Operator:

Good day, and thank you for standing by. Welcome to The Kraft Heinz Company Second Quarter Results Conference Call. [Operator Instructions] Please be advised that the conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Anne-Marie Megela.

Carlos Abrams-Rivera:

Well, thank you, Anne-Marie, and thank you, everyone, for joining us today. Recognizing that it remains a difficult consumer environment, I am proud that we at Kraft Heinz are providing high-quality, convenient solutions that are a great value, brand worth paying for. And we will continue to stay focused on renovating and innovating with new benefits functionality and accessibility. At the same time, our teams have been relentless in unlocking efficiencies with a mindset of continuous improvements. And as a result of greater productivity and efficiencies, we have been able to hold prices below inflation this year while continuing to invest in innovation, marketing and R&D. And for our stockholders, through our dividends and share repurchases, we have returned over $1.5 billion in capital so far this year. I am very encouraged on how our focus on improving working capital is paying off. We increased free cash flow nearly $100 million or approximately 9% compared to last year and maintain our targeted leverage ratio. And finally, it's hard to believe that it has only been 4 months since my leadership team came together. We're on this journey together, all committed to driving improvements and achieving our company dream. I see the ownership and grit with my direct reports and across the organization. We are all embracing this new operating model and ways of working, and we are only getting stronger and stronger. With that, I have Andre joining me. So let's open the call for Q&A.

Andrew Lazar:

Carlos, you mentioned the need for selective promotion and trade spend activity in the second half just to drive better volume results for a more value-seeking consumer. I'm curious if there's a way to dimensionalize the portion of the percentage of sales that are sort of in need some adjustments. And if there are any particular hotspots that require maybe more aggressive pricing actions or sort of a reset of sorts? Basically, I'm just trying to get a sense for how broad the price point issue really is across the portfolio with the understanding that, as you've talked about promotional right now are still below those you saw in 2019.

Andre Maciel:

Andrew, thanks for the question. Look, we -- as we said in our guidance, we're contemplating a step-up in trade investment level. You saw that in Q2, we already had a little more trade than what we had in the last year, where those are still well below 2019 levels. We believe that looking forward, we are more focused on those price gaps versus branded competitors and in places where it makes sense for the long term. We -- I think we have been saying all along, and we continue to stick to this that we believe that's the way we want to grow the business is not through over relying on promotions and rather continue to invest behind our innovation, our renovation and our market investments. And that's what we have been doing, and we're sticking to that. We are confident about that into the future. But in the short-term, we are seeing selected spots where it does make sense to add promotions to close those gaps. I'm not going to give you like an overly precise number to your question, but I estimate in the 30% to 40% of the portfolio where those price gaps require some incremental level of investments in the U.S.

Andre Maciel:

We do expect revenue and volume to gradually improve throughout the quarters. In our midpoint of the new guidance we don't have -- we don't need volume to grow for us to achieve our guidance. So our price expected to be in the -- around 1% territory for the total portfolio. So if you think about the second half, what's impacted the guidance is sales declining 0.5% and so that you can see. Now it's good. The good thing is volumes in emerging markets, despite some headwinds in Brazil and China, continue to be positive. They are positive in the second quarter. They will continue to be so a year to go. And in the U.S., we're going to -- we expect to have volume continue to improve. Again, in our midpoint, we don't need the volumes to turn positive for us to achieve it.

Andre Maciel:

Just a final comment is I think our dated guidance also reflects this philosophy in this approach because you see we have adjusted our net sales guidance down, but we largely kept our EBIT growth and we kept fully capital EPS growth. So that's what we are sticking for. We have been very disciplined in being very thoughtful about the type of investments we make and what are the long-term implications of that, and we're going to continue to do so.

Ken Goldman:

Just sticking on the subject of the back half. You provided a number of reasons for optimism. I think you've cited more innovation, renovation and marketing. You've talked about expanded distribution in certain parts of the business and then, of course, those targeted promotions. Just as we think about these drivers, plus the absence of the plant maintenance headwind, which are you counting on as being the most important and meaningful to hitting your updated outlook? Do the promos have to work? Is it really about innovation striking a note with consumer? I just want to get a better idea of kind of your visibility and reliance on the factors you're talking about.

Andre Maciel:

No, I think [indiscernible]

Steve Powers:

You called out a couple of overseas markets, specifically the U.K., China and Brazil, different dynamics in each of those markets. But obviously, a lot of work going on as you try to correct trade gaps -- or sorry, price gaps in the U.K. and fight through consumer demand softness in China and Brazil. I guess could you just expand on what you're seeing in those markets? And maybe a bit more color on what your expectations are for the back half in terms of any kind of sequential improvement?

Operator:

Our next question comes from John Baumgartner with Mizuho Securities.

Carlos Abrams-Rivera:

Yes. Well, first of all, thank you for the question. And as you pointed out, we have a series of iconic brands across our portfolio in North America that we feel great about. And you've seen already. I mean, you've seen brands from Philadelphia to -- or either where you are seeing the growth as we have continued to renovate those businesses are the success that we've had in a brand like Jell-O, where we have continued to renovate. So we have a playbook on how we continue to renovate our business, our brands to make sure that they, in fact, continue to be resonating with consumers today and for the future. I think in places where we are seeing that consumers are making choices as they are trying to manage the cash flow of the family, we also have to be aware that we have to provide consumers options at different price points so they can be part of their role basket size of the cash flow that they have available to them. That's why in a business like Mac & Cheese, well, it's certainly something that can fit the entire -- can feed the entire family. We want to make sure we have different price points in which we can come in to consumers and allow them to make sure they continue to enjoy our products. And it's also about us being able to be accessible in new places. One of the things we find right now is that consumers are actually increasing the number of trips and locations in which they shop. So for us, it's important that we continue to expand where consumers are going to try in our brands and why we have been so much focused on driving our improvements in terms of distribution in the dollar channel, whether that is with our Oscar Mayer businesses and making sure that we have the product they're looking for at that particular venue. But it's also us expanding our distribution in places like club, where we know consumers are also looking for different ways in which we can find value for the family. So for us, it's applying the playbook that we have from renovating and innovating and at the same time, making sure we have providing the access to families as they're shopping from -- in new spaces whether they're going from a dollar store to grocery to club and our brands continue to be there. Those are all things that you'll see us continue to add as we go forward into the second half of the year.

Michael Lavery:

Just was wondering in away from home, maybe two things. You called out that it had the 2.1% decline globally. Obviously, you had the plant closure and some discontinuations. Can you unpack maybe the components there and give a sense of how much the slower foot traffic was a headwind? Or what the -- what the growth rate was excluding those kind of onetime things and maybe how much was from slower foot traffic? And then also, you've given an update in the past on the remix launch in BurgerFi the test. And just curious how that's progressing there.

Andre Maciel:

Sure. So our Global Away From Home business declined 2.1% in the quarter. And the impact from the plant closure is about 200 bps. So meaning that we will be flat without that effect. That will put us in a situation of similar performance to Q1, if you remove the plant closure effect. The planned exits that we had at the end of last year, they had back in the quarter of roughly 150 bps. So will be then growing 1.5%. So we're still gapped versus our long-term ago. We have been gaining sustaining share. Again, if you remove the effects from the plant closure, what we saw in Q2 in the industry is in the category that in where we play is that industry was worse in Q2 than in Q1, which I think we were not really expecting that. So in the U.S., about 100 bps softer in Q2 versus Q1. So I think the performance on our side helped to offset that headwind that happened in Q2.

Operator:

Our next question comes from David Palmer with Evercore.

Carlos Abrams-Rivera:

Let me start. And then what I would say is -- we called those out because there were a meaningful headwind for us and in our second quarter. And I think it's something that the teams have done an amazing job of making sure that we have the right plans as we go forward. I mean, it was meaningful to the point that in the case of Lunchables, we saw from a low point of, I would say, down 17%, the worst weeks in the second quarter. What we have actually seen a steady recovery since that particular point, and we're building that improvement. And the teams are getting ready, both in terms of renovating, innovating, doubling the marketing spend, improving the media mix, improving the targeting strategies and increasing the value equation for the consumers as we go forward. And that includes innovation. Some of it we included already in some of the slides that you saw, but also we have other innovations that for competitive reasons, we're not including yet, but they will be coming in the second half of the year as well. For us, we continue to expand in the Lunchables within partnership with Del Monte in the second half of the year. So there is a meaningful amount of program that is supporting our Lunchables and you see that from -- and you begin to see that really come into fruition in our back-to-school program when we're teaming up with the Transformer movie, as something that, frankly, we have been successful in the past of doing movie tie-ins, as we have done with the Heinz brand. And we did point out as well Capri Sun because, again, it was a meaningful headwind for us in the second quarter that again, the teams have been very much focused on driving a change in trajectory as we go into the second half of the year. They have renovated the original Capri Sun to better align with the consumer taste preference, invested twice the marketing as we go into 2023 versus 2023. We have secured strong back-to-school displays with customers. We have invested in the right promotional events, and we have expanded into new channels with club. So again, it had both places where we have seen some meaningful headwind in Q2 that we now have also just as a meaningful reaction in terms of improving the trajectory as we go forward. And that will continue with the other things that are working for us. We do have some positive momentum in parts of our accelerated platform. I mentioned Narita, which is gaining almost a share point our Mexican business, we're also gaining 80 bps. Cream cheese business has sustained growth through the entire first half of the year. So those are business that we'll continue to see gain that momentum as we go into the second half of the year.

Carlos Abrams-Rivera:

Yes, yes. I think that -- if I think about how do I round up the items and accelerated platforms. There's probably two areas in which we feel like we also have to be focused on, and we are. One is on our Spoonable business in which we are, in fact, making sure that we are having the right brand price gaps against our branded competitors. So we are investing in new flavors and making sure we have renovating the package design on a Spoonable business. And in Mac & Cheese, as you saw from our slides, you saw us making sure that we bring in, again, new innovation, new shapes, new flavors, tie in now with Super Mario Brothers. So that idea of us being able to bring innovation and exciting into the Mac & Cheese business is part of us continue to see us improving the momentum of that business we go into the second half of the year which we know is a product that the families really care about in moments in which they're looking for value to feed their entire family.

Anne-Marie Megela:

Operator, we have time for one more question.

Robert Moskow:

Andre and Carlos, I think one of the concerns on Kraft Heinz stock is that all this great progress you've made on gross margin recovery might come under pressure over the next 12 months because you have to make some of these price investments and because volume has been weak. So maybe to address those, can you talk to -- what would gross margin have been in 2Q excluding some of these onetime issues like the plant closure and the other elements that maybe are more transitory? Could this have been an even higher number? And would that kind of give us confidence, therefore, that there's more room for gross margin expansion into 2025?

Carlos Abrams-Rivera:

The only thing I would build, Rob, is this idea was really changing the rewiring of the company, where we are all focused on driving efficiency because it's the fuel for us to drive profitable growth has now been embedded across the company. You see that with procurement, you see in operation, but you also see in marketing on us being able to have more efficiencies of how we go to market improving the return on investment. You see that in trade on how we apply AI to have better tools on how we actually have better investments and profitable ways in which we can embed our trade as we go into the marketplace. So it is not a one and done. It is something that we believe can be a sustainable strength for us as a company. And personally, I believe that having healthy gross margin is truly the key component of having a virtuous cycle of growth, and that is a big part of why we are so strong believers on a long-term algorithm for the company.

Anne-Marie Megela:

Thank you, everyone. Thank you for your interest in Kraft Heinz.

Operator:

Good day, and thank you for standing by. Welcome to the Kraft Heinz Company first quarter results conference call. [Operator Instructions] Please be advised that today's conference is being recorded.

Anne-Marie Megela:

Thank you, and hello, everyone. Welcome to our Q&A session for our first quarter 2024 business update.

Carlos Abrams-Rivera:

Well, thank you, Anne-Marie, and thank you, everyone, for joining us today. So before we begin our Q&A, I'd just like to provide some perspective on our top-up session here at Kraft Heinz, our consumers. And while we've seen a notable uptick in consumer sentiment in the first quarter, there is a gap between high and low earners continues to remain wide, and it shows a clear and continuing bifurcation. So the lower-income consumers are challenged with interest rates remaining high, gas prices elevated and savings dwindling. So there's a clear pullback of restaurant spend by these lower-earning households, especially in restaurants and convenience stores. These consumers instead are looking for value as they prepare more meals at home.

So for us, it's about having brands that are accessible and available to everyone. I believe we're well positioned to serve all of this consumer for three primary reasons:

one, because we are bringing innovative food solutions and faster than ever before; two, because we continue to renovate our core brands for today and tomorrow; and three, because we have the best team in the industry, full stop. We are on track to meet our goals of generating $2 billion incremental net sales from innovation, and the world has taken notice as we were recently named one of the world's Top 50 Most Innovative Companies by Fast Company. But more importantly, we are expanding the choices we offer our consumers so that they don't have to sacrifice, whether it's providing greater value through multipacks, plant-based options such as our newly released NotCo Mac & Cheese or expanded the choices in our iconic brands such as Zero Sugar Heinz Ketchup.

Andrew Lazar:

It looks like KHC is still losing share in North America Retail, though at a more modest pace recently. But in the ACCELERATE platform specifically, your remarks call out holding or gaining share in about 55% of this platform. I guess would you expect this percentage to be higher given the disproportionate allocation of resources to this platform?

Carlos Abrams-Rivera:

Yes. So thank you, Andrew, for the question. Before I get into the ACCELERATE, let me just at least give you a view of how I'm seeing so far the business performance. If you look at the last 5 weeks, just to remove the noise of Easter, we actually continued to see volume share improvement versus year-to-date, and we're holding dollar share at the same pace in the U.S. So that's at the macro level in the U.S. for our company.

Now to your question about ACCELERATE platforms. There's a couple of big brands that are in there that I would like to unpack a little more. If you think about our Mac & Cheese business, which is within the ACCELERATE platform, what you're going to be continuing to see is:

one, we are going to start lapping a lot of the headwinds from SNAP. Mac & Cheese was probably one of the more categories that were more actually impacted by SNAP. And as we go into Q2, beginning now in May, you'll see a plethora of new innovations from gluten-free to new options and flavors on our Mac & Cheese business as well as some new, exciting things for the category with some new SKUs that we're bringing in the second half of the year.

