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. Please 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.

Thank you, and hello, everyone, and welcome to our Q&A session for our first quarter 2023 business update. During today's call, we may make 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 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 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, Anne-Marie, and thank you, everyone, for 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 solid double-digit growth compared to the 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 through service globally, and we grew about 29% this quarter, and we'll grow through our priority growth platforms in the 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 supports our strategy. Let me start with people. Today, we have a great team and a 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, sales, and logistics. Two good examples of that are innovation, where we now have a much stronger pipeline for the future and we reduced the time for innovation from three years to a couple of months, and in supply where through the pods, plus the partnership with Microsoft and the usage of artificial intelligence, we are improving our planning, our service levels, reducing waste, and reducing times. We are in a very different place today. And finally, efficiencies. When we announced three years ago a $2 billion savings target over five years, there were a lot of skeptics, which represented $400 million per year. We not only delivered this number for three years in a row, but we are now increasing this target 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, who are joining me. Please, we are ready for the Q&A.

Thank you. Please proceed with your question.

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 mismatch between 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, 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 setups, please?

Andre, please.

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

The one thing I guess I would add, Bryan, to what Andre just said is, as you mentioned, the ROI has continued to improve. But let me give you a little more color on what's behind that. We have spoken about the agile scale and how that has reengineered Kraft Heinz. Part of that is us creating ownable agile revenue management tools that actually allow us to improve the returns of our promotions. For example, we have a trade management system that we created in-house, which gives us real-time access to essentially over 10,000 promotional events. We create digital tools that leverage that large amount of data to provide insights and recommendations in a very simple way. Those solutions help us to figure out what the right depth of discount is, what the right time of the year is, and what the right promotional tactics we have been employing. Looking at our Q1 numbers, we saw about a 10-point improvement in ROI in this particular quarter compared to what we saw a year ago. It's about 15 points if you compare it to 2019 of Q1. Again, our ownable tools continue to help us ensure that we drive those investments. Moving forward, our continued focus is to ensure that we invest in the business and are focused on the renovation of our business and marketing, driving stronger quality within those event-based activities that really have the high ROIs. And Raf, I don't know if there's anything you want to comment on what you're seeing in international promotions?

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

One moment for the next question, and it comes from the line of Andrew Lazar with Barclays. Please go ahead.

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 than originally planned for. Is there something you're seeing in the market that necessitates this adjustment? Or is this more a function of conservatism? And I appreciate that the fair outlook is already above your sort of long-term algorithm?

Andre, maybe you want to answer that question.

There is nothing that has changed our expectations. We are holding the guidance in the top line. Looking at what I believe the market was expecting, we over-delivered quite a lot in the international zone, which I think people still don't fully appreciate the impact of emerging markets growth in our portfolio and the foodservice portion of the international market on our portfolio as well. They've been performing extremely well, as Miguel indicated, and they continue to do. So momentum is very solid. Regarding the U.S., nothing changes in our internal expectations. We just see that at this moment, it is prudent to be cautious. There are macroeconomic uncertainties about interest rates and consumer behavior, but nothing significant.

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

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 channels 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 informing your decisions about product mix, new products, things like that?

Maybe Andre and Carlos can comment.

As you have seen since last year, the channel migration has started. We don't see a normal accelerated trend over that. We have consistently seen that for several months, the other channel and mass merchandising gaining ground consistently. This is not a new phenomenon, and we have been prepared for that for a while. 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.

Yes. What I would add in terms of color, I guess, first in retail, there have been some channel shifting which we expected. For lower-income consumers, this means kind of moving to more value-focused retailers or into the dollar channel. As Andre said, we anticipated this. For high-income consumers, that also means considering places that they can go instead of specialty retailers to more traditional grocery and club. We are looking to ensure that we have the right solutions for those respective channels. Whether that is more club-size packaging and brands like Mac & Cheese and JELL-O, or adding more dollar SKUs, allowing consumers who are stretched to stay within the category. As we discussed earlier, we are being savvy about how we go about our promotional activities in certain categories so that we can, in fact, be there with consumers with the right overall meal solution. If you think about what a grilled cheese sandwich can do with Kraft singles, as well as what Kraft Mac & Cheese can do for families, being able to be there for those kinds of meal solutions is part of the answer as well. Additionally, if you look at that same channel shift within foodservice, we are also making sure that we are adjusting for that. Our business continues to grow in QSR, and we are growing our share in that business as well. It's vital that we ensure our consumers are shifting from certain restaurants to QSR, where we can successfully drive our products and demonstrate ongoing growth, which we achieved in Q1. Thank you for the question, Ken.

