Good day and thank you for standing by. Welcome to the Kraft Heinz Company Second Quarter 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. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your speaker today, Anne-Marie Megela. Please go ahead.

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 2022 business update. During our remarks today, we will make some forward-looking statements that are based on how we see things today. Actual results may differ due to risks and uncertainties, and these are discussed in our earnings release and our filings with the SEC. We will also discuss some non-GAAP financial measures today during the call, and these non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at ir.kraftheinzcompany.com. Before we begin, I'm going to hand it over to our CEO, Miguel Patricio, for a few quick opening comments.

Well, thank you, Anne-Marie and thank you everyone for joining us today. I wanted to acknowledge the fact that we are living under a lot of uncertainty in what regards the external world. And in that sense, I want to thank my team and to congratulate my team for delivering another quarter of very solid results. Although, we are mindful of the current inflationary environment and how it affects our consumers and our customers, but we continue to develop solutions that benefit our consumers and our retailers. Our relationships with retailers continue to strengthen, and we have improved inventory and service levels, so we can have now more optionality to execute more mutually strategic programs. Well, with that, we are happy to take your questions.

Thank you. [Operator Instructions] And our first question will come from Bryan Spillane from Bank of America. And your line is now open.

All right. Thank you, operator. Good morning, everyone. I had just one clarification question and then a second question. The first one, just as a clarification. Andre, in the slide deck, I think it's slide 27, where you talk about the there's a portion or a section in there about gross margin and it shows gross margin at 30.3%. Just want to make sure that that is not adjusted, right? So, that's just your gross margin. I think, as we did the adjusted gross margin calculation, it was like 31.5%. So, just wanted to clarify that, that margin that you're -- that you put in slide deck is reported not adjusted.

Good morning, Bryan. Thanks for the question. Very good, by the way. So, yes, you are right. So, this is the GAAP gross margin. So, to get adjusted, we need to increase this number by 110 basis points due to the change of realized hedge on commodities. Okay. And in fact, if we adjust for that, our margin in Q2 is pretty much in line with the margin in Q1.

Okay.

And if you compare to prior year, you would see an expansion of margin if were not for the dilutive impact of repricing to offset inflation.

Okay. Thank you for that. And then, my question is just in the prepared remarks, Miguel, you talked a little bit about, I think there's still being supply chain pressures in the back half of the year and -- or currently I suppose. And if I recalling last year where part of what happened in the U.S. was, you had some supply chain issues and they affected service levels, especially around the holidays. Are -- I guess, does the guidance assume that there's still going to be some pressure there and that you won't be fully merchandised for the holidays? Or are we -- are you in a position where you can be more fully sort of supplied and merchandised at the holidays in the U.S.?

Okay. Bryan, I think that since your question is addressing more of the U.S., I will pass it to Carlos.

Okay. Thank you.

Thank you, Miguel. I think, first of all, thank you for your question. The reality is that we have continued to improve our production and our service levels as you saw in the presentation. And now that we are approaching kind of the low 90s in terms of service in Q2, they're going to allow to continue to focus on driving the right kind of levels of both service and inventory with our retailers. So, for us, it's important to see the continued progression that we have, and we don't anticipate that to actually going against us as we go forward. In fact, what we are going to continue to see as we go into Q3 and Q4 is the continued expansion of our service. And as a result, the continued improvement in terms of our performance. We saw that in Q2, where in fact, we have able to kind of unlock opportunities within, for example, brands like Philadelphia or Heinz Ketchup, both of which had record shares, in fact, higher share, they ever had in both of those businesses. So, I think as we go forward, we always going to continue to improve our position.

Okay. Thank you.

Thank you. And we'll take our next question from Ken Goldman from JP Morgan. Mr. Goldman, your line is open.

Hi, everybody. Thank you. You mentioned in the prepared remarks that you have the optionality now to execute more, I think, called it mutually strategic programs with retailers. Now that your service levels are in a better place, I just wanted to clarify, number one, is there any major difference between a mutually strategic program and just a really good promotion? That's more than just a discount. Maybe it's just something more in depth or creative than a usual promotion. I just wanted to kind of clarify that definition. And then, the second part of that is I wanted to ask if you're confident that these programs, if you do implement them, that they're being driven from a position of strength, right? Whereby you're doing them because you're able to versus maybe from a position where you're doing it, because the consumer in a position of weakness themselves is demanding it. Thank you.

