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

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 second quarter 2024 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 think 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 discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP financial measures. I will now hand it over to our Chief Executive Officer, Carlos Abrams-Rivera for opening comments. Carlos, over to you.

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

Our first question comes from Andrew Lazar with Barclays.

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

Andre, why don't you start and I'll add to that.

Andrew, thanks for the question. As we stated in our guidance, we're contemplating a step-up in trade investment levels. You saw that in Q2; we already had a bit more trade than we did last year, where those are still well below 2019 levels. We believe that looking forward, we are more focused on those price gaps versus branded competitors and in places where it makes sense for the long term. We have been saying all along, and we continue to stick to this that we believe that's the way we want to grow the business—not through over-reliance on promotions, but rather continue to invest behind our innovation, our renovation, and our market investments. That's what we've been doing, and we're committed to that approach. We are confident about that moving forward. In the short term, we are seeing selected spots where it makes sense to add promotions to close those gaps. I'm not going to give you an overly precise number, but I estimate it to be in the 30% to 40% of the portfolio where those price gaps require some incremental level of investments in the U.S.

That's really helpful. Just a quick follow-up: Do you anticipate volume turning positive in the back half? Because I think by our math, it's implied that that's the case even by the new guidance range. How do you see volume progress specifically playing out in North America in the second half?

We do expect revenue and volume to gradually improve throughout the quarters. At the midpoint of the new guidance, we don't need volume to grow for us to achieve our guidance. Our projected price is expected to be in the 1% territory for the total portfolio. What's impacting the guidance is that we have sales declining by 0.5%. The good news is volumes in emerging markets, despite some headwinds in Brazil and China, continue to be positive. They have been positive in the second quarter and will continue to be so as we go forward. In the U.S., we expect volume to continue to improve. Again, at our midpoint, we don't need volumes to turn positive for us to achieve it.

To add to that, what gives me confidence as we think about the trajectory improving in the second half is that we are very much focused on driving that value in a sustainable way. It cannot just be value for the sake of value; we must deliver value in a sustainable manner through innovation, renovation, and marketing, especially for families that we know are spending more time cooking at home. When you observe some of our innovation around items like Mac & Cheese, where we're introducing new shapes, new flavors, and new pack sizes to consumers at different price points, you see us offering new Mexican solutions with Taco Bell and Delimex, allowing us to bring families solutions for their home while they're spending more time together. This is part of our effort to introduce new ideas and ways to provide value to families at this particular time. We're also seeing improvements in our Away From Home business, where we continue to build momentum. We are now servicing better as we enter Q3 and are attracting new customers in our Away From Home business that, again, help us to build on past successes. As Andre mentioned, we have been selective with our investments in trade, and we're also committed to a disciplined approach with the revenue growth management tools we've used in the past, which help us maintain a balance on profitability and smart spending.

Just a final comment: I think our adjusted guidance reflects this philosophy because you've seen that we have lowered our net sales guidance, but we've largely retained our EBIT growth and fully capital EPS growth. We have been very disciplined, thoughtful about the types of investments we make and their long-term implications, and we will continue to do so.

Our next question comes from Ken Goldman with JPMorgan.

Just sticking on the subject of the back half. You've provided numerous reasons for optimism, citing more innovation, renovation and marketing, expanded distribution in certain parts of the business, and targeted promotions. As we consider these drivers, along with the absence of the plant maintenance headwind, which do you see as being the most important in fulfilling your updated outlook? Do the promotions need to work? Is it primarily about innovation resonating with consumers? I want to better understand your visibility and reliance on these discussed factors.

Thank you for your question, Ken. Frankly, it's a bit dependent on the region. In our emerging markets, as Andre pointed out, we have been growing volume and continue to see improvements as we enter the second half of the year. We exited June in a much better way than we did for the whole quarter, so we are seeing progress there with our distribution gains. In our Away From Home business, we continue to enhance our service in light of the plant closure that we experienced in Q2. That has led us to win back some customers that we have already qualified for in the second half of the year, both globally in the U.S. and outside the U.S. We do not expect an initial large improvement in our overall Away From Home situation in the U.S., but we are anticipating ongoing progress with our distribution gains. In the U.S. and North America more broadly, it is critical that we maintain a balance between driving innovation and renovation across our brands while being thoughtful about the value we create with consumers through better products and ideas. This includes being strategic about how we employ our revenue growth management tools to achieve the right price gaps across our branded competitors. This should give you an idea of how we're considering the overall portfolio. Andre, do you want to add anything?

No, I think that's clear.

Our next question comes from Steve Powers with Deutsche Bank.

