The Kraft Heinz Company — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good day, and thank you for standing by. Welcome to the Kraft Heinz Company first quarter results conference call. [Operator Instructions] Please be advised that today's conference is being recorded.
Thank you, and hello, everyone. Welcome to our Q&A session for our first quarter 2024 business update.
Well, thank you, Anne-Marie, and thank you, everyone, for joining us today. So before we begin our Q&A, I'd just like to provide some perspective on our top-up session here at Kraft Heinz, our consumers. And while we've seen a notable uptick in consumer sentiment in the first quarter, there is a gap between high and low earners continues to remain wide, and it shows a clear and continuing bifurcation. So the lower-income consumers are challenged with interest rates remaining high, gas prices elevated and savings dwindling. So there's a clear pullback of restaurant spend by these lower-earning households, especially in restaurants and convenience stores. These consumers instead are looking for value as they prepare more meals at home.
one, because we are bringing innovative food solutions and faster than ever before; two, because we continue to renovate our core brands for today and tomorrow; and three, because we have the best team in the industry, full stop. We are on track to meet our goals of generating $2 billion incremental net sales from innovation, and the world has taken notice as we were recently named one of the world's Top 50 Most Innovative Companies by Fast Company. But more importantly, we are expanding the choices we offer our consumers so that they don't have to sacrifice, whether it's providing greater value through multipacks, plant-based options such as our newly released NotCo Mac & Cheese or expanded the choices in our iconic brands such as Zero Sugar Heinz Ketchup.
[Operator Instructions] Our first question comes from Andrew Lazar with Barclays.
It looks like KHC is still losing share in North America Retail, though at a more modest pace recently. But in the ACCELERATE platform specifically, your remarks call out holding or gaining share in about 55% of this platform. I guess would you expect this percentage to be higher given the disproportionate allocation of resources to this platform?
Yes. So thank you, Andrew, for the question. Before I get into the ACCELERATE, let me just at least give you a view of how I'm seeing so far the business performance. If you look at the last 5 weeks, just to remove the noise of Easter, we actually continued to see volume share improvement versus year-to-date, and we're holding dollar share at the same pace in the U.S. So that's at the macro level in the U.S. for our company.
one, we are going to start lapping a lot of the headwinds from SNAP. Mac & Cheese was probably one of the more categories that were more actually impacted by SNAP. And as we go into Q2, beginning now in May, you'll see a plethora of new innovations from gluten-free to new options and flavors on our Mac & Cheese business as well as some new, exciting things for the category with some new SKUs that we're bringing in the second half of the year.
Our next question comes from Ken Goldman with JPMorgan.
You mentioned inflation in your comments in a few areas. I guess two questions here. First, I don't think you updated us, forgive me if I missed it, but I think last time you were talking about maybe 3% cost inflation for the year. I'm just curious if that's still a reasonable number.
Thank you, Ken, for the question. Let me just -- okay, let me start, and then I'll ask Andre to continue to build on it. For us, we are certainly committed to continue to provide families with affordable options. So -- and that means something that we take very seriously. And if you think about 2023, we did end the year with a 3% inflation, but we only pass about 1% pricing to consumers. So we do that very much intentional in a way for us to make sure we are all doing everything we can to offset things so that consumers don't see it.
Sure. So yes, we still expect inflation to be in the low single-digit territory, like we said before. So nothing has changed in that regard, with inflation a bit more concentrated in Q2 and Q3 than in the shoulder quarters. And that's primarily because of what we call the big 3 commodities: cheese, meat, coffee, which we are seeing particularly in meat and cheese, higher level of inflation happened in Q2, Q3 as we are lapping very favorable comps from last year. So yes, so we don't see any other meaningful change here. And the price that has been taken is very surgical around those categories have been suffering the largest impact. And say cocoa likely is not a relevant part of our portfolio at all. I mean a little bit in Netherlands, but beyond that, there's nothing worth mentioning. And we don't see any reason to believe at this point that we would not be able to continue to pass-through the prices in those commodity categories like it has always been the case. So...
All right. And if I could ask a quick follow-up. Just the increase in gross margin guidance, coupled with no other changes implies a bit higher SG&A than you previously expected. So just assuming that's accurate, are there any key areas in operating expenses we should think about that are maybe a little bit higher than planned, obviously, not a huge amount? Or maybe the plant shutdown is the primary, I guess, culprit here, so to speak. Just trying to get a little color there, if we could.
As you saw in CAGNY, we are starting to deploy our brand growth system, which is the method that allows us to continue to improve in our marketing and continue to strengthen our brands. And one of the components of the brand growth system is ensure that we have the sufficient level of marketing across the portfolio. And we've started to see a few selected areas where we need to step up the market investment, thinking on the long term. And we have been gradually approving incremental investments on top of what initially planned on the marketing side, in particular, which I think is a great thing for us. That's all.
Our next question comes from Bryan Spillane with Bank of America.
I just had two questions. One, just, I guess, a detail. Can you share with us -- I think in the past, you've shared with us how much the SNAP issue has impacted organic sales. So do you have that for the first quarter?
Look, it's never 100% precise. We're talking about the macroeconomic model, but we estimate on the U.S. Retail business back in the range of a few hundred bps negative impact.
Okay. And then a question on the Away From Home in the U.S. and the deceleration. And again, you've quantified the impact of the plant closure, but just can you give us a sense of how much the -- I'm sorry, the impact of the exiting the customer. But can you give us a sense of just how much of the decline is also related to like traffic at restaurants? Just trying to get a sense of the weighting of what's actually driving the slowdown.
