Kraft Heinz : Q4 2022 Q&A Transcript

The Kraft Heinz Company

Q4 2022 Earnings Call | Feb 15, 2023

COMPANY PARTICIPANTS

Anne-Marie Megela

Vice President, Global Head of Investor Relations, The Kraft Heinz Co.

Miguel Patricio

Chief Executive Officer & Chairman, The Kraft Heinz Co.

Andre Maciel

Executive Vice President & Global Chief Financial Officer, The Kraft Heinz Co.

Carlos Abrams-Rivera

Executive Vice President and President, North America, The Kraft Heinz Co.

Rafael Oliveira

Executive Vice President and President, International Markets, The Kraft Heinz Co.

OTHER PARTICIPANTS

Andrew Lazar

Analyst, Barclays Capital, Inc.

Bryan D. Spillane

Analyst, Bank of America Securities

Christopher R. Growe

Analyst, Stifel, Nicolaus & Co., Inc.

Cody Ross

Analyst, UBS Securities LLC

Ken Goldman

Analyst, JPMorgan Securities LLC

Pamela Kaufman

Analyst, Morgan Stanley & Co. LLC

Steve Powers

Analyst, Deutsche Bank Securities, Inc.

David Palmer

Analyst, Evercore ISI

Michael S. Lavery

Analyst, Piper Sandler & Co

The Kraft Heinz Company

Q4 2022 Earnings Call | Feb 15, 2023

QUESTION AND ANSWER SESSION

Operator: Good day and thank you for standing by. Welcome to The Kraft Heinz Company fourth quarter results conference call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there'll be a question-and-answer session.

I would now like to turn the call over to your speaker today, Anne-Marie Megela. Please go ahead.

Anne-Marie Megela

Vice President, Global Head of Investor Relations, The Kraft Heinz Co.

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 2022 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 investments, and related timing and expected impacts. These and 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.comunder News & Events for a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP financial measures.

Miguel Patricio

Chief Executive Officer & Chairman, The Kraft Heinz Co.

Thank you, Anne-Marie, and thank you, everyone, for joining us today. Let me first take a moment to say how proud I am of the Kraft Heinz team. We have come so far on our transformation journey. It's quite amazing, and the fourth quarter was no exception. You can see the momentum building across our business. Service levels and market share trends are improving. Base volumes are positive. We are outpacing the competition in Foodservice and Emerging Markets, and by a lot. And importantly, we continue to invest for growth.

Once again, we have unlocked efficiencies over $400 million dollars this year, and this allows us to invest in new tools and capabilities for our teams, and new product innovation for our consumers.

The Kraft Heinz Company

Q4 2022 Earnings Call | Feb 15, 2023

From a pricing perspective, 99% of all needed pricing has already been announced for 2023. As we look to the rest of the year, we have no current plan to announce new pricing in North America, Europe, Latin America, and most of Asia. I am very optimistic and very excited about how we are positioned to deliver long-term, sustainable growth.

With that, I have Andre, Carlos and Rafa to join me. So, let's open the call for the Q&A.

Operator: Thank you. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Andrew Lazar with Barclays. Your line is open.

Andrew Lazar

Analyst, Barclays Capital, Inc.

Your EBITDA guidance for fiscal 2023 excluding the impact from the 53rd week is actually in line with your long-term algorithm. And when you detailed this, I guess, at CAGNY a year ago, you sort of I think said it would take multiple years to reach this level of growth. So, I guess in this regard, I'm trying to get a sense of whether - if I have this right, whether you're ahead of schedule and if so, what you attribute it to. Like what's gotten better or faster maybe than you anticipated. And I guess most importantly, are you in a place where you see this level of growth now as more sustainable? Thank you.

Andre Maciel

Executive Vice President & Global Chief Financial Officer, The Kraft Heinz Co.

Hi, Andrew, good morning again, and thanks for the question. And thanks a lot for noticing it. In fact, we feel very proud about what we have been achieving as a company and I think 2023 will mark another step up in our performance. And as well noticed, we are on the long-term algorithm already on net sales and also on EBITDA if you remove the effects from currency and from the 53rd week. And I think this is the best way to show that our transformation is working through results. Right? And it's good to see how we finished 2022 with very strong momentum and how that's translating into stronger performance in 2023. This is a consequence of our market share in the US continuing to improve; still negative but improving. Foodservice continues to deliver at high, above 20%, Emerging Markets growing double digits and a strong rate, so all the three pillars of growth are working in our favor.