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

Two quick questions. First, the gross margin outlook for the year. It’s great to see it moving up; it implies that your gross margin for the year is going to look a lot like your first quarter, which would, of course, mark an end to what has been like a sequential build with every quarter moving higher. I guess my question is, why would that be the case, especially given that cost inflation appears to be moderating?

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

Yes. Gross margin has been building sequentially, right? You did have a chart in one of your slides showing every quarter moving higher. Your full year guidance implies that it kind of goes sideways. So you're going to finish the year at a margin rate very comparable to the first quarter. So my question is, why shouldn't we expect it to continue to grind a little higher as cost inflation moderates?

No, the gross margin, we have increased a little bit throughout the next quarter. So we should see Q4 will be the highest one. Q2 goes a little bit sideways, which is a product mix component of our portfolio, given the type of products that sell more during Q1 and Q4 compared to last sold in December. Beyond that, no, the costs are continuing to ease. We did implement a lot of pricing in the middle of the quarter, so we should reflect that in Q2. Remember too, I'm talking about something from next year, but no, the gross margin will gradually increase throughout the year. The expectation is a little bit because of product mix, which is not seasonality.

Yes. That's helpful. I appreciate that. And then free cash flow, can you tell us what your outlook is for the full year in terms of conversion or level, however you want to communicate that? I know you talked about working inventory down. It built a lot last year, and obviously, there's still a heavy usage of cash again in the first quarter. How much of that do you think we can get back out over the course of this year? Or do we have to bleed into next year before we can normalize those levels?

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 discussed that in CAGNY. We expect by 2025 to go up to 100%. This has to do mainly with the CapEx ramp-up we have done this year and next year, which is close to 4%, and we expect to wind down. Working capital was a drag last year, and in Q1 was also negative. We prioritized service-level recovery, as the payback is obviously there. What I can tell you is we have a very robust plan to bring the inventory down to levels prior to that. We have been working with buffers, as everyone in the industry does, given circumstances around supply chain volatility and resilience. We have a very clear glide path to bring that down throughout the year. The expectation for inventory is to land the year at similar levels to pre-pandemic levels as a percentage of COGS.

One moment for our next question, please. And it comes from the line of John Baumgartner with Mizuho Securities.

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. However, those are also categories where your promotion levels really seemed below branded competitors. Is it fair to isolate the share losses to reduced promotions and lingering supply chain issues? Or are there other factors at play outside of promotions and supply chain?

No, John. I think that's a fair assessment. Let me start by stating that as we think about growing the business, we have a very disciplined approach to how we're going to do that. As Miguel mentioned, we're focusing on our growth platforms and their growth in our portfolio. We will ensure we're building disruptive innovation and continue to adapt our core to consumer trends while managing margin efficiency to reinvest in the business with double-digit investments in marketing, technology, and R&D. As you noted, there are a few categories where we observed a slowdown. Let me highlight a couple. For example, Kraft Cheese saw some supply chain challenges this quarter. Those issues prevented us from truly taking advantage of the early part of the period. We now anticipate we will be better positioned as we progress throughout the year to take advantage. Another example would be cold cuts, where we started the year with low inventory. As we aim for recovery, by the end of the summer, we should be in a much better place regarding supply across the overall business. In that sense, short-term supply constraints impacted our assessment of the quarter as well. One other point is that in some categories, we're simply not going to chase volume down. If you think about bacon, it probably represented about a point of headwind when looking at consumer data, but we are simply not going to chase unprofitable volume. That provides some insight into how we view the business and what drove the performance in the first quarter.

Okay. Thanks, Carlos. On the international side, your categories have historically been defensive in terms of demand amid economic weakness. 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, new sauces, and 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 in that they reduce some of the impact of private label and price sensitivities in places like the U.K. and Europe? How do you view the net resilience you're building outside the U.S.? Thank you.

