then they still want affordability. And so that really requires renovation and looking at your portfolio and saying, okay, without making consumer compromise, how can I have a cleaner label? How can I have less of what the consumer doesn't want and more of what the consumer wants. And a brand like Oscar can absolutely -- has the right to go there. I mean making Oscar less perceivably processed is not going to hurt the brand. It's going to help the brand. And so renovation is incredibly important, probably more important in this year right now than it ever has been because what used to be a little bit more talk on the East Coast and the West Coast is becoming more of a national and international dialogue around I want to understand what's on my label. I want to clean label. I do want to eat better. And so oftentimes, that requires renovation. And we've been on that path to renovation 1 example. We said by the end of 2027, we removed all FD&C, artificial colors, and we're on our path to doing that. And it's the right thing to do, but it's also what the consumer wants. The consumer wants a cleaner label and renovation is a way to get there.

Maybe as we wrap up, Steve, if there's 1 thing that investors should remember and I guess, hold kraft in accountable for to judge success over the next year, what would that be?

I think it would be more than 1 thing. -- high on the list would be our market share performance. And there's a reason we've been very vocal about that. We're holding ourselves accountable to growing in the right way. So growing volume-led market share being a good steward of our categories, but making sure that we can grow faster than the category is very important. And you've written about this. I mean, if we just held share in the weighted global business that we have, we'd be back to growth. And so that's really important. Andre talked about productivity, getting 4% of COGS productivity year in and year out is equally important, making sure that our innovation pipeline is robust and that we're doing enough to gain distribution and grow our distribution over time. Our emerging markets business growing at high single to low double digits over a long period of time and making sure that we manage the volatility in emerging markets will equally be important. And then finally, our international developed markets remaining stable and share grower over time. You put all those things together and think about those 4 or 5 simple metrics, you'll have a really good understanding of the trajectory that we're on, the progress that they were making towards the promised turnaround that we've told our shareowners, that we're on the journey and committed to doing good.

All right. I think this is a really good point. We'll break here. We'll head in to the breakout. Please thanking Steve and Andre for being here.

Thank you.