Thank you and hello everyone! Welcome to our Q&A Session for our second quarter 2023 business update.

During today's call we may make forward-looking statements regarding our expectations for the future, including items related to our business, plans and expectations, strategy, efforts and investments, and related timing and expected impacts. These statements are based on how we see things today and actual results may differ materially due to risk and uncertainties.

Please see the cautionary statement 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 & 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 Anne-Marie and thank you everyone. Thanks for joining us today.

Before opening the call for questions, I would like to thank the entire Kraft Heinz team. We have proven again that our strategy works, generating top-line growth fueled by the three pillars, while reinvesting margin gains into the business.

But while we did lose share in the quarter, as price gaps have stayed wider for longer than we would have liked, we are managing the business for the long term and still generated mid-single-digit top-line growth within the range of what we expected. As you may remember on the last earnings call, we introduced four action plans to drive share.

We have seen those plans take hold, and they have led to improving results each month within the quarter, building momentum into the second half of the year. The continued execution of these action plans and the lapping of last year's pricing are expected to drive improving volume trends in the second half of 2023 and into 2024.

Our results give me continued confidence in our strategy and in our business, and I'm pleased to reiterate our full year guidance. With that, I have Andre and Carlos joining me.

Rafael [ph] is on a well-deserved vacation with his family, so let's open the call for Q&A.

Great. Thanks so much.

Good morning, everybody.

Good morning.

Good morning, Andrew.

I was hoping to dig into the promotional environment a little bit and some of the comments from your prepared remarks about branded competitors promoting at a higher level than Kraft Heinz. In your view, are branded competitors either over promoting or promoting in what you see as sort of in a irrational way, or is it more that KHC has not been able to ramp up its own merchandising activity yet to the extent needed, given some of those supply constraints and leading over the pricing actions?

I guess in other words, would you still expect the industry promotional levels to settle in below 19 levels or is there some concern building internally that competitive behavior could return to previous levels or beyond, and that pricing could actually go negative at some point? I’m just trying to put some context around all of this.

Thanks so much.

Good morning, Andrew. Thanks for the question.

I will ask Carlos to answer, since I believe it's related to the U.S. retail.

Good morning, Andrew. You know the way that kind of I look at it is that if you look at the industry as a whole, today's promotional levels are as you said, still below 2019.

What we are seeing is that our branded competitors are actually closer to those levels, and what we are working on is how do we continue to make sure that we act with a thought of protecting our margins and building the virtuous cycle as we continue to improve on our marketing, continue to improve our services, our innovation, and importantly that we stay focused on driving the revenue management needed in order for us to be rational in terms of the effectiveness of our promotions. So if you look at our promotions this year, we actually have been very effective and efficient.

We actually are generating attractive ROIs in investments. I think the numbers right now are up 50 points versus 2019, and that's true because the focus that we have on those agile AI Driven Revenue Management Tools, that we are applying to making sure that every promotion does have that kind of true ROI return.

Now, on top of that, we're also making sure that we are working to maximize the opportunity on those promotions, so the quality of our merchandising, especially when you look at displays continue to improve, and in fact our share of displays continue to see increasingly improvements over the first quarter. So I think all together what I would say is, our focus continues to be very much leveraging our revenue management tool, continue to focus and drive in the investments in terms of marketing innovation, which you will know will make sure that improve our view as we go into the second half of the year and on to 2024.

Great. I'll pass it on.

Thank you.

Thank you, Andrew.

Hi, thanks. You mentioned that the second half's organic sales growth rate will be more in line with the long-term algo, not to put too fine a point on it, just so we can model more accurately.

I was just curious, does this mean you expect it to be within that 2% to 3% range, that's your long-term algo or just getting somewhat closer to it?

Thank you, Ken. Andre please?

Hi Ken. Good morning.

As we have said in previous remarks, we expect to gradually go towards the long-term model. It might happen that we're going to reach there between Q3 and Q4, but you should expect like revenue to be gravitating towards that, yes.

Okay, I'll follow-up on that. And then I wanted to ask a follow-up about capital allocation priorities.

Paying down debt is I think number three on that list, ahead of portfolio management. You highlighted that leverage is I guess more or less at your target.

Does debt pay down thus move down a notch in importance, and I guess what I'm getting at is, is there a scenario in which you might, maybe start to buy back some stock again?

Yes. Yes, we are not changing our capital allocation policy now.