Operator:

Our next question comes from Ken Goldman with JPMorgan.

Kenneth Goldman:

All right. And if I could ask a quick follow-up. Just the increase in gross margin guidance, coupled with no other changes implies a bit higher SG&A than you previously expected. So just assuming that's accurate, are there any key areas in operating expenses we should think about that are maybe a little bit higher than planned, obviously, not a huge amount? Or maybe the plant shutdown is the primary, I guess, culprit here, so to speak. Just trying to get a little color there, if we could.

Operator:

Our next question comes from Bryan Spillane with Bank of America.

Carlos Abrams-Rivera:

Look, it's never 100% precise. We're talking about the macroeconomic model, but we estimate on the U.S. Retail business back in the range of a few hundred bps negative impact.

Andre Maciel:

I don't think so.

John Baumgartner:

Carlos, you highlighted consumer stress as a theme. And I wanted to ask in North America where the volume declines are still more pronounced, things like Mac & Cheese you just detailed for Andrew, but also catch-up in juices. These are categories where private label has been underpenetrated historically, and now you're seeing volumes growing a bit. Are you seeing anything different, whether it's new merchandising by retailers or new price sensitivity among consumers that's changing the dynamic in these categories at all?

Carlos Abrams-Rivera:

Let me thank you for the question. First on the private label, first of all, we are fortunate that we have such an iconic and beloved brands in our portfolio. And I think what you're seeing is that really, we haven't seen much of a change in terms of our overall gaps versus private label. And I think for us, the benefit that we have had is that over the last 2 years, we have spent a significant amount of energy and continue to renovate our portfolio. And today, we certainly have, in the U.S., renovated almost 100% of our portfolio to make sure that it continues to be relevant for today and tomorrow.

Stephen Robert Powers:

Carlos, in the prepared remarks, you talked about the unplanned maintenance that you had to take on one of your Away From Home plants. It seems that you've resolved that issue and you expect the impacts to be isolated to the second quarter. But maybe just a little bit more detail on what transpired there. Any kind of root cause diagnostic? And then just do you expect that to be a pretty quick bounce back in recovery in 3Q? Or is the recovery going to be more spread across the back half?

Andre Maciel:

Yes. So as we said in prepared remarks, production has resumed and is gradually going back towards the prior level. Not there yet, but production has resumed. And that's why I expect the impact to be -- we do expect production to be fully back on track within the quarter. And then the impact on top line, as we said, will be in the range of 50 to 100 bps to the total company growth, which is a function of how fast you can really bring the production fully up to speed.

David Palmer:

Two questions. First, a follow-up on Foodservice. What is your general Foodservice assumption going forward that underlines your mid-single-digit organic growth that you have planned for the year? Is that, that you basically expected that current trends industry-wide and globally will remain similar level that you saw in the first quarter or improving from there?

Carlos Abrams-Rivera:

Maybe, Andre, if you can comment on Away From Home and maybe I can build on the Oscar Mayer and beverage business.

Carlos Abrams-Rivera:

And then just going deeper on the Oscar Mayer and beverage question, David. But I would say, if you go back to our CAGNY presentation, those are businesses that are in 2 different portfolio roles within our company. So our beverage business is within our PROTECT business, in which we actually are allocating resources in order to protect the profitability through the renovation across those brands to drive the growth.

Operator:

Our last question comes from Robert Moskow with TD Cowen.

Andre Maciel:

Yes. First, as you said, the 50 bps that we mentioned in the prepared remarks should be clear, is linkage, the 50 to 100 bps expansion of plant shutdown and is focused on the second quarter. So we do not expect impact from that as we go into the second half. So as we head into the second half, as I said before, we do expect Emerging Markets to be fully back on algo. We do expect the U.S. Retail, North America Retail to continue to improve, like improve in Q1. We expect to improve more in Q2 and then more in the second half, like as a function, again, of lapping SNAP and a lot of contribution from innovation and renovation.

Carlos Abrams-Rivera:

Thank you, Andre. And on the retail trends, I guess, I'll go back to the point at the beginning, which is we are seeing volume share improvements versus in the last 5 weeks into year-to-date. So we are seeing that the momentum is happening already. And for us, what we are going to be doing is focus on those things we can control, which is as you go into the year to go, you'll see us continue to drive the renovation of our brands, like I mentioned, whether it's in our PROTECT platforms and ACCELERATE, which is driving more innovation, as you'll see now, begin now in Q2 and we continue to step up through the rest of the year. And then these margins are marketing investments.

Anne-Marie Megela:

And thank you, everyone, for joining us. This concludes our earnings call for the first quarter '24. Thank you.

Operator:

Good day and thank you for standing by. Welcome to the Kraft Heinz Company Fourth Results Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Anne-Marie Megela, Head of Global Investor Relations.

Carlos Abrams-Rivera:

Well, thank you, Anne-Marie, and thank you, everyone for joining us today. Before opening the call for questions, I just would like to say thank you to all my colleagues here at Kraft Heinz for delivering another solid 2023 results, and at the same time, making the strategic investment for the future. And frankly, all that while navigating some persistent industry pressures. I am very enthusiastic for our next chapter here at Kraft Heinz. And in 2024, we expect to drive top line growth, return to positive volumes, expand gross margins and operating margins and continue to reinvest in the business and an iconic brands. With that, I have Andre joining me today. Let's open the call for the Q&A.

Andrew Lazar:

Great. Thanks. Good morning, everybody.

Andre Maciel:

Good morning.

Carlos Abrams-Rivera:

Yeah. Good question, Andrew. Thank you for that. The math on Q4 to Q1 may be similar, but the factors driving it are very, very different. I think maybe, Andre, if you can give a little more color as to the effects of both the North America business versus the emerging market business and how that's shaping kind of the math behind the numbers?

Andrew Lazar:

Great. Really helpful. And then, Carlos, it seems -- like if I have this right, most of the pressure in the GROW platform in the fourth quarter was in Easy Meals. If I had that right, can you talk a bit about what caused that, and maybe how this plays out as you move into the first quarter? Because it sounds like you do expect North America to get better.

Andrew Lazar:

Thanks so much and see you all next week.

Operator:

Thank you. One moment for questions. Our next question comes from Bryan Spillane with Bank of America. You may proceed.

Carlos Abrams-Rivera:

Glad to. Let me start by clarifying something you said in your question. In our Foodservice business, we are growing both ahead of the industry in North America and International. So, I think that we actually feel very good about our performance on Foodservice, and we see that as we go forward into 2024. So, we see Foodservice growing up -- growing in 2024 in our long -- appropriate with our long-term guidance. So high single digits. So, we think actually it's going to be a continued driver of our performance as we go into 2024. And frankly, we see that us having even more coming as we go forward because we are not only performing well where we are, but we also are improving by getting into new higher margin channels like independent and non-commercial channels, plus driving big innovation, leveraging our technology, leveraging the iconic brands that we have. So until now, we have seen the beginning of the potential of Foodservice and that is actually driving faster growth than we have seen in the industry. And we actually believe that between the innovation that we have between us going into new channels that are higher margin and more attractive, we can actually make that even a faster growing part of our portfolio as we go forward.

Carlos Abrams-Rivera:

Let me just say, I think you are looking at the slide incorrectly, and happy to follow up with you …

Carlos Abrams-Rivera:

Thank you.

Stephen Powers:

Hey, thanks. Good morning, everybody.

Stephen Powers:

Carlos, I guess stepping back, I'd just like a little bit more detail on your conviction surrounding improve total portfolio volume trends and presumably volume share trends and a return to growth as you progress through '24. Because on the one hand, I understand drivers that you talked about in your prepared remarks. On the other hand, we're coming off a quarter that saw you tweak organic growth expectations lower coming into the quarter and then effectively undershoot those expectations when the dust settled. So, I guess, again, what gives you the confidence that we're not only leveling off, but we're approaching a level that where we can return to growth without, I guess, incremental investment in promotions and price because it doesn't seem like that's part of the outlook.

Stephen Powers:

Okay. Okay. Very good. Very good. Thank you. And then Andre, if I could, there was -- the free cash flow conversion this year improved as it was expected to. So that's a positive. I guess, just as we look into '24, how are you thinking about free cash flow conversion in the New Year. Can we expect further improvements? And if not, either way, I guess, what are the drivers of free cash flow progress as we go forward? Thank you.

Carlos Abrams-Rivera:

The one thing I would add too is as we go into -- those of you joining us in CAGNY, we'll be able to unpack to a little more of our investments we're making. I mentioned quite a bit about innovation, about how we are going to continue to invest in our brands, making sure they are superior to our competition. So I think you'll see a little more details that from myself and the team when we're together in Florida.

Carlos Abrams-Rivera:

Thank you.

Ken Goldman:

Hi. Good morning. Just curious, there's some early indications that maybe as an industry, quick service restaurants, seeing some fraying at the edges in terms of consumer demand, mainly under the weight of higher prices. I'm just curious if this is something you're seeing as well. And to what extent, if at all, does your outlook maybe potentially factor some kind of slowdown there.

Ken Goldman:

Understood. Thank you for that. And then the gross margin increase you're expecting this year despite a little bit of lingering inflation. Can you just remind us what some of the key drivers will be of that? Is it simply a continuation of would help 2023 in terms of COGS efficiencies and some revenue growth management assistance?

Ken Goldman:

Great. Thank you.

Operator:

Thank you. One moment for questions. Our next question comes from Pamela Kaufman with Morgan Stanley. You may proceed.

Carlos Abrams-Rivera:

Good morning, Pamela.

Pamela Kaufman:

I was hoping that you could double click a bit into the drivers behind your Q4 results in North America and how you're thinking about those factors going forward? You pointed to weaker consumer demand, but also discrete headwinds like the inventory deload and lapping the trade accrual. So, how are you thinking about North America consumer demand in '24? And can you explain what drove the one-time dynamics? Was it a specific retailer or specific categories where you saw a deload? And maybe you can explain the effect of the trade accrual. Thank you.

Andre Maciel:

Sure. So North America net sales declined 3%, and approximately 140 bps is linked to the trade accrual release from last year into -- probably 2022 and from inventory deload year-over-year. But in fact, it's not that we saw a deload happening in 2023, that in Q4 2022, as we started to recover, services start to ship ahead of consumption. So we are lapping that effect. So there's nothing really on that regard affecting 2023, it's just a lapping effect. Now the sellout was negative, and it was softer than what we anticipated. We underestimated the impact of SNAP in Q4. It turned out to be more than 150 basis points stronger than we thought. If you remember, there was a concentration of emergency allotments at the end of 2022. So, on a year-over-year basis, there is benefits declined close to 40%, which is substantial. And that's what affected a lot of sellout. We should continue to see some of that in Q1. So, on a year-over-year basis, Q1 '24 will still be about 20% less SNAP than last year. So, we're still going to suffer a portion of this effect. But on the other hand, our market share has improved in Q4 as we anticipated, which is a very good sign. We are living -- exiting the year with the best share performance of 2023. So that give us a lot of good momentum heading into this year. Hope that helps.

Andre Maciel:

Yes, Absolutely. Yeah. Because there is a concentration of emergency allotments considered in Q4 of -- in '22. So, there is SNAP a benefit in Q4 '22 were actually higher than Q2 and Q3 2022.

Andre Maciel:

And this itself is not a surprise. I mean, we just underestimated the elasticity of that.

Andre Maciel:

Okay.

Robert Moskow:

Hi. Thanks. A couple of questions. Those of us analyzing your commodity exposure see a lot of deflation running through on the ingredient side, maybe even the packaging side. And your guidance is for inflation to be positive. Can you walk through some of the components that we can't see, maybe it's conversion costs or things like that, that make this a -- continue to be an inflationary year? And then my second question was, you have a $25 million write-down for, I think, systems related to your modernization efforts. Can you go into a little more detail as to what caused that write-down? Thanks.

Robert Moskow:

Okay. Thank you, Andre.

Operator:

Thank you.

Operator:

Thank you. And our last question comes from John Baumgartner with Mizuho Securities. You may proceed.

Carlos Abrams-Rivera:

Good morning.

Andre Maciel:

Great. So thanks for the question. As we said, 2023 are very solid year. We delivered close to 4% of efficiencies as a percentage of COGS. And we do expect 2024 to be another year where we will be delivering ahead of the 3% COGS that we have outlined. I want to make sure that you understand that not only this is a consequence of the complete ways of working changes that we have done in supply chain, more focused on variable costs and continuous improvements. But also we are -- we still have some efficiency opportunities that are coming through as a consequence of the pandemic and all the inefficiency generated by that. That helped in 2023, and that is still going to help a little bit in 2024. But beyond that, there are a lot of things happening on the supply chain space, difficult to name only one because given the share size of our COGS, but we do have initiatives coming from network optimization in the U.S. We have a very complex distribution center network, more than 80 distribution centers overall. We do have initiatives in automation. In fact, we have a very strong partnership with Microsoft trying to do -- using technology to allow us to make faster decisions. And if that improves labor usage and reduce yield losses. We have a lot of opportunities on value engineering to continue to make sure to offer the right type of attributes to consumers. So, there is a lot of different levers. We're going to touch on a few of them next week in CAGNY, but I think we are very pleased with the quality of the pipeline we have in supply chain now.

John Baumgartner:

Okay. Thanks for that. And then just quickly on international. The emerging markets vol mix was pretty solid in Q4. But I'm wondering if you can speak to the vol mix in the developed markets, what you're seeing in Europe from category performance, private label competition and the consumer dynamics there sort of giving you confidence in the international guide for 2024. Thank you.

John Baumgartner:

Thanks Carlos. Thanks Andre.

Operator:

Thank you.

Operator:

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

Anne-Marie Megela:

Thank you, and thank you, everyone for your interest. We look forward to seeing you next week.

Operator:

Good day and thank you for standing by. Welcome to the Kraft Heinz Company Third Quarter Results Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Anne-Marie Megela, Global Investor Relations.

