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. 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.

Thank you, and hello, everyone. Welcome to our Q&A session for our third quarter 2023 business update. During today’s call, we may have forward-looking statements regarding our expectations for the future, including items 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 at ir.kraftheinzcompany.com, under News and Events, for a discussion of our non-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 remarks.

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.

Thank you. Our first question comes from Andrew Lazar with Barclays. You may proceed.

Great, thanks. Good morning, everybody. In Slide 33 of the slide deck this morning, you call out branded promotional activity is still below 2019 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 2024, 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.

Thanks, Andrew. It’s Carlos. Let me first address your point about clarification. What you see in the page is about those branded players that do compete with Kraft Heinz. The second part in terms of how do we think about our promotions as we go forward. First, I will tell you that I’m not going to comment on what other companies may or may not do. But I will tell you is that, one, we’re not going back to 2019 levels. At the same time, as we go forward into Q4, we know there is a seasonality to our business. And as we have said earlier, we’re going to make sure now as we go into the holiday season, that we make the right investments to support our business. Now I’ll say that at the same time, we’re going to continue with the same level of discipline that we have shown until now to make sure that our investment has the right level of ROI as we go forward. Thanks for the question, Andrew.

Thank you.

Thank you. Our next question comes from Peter Galbo with Bank of America. You may proceed.

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.

First of all, I think that – let me just put into context kind of the volume question that you see in North America. First, I would say is that what you see for us as a company, we continue to improve sequentially from what you saw in Q2 to now in Q3. If I look holistically at the company first, you’ll see that we continue to drive the things that are working for us. We are continuing to grow in Emerging Markets where we’re growing volume mix year-over-year now in Q3, that we continue to expand in our Foodservice and that we believe continues to drive opportunity as we go forward. Specifically in the U.S. business, you see how the investment we have made in terms of improving our share of shelf, our investments in marketing, our investing in innovation and our improvement in CFR have continued to improve overall actions. Now as we think about the total portfolio, there are some places in which we’re going to remain focused and disciplined on how we invest back into the business. I think you referred to our meat business, where we want to make sure that we are not going to be just following unprofitable growth, but that we’re going to be rational and disciplined on how we invest in those businesses in order for us to drive the right consumer pull, but at the same time, not sacrificing the overall profitability of the business that we need to maintain.

I will just add that in our long-term algorithm, volume is important to us. So in our 2% to 3% growth, it comes from a balanced contribution between price and volume, 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.

Great. Thanks very much.

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

Good morning. Thanks for the questions. Carlos, I just wanted to touch on the meats business again, coming back to Peter’s question. You point out it’s an energized business, but the category is seeing price competition, private label is gaining share, that was not happening at the outset during COVID, during work from home. It just seems as though the ambition to rebuild or maintain profit, it’s hard to square that with what looks like a need to reinvest more given the declines. So how do you think about resource allocation, your willingness to continue reinvesting in that business relative to the point where you just say, hey, these assets may be better suited to another owner like what happened with the nuts business? Just curious about your willingness to stick with it, given a very tough backdrop in the category. Thank you.

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

Sure. So as we have said before, different parts of our portfolio have different roles, and these roles might change over time. The role for me right now is to rebuild the profitability which has enrolled at 50% in the last 5 years while continuing to invest in the brands to improve, innovate, so then at some point, this brand can be in a position to grow in a profitable way again. And that’s what we’re doing. In Q3, for the second quarter in a row, this part of the portfolio declined mid to high single digits on the top line but grew mid to high single digits on the bottom line, not by milking the brand, but by making the right type of investment and the right type of actions that are appropriate for this portfolio right now. For us to be chasing volume with this in an unsustainable way, only through promotion, that’s not the game we want this brand to play.

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 begun 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 is 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.

Okay, thank you.

Fair questions, John.

Thank you. Our next question comes from Stephen Powers with Deutsche Bank. You may proceed.

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.

Thank you for the question, Stephen. Andre, why don’t you comment on the capital allocation, then I’ll talk about Foodservice and Emerging Markets.