Supply chain efficiencies continue to happen and in 2023, as you might have noticed in guidance, we are expanding gross margin and got back to 2019 levels, which is allowing us to continue to increase the investment in the business for growth. So, in 2023 we are increasing investments behind marketing, technology, and people which are critical enablers for us to fuel the growth of the company. So, we feel good about where we are moving. Still much to do but feel good.

Operator: One moment for our next question. Our next question comes from Bryan Spillane with Bank of America. Your line is open.

The Kraft Heinz Company

Q4 2022 Earnings Call | Feb 15, 2023

Bryan D. Spillane

Analyst, Bank of America Securities

Thanks, operator. Good morning, everyone. My question's about just the free cash flow. And I have a couple questions related to that. I guess the first is just simply, Andre, can you give us a little bit more insight in terms of I guess the inventory build? Is it finished goods inventory? Is it raw materials? The decision to do that, and I guess in the prepared remarks it's tied to service level. So are you going to need to carry elevated inventories through 2023 is my first question.

Miguel Patricio

Chief Executive Officer & Chairman, The Kraft Heinz Co.

Andre, please.

Andre Maciel

Executive Vice President & Global Chief Financial Officer, The Kraft Heinz Co.

Sure. Good morning, and thanks for the question. Look as we said, as you have seen throughout 2022, we have to rebuild inventory. Our case fill rate at the end of 2021 was in the low 80s which is extremely low. So we had a lot of recovery to do. So you have seen throughout the year, the effect of us building inventory. Keep in mind that we finished 2022 it's still in the low 90s. So it's still not what retailers are expecting it should be and what we expect ourselves should be.

Being said that, we do have, compared to historical levels, higher inventory coverage on average in raw and package materials, also which is normal because we're trying to build the buffers given all the volatility and uncertainty. So we expect that those raw and package materials should decline over time, starting in 2023. And in finished goods, even though we need to increase inventory in certain spots where the service levels are still low, we still have a lot of opportunity to rebalance our inventory across the network. I think one of the consequences of the pandemic and the demand volatility is that we start to have inventory stranded in the wrong warehouses to meet the demand. And that takes time to sort itself out, right, because it'd be too costly for us to be shipping items across the network.

So because of these effects and all the investments that we have made in the past two years to automate demand forecasting, we are investing a lot of resources in better supply trending. We have a big project that's already started for network simplification. So the combination of these investments, plus the rebalance of the network, plus going back to the more historical levels of raw and packaging materials, we should start to see recovery in inventory starting 2023 but more into the future.

Bryan D. Spillane

Analyst, Bank of America Securities

The Kraft Heinz Company

Q4 2022 Earnings Call | Feb 15, 2023

So I guess that we're kind of bridging that now to maybe how we should be thinking about free cash flow and free cash flow conversion for 2023. Can you give us a little bit of perspective on, I guess, capital spending? Will inventory or working capital be a tailwind? Like can we get back to more normal free cash flow conversion in 2023? Or is it still going to be somewhat, I guess, subdued relative to previous years?

Andre Maciel

Executive Vice President & Global Chief Financial Officer, The Kraft Heinz Co.

So free cash flow will be better than 2022. We are still not going to be on the long-term algorithm of 100%, and that's in great part because of CapEx investments. As we have said as well when we unveiled the long-term algorithm, we are investing for growth. And we have stepped up investment in CapEx. You have seen 2022, we're spending a little more than $900 million, which is a big increase versus $700 million-$750 million in the past. We are ramping up this again in 2023 and 2024 as part of our long-term plan. And then we should go back down to closer to 3.5% of net sales starting 2025. That's the current perspective.

So when the CapEx starts to come down, that will help us to give the step-up change to go back to achieve the 100% as we said in long-term outlook.

Bryan D. Spillane

Analyst, Bank of America Securities

Okay.

Andre Maciel

Executive Vice President & Global Chief Financial Officer, The Kraft Heinz Co.

So this year, I mean, if you want to expect something this year, it should be like about 80% or so, keeping a ballpark in mind.

Bryan D. Spillane

Analyst, Bank of America Securities

Okay. That's helpful. Thank you very much. Appreciate all the color.

Andre Maciel

Executive Vice President & Global Chief Financial Officer, The Kraft Heinz Co.

Thank you.