Miguel Patricio:

Well thank you, Anne-Marie, and thank you all for being with us today. And before opening the call for questions, I just would like to thank Kraft Heinz, my entire team for another great quarter. And again, I would like just to highlight some positive aspects about this quarter. We are generating accelerated profitable growth fueled by our three pillars. Our share and volume trends are improving as a result of the action plans that we are implementing. And we continue to strengthen our balance sheet, hitting our target net leverage of approximately 3x. And then we continue to invest in the future with another quarter of significant investments in marketing, technology and R&D. Well, with that, I have here with me today, Andre and Carlos. And so, let’s open the call for the Q&A.

Andrew Lazar:

Great, thanks. Good morning, everybody. In Slide 33 of the slide deck this morning, you call out branded promotional activity is still below ‘19 levels, and Kraft activity is below branded. So one clarification, Is the branded figure you highlight all food categories, or just the branded players within Kraft Heinz’s categories? And then I guess based on your plans for the remainder of the year and looking into ‘24, I guess how would you anticipate these metrics shifting? Do you expect branded promo levels to return to historical levels? And would you expect Kraft Heinz to narrow the gap versus branded? Or how do you see those metrics moving from here? Thanks so much.

Andrew Lazar:

Thank you.

Peter Galbo:

Hey, guys. Good morning. Thank you for taking the question. I guess just in North America, on the volume piece, there is a fair amount of discussion both in the prepared remarks around kind of meats being a drag this quarter. And you discussed a bit about how you’re giving up maybe some volume to maximize profitability and gross margins. But then you also kind of discussed how service levels aren’t where you want them to be, particularly in sliced meats, and you’re expecting improvement on that going forward. So I guess the question is just what should we be taking away from those comments? Are you kind of continuing to scale back on volume and focus on the profitability there? Or should we think about a volume share recovery and maybe some headwinds to the margin mix that come with that, particularly as we think about North America volume? Thanks.

Andre Maciel:

I will just add that in our long-term algorithm, volume is important to us. So in our 2%, 3% growth, it comes from a balanced contribution between price and volumes or volumes there, but as Carlos said, we are seeking profitable volume growth. We are not trying to maximize gross percentage margin, we are trying to deliver profitable, sustainable growth, ultimately translating to sustainable EPS growth. Thanks for your question.

Operator:

Thank you. [Operator Instructions] Our next question comes from John Baumgartner with Mizuho Securities. You may proceed.

Carlos Abrams-Rivera:

Andre, why don’t you start here, and I can build.

Carlos Abrams-Rivera:

The only thing I would add is that even in – if you think about our cold cut business within our meat business, we have continued to improve our CFR, but that is the one area where we’re still not at the right level of service that we want for the year. You’ll see that progression. At the same time, as we have improved our service, we have also began to see improvement in our share, too. So if you look at month to date as well through October, we are seeing that, in fact, our cold cuts business are beginning to gain share. So we are just going to be looking at the category in a very disciplined way to make sure we’re doing the right things, as Andre said.

Carlos Abrams-Rivera:

Fair questions, John.

Stephen Powers:

Great. Thank you. Good morning. I wanted to shift gears, if I could, and talk about the momentum you have in both Foodservice and Emerging Markets and just get your perspective on your confidence that momentum can continue and perhaps how the organizational changes that you announced today internationally might contribute to that momentum as we go forward. And also Andre, if you could, if I could tack on a second question, just now that leverage has dipped below that target level of 3x, just wondering how you’re starting to think about prioritization of cash going forward. Because the cash generation has been good, I presume cash will build and just think about how you’re thinking about allocating that cash going forward. Thank you.

Andre Maciel:

Sure. So on capital allocation, our priorities remain unchanged. That means continue to fund our very competitive dividend, maintain investment grade and prioritizing organic growth like we have been consistently doing during the past 3, 4 years. We are very proud that we were able to get to this level of leverage 1-year ahead of our initial expectation, and that’s very important. That shows that the business is strong and the organization is focused on delivering sustainable performance not only on the EBITDA side, but also in cash conversion, which is a remarkable improvement of this organization. And now I think that puts us in a very good situation to assess options to deploy this cash, and we are looking at those.

Stephen Powers:

Thank you.

Ken Goldman:

Hi, thank you. Just a quick one. In your slide presentation, from the prior quarter 2Q, you mentioned that you were expecting positive volume growth in 2024. I may have missed it, but did you reiterate that today in either of the slides or any of your commentary?

Carlos Abrams-Rivera:

In fact, I think everything that we’re seeing right now in the market, in our actions are working. And it just gives us more confidence as we think about our 2024 plans.

Andre Maciel:

I am not going to give guidance for 2024 right now. What I just said is what we have been saying all along.

Michael Lavery:

Thank you. Good morning. I know we have covered maybe a little bit just on the volume and how to think about its role in the portfolio side, but I want to just come back to one specific piece. You have talked about your approach and being disciplined and rational. But in your prepared remarks too, you also specifically said that in cold cuts, you are investing to hit the right price points. Can you just maybe unpack that a little bit and reconcile how those two go together and what exactly you mean by those investments on the price side?

Michael Lavery:

And so some of what you are saying would be the depth of the promotion is part of how you want to make the investments on price points, but the discipline is the depth of that and not to push it too hard, would that be a right interpretation?

Michael Lavery:

Okay. Thanks so much.

Operator:

Thank you. [Operator Instructions] Our next question comes from Jason English with Goldman Sachs. You may proceed.

Carlos Abrams-Rivera:

First of all, Jason, thank you for the kind words, and I am certainly very much humble and excited about the opportunity ahead for me and for the company. What I would say is that, as you pointed out, I have been sitting next to Miguel for the last almost 4 years now. And I think a number of things that we have done as a company, we certainly have done together. And strategically, I think that I am certainly committed to the three growth pillars that we have for going forward that is – and think about also how do we continue to drive our expansion in emerging markets, how do we continue to see foodservice as a great growth for us and then the growth platforms within our U.S. business. At the same time, you also probably read some of the changes we are making in our structure in order to actually help us accelerate some of those things that we have done. For me, one of the critical aspects of this time when I have been transitioning as – and coming to the new role in January, has been listening to the organization and making sure we have the clarity of our strategy. And our structure is going to follow that clarity. So, some of the things you will see in terms of us being able to have a bit of breaking down the international zone which has worked in the past well for us, but now as we go into a new way of us growing, allows us to be a little more focused on those emerging markets in which we are going to make some additional investments. That, I think is part of us thinking differently about how we bring that structure and so that strategy to life in our structure. So, that’s I think some of the things that you are going to see, is what are the places that – with the lens of the jobs to be done for the strategy of the company, that we can maybe arrange certain things where we can truly leverage the scale of the company, the scale that we have been investing behind our technology and our marketing capabilities and to deploy them against the three pillars strategically that I am very much aligned with.

Carlos Abrams-Rivera:

As Andre said earlier, we continue to look at opportunities, but I would say that’s something that is part of our ongoing thoughts about how do we continue to see the active view of our portfolio. But there is nothing today that I would say that we will be announcing. Andre, anything else you would add?

Jason English:

Understood. Thank you very much.

Operator:

Thank you. [Operator Instructions] Our next question comes from Matt Smith with Stifel. You may proceed.

Carlos Abrams-Rivera:

Maybe, Andre, if you could speak to our efficiency plans?

Matt Smith:

Thank you, Carlos and thank you, Andre.

Anne-Marie Megela:

Operator, this will be the last question.

Robert Moskow:

Hi. Can you hear me now?

Robert Moskow:

Sorry about that. So, this is kind of a what-if question, and maybe you might not want to ask – answer what-if questions. But we are all watching top line growth kind of decelerate in the U.S., and the U.S. retail is such an important part of your mix. So, I guess my question is, if we are in a scenario where we are kind of in a 0% to 1% kind of sales growth environment next year, just for your categories, what would your philosophy be on an EBITDA basis? Like would you still drive to drop savings to the bottom line to hit the mid-single digit EBITDA, or would a slower top-line environment necessitate a slower EBITDA growth kind of target?

Robert Moskow:

Okay. Thank you.

Operator:

Thank you. I would now like to turn the call back over to Carlos Abrams-Rivera for any closing remarks.

Operator:

Thank you. This concludes today’s conference call. Thank you for participating. You may now disconnect.

Operator:

Good day and thank you for standing by. Welcome to the Kraft Heinz Company Second Quarter Results. At this time all participants are in a listen-only mode. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anne-Marie Megela, Head of Global Investor Relations.

Miguel Patricio :

Well thank you Anne-Marie and thank you everyone. Thanks for joining us today. Before opening the call for questions, I would like to thank the entire Kraft Heinz team. We have proven again that our strategy works, generating top-line growth fueled by the three pillars, while reinvesting margin gains into the business. But while we did lose share in the quarter, as price gaps have stayed wider for longer than we would have liked, we are managing the business for the long term and still generated mid-single-digit top-line growth within the range of what we expected. As you may remember on the last earnings call, we introduced four action plans to drive share. We have seen those plans take hold, and they have led to improving results each month within the quarter, building momentum into the second half of the year. The continued execution of these action plans and the lapping of last year's pricing are expected to drive improving volume trends in the second half of 2023 and into 2024. Our results give me continued confidence in our strategy and in our business, and I'm pleased to reiterate our full year guidance. With that, I have Andre and Carlos joining me. Rafael [ph] is on a well-deserved vacation with his family, so let's open the call for Q&A.

Andrew Lazar :

Great. Thanks so much. Good morning, everybody.

Miguel Patricio:

Good morning, Andrew.

Miguel Patricio:

Good morning, Andrew. Thanks for the question. I will ask Carlos to answer, since I believe it's related to the U.S. retail.

Andrew Lazar :

Great. I'll pass it on. Thank you.

Operator:

Thank you. One moment for questions. Our next question comes from Ken Goldman with J.P. Morgan. You may proceed.

Miguel Patricio:

Thank you, Ken. Andre please?

Ken Goldman :

Okay, I'll follow-up on that. And then I wanted to ask a follow-up about capital allocation priorities. Paying down debt is I think number three on that list, ahead of portfolio management. You highlighted that leverage is I guess more or less at your target. Does debt pay down thus move down a notch in importance, and I guess what I'm getting at is, is there a scenario in which you might, maybe start to buy back some stock again?

Ken Goldman :

Thank you.

John Baumgartner:

Good morning. Thanks for the question. I wanted to stick with North America and the comments on promotions, but more so on delivery. Is there – Carlos, you highlighted the ROIs you're seeing and you touched on the quality promos a bit, but to dig inside a bit more deeply versus history, how are you seeing the lift sort of changing from quality promo programs, the feature, the display relative to the pre-inflation era? Are you seeing a greater role for price reductions going forward? Does quality programs still have the same degree of lift in terms of the influence of those drivers? Just trying to get a sense for, as you lean into promo more in the back half and programming, does pricing need to be a larger driver at the margin than you would have thought relative to feature and display a couple of quarters ago?

John Baumgartner:

I apologize for my connection there, but just to clarify, if we think about price promotions versus sort of non-price, the quality, the feature, the display, have you seen any sort of changes in terms of how deep you may have to go on price reductions going forward or do you think that kind of quality promo, you'll still see attractive lift? You don't really have to get deeper on pricing.

John Baumgartner:

Okay. Thanks for your time.

Operator:

Thank you. One moment for our next question. Our next question comes from Bryan Spillane with Bank of America. You may proceed.

Miguel Patricio:

Good morning.

Miguel Patricio:

Andre?

Bryan Spillane :

Okay.

Bryan Spillane :

Okay. And then second question, and I guess maybe this is related to what John Baumgartner was just asking, but maybe just more simplistically, I think coming out of the first quarter, you talked – and this, we're talking about North American retail, that one of the issues or one of the drivers of share losses was just price gaps, right? That competitors, whether it's private label or branded in certain categories hadn't followed your pricing. And so I guess I have two questions. One is, have price gaps narrowed or your share gains that you've seen sequentially over the last couple of months happened without the price gaps closing? And then when we think about your – the comments about the expectations for volume growth in ‘24, right, is that dependent also on kind of normalized price gaps? I guess what I'm trying to understand is like, can you drive volume without those price gaps closing, because you really can't control what your competitors do.

Carlos Abrams-Rivera:

Yes Brian, what I would add is that, first of all on the comment on private label. Private label shares trends actually have been flat since you looked at it. In fact since second half of 2022, even with increasing price gaps that we had after our price impact in February. So we have taken that pricing to protect our margins, and some branded competitors have not followed, but at the same time, we continue to stay diligent on the way we think about the business. Now, in the points that Andrew just mentioned, in terms of – as we think about going forward, why is it that we see the moderation of our improvement? I'll give you three reasons on the way kind of I look at it as we go into the second half of the year into 2024 in the U.S. retails. You know number one, we're investing more in marketing, we're launching more innovation, and we are lapping the pricing actions as we go into second half of the year. And just to unpack it one more level, if you think about the innovation that we are seeing right now, we are actually building momentum as we go into the year, as we are following this kind of two-pronged strategy innovation. First, you're going to see us continue to launch more disruptive innovation platforms, and that includes things like our NotCo line of plan-based offerings, the new Crisp from the Microwave, which delivers great taste and all the convenience, and the restaurant-to-retail platform, and you see that already with things like the IHOP® Coffee line. The second part of the innovation is also how do we take our existing brands into new spaces. Already, we introduced a new frozen Mac and Cheese. We are expanding our Delimex and Taco Bell into more spaces with the Mexican meals, and as we speak, we're also launching new Oscar Mayer scramblers as we continue to expand on the Brexit platform. So you see, it's comprehensive in terms of how we are approaching innovation in order to continue to shape the categories as we increase its shelf space and quality display as we go forward, and that's already paying us. And in fact, just to give you a factoid, if you look at our Lunchables, we are creating a new golden wall in Lunchables as we go into a second half, and we are seeing that in some of our top customers that increases about 40% our space within the shelf. So again, it's not only thinking through the kind of promotional event, but also what we're doing in terms of our driving, volume-driving activities that are important as we go forward.

Pamela Kaufman :

Hi! Good morning.

Andre Maciel:

Good morning.

Miguel Patricio:

Let me start with the – thanks for the question. Let me start with the second part of that, which, what we're seeing right now is – if you look at the second quarter and what we know today, we believe retail inventory is actually in pretty good shape. In fact, on average, retail inventory for us was flat across the North America business, and what did happen, it was in truly isolated pockets and earlier in the quarter, so that we actually saw that through the quarter it continued to improve, and so there's no – I don't see that as an ongoing situation as we go forward and that has been proven as we go through the quarter, so. And I'm sorry, the first part of your question then was what?