Sure. On capital allocation, our priorities remain unchanged. That means continue to fund our very competitive dividend, maintain investment grade and prioritize organic growth like we have been consistently doing during the past 3 to 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.

Thanks, Andre. Let me comment first on Foodservice. I feel very optimistic about our plans in Foodservice. We have really been working on building a foundation for the future. If you think about the way we are building our business in basically three areas, we continue to make the investments in our chef-led models, and that’s driving positive performance for us. We also are making sure we are competing in more attractive and better margin channels, things like our independent and non-commercial channels versus traditional where we have been limited to. Lastly, we are seeing much more powerful innovation that allows us to leverage the technology investments we have made and bring those into the product forefront, whether that is in things like our Heinz Remix machines and how that actually creates an opportunity for us to separate ourselves for the future. If you look at the full year for Foodservice, our expectation is probably to grow somewhere in the low to mid double digits versus last year. I will point out that we’re gaining share too, in both North America and the international zone. Then let me just make sure also that it’s clear that if we think about our long-term algorithm, Foodservice is expected to grow about 5%, and we’re going to be well above that level in 2023. When I switch over to our Emerging Markets, one great thing we also have been investing behind in Emerging Markets is kind of the discipline of our go-to-market model. The reason we feel so confident is because there is a data-driven go-to-market model that allows us to drive distribution, then we can build and press in existing markets and enter new ones. We have done that in several locations. In fact, we are on track to implement our model in 90% of Emerging Markets by the end of this year. Just to remind you, in the first phase of building distribution, we built the infrastructure, and then we go into the full structure to take advantage of our emerging business. In Emerging Markets, I would just add the comment that in Q3, we saw a temporary headwind particularly in Asia, where we have a business in Indonesia that mostly surrounds Ramadan season and saw some spending shifting from travel, away from gifting, and we have a gifting business in Indonesia. So that was a temporary thing. As we think about the year ahead, we believe that we will get back to the right levels of performance also in our Indonesia business. Thanks for the question.

Thank you.

Thank you. Our next question comes from Ken Goldman with JPMorgan. You may proceed.

Hi, thank you. Just a quick one. In your slide presentation, from the prior quarter, 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?

Yes, we did. And that’s the case. Nothing changes. So nothing changed in terms of volume expectations as Carlos said. We said, and it happened that volume would improve in Q3 sequentially to Q2, and it did. It improved in Q4 versus Q3. At some point in 2024, the volumes will turn positive.

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

Sorry, can I just quickly clarify that? I think people interpreted the commentary about positive volume as net throughout 2024; it will be positive. But I think the comment you just made was at some point in 2024, it will turn positive. I guess I’m curious, do you expect at the end of the year, your total 2024 volume to be positive? I just wanted to get a sense that people aren’t over modeling the year.

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

Thank you. Our next question comes from Michael Lavery with Piper Sandler. You may proceed.

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 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 unpack that a little bit and reconcile how those two go together and what exactly you mean by those investments on the price side?

Yes. Good question. Happy to clarify, Michael. What I would say is that we need to make sure we are responding to the moments in which consumers are looking for the right solutions for whether it’s at the holiday seasons or all the points throughout the year. As we go into Q4, for example, we will make sure that we are making the right investments. However, we will be doing that with the right level of discipline to ensure we drive the right returns on that investment. The idea is that we have simply – like we stated earlier, we are not going to just be chasing volume; we are going to look for what is the way for us to drive profitable volume in a way that combines our ability to continue to build our businesses through the right investments in marketing and using the full array of revenue management tools to drive the right efficiency and effectiveness of our investments.

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?

I think that would be one of the things that you could say. But I think on top of that, if you think about the full array of our revenue management tools, pricing, price architecture, and other tools at our disposal that allow us to think about what are the right investments in order to maintain the level of improving profitability that we have seen deteriorate over the last few years.

Okay. Thanks so much.

Thank you.

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

Okay. Good morning, folks. Thanks. Congrats are in order. Congrats, Miguel, for a good run and the improvements you have driven while at the helm of the company and congrats, Carlos, in the upcoming promotion and responsibility. So, on that topic, I guess the starting-off question is, what do you expect to do different? Should we be bracing and expecting any strategic shifts, or given that you have been an architect of many of the plans that have been in place, is this going to be sort of business as usual?

