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. 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.

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 fourth quarter 2023 business update. During today’s call, we may make 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 the Q&A session, it gives me great pleasure to hand it over to Carlos Abrams-Rivera for opening comments and to host his first earnings update as our Chief Executive Officer. Carlos, over to you.

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 iconic brands. With that, I have Andre joining me today. Let's open the call for the Q&A.

Thank you. One moment for questions. Our first question comes from Andrew Lazar with Barclays. You may proceed.

Great. Thanks. Good morning, everybody.

Good morning.

Good morning.

Carlos, I was hoping to start out maybe organic sales in the fourth quarter were impacted, as you talked about by trade timing and a retail inventory deload. You're suggesting that you expect the first quarter organic sales to be similar to 4Q, which implies that underlying sales maybe could be a bit worse than 4Q. I don't think you expect the retailer deload to continue. So, if I have that right, I guess, what would cause the sequential slowdown in organic sales in 1Q? And how do you see that playing out moving forward?

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?

Sure. Good morning, Andrew. We expect to see similar numbers from Q4, but they will be driven by different factors. In North America, we anticipate better performance since we shouldn't experience the same trade timing and inventory deload issues. We believe we'll be at a healthy level in terms of sellout. If anything, it may be in line or slightly better as we move into Q1. Regarding emerging markets, we expect shipment phasing to impact Q1. Instead of the double-digit growth we've experienced consistently, we anticipate emerging markets will grow in the mid-single digits. You may recall last year in Q1, we had very strong performance in Latin America, particularly with Brazil growing 40%. We'll be comparing to that, but the underlying sellout trends remain strong in both North America and emerging markets.

Great. That's really helpful. Carlos, it seems that most of the pressure in the GROW platform during the fourth quarter was in Easy Meals. If I have that correct, could you explain what led to that and how you expect it to evolve as we move into the first quarter? It sounds like you anticipate improvements in North America.

Sure. Reflecting on Q4, we experienced positive growth in our Ore-Ida business, which helped our performance and market share as we maximized our new partnership with Simplot. On the downside, we faced challenges in our mac & cheese business, primarily due to its reliance on SNAP programs, which impacted results in Q4. Looking ahead, we have three main strategies to improve this situation. First, we are increasing our investment in a new mac & cheese campaign and introducing innovative products, including new SKU flavors, variety packs, and a plant-based option developed with NotCo. Second, we're enhancing value for our mac & cheese offerings by collaborating with brands like Oscar Mayer to create complete meal solutions for our customers, along with multipack options tailored to various consumer preferences. Lastly, we're partnering with retailers to refine product assortments and boost aisle traffic. I am encouraged by our team's response to the challenges and their proactive planning for 2024 to enhance the performance of Easy Meals.

Thanks so much and see you all next week.

Thank you.

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

Thanks, operator. Good morning, everyone. I have a question about Foodservice, and I'd appreciate if you could provide more detail. In North America, the performance has slowed compared to previous quarters, and it appears to be lagging behind the industry as noted in your slide. I have a couple of questions regarding this. First, is there a trade or inventory reduction occurring in Foodservice? Could you elaborate on the different channels within Foodservice, specifically what has improved and what has declined? Additionally, what are your expectations for North America and globally regarding Foodservice? Do you anticipate it will align with your targets for this year, or could it be slightly better? I’d like to dive deeper into the Foodservice segment, please.

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 in 2024 in our long-term guidance—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 as having even more coming as we go forward because we are not only performing well where we are, but we are also 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 and 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.

I guess if I'm looking at slide nine correctly, I think you've got the industry growing faster than your North America business in the fourth quarter. So, again, it just seems like—I don't know if there's a disconnect between what you shipped versus what consumption was. But—again, unless I'm looking at this slide incorrectly, it actually looks like you underperformed the industry.

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

Okay. Okay. All right. Thank you.

Thank you.

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

Hey, thanks. Good morning, everybody.

Good morning.

Carlos, I guess stepping back, I'd just like a little bit more detail on your conviction surrounding improved 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 allows us to return to growth without, I guess, incremental investment in promotions and price because it doesn't seem like that's part of the outlook.