Miguel Patricio:

Yes. No, thank you. You know, I think if you look at our GROW platforms, which continue to drive our priority and our strategy, those actually in consumption remain very strong. I think if you think about Taste Elevation growing 8% for the quarter, Easy Meals growing 6% in the quarter. In those cases, the difference between organic and our consumption were specifically in Easy Meals, where there was an inventory de-load in the beginning part of the quarter that as I said earlier, it continued to improve as we go into – as we go forward. And I think for us is, that remains – our strategy remains – the fact that the consumption continued to improve as we go through the quarter and the performance we saw in those, I think supports our continued focus on that strategy as we go into the second half of the year.

Miguel Patricio:

Thank you.

Andre Maciel:

Yes. Look, our price – our price in Q2 as you saw was close to 11%, and the reason why we saw higher elasticity and higher volume decline as I said before is because of the expanded price gaps. Now moving forward, these price gaps are not getting worse. If anything, they are slightly getting better. So as you head into the second half, as we continue to lap price, we still have valuable price that happened last year, so that you're going to be lapping starting now in Q3, and even we had another round that implemented Q4 last year. So we have two rounds of price still to lap in the United States alone. So beyond the pricing side, there are other things linked to our action plans that will help us to step up the share level that we are at today. I think Carlos can speak about that.

Andre Maciel :

So volume expected to improve as a function of lapping prices from last year. We still have two rounds to lap. Innovation ramping up. Shelf resets in the fall. That I think would be favorable to us, that's the expectation and service level recovery, particularly in cold cuts.

Operator:

Thank you. One moment for questions. Our next question comes from Cody Ross with UBS. You may proceed.

Andre Maciel:

So commodities in general continue to come down, and as hedges roll off and our contracts get adjusted, some of them are based on indexes. We are seeing costs continue to move favorably, which has been allowing us to expand the gross margin, and by consequence has been allowing us to accelerate the investment behind the business, particularly in marketing, R&D and technology. [Cross Talk]

Andre Maciel:

That are declining?

Andre Maciel:

I don't think there is a particular one. I mean our portfolio is large, there are so many commodities in the business. There is a general movement of commodities coming down. The exceptions to that sale are tomato, potato, that have bad crops, and sweetness. Other than that, we are seeing generally commodities moving favorably.

Andre Maciel:

No. I would say…

Andre Maciel:

And the only thing I would say is remember that we never get to be very systematic in terms of pricing to offset the inflation, and that's what we have done. We have no price ahead of inflation. If you look at our gross margin in Q2, it's still slightly below 2021 levels. And the other thing that is worth mentioning in the gross margin, we showed that in prepared remarks. Our efficiency plan is trending very well, and we are ahead of – we are pacing ahead of the $500 million that we have said we’ll deliver by the year, so another good news.

Andre Maciel :

And I expect that people noted the difference as well, how they are operating, because we have been intentionally opting to use those resources, to put back in the long term behind marketing and technology. We could have opted to be adding more promotions, but that would not make sense, because we’d be adding promotions to low return. We are thinking about the long term here. I hope people note the difference of how they are being – they are getting the big base very different.

Miguel Patricio:

I just want to thank you all for the time and for the attention and the patience with us. So thank you so much, and hope to talk to you and to see you very soon.

Operator:

Good day and thank you for standing by. Welcome to The Kraft Heinz Company First Quarter Results. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] And be advised that today's conference is being recorded. I would now like to hand the conference over to Anne-Marie Megela, Head of Global Investor Relations. The floor is yours.

Miguel Patricio:

Well, thank you, Anne-Marie, and thank you, everyone, joining us today. We are proud, proud and confident. We are so confident that we are raising our guidance on EBITDA and earnings. We are so confident that we are increasing our investments in marketing and in R&D by $100 million to $150 million versus budget, which represents a solid double-digit growth versus previous year. These results are not a coincidence. They are because of our confidence. We have been consistently saying that we'll grow through emerging markets, and we grew 23% this quarter. We'll grow throughput service globally, and we grew about 29% this quarter, and we'll grow through our priority growth platforms in U.S., Easy Meals and Taste Elevation, where we had double-digit growth. The rest of the portfolio has to free up resources to invest in our strategy. These results are possible not only because of our strategy, but because of everything that is behind our strategy. Let me start with people. Today, we have a great team and very engaged team. Speed. Well, agility is a big word for us and the products that we have in place are transforming the company. In innovation, in supply, manufacturing, procurement, in sales, in logistics. And two good examples of that is innovation, where we have now a much stronger pipeline for the future and we reduced the time of innovating from three years to a couple of months, or in supply that through the pods plus the partnership with Microsoft and the usage of artificial intelligence, we are improving our planning, our service levels, reducing waste, reducing times. We are in a very different place today. And finally, efficiencies. When we announced 3 years ago, a $2 billion in 5 years of gross savings, there were a lot of people that were skeptical that represented $400 million per year. We not only delivered this number in 3 years in a row, but we are now increasing this bar to $500 million a year. With that, I have here with me today, Andre, our CFO; Carlos Abrams-Rivera, our Zone President for North America; and Rafael, our Zone President for International that are joining me. Please, we are ready for the Q&A.

Bryan Spillane:

I just wanted to ask, I guess, two questions related to the U.S. One is, I think as we kind of strip out the foodservice piece and look at what's underneath, it looks like there's a bit of a dismatch or mismatch, I should say, between kind of what we were seeing in the Nielsen data and what would have been reported underlying. So just trying to understand if there was anything there relative to timing of shipments or promotions that might have affected the cadence? And then, second, if you can just talk a little bit about in the U.S. specifically, kind of how you're seeing the promotional activity or the promotional environment as we kind of head into some of the big summer holidays? Is it intensified? Is it kind of in line with your expectations. Just kind of how you're seeing those summer holiday setup, please?

Andre Maciel:

Look, when you look at the U.S. performance, I don't think there is nothing out of the normal happening in the quarter. The inventory load was immaterial given where already ended at the end of Q4, as we said before. So it's really a function of the sell-out and the foodservice, which performed very well in the quarter in the U.S. zone. So maybe people underappreciated a little bit of impact of that. I believe it has something to do also the fact that last year, with Omicron and things, everything was shut down. So that impacted the sellout in retail across in the industry at the beginning of the quarter, but also helped a lot of foodservice to have a very strong performance. When it comes to promotions. As we have said all along - well, it has all along, we expect an increasing promotional year to go. That's what has been in the guidance to the plan from the beginning, so nothing changing there from that regard. Obviously, not prudent way and always emphasizing that well for 2019 levels. And you see in remarks [ph], how well we are doing in terms of continuing to improve our ROI with the tools that we have in place. And so I will give some color to pass over to Carlos to give some color on the promotional environment.

Rafael Oliveira:

It's not very different than what you described Carlos. I think, and what Andre mentioned, you might see a bit of an increase. We will see a bit of an increase in some marketing and promotional activity through the year to go, but nothing significant that is not included in our guidance.

Andrew Lazar:

I think you outperformed expectations, obviously, in the first quarter on organic sales growth and maintained the full year outlook, I guess, potentially implying slower go-forward trends maybe than originally planned for. Is there something you're seeing in the market that necessitates this adjustment? Or is this more a function of sort of conservatism? And I appreciate the fair outlook is already above your sort of long-term algorithm?

Andre Maciel:

So there is nothing that changed expectation. We are holding the guidance in top line. And if I look at versus what I believe market was expecting, we over delivered quite a lot in the international zone, which I think people still -- they don't fully appreciate the impact of emerging markets growth in our portfolio and the food service portion of the international market on portfolio as well. They've been performing extremely well, as Miguel indicated and they continue to do. So momentum is very solid. When it comes to the U.S., nothing changes in our internal expectations. We just see that at this moment is good to be prudent. It isn't macroeconomic uncertainties about interest rates and our consumers might expand on that, but nothing special.

Ken Goldman:

There's been some anecdotal evidence that consumers are beginning to trade down in terms of where they're doing their grocery shopping, either going from premium channel to more mainstream or mainstream to discount. I'm curious if this is something you're starting to see as well, even if it's just on the margin. And if so, is it in any way, I guess, informing your decisions about product mix, new products, things like that?

Andre Maciel:

So as you have seen since last year, the channel migration has started. So we don't see like a normal accelerated trend over that. We have seen consistently now for several months, there's the other channel and the mass merchandising gaining ground consistently. And as this is not a new phenomenon, we have been prepared for that for a while. So I'll pass to Carlos to talk about the panel activities we are doing in those channels, but we don't see anything abnormal happening. If anything, it's expected.

Operator:

Thank you. One moment for our next question, please. And it comes from the line of Jason English with Goldman Sachs. Please proceed.

Andre Maciel:

Sorry, Jason, could you repeat the question talking about the trajectory of the gross margin throughout the year?

Andre Maciel:

No, the gross margin, we've increased a little bit throughout the next quarter. So we should see Q4 will be the highest one. Q2 goes a little bit sideways that is a component of mix in our portfolio as well, given the type of products that sell more during Q1 and Q4 in comparison to last sold in December. But beyond that, no, because the costs are continued to ease. We put a lot of price in the middle of the quarter. So we have two reflection of that now in Q2. But remember as well, and then I'm going to talk to that something from next year, right? But no, the gross margin will gradually increase throughout the year. And expectation is a little bit because of product mix, which is not seasonality.

Andre Maciel:

Yes. So free cash flow, as we said last quarter, we expect this year to close in the 75% to 80% range, which is in line with our plan. We even talk about that in CAGNY. And then, we expect by 2025 to go up to 100%. This has to do mainly with the CapEx ramp-up that we have done this year and next year, which is close to 4% and then expect to wind down. Working capital was a drag last year and in Q1 was also a negative. We prioritized service-level recovery because I mean, the payback is obviously there. What I can tell you is we have a very robust plan, very robust plan to bring the inventory down to level before. We have been working with buffers. I mean, as everybody in the industry does, given other circumstances about supply chain volatility and resilience. But we have a very clear line of glide path to break it down throughout the year. So the expectation for inventory is to land the year at similar levels to very well the pre-pandemic level as a percentage of COGS.

John Baumgartner:

I wanted to come back to promotion in the U.S., Carlos. There were a few categories that drove the bulk of U.S. share loss in Q1. But I think those are also categories where your promotion levels really seem below branded competitors. So is it fair to isolate the share losses to reduce promo and lingering supply chain issues? Or are there other factors employed outside of promo and supply chain?

John Baumgartner:

Okay. Thanks, Carlos. And on the international side, your categories, I guess, historically, your category has been pretty defensive in terms of demand or economic weakness. And I'm curious, if you're doing a lot of good things, ramping distribution, launching new products. But as you transform the business with growth in food service, the new sauces, the BEES partnership with ABI, how do you think about the marginal structure? Are these new outlets and products introducing greater volatility into the business? Or do they benefit you and that they reduce some of the impact of private label and price sensitivities in places like the U.K. and Europe. How do you think about the net resilience you're building outside the U.S.? Thank you.

Rafael Oliveira:

Yes. Well, happy to. I think we need to differentiate a bit how we're growing in emerging markets and the developed markets across international. I think I mean, what you described probably applies a lot to the developed market because as you know, has been talking about, across emerging markets, we are growing significantly and the go-to-market and the opportunity having execution of this go-to-market has been significant and continues to be. On the developed market, I mean it's a mix. I mean we've been renovating our portfolio significantly in all the base specialty mentioned Europe. And then launching the products that have been incremental, not only in [indiscernible], Easy Meals category. Like those are the two platforms that we've been growing, especially the sauces of Taste Elevation. So this has been the focus. I mean right now is delivering the results that we expect and again, providing the gains that we need and the resources from the core and the innovation growth that comes from those introductions.

Miguel Patricio:

Let me mention one thing that you said that you mentioned that entering new categories with innovation, you're right. I mean we launched in U.K. Heinz pasta sauce. And in a couple of months, we achieved 7% share, and we continue growing. We just launched a vodka pasta sauce with Absolut that is being extremely successful in the market. But it's not only in Europe. I mean if you look at the profile of innovation that we are having right now in the U.S., it's very different from the past. In the past, we had a lot of innovation but really not incremental, it's very cannibalistic. I just think about what we've been launching, like NotCo that we are going to -- it's going to be national during the summertime. It's basically 80% incremental to the category or just spices that we just launched in the U.S. through direct-to-consumer, which is spices, which is a huge market where we don't play today. Our Tingly Ted's that we are launching globally throughout the year that is in hot sauces that is a pretty growing category that we will not play or even Kraft Mac & Cheese frozen that we are launching, that we are a leader with Kraft Mac & Cheese. We have a very strong portfolio of frozen, but we didn't have an option of Kraft Mac & Cheese frozen. And I can continue this list and tell you about Home Bake and increased Home microwave, really, really incremental innovation that will start to change the profile of innovation in our company.

Operator:

Thank you. One moment please. And the question comes from Stephen Powers with Deutsche Bank.

Miguel Patricio:

Andre, maybe Carlos then.

Carlos Abrams-Rivera:

Just a minute. Not much to add. What I would say is, we continue to see the improvement in service level. So just to give you a kind of a framework last year. I think at this time of the year, we were kind of in the mid-80s. In the mid-90s actually closer to the high levels of 90s, so as we exit the first quarter. So I feel like we do have a couple of categories that I mentioned earlier, where we had some isolated challenges. But overall, the business we are sectoring the right trajectory to continue to service the business the right way as we go forward.

Miguel Patricio:

All right. I just want to thank you for the time you spent with us and looking forward to sharing more information and more results with you. Thank you so much.

Operator:

Good day, and thank you for standing by. Welcome to The Kraft Heinz Company Fourth Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I'd now like to hand the conference over to your speaker today, Anne-Marie Megela. Please go ahead.