So as we said, our priority has been to fund the business organically and I think we have been doing that very consistently. We – for us to maintain the dividends that we have, which provided a very attractive yield is critical and I think we feel good about our rating now, the level of the grade we had in the past 16 months.

M&A, as we said before continues to be something that we actively look at. We’d like to – as we said in the remarks, we mentioned that multiple times, so we have been very disciplined in how we're doing that.

But there is no change at this point. I mean we're always taking into consideration market dynamics and our capital structure, but we don't have anything new to say at this point.

Thank you.

Good morning. Thanks for the question.

I wanted to stick with North America and the comments on promotions, but more so on delivery. Is there – Carlos, you highlighted the ROIs you're seeing and you touched on the quality promos a bit, but to dig inside a bit more deeply versus history, how are you seeing the lift sort of changing from quality promo programs, the feature, the display relative to the pre-inflation era?

Are you seeing a greater role for price reductions going forward? Does quality programs still have the same degree of lift in terms of the influence of those drivers?

Just trying to get a sense for, as you lean into promo more in the back half and programming, does pricing need to be a larger driver at the margin than you would have thought relative to feature and display a couple of quarters ago?

John, thanks for the question. I'll say, I think some of the parts were a little hard to understand, but I think I got the gist of your question.

Related to the second half that we think about promotional level, and we have said this in final calls and within our guidance, there is a step up that we'll do in promotional levels as we go into the second half of the year in selected categories, but always with a disciplined approach of positive returns. What I would add to is that, one of the things that we are able to do with our promotional investment to improve the effectiveness of those things, of that investment, is to make sure we level the entire portfolio and that we are thinking through how do we make sure we have the right product selection to the right audiences.

So for us, when you look at our, whether it's back to season, and we combine the different kind of categories that we can bring together, as we think about back to school in which we can bring in Lunchables and our Capri Sun business together, that idea of us being able to kind of go into the retail environment and actually leverage the entire scale of our business allows us to be more effective in terms of the returns of those promotions. So it's both, looking at the true ROI, through the AI management tools that we have, as well as maximizing our presence in store, leveraging our scale.

The last thing I will say is, as we think about going into the second half of the year, we're also seeing consumers behaving in a way, in two different kind of camps. They are the consumers who are going to be looking for those more, I would say larger packs in which they are going to look for the value by looking at the total size of the products that they are going to get and why we are introducing more products in the club type of packages, whether that is in our Mac and Cheese, in our Lunchables and you see that that is focused on driving that particular type of behavior with consumer effectiveness.

There's also going to be a number of programs specifically to making sure that we are keeping consumers who are also focused on the cash flow within our categories, which is why we also have been introducing more of the smaller package, more of the dollar type of products that allows us to maintain our consumers within the category for longer. So we're approaching that in those two prongs, at the same time, always looking at making sure we have the right ROI in every investment that we make.

I apologize for my connection there, but just to clarify, if we think about price promotions versus sort of non-price, the quality, the feature, the display, have you seen any sort of changes in terms of how deep you may have to go on price reductions going forward or do you think that kind of quality promo, you'll still see attractive lift? You don't really have to get deeper on pricing.

But what we have said Andre here, what we have seen throughout these past three years is that we can have very attractive lifts without having to go as deep. And I think that that, when you look across, at least based on data from my review [ph], that's what we have been observing for ourselves and I think that still remains true moving forward.

The other thing that as Carlos mentioned, that I think moving forward we're going to start to see more and more increasing importance of mix, and that's vis-a-vis only doing more promotions or playing with these prices. So I think we're going to be hearing a lot more about mix-related actions.

Okay. Thanks for your time.

Thanks, John.

Hey, thanks operator. Good morning, everyone.

Good morning.

Hi. So I had – I guess I had just two questions.

First one, just a clarification. I think we talked about margins in the prepared remarks that fourth quarter margins will be higher than the third quarter.

I just want to clarify, was that a comment on gross margin or EBITDA margin?

Andre?

It ends up being both, but it's driven by the gross margin.

Okay.

And it's mostly, it's a seasonal factor, because in Q4 we typically sell-through. We're over-investing products in higher margins.

If you look just for generality, aside [inaudible] Q2 is higher than Q3, because we ship a lot of greeting [ph] season, which has higher margin, we ship for summer. And then in Q4, we have items like cream cheese, gravies, and other items like that have very high margin, desserts.

So that's why it's just mixed related.