Let me start and then Andre, if you want to kind of build on that, and thanks for the question, Bryan. First of all, I continue to feel very good about overall strategy globally about Away From Home. Again, it's a business that we are seeing continue to improve outside the U.S. and even as we are seeing some of the slowing of the restaurant business here in the U.S.
I don't think so.
Our next question comes from John Baumgartner with Mizuho Securities.
Carlos, you highlighted consumer stress as a theme. And I wanted to ask in North America where the volume declines are still more pronounced, things like Mac & Cheese you just detailed for Andrew, but also catch-up in juices. These are categories where private label has been underpenetrated historically, and now you're seeing volumes growing a bit. Are you seeing anything different, whether it's new merchandising by retailers or new price sensitivity among consumers that's changing the dynamic in these categories at all?
Let me thank you for the question. First on the private label, first of all, we are fortunate that we have such an iconic and beloved brands in our portfolio. And I think what you're seeing is that really, we haven't seen much of a change in terms of our overall gaps versus private label. And I think for us, the benefit that we have had is that over the last 2 years, we have spent a significant amount of energy and continue to renovate our portfolio. And today, we certainly have, in the U.S., renovated almost 100% of our portfolio to make sure that it continues to be relevant for today and tomorrow.
Our next question comes from Steve Powers with Deutsche Bank.
Carlos, in the prepared remarks, you talked about the unplanned maintenance that you had to take on one of your Away From Home plants. It seems that you've resolved that issue and you expect the impacts to be isolated to the second quarter. But maybe just a little bit more detail on what transpired there. Any kind of root cause diagnostic? And then just do you expect that to be a pretty quick bounce back in recovery in 3Q? Or is the recovery going to be more spread across the back half?
Yes. Thank you for the question, Steve. Yes, listen, it's not -- I wouldn't give you that much more information than already shared. It was a temporary shutdown in our plant for that unplanned maintenance. Now that particular factory was very much focused on our Away From Home business. And so those continents are places that we can outsource from other places and much within our network of factories. So that's why, in particular, it created a little bit of a dissonance in the Q2 only. And Andre, if you want to give a little more details on the impact in our -- what we see in the range of the portfolio for Q2?
Yes. So as we said in prepared remarks, production has resumed and is gradually going back towards the prior level. Not there yet, but production has resumed. And that's why I expect the impact to be -- we do expect production to be fully back on track within the quarter. And then the impact on top line, as we said, will be in the range of 50 to 100 bps to the total company growth, which is a function of how fast you can really bring the production fully up to speed.
Our next question comes from David Palmer with Evercore ISI.
Two questions. First, a follow-up on Foodservice. What is your general Foodservice assumption going forward that underlines your mid-single-digit organic growth that you have planned for the year? Is that, that you basically expected that current trends industry-wide and globally will remain similar level that you saw in the first quarter or improving from there?
Maybe, Andre, if you can comment on Away From Home and maybe I can build on the Oscar Mayer and beverage business.
Yes. So first, if you think about our second half, as we said, we expect to be on algo throughout the entire second half. And if you think about our 3 pillars of growth, first, on Emerging Markets, as we said, Q1 came in line with what we said will happen mid-single digit, primarily because of the shipment phasing in Brazil. So as we head into Q2, we do expect Emerging Markets to be now very close at our long-term algo, and in the second half fully on the long-term algo. So that's a point comes from that roughly, maybe a little more.
And then just going deeper on the Oscar Mayer and beverage question, David. But I would say, if you go back to our CAGNY presentation, those are businesses that are in 2 different portfolio roles within our company. So our beverage business is within our PROTECT business, in which we actually are allocating resources in order to protect the profitability through the renovation across those brands to drive the growth.
The other thing I'll add on the BALANCE portfolio as a whole, you saw in prepared remarks that overall, the BALANCE declined 4% in the quarter, but the gross profit dollars grew 5%. So as we have said before, we continue to -- it's a balancing act, and we continue to make sure that we don't starve those brands of the core investments to sustain their business. But you should not expect an average growth coming from there.
Our last question comes from Robert Moskow with TD Cowen.
Andre, I think you might have already answered this, but mathematically, I think the guidance now for Foodservice implies a 50 basis point reduction to the overall company compared to, I think, the high single-digit guidance you had last quarter. So does the rest of the portfolio need to offset that? Is anything -- are you expecting anything to be a little better than you expected? Or is it just kind of absorbed?
Andre, do you want to start with Away from Home, and I can comment on the retail trends?
Yes. First, as you said, the 50 bps that we mentioned in the prepared remarks should be clear, is linkage, the 50 to 100 bps expansion of plant shutdown and is focused on the second quarter. So we do not expect impact from that as we go into the second half. So as we head into the second half, as I said before, we do expect Emerging Markets to be fully back on algo. We do expect the U.S. Retail, North America Retail to continue to improve, like improve in Q1. We expect to improve more in Q2 and then more in the second half, like as a function, again, of lapping SNAP and a lot of contribution from innovation and renovation.
Thank you, Andre. And on the retail trends, I guess, I'll go back to the point at the beginning, which is we are seeing volume share improvements versus in the last 5 weeks into year-to-date. So we are seeing that the momentum is happening already. And for us, what we are going to be doing is focus on those things we can control, which is as you go into the year to go, you'll see us continue to drive the renovation of our brands, like I mentioned, whether it's in our PROTECT platforms and ACCELERATE, which is driving more innovation, as you'll see now, begin now in Q2 and we continue to step up through the rest of the year. And then these margins are marketing investments.
And thank you, everyone, for joining us. This concludes our earnings call for the first quarter '24. Thank you.
Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.