Okay. Ken, I'll give you two examples of these programs that, because we have now much better service levels we can have. So, I'll give you two examples. One is what we call the Art of the Burger, has been a very successful program, especially now during summertime when people barbecue more. And when we can put together our sauces, our teas, together with the bonds of supermarket chains, it has been very good and very well accepted by our customers. I'll give you another example in a moment like this, that we are exploring value propositions, with together -- with customers, I'll give you example of grilled cheese. You can have a grilled cheese for less than $1. And we do programs with our customers putting together our cheese, our mayo, and with their brand as well, right? So, these are just two examples of bringing value, the value proposition, and the customers are receiving. This is extremely well. And this is bringing a little bit of creativity that had never used thinking about value or bringing the value of our products to life together with the customers.

And then the second part -- thank you for that. The second, doing this, I guess, from a position where you feel it's from strength rather than -- maybe because the consumer is demanding it a little bit. I just wanted to make sure about that. And I -- maybe you answered that a little bit with the second part of that, talking about the value proposition promos, but just curious for your thoughts there.

I'm not -- the other thing I would say here, Ken, is on stickiness we continue to have very productive conversations with our customers in a way that makes sense for both of us. But …

Great.

We feel very positive about it. We are excited with the momentum that we have with our customers and with our consumers.

Understood. Thanks very much.

Thank you. And we'll take our next question from Andrew Lazar from Barclays. And Mr. Lazar, your line is open.

Thanks very much. In the slide deck, you provided a breakdown of categories that are sort of more and less sensitive to price gaps with private label. I think 15% of sales are in categories that are more sensitive where gaps are increasing. And I'm just curious, how do you approach these businesses in terms of balancing share and profitability? Do you take the necessary price to protect profit and deal with the short-term pressure on share or protect share and sort of take the short-term profit hit? And you talk about another 25% that are sensitive to private label gaps, but currently stable. And I guess, if those were to expand from here, I guess what gives you confidence you can manage this bigger segment in the context of your sort of growth algorithm? Thanks so much.

Well, let me start this, I think, Andrew, the question specifically to the U.S., so I'll take a shot. I think for us the reality is that even as we think about those businesses, there may be, as you saw, a very small part of our portfolio is just more exposed to private label. One of the things that we’re actually doing is working differently in terms of how we offering consumer solutions in a moment in which they're looking for different choices across the spectrum of economic development of consumers. So, one of the things we're actually looking at is how we actually allow consumers to stay in our iconic brands because of the number of ranges of our products across our pricing ladder, whether that is -- and let me give you an example, something like Oscar Mayer in which we have from natural to deli fresh to regional Oscar Mayer, that allows consumers actually for, to have an option in which to actually stay within our brands. Knowing that over the last couple of years, we've actually been renovating many of our iconic brands and investing behind it. So, we have improved the quality. We have improved the renovation of those brands in a way now that makes our brands even more valuable to consumers. And frankly, we're seeing that already play out. We see that, for example, you have a product like Kraft Mac & Cheese portfolio in which we also have that kind of full array of products across pricing ladder that in Q2 you saw us gaining share as well. So, for us, it's about being strategic about how we think about leveraging the entire portfolio that we have in a way that allows us to continue to offer consumers different approaches in terms of options.

And it's really category-by-category, right? So, even in the 15% where the prices are expanding, the stories are very different. Like instead cheese, similar to cold cuts, we do have a very good price ladder. We have the VELVEETA license and the floor effects even priced at or below private label. We have the Kraft Singles and we have the Deluxe. And we're actually gaining share, so in the last several months, so it's working quite well for us. In Ore-Ida, for example, we have the partnership with Simplot that is now starting and that to unlock a lot of capacity later in the year, which will allow us to start to promote more of these brands, which we haven't been able to do in a consistent manner for years. So, it's really category-by-category. We monitor this very close and makes sense that -- we are doing something that makes sense for both top and bottom line.

Thank you.

Thank you, Andrew.

Thank you. And our next question will come from Chris Growe from Stifel. And your line is now open. Mr. Growe, please make sure your line is not on mute.

Can you hear me now?

Yes, sir.

Thank you. I just had a quick question for you, if I could, around the revenue growth in the quarter outpacing consumption. I was just curious how much of that was Foodservice strength, for example, and maybe the non-measured channels versus actual inventory rebuilding. I think this kind of fits with an earlier question around, do you see product availability as a constraint for the third and fourth quarter performance in the second half, or is that behind us now is what I'm ultimately trying to get to? Thank you.

