Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- The Kraft Heinz Co (KHC, Financial) has returned over $1.5 billion in capital to shareholders through dividends and share repurchases so far this year.
- The company increased free cash flow by nearly $100 million, or approximately 9%, compared to last year.
- KHC has been able to hold prices below inflation while continuing to invest in innovation, marketing, and R&D.
- The company is seeing positive volume growth in emerging markets despite headwinds in Brazil and China.
- KHC has made significant progress in improving working capital and maintaining its targeted leverage ratio.
Negative Points
- The company is facing a difficult consumer environment, which necessitates selective promotion and trade spend activity to drive better volume results.
- There are concerns about price gaps across the portfolio, with an estimated 30% to 40% of the portfolio requiring incremental investment in the US.
- Volume in the away-from-home business declined by 2.1% globally, impacted by plant closures and discontinuations.
- The company is experiencing challenges in key overseas markets like the UK, China, and Brazil, with varying dynamics affecting performance.
- There is a need for continued price investments and volume improvements, which could pressure gross margins over the next 12 months.
Q & A Highlights
Q: 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. Can you dimensionalize the portion of the percentage of sales that need adjustments and identify any hotspots requiring more aggressive pricing actions?
A: Andre Maciel, Global Chief Financial Officer, Executive Vice President: We are contemplating a step-up in trade investment levels, already seen in Q2, but still below 2019 levels. We are focused on price gaps versus branded competitors where it makes sense for the long term. Approximately 30% to 40% of the portfolio in the US requires some incremental level of investments.
Q: Do you anticipate volume inflecting to positive in the back half? How do you see volume progress playing out specifically in North America in the second half?
A: Andre Maciel: We expect revenue and volume to gradually improve throughout the quarters. At the midpoint of our new guidance, we don't need volume to grow to achieve our targets. We expect price to be around 1% for the total portfolio. In the US, we anticipate volume improvement but don't require positive volume growth to meet our guidance.
Q: Can you expand on what you're seeing in the UK, China, and Brazil markets, and your expectations for the back half in terms of sequential improvement?
A: Andre Maciel: In the UK, we stepped up investments to protect volume against significant inflation and private label traction, seeing positive returns. In China, the industry remains soft, but we continue to gain market share in modern trade. In Brazil, we face consumer fatigue and inventory adjustments by retailers, but we expect improvements as inventory levels stabilize.
Q: How do you feel about the ability to redefine your portfolio through innovation and marketing to better compete on non-price factors?
A: Carlos Abrams-Rivera: We have a playbook for renovating our brands to resonate with consumers. We provide options at different price points and expand accessibility in new places like dollar stores and clubs. This strategy ensures our brands remain relevant and accessible to families shopping in various channels.
Q: Can you unpack the components of the 2.1% decline in the global away-from-home business and provide an update on the Heinz Remix launch in BurgerFi?
A: Andre Maciel: The plant closure impacted about 200 bps, and product exits at the end of last year impacted roughly 150 bps. Excluding these, we would have seen slight growth. The Heinz Remix is in trial, with positive feedback from operators and consumers, and we plan to scale it meaningfully in 2025.
Q: How are you thinking about improvement across the US retail portfolio, and which brands and categories will improve the most in the second half?
A: Carlos Abrams-Rivera: We expect significant improvements in Lunchables and Capri Sun, which were headwinds in Q2. We have plans for renovation, innovation, and increased marketing spend. Other areas with positive momentum include Ore-Ida, Mexican business, and cream cheese, which we expect to continue growing.
Q: Can you address concerns about gross margin pressure over the next 12 months due to price investments and weak volume? What would gross margin have been in Q2 excluding one-time issues?
A: Andre Maciel: We had several one-time impacts in Q1 and Q2 but still expanded gross margin. We expect more muted year-over-year gross margin impact in the second half due to a strong step-up last year. Long-term, we anticipate continuous gross margin expansion driven by strong efficiencies and sustainable trends.
Q: How are you managing price gaps and non-price competition in North America?
A: Carlos Abrams-Rivera: We focus on renovating iconic brands and providing options at different price points. We expand accessibility in new channels and apply a playbook for innovation and renovation to ensure our brands remain relevant and accessible to consumers.
Q: What are your expectations for the away-from-home business in the second half?
A: Carlos Abrams-Rivera: We expect improvements in service and distribution gains. We are winning new customers and focusing on innovation and solving pain points for operators. Our equipment strategy, including Heinz Remix and new dispensers, is progressing well and will scale further in 2025.
Q: How are you addressing the challenges in the UK, China, and Brazil markets?
A: Andre Maciel: In the UK, we are protecting volume against inflation and private label traction. In China, we are gaining market share despite industry softness. In Brazil, we are addressing consumer fatigue and inventory adjustments, expecting improvements as inventory levels stabilize.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