Rafael, do you want to answer that one?

Yes. Well, happy to. I think we need to differentiate a bit how we're growing in emerging markets versus developed markets across international. What you described likely applies to the developed market as we talk, while in emerging markets, we are growing significantly, and the execution in this go-to-market has been significant and continues to expand. In developed markets, it’s a mix. We have been renovating our portfolio significantly across all base categories in Europe. We are launching products that have been incremental, particularly in the Easy Meals category and in Taste Elevation sauces. These areas have been our focus, and right now they are delivering the results and generating the gains we expect from the core and the innovations coming from those introductions.

Additionally, remember our international zone has developed marketing by emerging markets, right? Emerging markets account for 10% of our business. We expect to grow double digits as we have been doing. Our plan is about distributing more effectively and profitably. You may have noticed in the prepared remarks that since we started requiring a certain level of minimum ROIC or NDA from our emerging markets, we are seeing a healthy balance between top and bottom line. Significant gross margin expansion in emerging markets was observed in the quarter, and we expect that to continue improving. We feel very good about part of the investments Miguel discussed, about $150 million, which is being spread across marketing, R&D, advanced technology, and, in some cases, increasing sales headcount. For the emerging markets, we are accelerating the expansion of our go-to-market strategy. We constantly maintain stability as a priority. We want to grow while delivering leverage returns. In developed markets, not only in the U.S. but also in selected countries, we are using these incremental investments to restate marketing levels and, in some cases, accelerate the innovation agenda. This all contributes to maintaining a very good outlook for the future growth of the company.

Let me mention one thing that you said, which is that entering new categories with innovation. You're correct. We launched Heinz pasta sauce in the U.K. and within a couple of months achieved a 7% market share, and we continue to grow. We just launched a vodka pasta sauce with Absolut that has been extremely successful in the market. It's not only in Europe; if you look at our innovation profile in the U.S., it's very different from the past. In the past, we had a lot of innovation that wasn't truly incremental and was instead quite cannibalistic. Consider what we've been launching, like NotCo, which will be a national product during the summertime; it's about 80% incremental to the category. We also introduced spices, a huge market where we previously played no role. Our Tingly Ted's brand will be launching globally throughout the year, as it’s in a rapidly growing hot sauce segment we were not previously involved in. We have a very strong frozen product range but didn’t have a Kraft Mac & Cheese frozen option before. These innovations are substantially different from our past approaches and will radically change our company's innovation profile.

Operator, we have time for one more question.

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

I just wanted to follow up on the supply topic. It sounds like you've made good headway and have good visibility to improvements going forward. However, I guess, just framing that, is there a way to think about what the supply challenges in the first quarter cost you? And then as you move forward with those supply bottlenecks resolved, do you expect to resume a more normal growth trajectory in those categories? Will those issues be behind you? Will ketchup accelerate over the next couple of quarters as you dig out of the hole, or is it more prudent for us to think about a more gradual ramp of recovery, as those issues subside? Thank you.

Andre, maybe Carlos then.

We expect that as some of the solutions, as Carlos indicated, we will review the inventory at the retailer, and that should improve the top-line performance. However, that is all compensated in our guidance here. Remember that our priority in the U.S. is to grow in our growth platforms, which have performed very well in the first quarter, particularly Taste Elevation and Easy Meals. We expect ketchup to improve its performance throughout the year as those supply chain challenges are resolved. In other categories, like meat, as Carlos noted, we won't necessarily see a strong acceleration in growth because we want to be prudent about maintaining profitability.

Just a minute. There’s not much more to add. What I would say is we continue to see improvements in service levels. For context, last year at this time, we were in the mid-80s, and now we are closer to the high 90s as we exit the first quarter. We continue to have a few categories where we encountered isolated challenges, but overall, the business is on the right trajectory to continue servicing our clients effectively as we move forward.

Operator, that will be it for the Q&A session. I'd like to turn it over to Miguel for some closing comments.

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

Thank you. With that, we conclude today's conference call. Thank you for your participation. You may now disconnect.