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 almost 4 years now. I think a number of things that we have done as a company, we certainly have done together. Strategically, I am certainly committed to the three growth pillars that we have going forward: how we continue to drive our expansion in emerging markets, how 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 probably read some of the changes we are making in our structure to 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 into the new role in January has been listening to the organization and making sure we have clarity of our strategy. Our structure is going to follow that clarity. You will see some of the things that we will be able to do as we break down the international zone, which has worked well for us in the past. Now, as we go into a new way of growing, we want to focus more 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 our strategy to life. We can leverage the scale of the company, the scale we have been investing behind our technology, and our marketing capabilities to deploy them against the three strategic pillars that I align with.

And should we expect inorganic solutions to come into the fold a little bit more so now that your balance sheet is in a better situation?

As Andre said earlier, we continue to look at opportunities. 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 we will be announcing. Andre, anything else you would add?

No, I think that’s consistent with what we have said before. I think our priority is organic business and M&A. If it happens, it has to help us accelerate our organic strategy, essentially be fully consistent, like we have done with less for acquisitions, or sales elevation and pre-opting in emerging markets to be accretive to our top line, bolt-on on top of acquisitions. That’s what we are focusing on.

Understood. Thank you very much.

Thank you, Jason.

Thank you. Our next question comes from Matt Smith with Stifel. You may proceed.

Hi. Good morning. I wanted to ask a question. Your productivity savings have been very strong this year, and you already increased your target for the year. Those have in part been used to have a stepped-up level of investment behind marketing, R&D, and innovation. But as we look forward, can you sustain this level of incremental savings into 2024, or should we expect a return to the target of $500 million? After this year with stepped-up investment, do you believe you are exiting with the appropriate level of investment across the business, or do you plan to continue to invest at an elevated rate as we look forward?

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

Sure. At this point, we are still committed to delivering the 3% of COGS of $500 million on a go-forward basis. But as we have said before, our benchmark is really on the 4% level, which we are achieving this year. You should keep in mind that this year we had a lot of, let’s call, gettables from inefficiency that was generated from the pandemic, that’s also helping. We feel good about how our supply chain organization is operating at a superior level with very stable service levels and being much more forward-thinking, which gives us confidence in delivering that 3% we have talked about previously. From an investment standpoint, this has been a great year because we have delivered very solid bottom line growth while really resetting the investment level from the company for the future, which means that I think a lot of the reset has happened. There are still places that we want to invest more. But I think we took advantage of this year to reset the level of investments to a very good level.

Thank you, Carlos, and thank you, Andre.

This will be the last question.

And our last question comes from Robert Moskow with TD Cowen. You may proceed.

Hi. Can you hear me now?

Yes.

Sorry about that. This is kind of a what-if question, and maybe you might not want to answer what-if questions. 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. I guess my question is, if we are in a scenario where we are in a 0% to 1% sales growth environment next year 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?

Good morning, Rob, and good to hear back from you. We believe that for us to grow top line in a profitable, sustainable way is critical. If in an event where the industry is zero, I think that doesn’t change the game we are trying to play. I don’t know if you are implying that we will start to get aggressive with promotions to try to gain volume through market share in a productive and sustainable way. If that’s what you are asking behind your question, that’s not the game we are going to play. I will just say that our strategy continues to be the same; it’s working. We feel that it’s heading in the right direction. We don’t want to change direction because of temporary situations in the industry.

Okay. Thank you.

Thanks, Robert.

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

Thank you. Before we leave here, I wanted to acknowledge and take a moment to thank Miguel for all the support and trust that he has shown to me personally and for everything he has done for the company, as he has built this tremendous and strong foundation. I can tell you that today, Kraft Heinz is a much stronger company because in 2019, Miguel Patricio put this company on his back and carried it forward. I am forever grateful for being part of his team as we all worked together to transform Kraft Heinz. As I take over as the next CEO of Kraft Heinz, I am proud of where we have been as a company and even more thrilled about where we are going. Thank you all for joining us today.

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