Ladies and gentlemen, thank you for standing by. Welcome to the Kraft Heinz Company Third Quarter Results. 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] I'd now like to hand the conference over, Anne-Marie Megela, Global Head of Investor Relations. 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 third quarter 2022 business update. During today's call, we may make some forward-looking statements regarding our expectations for the future, including related to our business plans and expectations, strategy, efforts and investments and related timing and its expected impacts. These 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.com under News and Events for a discussion of our non-GAAP financial measures and reconciliations to the comparable GAAP financial measures. Before we begin, I'm going to hand it over to our CEO, Miguel Patricio, for some brief opening comments.

Well, thank you, Marie, and thank you, everyone, for joining us here today. We are excited. We are proud. We delivered another quarter of strong results. And as we see consumer demand remaining strong and analytic elasticities, they continue to hold. We see our portfolio of iconic brands strong and very adequate for the moment that we are living. And we continue investing in these brands and seeing that this investment is paying off. Yet at the same time, we realize we know that supply chain remains challenging, particularly with inflation and material shortages. I'm proud of the teams as they continue to anticipate and adapt to these challenges, where we improved capacity and we're able to meet demand, we actually gained share. At the same time, we continue to advance our transformation, then including modernizing our marketing and transforming our portfolio. As we look ahead, we continue cautiously optimistic. We are providing our consumers with solutions that they value, and we continue to unlock efficiencies and reinvest in the business. All of which makes us stronger and positions us well for whatever challenges are still to come. With that, we are very happy to take your questions.

[Operator Instructions] Our first question comes from Andrew Lazar with Barclays.

Great. I guess maybe to start, the company had moderated its EBITDA expectations back in September 1, third quarter when you were already about 2 months into the quarter. Today, you not only beat those expectations, but came in above the initial guidance as well. So, what came in better than you thought? Are there any timing issues to be aware of that might impact 4Q as a result? And maybe more importantly, do these fluctuations give you any pause with respect to visibility into the business with the understanding that it's obviously still a very dynamic environment.

Andrew, thank you for the question. Andre, you may answer this one.

So, Andrew, first of all, we -- as Miguel said at the beginning, I think we feel very excited and pleased with the results we achieved in the quarter. And I'll tell you that a lot of things happened in our favor towards the month of September. First of all, if you might remember, we have executed a new price increase in the month of August. And the elasticities turned out to be stronger than what is anticipated, which resulted in strong top line. Shipments were very good. I think our team did a great job in the month of September to be able to ship in a much better pace than earlier in the quarter, which also helped us. We end up spending less promotion also that we have initially anticipated, which is fine, as well that we're being very prudent to put all the promotions and expense in our portfolio. And finally, we did have about $30 billion of one-time gains in the P&L, 80% in costs, 20% in SG&A. And those are mostly anticipation from Q4, okay? That's what we're able to do in Q3. And obviously, we also had a little contingency, given the volatility, right? But all in all, I think we're able to have a lot of things play in our favor. I think it is a testimony here that organization is moving with the speed and reacting fast to diversities. And we delivered and maintained our guidance fully here in Q3, right? And so I think we felt confident about the number that we’ve put a lever and I think we’re just reinforcing that now by [regular thought]. And you can count on us, all is true being a transparent dialogue and being -- in a very friendly fashion, like we did back in the September when I heard the first news about the inflationary pressure.

Our next question comes from Ken Goldman with JPMorgan.

You mentioned that your supply chain tightness is still mostly caused by factors from your upstream suppliers. This is not an uncommon refrain. We're certainly hearing this from many of your peers. I'm just curious, can you maybe help us better understand what the specific issues are. You mentioned disruptions, I guess, on ingredients and packaging. Does this suggest that the issues are somewhat temporary. They can fade when the disruptions have passed? Or are there maybe some structural problems, I guess, that could take longer to fix?

Carlos, I think that's related to you. Go ahead, please.

Yes. What I would say -- first of all, thank you for the question. What I'll say is that I think you can see that the environment continues to be challenging. And what I'm really proud is the fact that our team is doing a terrific job of working through the wave of challenges. So, as we speak, we are both rebuilding inventory and improving service levels, and we have done that through the quarter -- sequentially in each quarter. I think we continue to see that going forward. I think what -- if I take a step back in terms of the overall constraints, what I see is about 80% of those challenges are really due to upstream supply distribution on ingredients and certain packaging materials. At the same time, what I'm saying is it's very asynchronistic the way they're recovering. So, you'll see that in some cases, we are moving quickly and recovering overall in our supply chain. There's a few ingredients that have been a little tighter for us. And I point to things like have affected us in the past and things like cold cuts and lunch -- I'm sorry, in cream cheese. And at the same time, even in those categories, we now have recovered and feel good about kind of our position as we go towards the end of the year.