I think it's a combination of these factors. So, Foodservice, as you have seen in our presentation, is growing north of 20%. So -- and that represents roughly 30% of our total revenue. In non-measured channels in the U.S., we have been doing very well in club and dollar, actually been gaining share we are to date in those two channels, because we are already prepared for a gradual shift toward those channels. And we have been guiding what month announced in Q1, in fact, in Q2 was very minor. So, I think it's not attributed for the first two. Regarding service levels, as you have seen, we are still in the low 90s, where the ideal level is in the high 90s. So, we still have virtual. Obviously, it's got the average of the portfolio in. Some categories are in great shape, back to the historical appropriate levels of services, some others still working through it. And even to look on shelf availability, we are much closer to the historical levels. So, if you think about shelf availability, I think you are going to see the industry like 93, 94. We are now in the 91, 92. So, we're getting there. There's still some room to grow.

And would there still be some continued inventory build you'd expect at retail as you improve your service levels?

We might. Obviously, we cannot comment on how -- we don't know how we're going to measure the inventories moving forward. If you were to look capacity historical levels, yes, there could be some room for further inventory buildup.

Okay. Thank you.

Thank you. And our next question will come from Steve Powers from Deutsche Bank. Mr. Powers, your line is now open.

Yes. Hey. Good morning. Good morning. Thanks. You talked about your outlook contemplating greater price elasticity negatively impacting volume and mix, I guess, over the balance of the year. Is there a way for you to help us think through the P&L impacts of lower volumes at this point? Clearly, there are many other moving parts. But all else equal, if volumes are to move lower in places where you anticipate, how material is that on margins in terms of fixed cost deleverage per unit sold? I'm just -- I'm really asking just how fixed versus variable the cost structure is at this point.

Thanks for the question. At this point, it is not really a drag because we are still building inventory. Remember, our services in the low 90s. So, as we continue to produce more than what we sell, it actually is a little positive effect at this moment. And we are monitoring the demand curves very closely. So, then, we'll also adjust our labor accordingly to make sure that we don't have an overhang down the road when we start to step down on production to make sure that we don't have more labor than needed and have this effect that you're talking about. But as of right now, this is not an issue.

Okay. Great. Thank you. And if I could, you gave some good color on the cost outlook for the remainder of 2022. I guess, I'm just curious how you see, if possible, early positioning looking out to 2023. I guess, on the one hand, you mentioned costs hopefully peaking and maybe starting to receive in some cases. But on the other hand, we're still obviously a lot higher year-over-year. And you presumably have some hedges rolling into the year that will roll-off both on commodities and currency. So, just maybe a little bit of color, if you have any, on early positioning, visibility on constant currency looking out to the first part of 2023.

There’s still a lot of volatility out there. Yes. The costs have received it. They are still very high. We are working with different senates for next year, but I need to talk about that. See that we have been taken like price throughout the year that we wanted to have a carryover effect into next year, especially in the first half of the year. So that will help, but early to tell.

Okay. Very good. Thank you.

Thank you. Our next question will come from Robert Moskow from Credit Suisse. Your line is now open.

Hi. Thanks. Your income statement shows losses on your derivative hedges in 2Q. I imagine that commodity inputs are now falling. And if that's right, should we assume at some point that this necessitates more counts in your existing on any specific products? And then a quick follow-up.

Yeah. So, thanks for the question. So, a couple of things. First, maybe to answer the prior question you need little bit to this one. We typically price on what -- on market changes, not on our hedges position, right? So, that's important you know that. Hope this is clear. We price based on what we're seeing out in the market, not based on what our internal pricing hedgings are. But the second thing is regarding this effect, what you see in the P&L is the change in the unrealized hedge on commodities, okay? So, it doesn't mean that the hedge is positive or negative. It just made that there was a change period over period. So, we're still having hedge gains. We had hedge gains in both Q1 and Q2. But because part of that materialized, we see this negative effect on the realized portion. But again, what is important thing is we look at the market prices and that's how we make our price decisions.

Okay. Maybe I'll follow-up. My follow-up is, I think you did shift above [technical difficulty] consumption in 2Q. And I think you said that you'd be refilling shelves in 2Q. Can you give us any number as to how much that might be just in 2Q?

