Ladies and gentlemen, thank you for being here. Welcome to the Kraft Heinz Company Third Quarter Results. Currently, all participants are in listen-only mode. Following the presenters' remarks, there will be a question-and-answer session. I would now like to turn the conference over to Anne-Marie Megela, Global Head of Investor Relations. Please proceed.

Thank you, and hello, everyone. This is Anne-Marie Megela, Head of Global Investor Relations at the Kraft Heinz Company, and welcome to our Q&A session for our third quarter 2022 business update. During today's call, we may make some forward-looking statements regarding our expectations for the future, including related to our business plans and expectations, strategy, efforts and investments and related timing and its expected impacts. These statements are based on how we see things today, and actual results may differ materially due to risks and uncertainties. Please see the cautionary statements and risk factors contained in today's earnings release, which accompanies this call as well as our most recent 10-K, 10-Q and 8-K filings for more information regarding these risks and uncertainties. Additionally, we may refer to non-GAAP financial measures, which exclude certain items from our financial results reported in accordance with GAAP. Please refer to today's earnings release and the non-GAAP information available on our website at ir.kraftheinzcompany.com under News and Events for a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP financial measures. Before we begin, I'm going to hand it over to our CEO, Miguel Patricio, for some brief opening comments.

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 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, including modernizing our marketing and transforming our portfolio. As we look ahead, we remain 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.

Our first question comes from Andrew Lazar with Barclays.

Great. I guess maybe to start, the company had moderated its EBITDA expectations back on 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.

Andrew, thank you for the question. Andre, you may answer this one.

So, Andrew, first of all, we are very excited and pleased with the results we achieved in the quarter. A lot of positive developments took place in September. If you recall, we implemented a price increase in August, and the elasticities turned out to be stronger than expected, leading to a robust top line. Our shipments were excellent, and the team did a fantastic job shipping at a much better pace compared to earlier in the quarter. This improvement helped us spend less on promotions than we initially expected, which was a prudent decision as we allocated our promotions and expenses across our portfolio. Additionally, we recognized approximately $30 billion in one-time gains on the profit and loss statement, with 80% related to costs and 20% in selling, general, and administrative expenses. These gains mainly stemmed from anticipations for Q4, which we managed to achieve in Q3. We also accounted for some contingencies due to volatility. Overall, many factors worked in our favor, showcasing our organization's ability to respond swiftly to challenges. We successfully delivered on our guidance in Q3, and we are confident in the numbers we have provided, reinforcing that with the transparency established in our dialogue.

Our next question comes from Ken Goldman with JPMorgan.

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 on ingredients and packaging. Does this suggest that the issues are somewhat temporary and can fade when the disruptions have passed? Or are there some structural problems that could take longer to fix?

Carlos, I think that's related to you. Go ahead, please.

Yes, thank you for the question. The environment remains challenging, and I’m really proud of our team for effectively navigating these difficulties. We are currently rebuilding inventory and enhancing service levels, and we have made progress in each quarter. We anticipate this trend will continue. Looking at the overall constraints, I would estimate that about 80% of our challenges stem from upstream supply distribution issues regarding ingredients and certain packaging materials. The recovery is uneven, with some areas improving rapidly while others remain tight. Specifically, we faced challenges with cold cuts and cream cheese, but we have now recovered in those categories and feel confident about our position as we approach the end of the year.

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

To build on the previous two questions, you're looking at the current environment now dealing with numbers and what you're seeing in the marketplace. Is there any reason that we shouldn't expect that your long-term targets, which you discussed a bit about back in September, are viable for 2023? Or is this environment still too volatile to align with what your long-term targets would be?

Andre, you may want to answer this question.

Sure. Look, as we said back in CAGNY, when we unveiled our new long-term growth targets, we expect to meet those over the years. Think of it in terms of three years or so. We feel good about our continued improvement in performance and we expect to continue moving towards the algorithm that we communicated back then. We are not ready to provide guidance around '23. But yes, the environment is still volatile. We've been hearing about supply chain volatility, which has consequences on availability and impacts on our costs.

Our next question comes from Chris Growe with Stifel.