Miguel Patricio:

Thank you, Anne-Marie, and thank you, everyone, for joining us here today. Let me first take a moment to say, how proud I am of Kraft Heinz team. We have come so far on our transformation journey. It's quite amazing. And the fourth quarter was no exception. You can see the momentum building across our business, service levels and market share trends are improving. Base volumes are positive. We are outpacing the competition in foodservice and emerging markets and by a lot. And importantly, we continue to invest for growth. Once again, we have unlocked efficiencies over $400 million this year, and this allow us to invest in new tools and capabilities for our teams, a new product innovation for our consumers. From a pricing perspective, 99% of all needed pricing has already been announced for 2023. As we look to the rest of the year, we have no current plan to announce new pricing in North America, Europe, Latin America and most of Asia. I am very optimistic. I'm very excited about how we are positioned to deliver long-term sustainable growth. With that, I’ll ask Andre, Carlos and Rafael to join me. So let's open the call for the Q&A.

Andrew Lazar:

Great. Thanks. Good morning, everybody. Your EBITDA guidance for fiscal '23 excluding the impact from the 53rd week is actually in line with your long term algorithm. And when you detailed this, I guess at CAGNY a year ago, you sort of I think said it would take multiple years to reach this level of growth. So I guess in this regard, I'm trying to get a sense of whether -- if I have this right, whether you are ahead of schedule? And if so, what you attribute it to? Like, what's gone better or faster maybe than you anticipated? And I guess most importantly, are you in a place where you see this level of growth now as more sustainable? Thank you.

Andre Maciel:

Sure. Hi, Andrew. Good morning again. And thanks for the question and thanks a lot for noticing it. In fact, we feel very proud about what we have been achieving as a company. And I think in 2023, we will mark another step-up in our performance. And as we all notice, we are on the long-term algorithm already on net sales and also on EBITDA, if we remove the effects from currency and from the 53rd week. And I think this is the best way to show that transformation is working through results, right? And it's good to see how 2022 that we finished in very strong momentum, how that's translating into a stronger performance in 2023. This is a consequence of our market share in the U.S. continuing to improve. Still negative but improving, as foodservice continues to deliver at high at above 30%, emerging markets growing double-digits in a strong rate. So all these, in terms of growth, are working in our favor. Supply chain efficiencies continue to happen. And in 2023, as you might have noticed in guidance, we are expanding gross margin and see our path to go back to 2019 levels, which is allowing us to continue to increase the investment in the business for growth. So we are in 2023 increasing investments behind marketing, technology and people, which are critical levers for us to fuel the growth of the company. So we feel good about, where we are moving. We still want to do, but we will.

Bryan Spillane:

Thanks, operator. Good morning, everyone. My question is about just the free cash flow, and I have a couple of questions related to that. I guess the first is just simply, Andre, can you give us a little bit more insight in terms of, I guess, the inventory build? Is it finished goods inventory? Is it raw materials, the decision to do that? And I guess, in the prepared remarks, it's tied to service level. So are you going to need to carry elevated inventories through '23? Is my first question.

Bryan Spillane :

So I guess this was kind of bridging that now to maybe how we should be thinking about free cash flow and free cash flow conversion for '23. Can you give us a little bit of perspective on, I guess, capital spending? Will inventory or working capital be a tailwind? Like can we get back to more normal free cash flow conversion in '23? Or is it still going to be somewhat, I guess, subdued relative to previous years?

Operator:

Our next question comes from Chris Growe with Stifel.

Miguel Patricio :

Maybe, Andre, you can start and then Carlos comment specifically in U.S.

Carlos Abrams-Rivera :

Yes. Let me -- it's Carlos here, Chris. Listen, what I would say is just building on some of the comments that Andre just mentioned is that as we think about promotional activity going forward, it really is about being surgical about how we invest those promotion dollars. Thinking through making them around event-based activity. So that way, we are thinking through how do we make sure that we are driving the best utilization of that particular event versus a price-based activity. And I think what happens then is it allows us to actually make sure we are focused in terms of driving positive ROIs. And I think if you -- as you heard from Andre, we have made a huge thrive from where we went to 2019, and we're not going back. In fact, when you look at some of our focus on improving the ROI of our programs, today, on average, if you think of 2022 versus 2019, we've actually tripled the level of ROI returns of our promotions from three years ago. So again, it is a signal that all the investments we're doing in terms of revenue management are agile still work in terms of better understanding how to read the data and how to utilize our funding is actually driving specifically better ROI in every funding that we're doing.

Cody Ross:

Just a quick question around your organic sales guidance. You guided 2023 organic sales growth of 4% to 6%. Based on wraparound pricing from 2022 and the incremental price that you discussed for 2023, we estimate that your volume growth assumption is flat to down low single digits. Is that correct? And then if so, what gives you the confidence that elasticity will remain so low as we move throughout the year?

Andre Maciel :

Yes. Hi, Cody, thanks for the question. So as well noted, we are finishing Q4 growing about 10%. And we just have a new round of price that we just implemented. So that certainly has a positive effect in the first half of the year. We expect gradually throughout the year for us to be -- as we circulate the price increases from last year that we end up landing in the second half on something closer to our long-term growth algorithm, okay? Being said that, the growth in 2023 is all driven by price. So volume is still negative. Obviously, it improves throughout the quarters as we start to lap the prices. But even at the end of the year, will still be negative. That's something that as we think about the future, it's not the negative balance that we want. We want a good balance as we think about top line growth between price and volume. And we're going to talk a lot about that the next week in CAGNY. We have contemplated the guidance and increased level of elasticity compared to what we saw in 2022, but still not the way up to the historical levels. In terms of what gives confidence. So you saw the sell-out for the industry to our Q4 was still very strong. In fact, if you look at sell-out elastic, just looking at price and volume based on the sell-out, Q4 was better than any other quarter in the year. Now we obviously need to -- we need to keep actively monitoring and we are because throughout this year, we can see maybe consumers will change the behavior. Carlos, do you want to comment something on that?

Operator:

Our next question comes from Ken Goldman with JPMorgan.

Miguel Patricio :

Andre, please?

Operator:

Our next question comes from Pamela Kaufman of Morgan Stanley.

Miguel Patricio :

Maybe Andre and Carlos can comment on that.

Miguel Patricio:

Andre, do you want to talk about is there anything you would like to add from an international standpoint on this question?

Miguel Patricio :

Okay. Yes. Just to put it in perspective, retail in Europe is about 5% of our business, and that's what Rafael was talking about. I just want to add to these points that 2/3 of our growth are coming from emerging markets and from foodservice. And on these two channels, we continue gaining share and growing in a very, very positive way, double digit?

Stephen Powers :

Two questions. The first one is on service levels and fill rates. On Slide 16, you got -- you show how you've seen improvement in the fourth quarter, really every month within the fourth quarter. I guess question is -- number one on this is, just has that improvement continued into '23 thus far? And what have you really assumed sort of as the base case for '23 relative to the ultimate goal of getting back to the high 90s. Is that an assumption in the guidance? Or is that more of an aspiration to have some less than allowances in the outlook?

Stephen Powers :

Okay. Great. If I could follow up also -- sorry.

Stephen Powers :

I was just going to ask if I could follow up on the elasticity point that you've been talking about. You also exited the year with elasticity sort of at their most favorable point, just kind of going off the data on Slide 9. You've obviously talked about assumption of those elasticities sort of normalize directionally through '23. I guess the question is just what's your base case assumption of the pacing of that normalization? And you talk about an ultimate assumption of not going all the way back to historical elasticity. So just how do we think about that as we expect '23 to be sort of the mirror image of '22 from an elasticity standpoint? Or any more color you can offer around that would be great.

Andre Maciel :

Yes. So look, as we have said, right, we contemplated the guidance that elasticities gradually go back to the historical levels, and we expect historical levels in the guidance to be established towards the end of the year. And we expect Q1 to be the way that we contemplated now to be a little worse than it was in Q4, and again, it goes -- if you want to think about that linearly going back to historical levels towards the end of the year. There are obviously things that we keep a close eye on, like we are obviously fully aware and have put the actions in place on its net reduction in the subsidies, which is happening when that has implications and we are ready for that. So I mean we are monitoring each of those things, right? But we believe that elasticities will normally graduate back to the historic plans.

Carlos Abrams-Rivera :

Yes, I think for us, Andre said, we have seen this coming. So for us, it's making sure that we continue to provide great value to consumers regardless of the situation they're in. And I think as I mentioned earlier, for us, it is making sure we use kind of the full price size architecture in terms of options for consumers so that make sure that we also maintain them in the franchise. And that we talked about in terms of our promotion levels, we're using much more rigorous way in which we can understand the ROIs of investments so that consumers are looking for particular events, whether it's certain key holidays and so forth. We are present but in a way that actually allows us to be in a much more positive ROI than in the past. So it is part of what we see. And like Andre said, in North America, we have seen -- our stance right now is that by the end of the year, we'll go back to historical levels. And we are -- that's the way kind of rebuilding our guidance as we think about 2023.

Operator:

Sure. One moment for our next question. Our next question comes from Michael Lavery with Piper Sandler.

Miguel Patricio:

Michael, we are having a great momentum in foodservice across the globe, both on U.S. and -- or North America and the international zone. So I will ask Carlos and then Rafael to comment.

Miguel Patricio:

Before, Rafael, I'll just build on one thing Carlos mentioned. One of the reasons of our improvement in growth as well is capacity. We've been investing throughout these years on capacity on foodservice, and we continue to do so. So now in May, we will have an extra 25% capacity in the U.S. on pouches and we'll have 50% more capacity on paper and squeeze, which are absolutely critical items for the growth of foodservice. With that in mind, Rafael, please go ahead.

Miguel Patricio :

Thank you, Rafael. On a nutshell, I would say that on foodservice, I think in the past, we were very transactional, and we define this as one of the strategic pillars for us for growth, and we've been investing on talent, with technology, on people, on portfolio and it's paying off. I mean we are very excited with that. Anne-Marie?

Miguel Patricio :

I just want to say that we continue to be very excited about what we are doing. We see our transformation evolving. The journey still very far from finishing but we are evolving every day. And why are we so excited? We are excited because we see the momentum building service level up, market share, especially in the growth platform is growing. Foodservice and emerging markets are gaining market share and with a great momentum. Second, we see a very different level of agility in our company. We have today a very agile organization that is able to change, to adapt, to predict much better than in the past. We are investing to grow. Gross margin expansion feeds investments in technology, in people, in marketing, in R&D. We are excited as well because we anticipated pricing and today, we have 99% of all our pricing for 2023 already announced. We have about 95% of our pricing already accepted, and we have about 90% already implemented. And so the way we see it, we'll continue delivering quarter-after-quarter year-after-year. With that, thank you so much for your attention, and I expect to see you on CAGNY next week. I think we have a lot of excitement to share with you. Thank you.

Operator:

Ladies and gentlemen, thank you for standing by. Welcome to the Kraft Heinz Company Third Quarter Results. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I'd now like to hand the conference over, Anne-Marie Megela, Global Head of Investor Relations. Please go ahead.

Miguel Patricio:

Well, thank you, Marie, and thank you, everyone, for joining us here today. We are excited. We are proud. We delivered another quarter of strong results. And as we see consumer demand remaining strong and analytic elasticities, they continue to hold. We see our portfolio of iconic brands strong and very adequate for the moment that we are living. And we continue investing in these brands and seeing that this investment is paying off. Yet at the same time, we realize we know that supply chain remains challenging, particularly with inflation and material shortages. I'm proud of the teams as they continue to anticipate and adapt to these challenges, where we improved capacity and we're able to meet demand, we actually gained share. At the same time, we continue to advance our transformation, then including modernizing our marketing and transforming our portfolio. As we look ahead, we continue cautiously optimistic. We are providing our consumers with solutions that they value, and we continue to unlock efficiencies and reinvest in the business. All of which makes us stronger and positions us well for whatever challenges are still to come. With that, we are very happy to take your questions.

Andrew Lazar:

Great. I guess maybe to start, the company had moderated its EBITDA expectations back in September 1, third quarter when you were already about 2 months into the quarter. Today, you not only beat those expectations, but came in above the initial guidance as well. So, what came in better than you thought? Are there any timing issues to be aware of that might impact 4Q as a result? And maybe more importantly, do these fluctuations give you any pause with respect to visibility into the business with the understanding that it's obviously still a very dynamic environment.

Andre Maciel :

So, Andrew, first of all, we -- as Miguel said at the beginning, I think we feel very excited and pleased with the results we achieved in the quarter. And I'll tell you that a lot of things happened in our favor towards the month of September. First of all, if you might remember, we have executed a new price increase in the month of August. And the elasticities turned out to be stronger than what is anticipated, which resulted in strong top line. Shipments were very good. I think our team did a great job in the month of September to be able to ship in a much better pace than earlier in the quarter, which also helped us. We end up spending less promotion also that we have initially anticipated, which is fine, as well that we're being very prudent to put all the promotions and expense in our portfolio. And finally, we did have about $30 billion of one-time gains in the P&L, 80% in costs, 20% in SG&A. And those are mostly anticipation from Q4, okay? That's what we're able to do in Q3. And obviously, we also had a little contingency, given the volatility, right? But all in all, I think we're able to have a lot of things play in our favor. I think it is a testimony here that organization is moving with the speed and reacting fast to diversities. And we delivered and maintained our guidance fully here in Q3, right? And so I think we felt confident about the number that we’ve put a lever and I think we’re just reinforcing that now by [regular thought]. And you can count on us, all is true being a transparent dialogue and being -- in a very friendly fashion, like we did back in the September when I heard the first news about the inflationary pressure.

Ken Goldman:

You mentioned that your supply chain tightness is still mostly caused by factors from your upstream suppliers. This is not an uncommon refrain. We're certainly hearing this from many of your peers. I'm just curious, can you maybe help us better understand what the specific issues are. You mentioned disruptions, I guess, on ingredients and packaging. Does this suggest that the issues are somewhat temporary. They can fade when the disruptions have passed? Or are there maybe some structural problems, I guess, that could take longer to fix?