Our next question comes from Bryan Spillane with Bank of America.

To build on the previous 2 questions, you're kind of looking at the current environment now dealing with what you're dealing with numbers and seeing what you're seeing in the marketplace? Is there any reason that we shouldn't expect that your long-term targets, which you laid out back in -- or you talked a bit about back in September are targets that we should expect that those are achievable for 2023? Or is this environment still maybe too volatile to be in line with what your long-term targets would be.

Andre, you may want to answer this question.

Sure. Look, as we said back in CAGNY, when we unveiled our new long-term growth for the reason, we expect to get that over the years. So think of it in terms of 3 years or so. So we feel good in our continued improvement, in our performance and we expect to continue to move towards the algorithm, the way that we have communicated back then. We are probably not ready to give any guidance around ‘23. But yes, the environment is still volatile. As you have been hearing from us and public promoters in the sector about supply chain volatility, which has consequences on availability and they speed up using our costs.

Our next question comes from Chris Growe with Stifel.

I just had a quick question for you in relation to, you showed in one of your charts in the slide deck, private label gaining more share in your categories. It also showed Kraft Heinz doing much better in its categories as well. And as we look across the store, private label share has been up at a lesser rate over the past few months, although it seems like it's gone up a little bit more so in your categories. I just want to get a sense of if you see incremental risk in your categories from private label share gains as you take more pricing where you have more pricing that's been put in place? And then just any change in your thoughts on elasticity in relation to your pricing, which has been very favorable for your business?

Andre, do you want to answer the question?

Sure. Thanks for the question. On private label, a few things. First of all, as we have been continuously reiterating our exposure to private label have reduced significantly after the [diversion] mid last year. So now the average market share in our portfolio is about 11%, wherein across food and beverage is 20%. So that were not impacted. Second, during the past 3 years, as part of our transformation, we have been directing a lot of our effort and energy around the core. So resources have moved that. We have been renovating the core in a very systematic way, so our portfolio is stronger. Third, the private label have been increasing the price together with the rest of the players. So as recent as the last 4 weeks, including already 3 weeks of October looking at sellout data, our sellout price is about 17% up, whereas private label is 16% up. So price gaps are widely preserved. You might have seen as well in 1 of this calendars we provided that comparing Q2 to Q3, the price gap with private label remains the same. So we do not see any category where our price gap expanded versus private label except to Ketchup and Lunchables, which honestly the interaction is limited, and we gained share in both of these categories. So yes, I think we feel good about that. We don't want to be even over optimistic that depending on how consumers eventually shifts behavior in a very drastic way, things can change, but there is no indication of that as of right now. And honestly, I mean, despite all the environment, food is proving to be very resilient. The brands are being very resilient. And with unemployment today we see right now, when I was here back in 2008, 2011, we only had this accelerated shift in behavior, but unemployment starts to go up, which is far from the reality today.

Yes. And I think what I would say is we have continued to invest in the equity of our brands, which if we think about the fact that companies really don't have pricing power brands, have pricing -- pricing power. So the investments we have made with the quality of the marketing we have improved here at Kraft Heinz and the commitment we have to continue to invest in our brands going forward, also give us some confidence as we continue to manage through the current environment.

Our next question comes from Alexia Howard with Bernstein.

I mean looking at the lineup of products on Page 19 of the presentation, and they really do seem to be meeting the moment in terms of the consumer need for convenience and affordability. But I'm just wondering about your thoughts on the recent White House Conference on Hunger Health and Nutrition that happened last month for the first time in 50 years, I think. And there were a lot of initiatives coming out of that with respect to Front of Pack labels, a very tight definition of what a healthy food is, educating consumers and health professionals on the importance of good nutrition. And I wonder just how you -- it may be too soon, but how you're thinking about those types of developments in the industry over the coming months and years? And how that might shape your plans for innovation and the portfolio going forward? And I'll pass it on.

Let me -- I'm glad to start answering this question and then since Carlos wants to complement. Nutrition is part of our long-term strategy. It's part of our agenda. It is a very important part of our ESG goals for the future. We've been renovating our portfolio throughout the years, reducing or eliminating dies and artificial ingredients. And we have global agenda, a very specific agenda on reducing salt and sugar, which are 2 critical things in our portfolio that we have a responsibility to do. We are on the way to achieve the targets that we put in place until 2025. I mean just to give you an example, we changed the formulation of our Capri Sun this year. We reduced 40% of sugar content, and that's -- to put it in perspective, just that is 40 million pounds of sugar per year that we reduced. We continue committed to that for the short, the medium and the long term to make our products more nutritious.