I just had a quick question for you in relation to the chart you showed in the slide deck, indicating private label gaining more share in your categories. It also showed Kraft Heinz doing much better in its categories as well. 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 more in your categories. I want to understand if you see incremental risk in your categories from private label share gains as you increase pricing in those areas. Any change in your thoughts on elasticity in relation to your pricing, which has been very favorable for your business?

Andre, do you want to answer the question?

Sure. Thanks for the question. On private label, a few things. First of all, as we have continuously reiterated, our exposure to private label has reduced significantly after the changes made mid last year. Now the average market share in our portfolio is about 11%, whereas across food and beverage, it is 20%. Second, during the past three years, as part of our transformation, we have been directing a lot of our effort toward the core. We've been systematically renovating our core, making our portfolio stronger. Third, private label has been increasing prices alongside other players. Recently, data shows that our sellout price is up by about 17%, while private label is up 16%. So, price gaps are widely preserved. You might have also seen in one of the slides we provided that comparing Q2 to Q3, the price gap with private label remains the same. We do not see any category where our price gap expanded versus private label, except for Ketchup and Lunchables, which honestly have a limited interaction, and we gained share in both of these categories. So, yes, we feel good about that. We don't want to be overly optimistic; depending on how consumer behavior shifts, things can change. However, there is no indication of that right now. Despite all the challenges, food is proving to be very resilient. Our brands are also resilient. With the current unemployment levels, we see the situation that differs greatly from what happened back in 2008 and 2011, when accelerated shifts in behavior followed an increase in unemployment.

Yes. What I would say is we have continued to invest in the equity of our brands. If we think about the fact that companies that don't have pricing power are commodity-based, brands do have pricing power. The investments we've made in improving the quality of our marketing here at Kraft Heinz and our commitment to continue investing in our brands moving forward give us some confidence as we manage through the current environment.

Our next question comes from Alexia Howard with Bernstein.

Looking at the lineup of products on Page 19 of the presentation, they seem to be meeting the consumer's need for convenience and affordability. I'm wondering about your thoughts on the recent White House Conference on Hunger, Health, and Nutrition. There were many initiatives regarding Front of Pack labels, definitions of healthy foods, and educating consumers on good nutrition. How do you think these developments will shape your plans for innovation and your portfolio moving forward?

I'm glad to start answering this question. Nutrition is part of our long-term strategy and a very important aspect of our ESG goals. We've been renovating our portfolio over the years, reducing or eliminating artificial dyes and ingredients. We have a specific agenda focused on reducing salt and sugar, two critical components in our portfolio that we have a responsibility to address. We are on track to achieve the targets we set for ourselves by 2025. For example, we changed the formulation of our Capri Sun this year, which reduced its sugar content by 40%. This translates to a reduction of 40 million pounds of sugar per year. We are committed to this agenda in the short, medium, and long term to make our products more nutritious.

To add to Miguel's point, this is a long-term commitment for us. Every time we renovate our portfolio, we consider how we can enhance our products. It's not just because it's the right thing to do but also because consumers expect it from us. We are committed to sugar and salt reduction, and we continue to work with communities to improve food insecurity. This is an ongoing commitment for us as we move forward.

We are buyers of tomatoes and beans, and at our core, we are an agricultural company. We've been investing a lot in this aspect. You can see what we are doing in Europe with our beans and the launch of new bean-based products like Heinz Beanz Burgers and Protein Pots. Here in the U.S., we are very proud to announce that this week we're launching our plant-based cheese, which is an incredible product, different from anything else on the market. It melts, tastes, and smells like cheese, which sets it apart from everything else currently available.

Our next question comes from Stephen Powers with Deutsche Bank.

I wanted to ask about gross margin progression. Across the consumer goods space, we see signs of gross margin stabilization, if not recovery, with many companies coming in ahead of consensus expectations or improving sequentially. Your portfolio is different, but you are not yet experiencing this situation. I'm curious about how you're thinking about gross margin progress and the expectations we should have going into the fourth quarter and improvement prospects as we build into fiscal '23.

Andre, you may answer this question, please.

Sure. Thanks for the question. We have been focusing on pricing to protect against dollar inflation, and we have been doing that for the second consecutive quarter. In Q2 and now in Q3, the price was in line with inflation and price plus gross efficiencies was ahead of inflation. In Q3, we experienced some incremental pressure in selected areas, and we already took action on it. There is a continuous lag effect. We expect Q3 to be the bottom of our gross margin, and you should expect to see a sequential improvement in Q4 compared to Q3.