Carlos Abrams-Rivera:

Yes. What I would say -- first of all, thank you for the question. What I'll say is that I think you can see that the environment continues to be challenging. And what I'm really proud is the fact that our team is doing a terrific job of working through the wave of challenges. So, as we speak, we are both rebuilding inventory and improving service levels, and we have done that through the quarter -- sequentially in each quarter. I think we continue to see that going forward. I think what -- if I take a step back in terms of the overall constraints, what I see is about 80% of those challenges are really due to upstream supply distribution on ingredients and certain packaging materials. At the same time, what I'm saying is it's very asynchronistic the way they're recovering. So, you'll see that in some cases, we are moving quickly and recovering overall in our supply chain. There's a few ingredients that have been a little tighter for us. And I point to things like have affected us in the past and things like cold cuts and lunch -- I'm sorry, in cream cheese. And at the same time, even in those categories, we now have recovered and feel good about kind of our position as we go towards the end of the year.

Bryan Spillane:

To build on the previous 2 questions, you're kind of looking at the current environment now dealing with what you're dealing with numbers and seeing what you're seeing in the marketplace? Is there any reason that we shouldn't expect that your long-term targets, which you laid out back in -- or you talked a bit about back in September are targets that we should expect that those are achievable for 2023? Or is this environment still maybe too volatile to be in line with what your long-term targets would be.

Andre Maciel :

Sure. Look, as we said back in CAGNY, when we unveiled our new long-term growth for the reason, we expect to get that over the years. So think of it in terms of 3 years or so. So we feel good in our continued improvement, in our performance and we expect to continue to move towards the algorithm, the way that we have communicated back then. We are probably not ready to give any guidance around ‘23. But yes, the environment is still volatile. As you have been hearing from us and public promoters in the sector about supply chain volatility, which has consequences on availability and they speed up using our costs.

ChrisGrowe:

I just had a quick question for you in relation to, you showed in one of your charts in the slide deck, private label gaining more share in your categories. It also showed Kraft Heinz doing much better in its categories as well. And as we look across the store, private label share has been up at a lesser rate over the past few months, although it seems like it's gone up a little bit more so in your categories. I just want to get a sense of if you see incremental risk in your categories from private label share gains as you take more pricing where you have more pricing that's been put in place? And then just any change in your thoughts on elasticity in relation to your pricing, which has been very favorable for your business?

Andre Maciel :

Sure. Thanks for the question. On private label, a few things. First of all, as we have been continuously reiterating our exposure to private label have reduced significantly after the [diversion] mid last year. So now the average market share in our portfolio is about 11%, wherein across food and beverage is 20%. So that were not impacted. Second, during the past 3 years, as part of our transformation, we have been directing a lot of our effort and energy around the core. So resources have moved that. We have been renovating the core in a very systematic way, so our portfolio is stronger. Third, the private label have been increasing the price together with the rest of the players. So as recent as the last 4 weeks, including already 3 weeks of October looking at sellout data, our sellout price is about 17% up, whereas private label is 16% up. So price gaps are widely preserved. You might have seen as well in 1 of this calendars we provided that comparing Q2 to Q3, the price gap with private label remains the same. So we do not see any category where our price gap expanded versus private label except to Ketchup and Lunchables, which honestly the interaction is limited, and we gained share in both of these categories. So yes, I think we feel good about that. We don't want to be even over optimistic that depending on how consumers eventually shifts behavior in a very drastic way, things can change, but there is no indication of that as of right now. And honestly, I mean, despite all the environment, food is proving to be very resilient. The brands are being very resilient. And with unemployment today we see right now, when I was here back in 2008, 2011, we only had this accelerated shift in behavior, but unemployment starts to go up, which is far from the reality today.

Operator:

Our next question comes from Alexia Howard with Bernstein.

Miguel Patricio:

Let me -- I'm glad to start answering this question and then since Carlos wants to complement. Nutrition is part of our long-term strategy. It's part of our agenda. It is a very important part of our ESG goals for the future. We've been renovating our portfolio throughout the years, reducing or eliminating dies and artificial ingredients. And we have global agenda, a very specific agenda on reducing salt and sugar, which are 2 critical things in our portfolio that we have a responsibility to do. We are on the way to achieve the targets that we put in place until 2025. I mean just to give you an example, we changed the formulation of our Capri Sun this year. We reduced 40% of sugar content, and that's -- to put it in perspective, just that is 40 million pounds of sugar per year that we reduced. We continue committed to that for the short, the medium and the long term to make our products more nutritious.

Miguel Patricio:

We are buyer of tomatoes and beans. And in the heart, we are agricultural company. And we've been investing a lot in that sense in client base. I mean you see what we are doing in Europe with our beans with a project of launching new beans based products with Heinz Beanz Burgerz, with Heinz Beanz [Hams], Protein Pots and a portfolio of innovation for the next 5 years related to that. And here in the U.S., we are very proud to announce this week that we are launching our plant-based cheese, which by the way, is an incredible product, very different from what is in the market. It melts, it tastes like cheese, it smells like cheese and melts like cheese and its very different from everything that is in the market. So we're absolutely committed on the nutritional agenda.

Stephen Powers:

I wanted to ask on gross margin progression. Across the consumer goods space broadly, I think we're beginning to see more signs an evidence of gross margin stabilization, if not recovery, with results across many companies either coming in ahead of consensus expectations or improving sequentially or even starting to improve year-over-year. And every portfolio is obviously different, but you're not yet in that position. So I am curious as to how you're thinking about the progress of gross margin? What kind of framing of expectations we should have going into the fourth quarter? And the prospects for improvement as we build into fiscal '23?

Andre Maciel :

Sure. Thanks for the question. Look, we have been -- as we said all along, have pricing to protect the dollar inflation, so dollar for dollar, and we have been doing that now for the second quarter in a row. So both in Q2 and now in Q3, price was in line with inflation and price plus gross efficiencies was ahead of inflation. Given that we had in Q3 as we initially said back in September, some incremental pressure in selected places and we took action already on it, there is this continuous lag in effect. So we expect Q3 to be the bottom of our gross margin, and you should expect to see a sequential improvement in Q4 in comparison to Q3.

David Palmer:

Just a follow-up on some of the supply chain stuff. Your case fill rates in your slide deck, you say -- they were in the low 90s in the third quarter, and that's better than the high 80s than it was in the first quarter. But I was slightly surprised to see that, that fill rate was the same as 2Q. Is that a result of that upstream supplier effect that you're talking about. And I'm wondering how you're thinking about progress there. Is that -- is that some -- do you have visibilities to getting that fill rate back? I'm sure you want to get back to the high '90s. And what -- when could we expect bigger leaps and improvement in fill rates?

Carlos Abrams-Rivera:

Yes. Listen, what I'll say is that exactly what you said, it is connected to the availability of certain ingredients in the -- of the upstream. But at the same time, our commitment with our customers is continue to improve that. I'll tell you that as we continue to navigate the situation in terms of those capacity constraints, what I'll say is that we also are looking to see how we lead with the capacity that we have available to us. And let me give you a couple of examples of how we're doing that. We actually are ingesting data directly from our customers in a way that allows us to better deploy our inventory to reduce out of stocks. We started that with a pilot with 1 particular retailer and that allows us to actually reduce the amount of inventory by 40%. The out-of-stocks in their stores, by 40% in a period of about 8 weeks. We now have expanded that program and now we're ingesting more data from different customers that allows you to then make sure that we are then putting the right inventory in the right stores and green the right signals into our production so that we can maximize the availability capacity that we have in our plants. So we're both working upstream with suppliers, but it's also us being smarter and better capabilities internally to deploy our inventory to improve overall service levels, which we're committed to do. Thanks for the question.

John Baumgartner:

Miguel, I was wondering if you can touch on the nice rehearsal you had in Q3 regarding market shares relative to your branded competition. How would you break that down between the benefits from some of the supply chain constraints easing, the pricing differentials in the market as opposed to how much of that is derived from just underlying changes to your execution in the market on more of a like-for-like basis, and how sustainable do you think that performance will be in the share gains versus brands going forward?

Carlos Abrams-Rivera:

Yes. I would say to build on Miguel's point, this is a combination of the continuing investments that we have made in renovating our brands, investment in improving the quality of our marketing communication. And then, as you said, unlocking some of the capacity in some key brands. I think the example Miguel gave around Lunchables and Capri Sun in which we saw the improvement on inventory and CFR and then our ability to actually then go into market and then drive event-based promotions that allows to then continue to grow those particular categories during the back-to-school period, which was basically a phenomenal result for us in terms of performance. As we go forward, when you see the places that continue to have challenges in terms of capacity, we know that once we unlock those we also have opportunity to then continue to grow our consumption as we go forward. And those, as I said before, areas like our Cold [indiscernible] and Cream Cheese that are slowly getting into better positioning our inventory. And now as we go into the holidays, making sure we protect the ability to then go into those event-based promotions we were doing the time of year that consumers are really looking for our brands. So when you take a step back, I will say, is a great combination of the work we have done over the last 1.5 years for us to improve internally the equity of our company. And at the same time now, see the benefit of us being able to now go back into the marketplace in a more aggressive way that allows to then continue to drive consumption and whole penetration on our brands.

Operator:

Our next question comes from Michael Lavery with Piper Sandler.

Miguel Patricio:

I would ask Carlos to answer that question, and then Rafael is maybe with us on this call to present for International zone, where we have a great momentum in food service, by the way.

Rafael Oliveira:

Yes. Look, it's not very similar to that. The opportunity in foodservice is significant. And you can see it has been a core pillar for our results in the last few years, and the quarter is no different. You can see that the numbers we released, we are growing actually very fast and twice the size of the industry, twice the rate of the industry. So you can attribute that part of it was the slowdown that happened during the pandemic. A lot of the -- across international, we do compete with some global players but also with some local players and a lot of them specialize in foodservice that during the pandemic, they suffer a lot and some of them either went bankrupt or had to downsize significantly their operations. We didn't. We maintained the same level of investments and consequently coming out of the pandemic in most of the countries across the world, I mean, we are riding ahead of it. So we continue to be excited. I mean, QSR is the core. Our products, especially within the sauces environment goes very hand-in-hand with the QSR industry, and we still have a long way to go. I mean our estimate with the data available that we are about between 3% and 4% market share of the sauces category of food service. So there is significant room ahead. And we are going to continue to do that, driving our chef-led model, where we have invested in chefs that partner with those customers, driving innovations that have been very well received. So it should be a continuous source of growth, sustainable growth for us.

Miguel Patricio:

I would like to finish with a quote. A quote from a famous legendary car racer on Formula 1 that once said, "If it's raining, I can pass 15 cars. But when it's sunny, I cannot." Let me tell you, it's not raining, it's pouring. But we are super excited at this moment because we are seeing this as a great moment of opportunity. And we've been able to navigate through the uncertainties of the short term and adapt and rebuild very fast at the same time that we are continue building our future. We are excited with what we have ahead of us. Thank you very much.

Operator:

Good day and thank you for standing by. Welcome to the Kraft Heinz Company Second Quarter Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Anne-Marie Megela. Please go ahead.

Miguel Patricio:

Well, thank you, Anne-Marie and thank you everyone for joining us today. I wanted to acknowledge the fact that we are living under a lot of uncertainty in what regards the external world. And in that sense, I want to thank my team and to congratulate my team for delivering another quarter of very solid results. Although, we are mindful of the current inflationary environment and how it affects our consumers and our customers, but we continue to develop solutions that benefit our consumers and our retailers. Our relationships with retailers continue to strengthen, and we have improved inventory and service levels, so we can have now more optionality to execute more mutually strategic programs. Well, with that, we are happy to take your questions.

Bryan Spillane:

All right. Thank you, operator. Good morning, everyone. I had just one clarification question and then a second question. The first one, just as a clarification. Andre, in the slide deck, I think it's slide 27, where you talk about the there's a portion or a section in there about gross margin and it shows gross margin at 30.3%. Just want to make sure that that is not adjusted, right? So, that's just your gross margin. I think, as we did the adjusted gross margin calculation, it was like 31.5%. So, just wanted to clarify that, that margin that you're -- that you put in slide deck is reported not adjusted.

Bryan Spillane:

Okay.

Bryan Spillane:

Okay. Thank you for that. And then, my question is just in the prepared remarks, Miguel, you talked a little bit about, I think there's still being supply chain pressures in the back half of the year and -- or currently I suppose. And if I recalling last year where part of what happened in the U.S. was, you had some supply chain issues and they affected service levels, especially around the holidays. Are -- I guess, does the guidance assume that there's still going to be some pressure there and that you won't be fully merchandised for the holidays? Or are we -- are you in a position where you can be more fully sort of supplied and merchandised at the holidays in the U.S.?

Bryan Spillane:

Okay. Thank you.

Bryan Spillane:

Okay. Thank you.

Ken Goldman:

Hi, everybody. Thank you. You mentioned in the prepared remarks that you have the optionality now to execute more, I think, called it mutually strategic programs with retailers. Now that your service levels are in a better place, I just wanted to clarify, number one, is there any major difference between a mutually strategic program and just a really good promotion? That's more than just a discount. Maybe it's just something more in depth or creative than a usual promotion. I just wanted to kind of clarify that definition. And then, the second part of that is I wanted to ask if you're confident that these programs, if you do implement them, that they're being driven from a position of strength, right? Whereby you're doing them because you're able to versus maybe from a position where you're doing it, because the consumer in a position of weakness themselves is demanding it. Thank you.

Ken Goldman:

And then the second part -- thank you for that. The second, doing this, I guess, from a position where you feel it's from strength rather than -- maybe because the consumer is demanding it a little bit. I just wanted to make sure about that. And I -- maybe you answered that a little bit with the second part of that, talking about the value proposition promos, but just curious for your thoughts there.

Ken Goldman:

Great.

Ken Goldman:

Understood. Thanks very much.

Andrew Lazar:

Thanks very much. In the slide deck, you provided a breakdown of categories that are sort of more and less sensitive to price gaps with private label. I think 15% of sales are in categories that are more sensitive where gaps are increasing. And I'm just curious, how do you approach these businesses in terms of balancing share and profitability? Do you take the necessary price to protect profit and deal with the short-term pressure on share or protect share and sort of take the short-term profit hit? And you talk about another 25% that are sensitive to private label gaps, but currently stable. And I guess, if those were to expand from here, I guess what gives you confidence you can manage this bigger segment in the context of your sort of growth algorithm? Thanks so much.