But I would add to Miguel's point, which I think is right on, is the fact that this is a commitment we have for the long term. Every single time we are renovating our portfolio, we're putting in kind of the view of how do we continue to improve our products overall, not just because it's the right thing to do, but also because that's what consumers want us to do. So I think that is happening and obviously, you can see it very clearly in terms of commitment to sugar reduction, salt reduction, we continue to work with communities and improving the food and security situation. And this is something that as a company we are committed to and we'll continue to as we go forward.

We are buyer of tomatoes and beans. And in the heart, we are agricultural company. And we've been investing a lot in that sense in client base. I mean you see what we are doing in Europe with our beans with a project of launching new beans based products with Heinz Beanz Burgerz, with Heinz Beanz [Hams], Protein Pots and a portfolio of innovation for the next 5 years related to that. And here in the U.S., we are very proud to announce this week that we are launching our plant-based cheese, which by the way, is an incredible product, very different from what is in the market. It melts, it tastes like cheese, it smells like cheese and melts like cheese and its very different from everything that is in the market. So we're absolutely committed on the nutritional agenda.

Our next question comes from Stephen Powers with Deutsche Bank.

I wanted to ask on gross margin progression. Across the consumer goods space broadly, I think we're beginning to see more signs an evidence of gross margin stabilization, if not recovery, with results across many companies either coming in ahead of consensus expectations or improving sequentially or even starting to improve year-over-year. And every portfolio is obviously different, but you're not yet in that position. So I am curious as to how you're thinking about the progress of gross margin? What kind of framing of expectations we should have going into the fourth quarter? And the prospects for improvement as we build into fiscal '23?

Andre, you may answer this question, please.

Sure. Thanks for the question. Look, we have been -- as we said all along, have pricing to protect the dollar inflation, so dollar for dollar, and we have been doing that now for the second quarter in a row. So both in Q2 and now in Q3, price was in line with inflation and price plus gross efficiencies was ahead of inflation. Given that we had in Q3 as we initially said back in September, some incremental pressure in selected places and we took action already on it, there is this continuous lag in effect. So we expect Q3 to be the bottom of our gross margin, and you should expect to see a sequential improvement in Q4 in comparison to Q3.

Our next question comes from David Palmer with Evercore ISI.

Just a follow-up on some of the supply chain stuff. Your case fill rates in your slide deck, you say -- they were in the low 90s in the third quarter, and that's better than the high 80s than it was in the first quarter. But I was slightly surprised to see that, that fill rate was the same as 2Q. Is that a result of that upstream supplier effect that you're talking about. And I'm wondering how you're thinking about progress there. Is that -- is that some -- do you have visibilities to getting that fill rate back? I'm sure you want to get back to the high '90s. And what -- when could we expect bigger leaps and improvement in fill rates?

David thanks for the question. Carlos, please.

Yes. Listen, what I'll say is that exactly what you said, it is connected to the availability of certain ingredients in the -- of the upstream. But at the same time, our commitment with our customers is continue to improve that. I'll tell you that as we continue to navigate the situation in terms of those capacity constraints, what I'll say is that we also are looking to see how we lead with the capacity that we have available to us. And let me give you a couple of examples of how we're doing that. We actually are ingesting data directly from our customers in a way that allows us to better deploy our inventory to reduce out of stocks. We started that with a pilot with 1 particular retailer and that allows us to actually reduce the amount of inventory by 40%. The out-of-stocks in their stores, by 40% in a period of about 8 weeks. We now have expanded that program and now we're ingesting more data from different customers that allows you to then make sure that we are then putting the right inventory in the right stores and green the right signals into our production so that we can maximize the availability capacity that we have in our plants. So we're both working upstream with suppliers, but it's also us being smarter and better capabilities internally to deploy our inventory to improve overall service levels, which we're committed to do. Thanks for the question.

Our next question comes from John Baumgartner with Mizuho.

Miguel, I was wondering if you can touch on the nice rehearsal you had in Q3 regarding market shares relative to your branded competition. How would you break that down between the benefits from some of the supply chain constraints easing, the pricing differentials in the market as opposed to how much of that is derived from just underlying changes to your execution in the market on more of a like-for-like basis, and how sustainable do you think that performance will be in the share gains versus brands going forward?

Thanks for the question. So let me give you my perspective, and then Carlos can go further on that answer, right? We are excited to keep the levels of market share even with the problems that we continue facing on supply. I mean, we would be gaining a lot of share if we would not be facing still shortages on raw materials. A good proof of that is like Capri Sun and Lunchables, where in the previous quarters, we had problems with supply charters of raw materials we lost this year, and now we are in rocket -- record share gains on these 2 brands. So I actually am optimistic that we can move further on market share. Carlos, please?