The inventory effect in Q2 is very small. So, yeah, the 2Q is a very small number. And again, we don't know how retailers are going to manage their inventories. If you were to look at the levels pre-pandemic, net-net, we still have room to grow our inventory retailers. And our shop availability, as I said before, it is still a little below the historical level, which might give further indication that this is a possibility.

Yeah. Andre, I get it. But you also said you're producing above your sales. So, I don't know, is it a material amount? Or are you just -- it is. And are you refilling your own inventory then rather than retailers or?

We are now refilling our own inventory because we think -- the historical levels. And eventually, this will go to the retailers. I don't know, Carlos, do you want to add something else?

Yeah. I mean, I would say if you look at the presentation and the fact that we are able to provide service from the low 80s to the low 90s, it's a result of us being able to actually leverage our entire supply chain in a way that now with right inventory levels in many of our categories that we can provide that service. At the same time, as Andre said, we're still in the low 90s. So, there is opportunity for us to continue to drive that to the high 90s by pushing the right level of inventories internally, so that we can actually be able to better service our customers.

Thanks. Thank you for the clarification.

Thank you. And we'll take our next question from Alexia Howard from Alliance Bernstein. Alexia, your line is open.

Thank you. Good morning, everyone.

Good morning, Alexia.

Can I ask about the comments you made in your prepared remarks about the International Zone and the expansion of distribution points? It seems as though in the go-to-market areas, there's been a very material expansion of distribution points in some of those emerging markets. How do you ensure that you've got the critical mass in those new outlets to make money? I don't know whether you can give us data on how profitable you are in some of those regions. But we've seen some other companies kind of dig themselves a profit hole as they're trying to do that expansion. And I just want to find out how you're making sure that you have got guardrails on that expansion. Thank you very much and I will pass it on.

Carlos, your view?

Yeah. No, Alexia, thanks for the question. I mean, to be honest with you, we are extremely proud and happy with what's happening with our go-to-market model, because it's a very comprehensive model that we actually start by analyzing. It starts by where we can make money. So, it starts by looking at the gross profit of each individual either channel or submarket, let's say, traditional modern trade, I mean, depending on the region in multiple countries like you -- as you just mentioned. If you pick up Brazil where we started, Russia, China, they are very vast countries so they have the profitability that you can achieve in different regions and different channels is significant -- can be significantly different. So, we start by analyzing that, flowing through all the way to how we're going to execute the store. So, it's a very comprehensive model of very detailed analytics with execution. So, as you saw and you alluded to on the slides, we started this model in 2018 in Brazil, copied, adapted and copied to Russia, and then to China. And now we are scaling up to -- by the end of the year, we expect to have 75% of our markets into this go-to-market model. And the numbers -- the result speaks for itself. So, everywhere that we implemented the model, the growth has been significantly above the other emerging markets that are also growing. So, we will continue to roll that out. It's a model that, again, requires a lot of analytics to be profitable, but at the same time, a lot of discipline on execution to kind of keep expanding in those regions that still have a lot of distribution to begin.

Thank you.

On the profitability side, which is obviously very important, right? We don't want to make sure that we don't put a lot of people out there and we cannot have a payback on that. We're also very disciplined on it, right? So, to give an example, in Brazil, we have about, I don't know, 1 million points of sales that we could hypothetically serve. We are still in the 100,000, 130,000 and 140,000. So -- and part of that is because the limits of our scale, right? So, that's very important. We are halfway exploring alternatives, potential partnership should actually increase the penetration in some markets. So, maybe there will be more to come in the future. But yes, profitability is also an important consideration.

Since we are talking about Brazil, I think that -- now with the acquisition of Hemmer that is very strong in the South and Heinz is very strong in the Southeast, this gives us even a bigger opportunity to expand our distribution and the strength of our brands. We are really now with great scale in Brazil that we are very happy with how this acquisition is going and the plans that we have in place for the business there.

Great. Thank you very much. I'll pass it on.

Operator, we have time for one more question.

Thank you. And we'll take our last question from David Palmer with Evercore ISI. Your line is open.

Thanks. In your prepared remarks about gross margins, you talked about the fact that you're protecting profit dollars and not margin and that was causing 450 basis points of decline and that math makes sense. But I'm sure there's more going on underneath the surface with regard to gross margins. Supply chain, I'm sure was a friction cost and maybe there's some timing with regard to pricing versus input. So, anything that you would call out that was also a factor in gross margins that we can be thinking about even into 2023 as a comparison?