Miguel Patricio:

And it's really category-by-category, right? So, even in the 15% where the prices are expanding, the stories are very different. Like instead cheese, similar to cold cuts, we do have a very good price ladder. We have the VELVEETA license and the floor effects even priced at or below private label. We have the Kraft Singles and we have the Deluxe. And we're actually gaining share, so in the last several months, so it's working quite well for us. In Ore-Ida, for example, we have the partnership with Simplot that is now starting and that to unlock a lot of capacity later in the year, which will allow us to start to promote more of these brands, which we haven't been able to do in a consistent manner for years. So, it's really category-by-category. We monitor this very close and makes sense that -- we are doing something that makes sense for both top and bottom line.

Miguel Patricio:

Thank you, Andrew.

Chris Growe:

Can you hear me now?

Chris Growe:

Thank you. I just had a quick question for you, if I could, around the revenue growth in the quarter outpacing consumption. I was just curious how much of that was Foodservice strength, for example, and maybe the non-measured channels versus actual inventory rebuilding. I think this kind of fits with an earlier question around, do you see product availability as a constraint for the third and fourth quarter performance in the second half, or is that behind us now is what I'm ultimately trying to get to? Thank you.

Chris Growe:

And would there still be some continued inventory build you'd expect at retail as you improve your service levels?

Chris Growe:

Okay. Thank you.

Stephen Powers:

Yes. Hey. Good morning. Good morning. Thanks. You talked about your outlook contemplating greater price elasticity negatively impacting volume and mix, I guess, over the balance of the year. Is there a way for you to help us think through the P&L impacts of lower volumes at this point? Clearly, there are many other moving parts. But all else equal, if volumes are to move lower in places where you anticipate, how material is that on margins in terms of fixed cost deleverage per unit sold? I'm just -- I'm really asking just how fixed versus variable the cost structure is at this point.

Stephen Powers:

Okay. Great. Thank you. And if I could, you gave some good color on the cost outlook for the remainder of 2022. I guess, I'm just curious how you see, if possible, early positioning looking out to 2023. I guess, on the one hand, you mentioned costs hopefully peaking and maybe starting to receive in some cases. But on the other hand, we're still obviously a lot higher year-over-year. And you presumably have some hedges rolling into the year that will roll-off both on commodities and currency. So, just maybe a little bit of color, if you have any, on early positioning, visibility on constant currency looking out to the first part of 2023.

Stephen Powers:

Okay. Very good. Thank you.

Robert Moskow:

Hi. Thanks. Your income statement shows losses on your derivative hedges in 2Q. I imagine that commodity inputs are now falling. And if that's right, should we assume at some point that this necessitates more counts in your existing on any specific products? And then a quick follow-up.

Robert Moskow:

Okay. Maybe I'll follow-up. My follow-up is, I think you did shift above [technical difficulty] consumption in 2Q. And I think you said that you'd be refilling shelves in 2Q. Can you give us any number as to how much that might be just in 2Q?

Robert Moskow:

Yeah. Andre, I get it. But you also said you're producing above your sales. So, I don't know, is it a material amount? Or are you just -- it is. And are you refilling your own inventory then rather than retailers or?

Carlos Abrams-Rivera:

Yeah. I mean, I would say if you look at the presentation and the fact that we are able to provide service from the low 80s to the low 90s, it's a result of us being able to actually leverage our entire supply chain in a way that now with right inventory levels in many of our categories that we can provide that service. At the same time, as Andre said, we're still in the low 90s. So, there is opportunity for us to continue to drive that to the high 90s by pushing the right level of inventories internally, so that we can actually be able to better service our customers.

Operator:

Thank you. And we'll take our next question from Alexia Howard from Alliance Bernstein. Alexia, your line is open.

Miguel Patricio:

Good morning, Alexia.

Miguel Patricio:

Carlos, your view?

Alexia Howard:

Thank you.

Miguel Patricio:

Since we are talking about Brazil, I think that -- now with the acquisition of Hemmer that is very strong in the South and Heinz is very strong in the Southeast, this gives us even a bigger opportunity to expand our distribution and the strength of our brands. We are really now with great scale in Brazil that we are very happy with how this acquisition is going and the plans that we have in place for the business there.

Anne-Marie Megela:

Operator, we have time for one more question.

David Palmer:

Thanks. In your prepared remarks about gross margins, you talked about the fact that you're protecting profit dollars and not margin and that was causing 450 basis points of decline and that math makes sense. But I'm sure there's more going on underneath the surface with regard to gross margins. Supply chain, I'm sure was a friction cost and maybe there's some timing with regard to pricing versus input. So, anything that you would call out that was also a factor in gross margins that we can be thinking about even into 2023 as a comparison?

David Palmer:

Thanks for that. And then, on Foodservice, the -- very impressive growth there. The over 20% growth in North America does imply something's happening there, some big market share wins. What's driving that? And is that sustainable? And I guess, you're just citing that the big global QSRs as the momentum driver for international, and that does sound sustainable in your view?

Miguel Patricio:

Before Rafa talks about International Zone, I just want to say that since you, Andre, compared with 2019, in 2019, Foodservice was -- it's a very transactional area for the company, was not really strategic. And it was a small part of the company that we didn't put a lot of attention. I think we have a great team today with a lot of ambition and really looking at this channel as a critical strategic channel that generates penetration of our brands across the globe. If we're having great momentum in emerging markets in part is because our consumers are getting in touch with our brands in Foodservice. And so that's a very different change in mindset. And as a consequence, the team changed, yeah, I think entirely since 2019. Rafael, please?

Carlos Abrams-Rivera:

Yeah. I would say, Rafa, the only thing I would add here is just the fact that the model that we have, we're also looking at it at a global basis. So, the same concept of us being able to kind of -- as Miguel and Rafa pointed out, leveraging our points of distribution in away from home in order for us to kind of build our iconic brands in retail. That type of virtuous cycle is something we're going to continue and we see that paying up for us. At the same time, over the last couple of years, not only have we reorganized ourselves and focused our team in being -- having kind of the right expertise and capabilities with Foodservice, but we have also simplified our portfolio quite a bit. I can tell you that since the last two years, we have reduced the number of SKUs in the U.S. Foodservice by app. So that allows us to actually pivot to the things that really matter to our customers in a way that they can help with both in terms of providing the great service and great value in away from home. And with that, let me pass it over to Miguel for some closing remarks.

Operator:

Thank you. This concludes today's conference call. Thank you for your participation and you may now disconnect. Everyone, have a wonderful day.

Operator:

Ladies and gentlemen, thank you for standing by, and welcome to the Kraft Heinz Company Frst Quarter Results Question-and-Answer Session. I'd now like to turn the call over to your host, Chris Jakubik. You may begin.

Miguel Patricio:

Well, thank you, Chris. I would just like to start by sharing how proud I am of our people, and the truly transformational work they continue to deliver for our company. We've seen 2 years of a lot of disruption, and they continue to successfully address the short-term challenges, at the same time that we are building the long-term advantage of our company and our brands. Our teams delivered a strong start for the year, both on top line and bottom line. We remain on strategy with the strongest growth coming from our priority platforms, brands, channels and markets. We are effectively managing our inflation, improving our supply constraints, while continuing to gain incremental efficiencies. We continue to make progress, building and deploying initiatives to accelerate our advantages in areas like becoming more agile, becoming much more creative in marketing, developing joint business plans between retail and foodservice and capacity unlocks in our Grow and Energize platforms. As you are now seeing, we are doing this through strategic partnerships with technology clients and cutting-edge innovators to accelerate our transformation and redefine best-in-class across our value chain. It is a very exciting time for Kraft Heinz and I don't think we could be better equipped to build on our momentum through what promises to remain a very challenging environment. With that, well, let's take your questions.

Andrew Lazar:

Chris, congratulations to you. Thank you for all the help over the -- well, too many years to quantify. I appreciate it. My question really is around retail inventory. I guess, where are you currently regarding the retail inventory rebuild versus where you want to be? And how much more opportunity might there be for shipments to exceed consumption going forward related to this dynamic, which I guess, could be somewhat of an offset, should elasticity ramp up a bit from here? And is there any indication that retailers may opt to hold more inventory going forward than they did pre-pandemic, having seen during the past 2 years how problematic out of stocks can be when there are supply dislocations?

Operator:

Our next question comes from David Palmer with Evercore ISI.

Miguel Patricio:

Carlos, do you want to answer that question, please?

Miguel Patricio:

I would just like to add to what Carlos just said that these partnerships go beyond just technology. So as you remember, we announced, before the NotCo and the Simplot partnerships, these are other great examples of us to become more agile in all areas of the company. We didn't have a good pipeline of plant-based products and would take a lot of time to develop. Well, partner with a company that can bring you solutions in a record time and great quality. We didn't have a solution for our line business from a supply standpoint, well, partner with the ones that can solve quality, innovation and volume problems that we would eventually have moving forward. We'll -- these are just great examples of partnerships that will just make us more agile and faster.

Miguel Patricio:

I can’t give you a better sense of the percentage of net sales, because with all these changes we are having net sales, I don't want to give you a number that is not precise. But let me tell you that it's not our intention to reduce the investments in marketing. This year will either be flat or growing, depending on how the year continues, because we want to continue investing in our brands. Our investment in digital today is about 2/3 of all our investment, about 70% of our investment. But I would say that more than even the quantity at this moment, I'm really, really impressed with the quality and how we changed the way to communicate. Today, we have, in all our views, our own development of digital marketing that gives us really the possibility of being at the speed of culture and producing from a day to another one, great quality marketing that makes us much more engaging. It is very different, the quality of marketing that we have nowadays. I don't know if you saw, but Advertising Age selected us as the best campaign of the year. It put us among the 5 best marketers in North America, and more recently, they called VELVEETA the best renovation or the best rebranding of the year. And these are all consequences of huge improvement of the quality of our marketing.

Operator:

Our next question comes from Bryan Spillane with Bank of America.

Andre Maciel:

Thanks for the question. I'll get this one. Andre here. So yes, situations come up every day on the raw material and packaging materials side. So the situation continues to be challenging. And I think the teams have been out for 2 years dealing with these challenges on a recurring basis, right? It requires a lot of resilience from our team, which have been demonstrating very strongly. Now, the great thing is, despite all these challenges, we have been able, throughout the quarter, to rebuild inventories for the first time from ever since the pandemic level, and we have improved service levels. And I think we are now in a good trajectory to continue to do so into the second quarter. So despite the challenges that we continue to face in the whole market, we have been able to navigate through that. I think our scale also definitely helps on this regard. Regarding hedging, as we said before, we have been maintaining a very disciplined approach for hedging. So we haven't been speculating or trying to second guess, what's going to happen in the market. I have been maintaining our strategy to maintain a consistency. And as we mentioned, some of the commodities have been the most impacted by the Ukraine conflict, like grains, oils, energy, we are hedged on those until Q4, which put us also in a good position.

Bryan Spillane:

And then if you could touch just on bird flu, is that a concern at all?

Rafael Oliveira:

Bryan, Rafa here. Just to compliment to you, you asked about exposure to Ukraine. For us, it's negligible, it's very small, okay, the exposure to raw materials in Ukraine.

Jason English:

Good morning, folks. Thanks for slotting me in. To echo the earlier sentiment, congrats, Chris. Your legend will miss you. And Marie, congrats on the escalation. Looking forward to working with you more closely going forward. To the questions I have, great to see your foodservice momentum. I think you gave 2 statistics, the growth in U.S. and growth internationally. Can you give us the blended growth rate like across all of foodservice, 12% of sales growing, what on average? And how close are you to back to pre-pandemic levels? Have we pretty much closed the gap? Is that what's driving the majority of the growth? Or is this momentum over and above the recovery from COVID?

Miguel Patricio:

And I would add on the comments from Andre, that we are very excited with the foodservice. We see as the different from the past, there was a very transactional channel. Today, it’s a truly transactional -- sorry, a strategic channel for us. It's a great way for us to launch new products, to test them, to sample them with the consumers and then to leverage that sampling to the trade. In the presentation, you have a very recent example of that, but it's our intention to keep doing that through -- to through the future.

Carlos Abrams-Rivera:

On the SG&A, we have in the first quarter having a onetime gain from last year that do not get repeated. So pretty much, that's what's driving the entire impairments that you're asking.

KenGoldman:

And just to echo the prior comments. Chris, thank you for all of the help, you'll truly be missed and Ann Marie, congratulations as well on the new role. I wanted to ask, you've highlighted your reduced exposure to private label in the U.S., so I don't want to suggest Kraft is at any particular risk here. I'm really just curious if you're starting to see retail customers leaning in a bit harder to their store brands recently, whether it's via incremental displays or other efforts, I guess, to try and maybe highlight for consumers some other offerings that are at lower prices. Are there any behavioral changes you're seeing from those customers?

Ken Goldman:

And then a quick follow-up for Andre. Andre, you mentioned that as inflation plateaus, you expect to see your margin percentage rebound. I understand that futures curves are volatile, but is there an estimate you have for when you expect your gross inflation, including hedges to have peaked? Might we be a little bit closer to that than maybe, some bears you're thinking about?

Chris Jakubik:

If we can take, maybe, one more question.

Robert Moskow:

Thanks for the question. And Chris, I congratulate you, and I'm jealous of you also. But I guess, my question here is, can you drill down a little bit more into -- I think the comment was that your production volume will be up 10% versus a year ago. But this is an environment where there's a lot of unknowns about elasticity. And I think a lot of your peers are expecting elasticity to really accelerate by the end of the year. So can you give me a sense as to what that 10% increase really means? And is it contingent upon what you see in the demand environment, obviously?

Andre Maciel:

And Rob, just to add to that. So to be clear, right? So the production in Q1 was 10%. It doesn't mean that we definitely go up 10%. We are just now ramping up production to rebuild the inventory levels at the retail and in our warehouses, okay? So we are not changing our inventory policy for the future. We just did to get to that level.

Carlos Abrams-Rivera:

Well, it's 10% in Q1.

Carlos Abrams-Rivera:

Look, we -- I think that's where the inventory review discussion comes from, right, which is important. Because we are rebuilding inventories right now. So despite the volumes are being down, we still need to produce a lot to recover the inventory level. So we don't expect any relevant impact from fixed COGS in this fiscal year.