Right. Let me just unpack that a little bit. First, as you—Andre mentioned earlier, there are some factors specifically affecting our Q4 performance in terms of trade as well as inventory that we're not going to repeat as we go forward. As we go into 2024, if I think about first the top line, we are going to continue the progression of emerging market at Foodservice. And then emerging markets are already growing volume. We have seen the progress of our Foodservice business growing faster than the industry. And in North America on the top line, we actually expect to recover share as we are now making all the payoff from the innovation investments we have made, we'll start seeing that coming throughout the year. So I think that idea of us continuing to invest in the right things behind our insights in North America is paying off with innovation. And then we also need to have the right business plans with our retailers. Those factors actually are going to help us drive the top line with confidence. If I think about kind of the—specifically, you talked about volume. One of the things that we are looking at is we are anticipating a return to the historical activity levels, and in fact, we are seeing that already. So, we are expecting volumes to turn positive in the second half of the year because as I mentioned, the idea of us continuing to invest in innovation will give us the right tailwinds as we go into the year, plus we no longer will have some headwinds associated with both pricing that we took in Q1 of last year as well as the SNAP benefits cycling. So that altogether gives me the confidence that we can see that us coming together with a better performance going into '24 in a way that actually allows us to exit the year with an algo for us as a company.

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.

Sure. And good morning. So yeah, as you pointed out, we were able to deliver a very solid cash flow conversion in 2023, above 80%. And we do expect a small progression also as we head into 2024. We're still going to be in the 80s territory because we do expect another year of solid CapEx investment like we have been doing in the last two years. There's a lot of good investment opportunities for us in the organic business. Yeah, and we have some taxes step-up that we also mentioned are affecting earnings as well. So those two factors go against that. But on the other hand, the working capital should expect to continue to improve as a consequence of the investments we have been making.

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 a little more about 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 from myself and the team when we're together in Florida.

Okay. Very good. We will see you there. Thank you.

Thank you.

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

Hi. Good morning. Just curious, there's some early indications that maybe as an industry, quick service restaurants, are 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 in some kind of slowdown there.

Yeah. In our business, frankly, a lot of our business is really focused on the front of the house. And we're actually seeing solid performance for our away-from-home business, both in the U.S. and as well as outside the U.S. And if you think about the fact that outside the U.S., we use that channel very much as a way for us to drive awareness and build their brands. That continues to drive positive growth for us. In the U.S. as well, we see that even within the context of QSR, we continue to see progress and improvement. But at the same time, we're also expanding into new channels that allow us to continue to drive growth, whether that is from our vending opportunities into new hospitality areas. So, we also are having a little bit of a broader view of how we define our away-from-home business to go into new spaces that we know are margin accretive and not be dependent on just one channel in order for us to drive the growth.

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 what helped in 2023 in terms of COGS efficiencies and some revenue growth management assistance?

Sure. So, we expect gross margin to expand again and it is part of our long-term algorithm. We feel proud of what we have done so far. Remind that we have always been pricing to offset inflation dollar for dollar, and that's what we have done in the last two years. However, in 2024, we are expecting to price approximately at a 1% level, which is below the inflation that we're expected at 3%. So, the main driver is really coming from gross efficiencies. We have been delivering ahead of what we outlined to you a couple of years back. So, 2023 was a very solid year, with almost 4% of gross efficiency as a percentage of COGS. And in 2024, we expect another solid year. So, this gross efficiency is helping us not only to offset a component of inflation but also is helping us to expand gross margins and investing a little more in the business on the SG&A side. And that's something that you should expect to see from us.

Great. Thank you.

Thank you.

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

Good morning.

Good morning, Pamela.

Good morning.

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.

Let me start and give you a sense of how we see the consumer today. And then maybe, Andre, you can go deeper into the specifics about the Q4 and how we see that playing as we go forward. But I guess the place that will start would be that what we're seeing in the data is regardless of the income levels that consumer is looking for value and they continue to be under pressure. And what we see is low-income consumers are actually shopping more at places like Dollar Stores, while higher-income consumers are shopping more at club stores. But mostly, we are seeing them looking for overall, smaller trips to stretch their dollar further. So for us, it continues to be about how do we continue to deliver value in different ways to that consumer who is very much focused on value through intentionally investing in our brands making sure we have longer value offerings and increasing the distribution in different channels mirroring what we have done in the past. And let me just be specific before Andre gives you the details on the Q4. And if I think about club channels, we have introduced a number of brands into club from Capri Sun to Lunchables to Classical Pasta Sauce. In fact, we also tested new innovations in our club channels. And in 2024, we'll have a 20% higher number of offerings in club than we did in 2023. Now, if I think about the enterprise points in the category and the SKU that we can have in areas around Dollar Stores, we're actually making sure that we're driving things like improving the assortment of barbecue and mustard or crab of mayo and salad dressing as well as new items around Taco Bell and our partnership that we have in order for us to drive expanded use of our Mexican initiatives. So, if I think about Dollar Store, we actually have today over 300 SKUs. And year-over-year, we're going to be increasing by about another 10% versus what we had in the past. So, we are making sure that we are in the right channels with the right assortment and continue to invest in our innovation to make sure that we can absolutely meet consumers looking for value independent of where they're looking for different occasions, different formats, different shopping behaviors. And now, Andre, if you want to give a little more context on the Q4.