You highlighted a few overseas markets, specifically the U.K., China, and Brazil, which are experiencing unique dynamics. There is certainly much effort directed toward correcting price gaps in the U.K. and navigating consumer demand softness in China and Brazil. Could you expand on what you're experiencing in those markets and perhaps provide some additional insight into expectations for the back half in terms of any sequential improvement?

Sure. Starting with the U.K., as we mentioned last year, this market has experienced significant inflation, likely more so than other developed markets. Private label in this particular market has begun to gain substantial traction. We decided in Q3 last year to increase investments to protect volume, particularly with factories in the U.K. that require mindful utilization to protect volume for our strong brands there. Since implementing this approach nearly a year ago, we have seen positive returns in terms of volume share. We believe we're moving in the right direction in the U.K., and we have managed to mostly protect our gross margin due to efficiencies generated there. When it comes to China, similar to insights we've gathered from others, the industry is continuing to be weak. Although we have gained market share in modern trade, the overall industry growth is not meeting expectations, so we have adjusted our outlook accordingly. In Brazil, we continue to gain market share consistently, which is promising. However, consumers, like in other regions, are showing signs of fatigue and vulnerability. We've also observed price gaps with branded players and private labels shrinking, requiring us to invest accordingly. Retailers in emerging markets, such as Brazil, tend to hold higher inventories than in developed markets; thus, the average inventory levels are around 45 to 50 days, compared to the 20 to 25 days for the U.S. We have recently seen retailers adjust their inventories down. Given the current high-interest environment, there is significant consumer tightness; this is challenging for us in Brazil during the first half of the year, but we believe those inventories should now be at appropriate levels, improving our situation.

Our next question comes from John Baumgartner with Mizuho Securities.

I wanted to revisit North America. Your portfolio in many categories doesn't hold the highest prices. Consequently, with expectations for some trade downs into your brands, the focus on managing price gaps with other brands seems price-centric. How do you assess your ability to redefine your portfolio through innovation and marketing to better compete on non-price factors? It seems substantial work has already been completed with ingredient reformulations and so on. How do you view non-price competition?

Thank you for the question. As you've outlined, we have a variety of iconic brands across our North American portfolio that we feel very positive about. We've experienced growth with brands from Philadelphia to Jell-O as we continuously renovate those businesses. We have a strategy in place for our brands to ensure they resonate with consumers today and in the future. In areas where we see consumers making choices in response to managing family cash flow, we recognize the need to provide accessible options at varied price points to fit their budgets. For example, in the case of Mac & Cheese, we want to ensure we have various price points to accommodate consumers while maintaining their enjoyment of our products. We also recognize the need to be accessible in new retail environments. One insight we've garnered is that consumers are increasing their shopping trips and exploring more shopping venues, so it is critical that we extend our distribution to ensure consumers can find our brands across various channels. This means a focus on enhancing our reach in the dollar and club stores, where consumers are also looking for value for their families. These strategies articulate how we will continue to drive innovation and access as we progress into the second half of the year.

Our next question comes from Michael Lavery with Piper Sandler.

I wanted to ask about Away From Home—specifically about two things. You noted a 2.1% global decline. While the plant closure and some discontinuations impacted this, can you elaborate further on the individual components and clarify how much slower foot traffic contributed to the decline? What would the growth rate have been without those one-time issues, and what impact did slower foot traffic have? Additionally, you've previously updated us on the remix launch in BurgerFi. How is that progressing?

Andre, do you want to start?

Sure. Our global Away From Home business declined by 2.1% in the quarter, and the impact from the plant closure accounted for approximately 200 basis points, meaning we would have been flat without that effect. If we exclude the planned exits we executed at the end of last year, we would have had a growth of about 1.5%. It's worth noting that the overall category's industry performance in Q2 was worse than in Q1, an unexpected trend. In the U.S., performance was about 100 basis points weaker in Q2 compared to Q1. Fortunately, our results have helped to offset that industry headwind.

In terms of our equipment strategy, we have a comprehensive view regarding innovation and solving operational pain points for operators in the Away From Home sector. The HEINZ REMIX is currently in market, and we view this as an opportunity to trial the product and learn from feedback, setting the stage for meaningful scaling by 2025. So far, we are receiving excellent feedback from operators, and we are gathering valuable consumer data on how it can enhance our future deployment strategy. Interestingly, we initially anticipated the HEINZ REMIX would primarily feature in burgers, but we are observing it being integrated into a variety of other food offerings in different QSRs. Beyond the HEINZ REMIX, we are also experimenting with new dispensers and improvements to ease the operators' operational workflow. For instance, our dispensers are designed to be easier to clean, ultimately reducing labor involved in maintenance. We began shipping these to customers in Q2, with distribution exceeding our initial expectations as we move into the second half of the year. Thus, you will see us utilize feedback gained from the U.S. experience to drive similar initiatives globally while continuing to introduce more tabs and ideas into the marketplace.