ChrisGrowe:

Thank you. And Chris, congratulations to you. Just thinking, 68 or so earnings reports over those 17 years. So it's kind of crazy when you put it in those terms. I just want to ask a quick question, if I could, on the supply constraints to your volume. You outlined it in a chart, like a 50 basis point market share decline as a result of those factors. How much of a revenue burden was that in the quarter, if you can say that?

Chris Growe:

Fair enough. No problem. Go ahead.

Chris Growe:

Okay. And just one other quick follow-on would be in relation to pricing. You had more pricing coming through in the second quarter. When you account for that pricing along with -- you've got a lot of productivity savings as well, do you believe this pricing, along with the productivity savings would be enough to offset inflation once it's in place? Are you going to sort of be caught up now with the level of inflation based on the pricing you have currently announced?

Chris Growe:

Okay. Okay. Thank you for that color.

Miguel Patricio:

I opened today's call saying that it's a very exciting time to be at Kraft Heinz, and let me tell you why we think that way. First, we are very proud because we've been able to navigate through all the uncertainties over the last 2 years, at the same time that we are building a much better tomorrow. And that's not easy in moments like this. We are a very company -- in a very different company today. We are much more growth-oriented. We have improved our portfolio mix, and today, just the platforms where we are working, and we have focused, Taste Elevation is about 30% of our business today. It's big and growing, and profitable. And just to put it in perspective, it's bigger and more profitable than McCormick, just to give you an example. We have consistent double-digit net sales growth in emerging markets. Our business in foodservice is strong and growing. And we are investing more in marketing in our brands and doing a much better job, so really, the profile in terms of growth is very different. From an efficiency standpoint, I think that we are in a much better place, not only because of the $2 billion that we talked about 3 years ago, when we delivered last year and the previous year on gross savings and supply, but efficiencies across the board, I mean, from marketing to distribution and these partnerships now with technology companies that will help us accelerate these efficiencies. Finally, I think that we have a very different situation from a financial flexibility standpoint. With the discipline we had in the last 2 years, put us back in investment grade, and in a record time, just in 2 years. And going forward, we will continue generating free cash flow conversion at a rate of 100%, and we'll look to acquire business and capabilities that can be much more powerful when combined with the scale of our portfolio. All is, of course, with a lot of discipline in pricing. So that's why it's exciting to be at this moment working at Kraft Heinz. Thank you.

Operator:

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

Operator:

Good day, and thank you for standing by. Welcome to The Kraft Heinz Company Fourth Quarter Results Conference Call. [Operator Instructions] Please be advised today's conference may be recorded. [Operator Instructions] I'd now like to hand the conference over to Chris Jakubik, Head of Global Investor Relations. Please go ahead.

Operator:

[Operator Instructions] Our first question comes from Bryan Spillane with Bank of America.

Miguel Patricio:

Bryan, thanks for the question. I mean, the macro pressures that you are mentioning, they've been here for a while now. And at the beginning, it was hard to adapt. But I think that this is the new normal, and we are absolutely embracing the change of the macro pressures every day. I'm personally very confident about the path forward. First, because of our people. We have today a great team, a very engaged and with a low turnover, which is very different from 2.5 years ago. Our business is growing and we've been relatively strong when we talk about gross margins despite the inflation that we are seeing, which in a way has enabled us to keep investing in our brands, and our cash flow and balance sheet is almost much, much stronger than 2 years ago. Now moving forward, I think that what we have to do is even to accelerate the path and the speed to accelerate profitable growth and unlock greater efficiencies. But on that one, I will leave for the CAGNY for us to speak a little bit more next week. Thank you for the question, Bryan.

Paulo Basilio:

Sure, Bryan. So if -- stepping back a little bit, like we closed 2021 very strong. Our EBITDA was $6.37 billion. And in this number, we had approximately $400 million of divested business, okay? So we start from there. We are going to see -- we are expecting to see the benefit of our sales growth, the combination of pricing plus efficiencies that we have in our plan, mitigating the inflation, the higher inflation that we are seeing. And also we expect some headwind from volume mix, and we are assuming a more conservative levels of consumption and elasticities as the stimulus and government support states, okay? And again, as you said, we are expecting closer to 47, 53, H1, H2, and this reflects where we are currently on the inflation versus the price curve that we are implementing. Also, the recovery, as you mentioned, of the supply chain constraints that we have that we expect this to improve through the first half. There is also here in terms of the curve, we are going to have this year 53rd week that will benefit our Q4 in the magnitude of $60 million to $70 million. That's what we're expecting. And in terms of inside the first half between Q1 and Q2, we expect Q1 to be softer in relation to Q2 because of the timing of Easter shipments that we're going to have this year and also the timing that we are executing our pricing.

Andrew Lazar:

I was hoping to get a bit more clarity on the various buckets you broke out in the prepared remarks with respect to the supply chain constraints and market share. Maybe could you be a bit more specific on sort of what the one-time issues were in the fourth quarter and why you've got visibility to this being fixed by the end of Q1. Is the second bucket you mentioned of supply constraints simply demand outstripping supply and not necessarily execution-related? And then the third bucket, I assume are brands that are losing share for other reasons than supply constraints. So maybe if you can just sort of give us a little more clarity on those 3 buckets, that would be really helpful.

Operator:

Our next question comes from Chris Growe with Stifel.

Carlos Abrams-Rivera:

First of all, thank you for the question. I would say I think it's a little bit difficult to quantify the share to the volume. What I can tell you is those are in the last 30%, those are categories, again, that we continue to see opportunity for us to service the consumer demand in a stronger way. So we have something that is focused for us. And we are -- the reality is that we have been -- we are actually thinking through very creative ways in which we can actually satisfy that demand going forward. And to your point around our focus on share, absolutely. For us, it's something that we as a company take very seriously. We mentioned the fact that we have great bright spots within our business, big iconic brands that have been growing quite a bit of share. But as we think about going forward, we want to make sure that it's consistently across our businesses and us being able to deal with recovery, both in Q1 and Q2 as we exit the first half is going to help us actually continue to grow in that perspective.

Carlos Abrams-Rivera:

Please. No, go ahead.

Carlos Abrams-Rivera:

Listen, I think for me, whenever I talk about market share, think of it as profitable market share. I've been working in food company for a number of years. And there is no substitute to make sure that we -- whenever we think about market share, it has to be done in a proper way. We have to make sure we do -- everything that we do is with a consumer-first approach to make sure we, in fact, bringing consumer solutions, whether that is location-based, in-store and online, we'll always focus on making sure that it's done with a drive on profitable market share growth.

Alexia Howard:

Can we ask about what came through better than expected in the fourth quarter. When you reported at the end of October, you were talking about adjusted EBITDA, I think, in the $6.1 billion to $6.2 billion range, and it came through at $6.4 billion. That's a big step-up for the last couple of months of the year. So could you just walk us through what the positive surprises were and whether those are likely to continue?

Operator:

Our next question comes from Rob Dickerson with Jefferies.

Paulo Basilio:

Right. I can start here and maybe Carlos can complement if he feels the need. What we have embedded in our outlook is that we are -- again, we are going to -- we expect, as we said, low single-digit organic sales growth in this year with greater contribution from the growth platforms that we have. Our foodservice channel is also recovering and gaining share in all the emerging markets performance and our continued strong performance through distribution. And also, as I was mentioning before, some relief of the key supply chain constraints that -- as the year progresses. But we -- as we were discussing, we also are embedded in our forecast, in our expectation, some headwinds in volume and in fact, in volume '22 because we are taking into consideration the fact that we are going to be having stems from the government support that happened and also a more conservative levels of elasticity than we saw before. But net-net, so that is that we are -- we have assumptions that are more conservative in terms of elasticity and consumption that we're seeing today, but we think it is the appropriate way to go in our outlook.

Rob Dickerson:

Super. And then very quickly, Paulo, you've done a very nice job of improving your leverage positioning at the end of the year still with a decent cash balance. Should we just be thinking as you go forward that kind of use of cash would either be for kind of smaller add-on acquisitions or just kind of an ongoing deleverage cycle as you get through '22? That's it.

Operator:

Our next question comes from Pamela Kaufman with Morgan Stanley.

Paulo Basilio:

Sure. So let me take that. Our Q4 inflation were higher than we expected in our October call. We ended up like with a low double digit. But for 2022, we are likely to see or expecting today near inflation of low teens for the full year, okay? And we expect this inflation to be higher in the first half than in the second half. And just to complement the -- by the end of next -- last year in '21, we took the necessary actions to mitigate the inflation we were seeing. And since then, more inflation has come and we are taking these additional actions as we've been discussing. And we are -- when you look about -- in terms of our hedging position, we normally hedge -- although we hedge a more significant part of the commodities, when you talk about our total COGS, we only hedge around 20% to 30% of the COGS. So -- because there are a lot of other costs that are not only commodities in our cost. So again, that is the range that we have ahead. So it's not material when we have a situation that we're having today that we are seeing inflation in pretty much all the lines of our COGS.

Ken Goldman:

I'm curious in your guidance for 2022, how much does the outlook require or bake in, I guess, what I would consider rational behavior from your competitors? In other words, are there any assumptions that as the consumer maybe gets a little bit more stretched as prices rise a little bit as some of your competitors also add to their capacity. Is there any expectation built in that there might be -- yes, you talked about elasticity certainly being there, but maybe a little bit more of an aggressive stance from some of your rivals. I'm just trying to get a sense for what's baked in.

Ken Goldman:

Makes sense. And then very quickly -- Paulo, thank you. For the gross margin, the Street is modeling a pretty flattish figure in 2022 versus '21. Recognizing you don't provide specific guidance for this line item, just directionally, I guess, is it fair to say that gross margin is more likely to be down than flat? Just especially in light of, I guess, your reminder this morning that in the context of inflation, you're aiming to recapture gross profit dollars, not necessarily percentages?

Operator:

Our next question comes from Steve Powers with Deutsche Bank.

Carlos Abrams-Rivera:

I think, I'm guessing that you're referring mostly to our U.S. business. So let me just take that up first. I think so far, and Paulo spoke to this a little bit earlier, other expectation for elasticity have proven to be conservative. So as we go forward, we're expecting some of those more, I would say, normal levels of elasticity to impact in 2022. And just to be clear, our outlook contemplates both those elevated levels of elasticity and the continued investments on our brand value proposition. Now when you look at overall kind of how the way we look at the business is that demand really has remained pretty much intact. So the inflation, which is, as you know, being broad-based and not specific to one category is really kind of impacting everywhere similarly. Now if you look at it deeper, personal spending on food has been more stable than disposable income or even discretionary spending over time. And if you go even further, when you look at Kraft Heinz specifically, the reality is that we have, as I said earlier, quality products in categories in which we can compete at a price that is affordable to consumers. I mean just to give you a sense, I mean, when you think about Kraft Mac & Cheese, Blue Box is about $0.50 per serving. If you think about Oscar Mayer hot dogs, it's about $0.25 a piece. If you think about Heinz Ketchup, it's about $0.10 an ounce. So those are things that we continue to feel strong about because we have a way in which to create great quality products in a way that consumers can afford. But we're also taking more actions than that. We also are using our designed to value to make sure that we're thinking around how do we boost quality in our products while reducing cost, essentially making sure that we give consumers exactly what they're looking for and not the things they don't need. And lastly, we're also making sure that we're investing in better creative and communication so that we have, in fact, stronger relevance of our brands that actually are helping us make sure that we continue to drive better renovations, innovations in a way that matters to what consumers are looking for today.

Rafael Oliveira:

Maybe I can take it here, it’s Rafa speaking. Look, we continue to be very optimistic of our strategy we focus on emerging markets, right, on Taste Elevation. And – I mean, we continue to expect double-digit organic growth, further gains of market share in the future and leveraging our repeatable go-to-market model. I mean this has been live in about 30% of the countries we operate today in emerging markets, and we look to continue growing this and boosting our go-to-market for the -- in 2022. So I mean, the strategy remains the same. We’ll play the – as we’ve been doing, we did 4 acquisitions in 2021 and add-ons in different markets that enable us to expand within our Taste Elevation focus in specific countries that we see a big opportunity for growth. So that strategy should remain is paying off and we will continue.

Operator:

That concludes today's question-and-answer session. I'd like to pass the call back to Chris Jakubik for closing remarks.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Thank you for standing by. Welcome to The Kraft Heinz Company's Third Quarter 2021 results conference call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised today's conference may be recorded. [Operator Instructions]. I would now like to hand the conference over to your host today, Chris Jakubik, Head of Global Investor Relations. Please go ahead.

Miguel Patricio:

Well, thank you Chris, and good morning everyone. I would just like to start by sharing how encouraging it is for us to see our Company leaning into a scale and agility that we have been talking about for some time, addressing short-term challenges at the same time that we are building the long-term advantage. We are today a much stronger Company and we are better positioned to address inflation that we're seeing. We are taking actions now to protect profitability through 2022 and our actions, and not just branching, we are also implementing price pack architecture, value-engineering, and leveraging our scaling procurement. At the same time, our team has continued transforming our business for long-term growth and advantage. Our momentum with the consumer is strong, and our consumer-focused platform-based approach is taking us to new occasions. We continue to invest, to improve relevance of our brands. They are making greater, more creative marketing investments. And at the same time, we are building agility that will deliver the 2 billion of gross efficiencies and looking to unlock more. We are continuing to pay down debt and improve our net leverage. And we continue to invest in our most important assets, our people. And as we mentioned in our remarks, we have done all of these while delivering better 2021 results than previously expected, which speaks to the strength of our business. Well, with that, let's take your questions.

Andrew Lazar:

Great. Thanks so much. My question is actually for Rafa, if I could. We've been taking a look at some Nielsen trends and some key food categories in the U.S. and Western Europe. And while consumption obviously in the U.S. has certainly remained elevated, trends at least in some categories in Europe seems to be decelerating meaningfully, or I guess normalizing is a better word for it as those markets reopen at a faster pace than what we've seen here in the U.S. So I'm curious if KHC is seeing this dynamic play out at all for the Company, and if you see maybe certain trends in Europe as a fair leading indicator of what's to come in the U.S. around stickiness of demand. Or if maybe there are some differences suggesting that not a great set of data points to necessarily use to compare. Thanks so much.

Andrew Lazar:

Great. Thanks very much.