Our next question comes from David Palmer with Evercore ISI.

Just a follow-up on supply chain. Your case fill rates in your slide deck were in the low 90s in the third quarter, which is better than the high 80s in the first quarter. I was surprised to see the fill rate remained the same as Q2. Is that a result of upstream supplier effects? How do you see progress there? When can we expect to see improvements in fill rates?

David, thanks for the question. Carlos?

What I'll say is that, as you mentioned, it is connected to the availability of certain upstream ingredients. However, our commitment is to continue to improve that. As we navigate the situation concerning these capacity constraints, we're also looking into how we can lead with the capacity we have. For instance, we are ingesting data directly from our customers, allowing us to better allocate our inventory and reduce out-of-stocks. We started with a pilot involving one particular retailer, which reduced out-of-stocks in their stores by 40% in roughly eight weeks. We have expanded that program, utilizing data from different customers to ensure we're deploying the right inventory to the right stores. We are also sending the right signals to our production to maximize availability. This is how we are addressing the challenges on both the upstream and our internal capabilities.

Our next question comes from John Baumgartner with Mizuho.

Miguel, I was wondering if you could discuss the market share recovery you had in Q3 relative to your branded competition. How would you break that down between benefits from easing supply chain constraints, pricing differentials, or underlying changes to your execution in the market? How sustainable do you think those performance levels will be going forward?

Thanks for the question. Let me give you my perspective, and then Carlos can elaborate further. We are excited to maintain our market share levels despite the ongoing supply challenges. We would have gained even more share if we were not still facing shortages on raw materials. A good example is Capri Sun and Lunchables, where previously we had problems with supply but now are experiencing record share gains in these two brands. I am optimistic that we can continue to expand our market share. Carlos?

To build on Miguel's point, this is a combination of the continuous investments we've made in renovating our brands and improving the quality of our marketing communication. Unlocking capacity in key brands also contributed to our success. The examples Miguel mentioned, such as Lunchables and Capri Sun, demonstrate our improved inventory and case fill rates, allowing us to run event-based promotions effectively. Despite parts of our inventory still facing challenges, when we unlock those, we will have the opportunity to grow our consumption further. Overall, this is a result of our hard work over the past year and a half to enhance our company's equity and we are seeing the benefits as we engage aggressively in the marketplace.

Operator, we have time for one more question.

Our next question comes from Michael Lavery with Piper Sandler.

I wanted to revisit the foodservice opportunity you've called out. You stated that roughly half of the top 50 QSRs present distribution opportunities for you. Can you give us a sense of what has kept you from being in some of those accounts? How sticky are those relationships, and how realistic are your expectations in terms of acquiring those accounts?

Carlos, could you answer that question, and then Rafael might join us to share insights regarding our international zone where we have great momentum in food service?

Yes. First, let's note that our business in North America is growing, and we feel good about our performance so far. The food service channel is critical for us going forward. We have restructured internally to transform our approach to foodservice. We've changed leadership and reoriented our focus, treating food service not just as a stable contributor but as a growth driver. We've simplified and renovated our portfolio, reducing about half of the SKUs we had in 2019, while enhancing product quality. To unlock opportunities with QSRs, we must continue investing in business capacity. We have made significant investments in CapEx over the past two years—over $100 million—to support our growth in the foodservice channel. This positions us well for discussions with QSR customers.

The opportunity in foodservice is significant. It has been a core pillar for our results over the last few years. Our growth is faster than the industry average. Many competitors struggled during the pandemic, while we maintained our investment levels. Now, as we emerge from the pandemic, we continue to see strong performance. QSR is a key channel for us, particularly in sauces, and we have substantial room to grow. Currently, our market share in the foodservice sauces category is about 3%-4%, leaving significant opportunities ahead. Our chef-led model allows us to engage customers effectively, driving innovations that are well received.

Thank you, Operator. I'm now going to hand it over to Miguel for some closing commentary.

I would like to finish with a quote from a famous legendary car racer in Formula 1 who 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 see this as a great opportunity. We've navigated through short-term uncertainties and adapted quickly while continuing to build for the future. We are excited about what lies ahead. Thank you very much.

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