Sure. So North America net sales declined by 3%, and approximately 140 bps is linked to the trade accrual release from last year into 2022 and from inventory deload year-over-year. But in fact, it's not that we saw a deload happening in 2023; in Q4 2022, as we started to recover, our services started 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 exiting the year with the best share performance of 2023. So that gives us a lot of good momentum heading into this year. Hope that helps.

Yes. Thanks. Just a quick clarification. So, are you saying that SNAP was a greater headwind in the fourth quarter than the prior two quarters? And why do you think that is?

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

Okay. Thank you.

Okay.

Thank you. One moment for questions. Our next question comes from Robert Moskow with TD Cowen. You may proceed.

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.

Sure. Good morning, Robert. Good to hear from you. So on the inflation side, as we said in prepared remarks, we do expect inflation again into 2024, low single digits in the 3% territory. Even though ingredients as a whole, we see quite a few commodities that are deflationary, we still have the impact of tomatoes and sugar affecting us negatively. So, there is a little net increase in terms of commodity inflation. And then—but the biggest bulk of the inflation is really coming from labor. We continue to see a relevant higher than pre-pandemic level on wage increase as well as transportation—making 2023, the transportation costs were quite low, and we are seeing some signs of rebound on the transportation cost side. So, this is where inflation is mostly coming from. On the second part of the question about the $25 million, not 100% of that is the system write-off, even though it's the majority of it. And this has to do with us deciding not to maintain investment in a certain technology that we think will not be relevant for the future. So we decided to stop that investment and redirected it to something that we think will be more relevant towards our future agenda. As you know, technology is front and center of our strategy, and we have continued to make decisions to ensure that we can turn it into a competitive advantage for us. So—and if this might require us to make decisions in between a quarter that we do not initially anticipate because we saw that that's the right thing for the business for the long term, we're not going to hesitate to do that.

Okay. Thank you, Andre.

Thank you.

Operator, we have time for one more question.

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

Good morning. Thanks for the question.

Good morning.

First off—good morning. Wondering if you could provide an update on the outlook for efficiencies. Just given the over-delivery in 2023, what's included in the guide for 2024. And as you think out to this next round of improvements, specifically the new overhead savings from automation, fixed assets. How are you thinking about the timing for when those benefits begin to accrue?

Great. So thanks for the question. As we said, 2023 was a 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 is this a consequence of the complete ways of working changes that we have done in the supply chain, more focused on variable costs and continuous improvements, but also 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 in the supply chain space, difficult to name only one because of 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, with more than 80 distribution centers overall. We do have initiatives in automation. In fact, we have a very strong partnership with Microsoft trying to use technology to allow us to make faster decisions. And if that improves labor usage and reduces yield losses. We have a lot of opportunities in value engineering to continue to ensure to offer the right type of attributes to consumers. So, there are 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.

And I think you will see is that how the investments we have been making in technology, the partnership we have been making in digital are basically fueling a lot of that efficiency in a way that actually creates some benefit for us for now and into the future as well. And again, will impact that even further when we are together in Florida.

Okay. Thanks for that. And then just quickly on international. The emerging markets volume mix was pretty solid in Q4. But I'm wondering if you can speak to the volume 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.

Happy to. I think if we think about what we have mentioned in terms of value and how consumers are looking for value in the U.S. is similar as well too, in terms of consumers in Europe. I mean, they are looking for that value as well. And we are continuing to make sure that we're bringing that value through the critical brands that we have, like our Heinz business in the U.K., for example, and how we continue to bring the products to the market that improve the quality of our products as well as focusing on the benefit that we bring. So, for example, a product like HEINZ Beanz and the fact that it brings such a benefit around protein, that's something that is now shifting in terms of how we think about that product. The fact that we're also bringing within certain parts of our categories, new entries leveraging our brands. So, in baked beans, we will have not only the HEINZ Beanz, but we also have HP baked beans. And that allows us to actually play in a couple of different areas with consumers, both at a more mainstream as well as to more value. And then in places like Germany, we're also introducing new benefits to consumers as they are also looking again for value, whether that is Heinz Mayonnaise in new channels in the discount spaces, but also making sure that we continue to bring the innovations consumers are looking for from us, like our Heinz Tomato Ketchup with zero sugar. So, we are approaching it with the same sense as we do in the U.S., which is let's make sure we're in the right channel with the right assortment. And at the same time, let's focus on bringing—and focusing on the benefits that we bring with our products.

Thanks, Carlos. Thanks, Andre.

Thank you.

Thank you.

Thank you very much.

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

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

Thank you for your participation. You may now disconnect.