Yes. I would say to build on Miguel's point, this is a combination of the continuing investments that we have made in renovating our brands, investment in improving the quality of our marketing communication. And then, as you said, unlocking some of the capacity in some key brands. I think the example Miguel gave around Lunchables and Capri Sun in which we saw the improvement on inventory and CFR and then our ability to actually then go into market and then drive event-based promotions that allows to then continue to grow those particular categories during the back-to-school period, which was basically a phenomenal result for us in terms of performance. As we go forward, when you see the places that continue to have challenges in terms of capacity, we know that once we unlock those we also have opportunity to then continue to grow our consumption as we go forward. And those, as I said before, areas like our Cold [indiscernible] and Cream Cheese that are slowly getting into better positioning our inventory. And now as we go into the holidays, making sure we protect the ability to then go into those event-based promotions we were doing the time of year that consumers are really looking for our brands. So when you take a step back, I will say, is a great combination of the work we have done over the last 1.5 years for us to improve internally the equity of our company. And at the same time now, see the benefit of us being able to now go back into the marketplace in a more aggressive way that allows to then continue to drive consumption and whole penetration on our brands.

Operator, we have time for one more question.

Our next question comes from Michael Lavery with Piper Sandler.

I just wanted to come back to the foodservice opportunity you've called out. And I think specifically, you said roughly half of the top 50 QSRs are distribution opportunities for you. Can you just give us a sense of maybe what's kept you from already being in some of those accounts? How sticky are those relationships? And what's sort of realistically the expectations or how many of those could come your way?

I would ask Carlos to answer that question, and then Rafael is maybe with us on this call to present for International zone, where we have a great momentum in food service, by the way.

Yes. But I think let me start with the comment Miguel just made. I think if you look at our business in the North America and year-to-date, we're growing and growing market share. So we feel very good about our performance so far. And what I will tell you is, for us, it's a critical channel as we go forward. It is one that we really have thought about how do we continue to transform the organization internally. So we have done things like changing the leadership and reorienting our focus from operators to advance distributors -- we have done things like making sure that our food service now has a different role within North America zone that is from what we used to see as basically a stable contributor to now a growth driver. We have simplified and renovated the portfolio. I'll tell you that we have reduced about half of our SKUs that we had in 2019. At the same time, we have improved quality. And then finally, we continue to enhance our overall distribution, overall. Now part of the point that you made around how do we continue to unlock some of the opportunities we have in QSR is us continue to invest in the capacity of the business. So we're also making strong investments in CapEx in order for us to support the opportunity for us to continue growing in our foodservice channel. Over the last 2 years, that number is over $100 million we have invested, so that allows us now the opportunity to have those conversations with QSR in a way that truly unlocks opportunities for us to continue growing. Now that's a view of North America. Let me pass it out to Rafael to give you a view also of on international side.

Yes. Look, it's not very similar to that. The opportunity in foodservice is significant. And you can see it has been a core pillar for our results in the last few years, and the quarter is no different. You can see that the numbers we released, we are growing actually very fast and twice the size of the industry, twice the rate of the industry. So you can attribute that part of it was the slowdown that happened during the pandemic. A lot of the -- across international, we do compete with some global players but also with some local players and a lot of them specialize in foodservice that during the pandemic, they suffer a lot and some of them either went bankrupt or had to downsize significantly their operations. We didn't. We maintained the same level of investments and consequently coming out of the pandemic in most of the countries across the world, I mean, we are riding ahead of it. So we continue to be excited. I mean, QSR is the core. Our products, especially within the sauces environment goes very hand-in-hand with the QSR industry, and we still have a long way to go. I mean our estimate with the data available that we are about between 3% and 4% market share of the sauces category of food service. So there is significant room ahead. And we are going to continue to do that, driving our chef-led model, where we have invested in chefs that partner with those customers, driving innovations that have been very well received. So it should be a continuous source of growth, sustainable growth for us.

Thank you, Operator. I'm now going to hand it over to Miguel for some closing commentary.

I would like to finish with a quote. A quote from a famous legendary car racer on Formula 1 that once said, "If it's raining, I can pass 15 cars. But when it's sunny, I cannot." Let me tell you, it's not raining, it's pouring. But we are super excited at this moment because we are seeing this as a great moment of opportunity. And we've been able to navigate through the uncertainties of the short term and adapt and rebuild very fast at the same time that we are continue building our future. We are excited with what we have ahead of us. Thank you very much.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.