Our next question comes from David Palmer with Evercore.

In the U.S. retail sector, as you look to stabilize, I appreciate the insights you've shared regarding volume and pricing. However, I'm curious about improvements across your portfolio and scanner data expectations. You've highlighted Capri Sun and Lunchables as turnaround situations; can you elaborate on which brands and categories you anticipate will improve the most in the second half?

Let me start by saying we highlighted those brands because they presented a significant headwind for us in the second quarter. I think the teams have crafted strong plans moving forward. For instance, in Lunchables, we experienced a low point with a decline of 17%, marking our worst weeks in the second quarter. However, since then, we have observed a steady recovery and are working towards further improvements. Our marketing team is increasing the marketing spend, optimizing the media mix, refining targeting strategies, and enhancing the value proposition for consumers. This includes innovations, and while there are competitive reasons to withhold some details, more plans will be revealing in the second half of the year. We also plan to expand our Lunchables offerings in partnership with Del Monte, and you will see meaningful support for our Lunchables as we move into the back-to-school program with tie-ins to the Transformer movie, mirroring our past successes with movie promotions for Heinz. We also pointed out Capri Sun due to its significant headwind in Q2, and our teams are keenly focused on driving change as we head into the second half. They have renovated the original Capri Sun to better align with consumer preferences, increased marketing investment for 2023 by two-fold, secured noteworthy back-to-school displays with customers, and executed the right promotional events, while also expanding into new channels, including club stores. Thus, we are optimistic about our response to the challenges we faced in Q2 and will continue building on progress across brands that are already succeeding, like Narita and our cream cheese business, which has shown sustained growth in the first half of the year.

We should also anticipate strong performance from Mac & Cheese, as there are many initiatives in the pipeline for that product line in the second half.

Exactly. To summarize, I believe there are two main areas we need to prioritize: our Spoonable business, where we are ensuring the right brand price gaps versus competitors, and Mac & Cheese, as I referenced in our slides. We are introducing new innovations, shapes, flavors, and even a tie-in with Super Mario Brothers. This blend of renovation and innovation is crucial for sustaining momentum with that product, which is a favorite among families looking for budget-friendly meals.

Great. I wanted to ask about condiments and sauces, particularly in the spoonables category, which you touched upon, but you covered it all. I'll pass.

Operator, we have time for one more question.

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

Andre and Carlos, one concern regarding Kraft Heinz stock is that the great progress made on gross margin recovery might face pressures over the next 12 months due to necessary price investments and ongoing volume weakness. Can you provide insights on what gross margin would have appeared in Q2 without these one-time issues, including the plant closure and others that are more transitory? Could it have been even higher? Does this suggest confidence in more room for gross margin expansion into 2025?

Rob, thanks for the question. In both Q1 and Q2, we faced unique situations that negatively affected our gross margin, which were quite significant and one-time in nature. While I would be hesitant to give precise percentage points, there were multiple substantial events that impacted our margin in both quarters. Despite those pressures, we still managed to expand our margins as we did. In the second half of the previous year, we saw a significant step-up in gross margin, so we should expect a more muted year-over-year impact moving forward. Nevertheless, that's part of the overarching plan. This is not a concern on our end. As we look to 2025, I won't provide specific guidance, but it’s important to recall our long-term expectations, which do include continuous gross margin expansion—not at the levels we've been seeing lately, but in the 25 to 75 basis point range. The strong efficiencies we've achieved are a significant contributor to this outcome, especially considering the supply chain enhancements from recent years. We've seen solid performance for four consecutive years. Additionally, we managed only about a 1% price increase despite a 3% inflation rate this year, and we were able to still expand gross margin while investing back into the business. Therefore, we foresee this favorable equation continuing among future prospects.

To build on that, Rob, this idea of rewiring the company, with a laser-like focus on driving efficiency as the fuel for profitable growth, is now deeply embedded in our culture. You can see this with procurement, operations, and marketing as we refine how we go to market and enhance returns on investment. The same applies to trade dynamics, utilizing AI for better investment strategies and profit-driven spending in the marketplace. This is not just a one-off; we believe this can provide sustainable strength moving forward. Healthy gross margins are critical for a virtuous growth cycle, which is a foundational aspect of our strong beliefs aligned with our long-term strategies for the company.

The changes in our operating model, which integrate commercial and supply chain functions, have also played a significant role in our performance. Importantly, everyone in the company shares two common objectives: market share and gross margin, as we strive for profitable growth.

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

Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.