Yeah. Thanks for the question. Look, this is by very far the highest impact. But other than the need that you have the growth efficiency. Remember that you have the $2 billion that [indiscernible] have communicated and that we are on track to deliver. We delivered the first two years in line with the expectation. And year three, which is now -- we continue to be on track. So, that certainly continues. Mix effect is relatively small. It's now in the quarter, slightly positive as we continue to accelerate the growth platforms where we have higher margins. But the number in the quarter is not significant. So, really in this quarter, it's about the dilutive effect. But again, moving forward, we should expect to continue to deliver the growth efficiencies. And as we continue to price inflation, the inflation events that start to ease, that might put us in a better position for us to continue to recover the margin.

Thanks for that. And then, on Foodservice, the -- very impressive growth there. The over 20% growth in North America does imply something's happening there, some big market share wins. What's driving that? And is that sustainable? And I guess, you're just citing that the big global QSRs as the momentum driver for international, and that does sound sustainable in your view?

Thanks for the question. I think there are two things. One is, I want to highlight that was not in the prepared remarks that our Foodservice now in Q2 is 14% higher than Q2, 2019, which is really remarkable. There is a component of price, right? We've been pricing that channel consistent to what we've been doing in retail. So, price also has a lot to do with the growth that that we're seeing in Q2. But the volume continues to grow as we expand distribution. We have been getting market share in the -- where we have the information in developed markets in North America, Europe and Central. Regarding QSR, our strategies, I'll let Rafa talk a little bit to what we are doing on the International Zone.

Before Rafa talks about International Zone, I just want to say that since you, Andre, compared with 2019, in 2019, Foodservice was -- it's a very transactional area for the company, was not really strategic. And it was a small part of the company that we didn't put a lot of attention. I think we have a great team today with a lot of ambition and really looking at this channel as a critical strategic channel that generates penetration of our brands across the globe. If we're having great momentum in emerging markets in part is because our consumers are getting in touch with our brands in Foodservice. And so that's a very different change in mindset. And as a consequence, the team changed, yeah, I think entirely since 2019. Rafael, please?

Yeah. The only thing I would complement, I mean, to build on what Miguel said, we have a say here we use the model we define for Foodservice. We call -- we own the chef, own the kitchen, own the customer. And that reflects the investments we made on chefs, because chefs are extremely important, especially on QSR, global QSRs, as you alluded, because that's how you develop recipes or LTO, limited-time offers, with those customers. And this is the door into developing -- into innovating products for them to put in their stores. So, we've invested on this capability, and this is paying off peak time, because then you develop a relationship with those customers. That takes you to a different level, that allows you to innovate, to price better to get out of commodity competition. And with that, we continue to use the channel as well to build the brand, I mean, in terms of impressions, a fantastic channel to build brand impressions. So, Foodservice is a core pillar for our growth both across International, but in the U.S. as well. And Carlos can complement that. But we've been very successful with this model of investing in chefs and parting with the customers on product development.

Yeah. I would say, Rafa, the only thing I would add here is just the fact that the model that we have, we're also looking at it at a global basis. So, the same concept of us being able to kind of -- as Miguel and Rafa pointed out, leveraging our points of distribution in away from home in order for us to kind of build our iconic brands in retail. That type of virtuous cycle is something we're going to continue and we see that paying up for us. At the same time, over the last couple of years, not only have we reorganized ourselves and focused our team in being -- having kind of the right expertise and capabilities with Foodservice, but we have also simplified our portfolio quite a bit. I can tell you that since the last two years, we have reduced the number of SKUs in the U.S. Foodservice by app. So that allows us to actually pivot to the things that really matter to our customers in a way that they can help with both in terms of providing the great service and great value in away from home. And with that, let me pass it over to Miguel for some closing remarks.

Okay. Well, thank you all for your questions today. As you are seeing, we are a company in the midst of a transformation. We are proud of what we've done so far, very proud, but each day, we continue to improve and to evolve, and we are just getting started. We have so many opportunities ahead of us, and we are all very excited about what's to come. Thank you very much, and thank you for the continued interest in Kraft Heinz.

Thank you. This concludes today's conference call. Thank you for your participation and you may now disconnect. Everyone, have a wonderful day.