Okay. And then second question, and I guess maybe this is related to what John Baumgartner was just asking, but maybe just more simplistically, I think coming out of the first quarter, you talked – and this, we're talking about North American retail, that one of the issues or one of the drivers of share losses was just price gaps, right?

That competitors, whether it's private label or branded in certain categories hadn't followed your pricing. And so I guess I have two questions.

One is, have price gaps narrowed or your share gains that you've seen sequentially over the last couple of months happened without the price gaps closing? And then when we think about your – the comments about the expectations for volume growth in ‘24, right, is that dependent also on kind of normalized price gaps?

I guess what I'm trying to understand is like, can you drive volume without those price gaps closing, because you really can't control what your competitors do.

Yes, I think there's a couple of things. If we look versus the bottom, the last two, three months we have seen the price gaps narrowly moving favorably to us, so getting closer.

So there is certain contribution coming from that. And also, all the other actions that we outlined in the remarks, right.

So we had to do some pockets of challenges in service that is now getting behind us. I think the only big remaining item is cold cuts.

That as we said is going to be recovered by end of Q3 or the Q4. We have innovations starting to ramp up, and I think Carlos can give more color on that.

Yes Brian, what I would add is that, first of all on the comment on private label. Private label shares trends actually have been flat since you looked at it.

In fact since second half of 2022, even with increasing price gaps that we had after our price impact in February. So we have taken that pricing to protect our margins, and some branded competitors have not followed, but at the same time, we continue to stay diligent on the way we think about the business.

Now, in the points that Andrew just mentioned, in terms of – as we think about going forward, why is it that we see the moderation of our improvement? I'll give you three reasons on the way kind of I look at it as we go into the second half of the year into 2024 in the U.S.

retails. You know number one, we're investing more in marketing, we're launching more innovation, and we are lapping the pricing actions as we go into second half of the year.

And just to unpack it one more level, if you think about the innovation that we are seeing right now, we are actually building momentum as we go into the year, as we are following this kind of two-pronged strategy innovation. First, you're going to see us continue to launch more disruptive innovation platforms, and that includes things like our NotCo line of plan-based offerings, the new Crisp from the Microwave, which delivers great taste and all the convenience, and the restaurant-to-retail platform, and you see that already with things like the IHOP® Coffee line.

The second part of the innovation is also how do we take our existing brands into new spaces. Already, we introduced a new frozen Mac and Cheese.

We are expanding our Delimex and Taco Bell into more spaces with the Mexican meals, and as we speak, we're also launching new Oscar Mayer scramblers as we continue to expand on the Brexit platform. So you see, it's comprehensive in terms of how we are approaching innovation in order to continue to shape the categories as we increase its shelf space and quality display as we go forward, and that's already paying us.

And in fact, just to give you a factoid, if you look at our Lunchables, we are creating a new golden wall in Lunchables as we go into a second half, and we are seeing that in some of our top customers that increases about 40% our space within the shelf. So again, it's not only thinking through the kind of promotional event, but also what we're doing in terms of our driving, volume-driving activities that are important as we go forward.

Hi! Good morning.

Good morning.

Good morning.

In North America, you pointed to your organic sales growth below consumption in certain parts of the portfolio, like the GROW platform, Taste Elevation, Easy Meals. What's driving that gap, and are you seeing a change in how retailers are managing inventory levels or shelf space for your brands?

Let me start with the – thanks for the question. Let me start with the second part of that, which, what we're seeing right now is – if you look at the second quarter and what we know today, we believe retail inventory is actually in pretty good shape.

In fact, on average, retail inventory for us was flat across the North America business, and what did happen, it was in truly isolated pockets and earlier in the quarter, so that we actually saw that through the quarter it continued to improve, and so there's no – I don't see that as an ongoing situation as we go forward and that has been proven as we go through the quarter, so. And I'm sorry, the first part of your question then was what?

Why were your sales below consumption across some of your platforms?

Yes. No, thank you.

You know, I think if you look at our GROW platforms, which continue to drive our priority and our strategy, those actually in consumption remain very strong. I think if you think about Taste Elevation growing 8% for the quarter, Easy Meals growing 6% in the quarter.

In those cases, the difference between organic and our consumption were specifically in Easy Meals, where there was an inventory de-load in the beginning part of the quarter that as I said earlier, it continued to improve as we go into – as we go forward. And I think for us is, that remains – our strategy remains – the fact that the consumption continued to improve as we go through the quarter and the performance we saw in those, I think supports our continued focus on that strategy as we go into the second half of the year.

Okay. Thank you.

Thank you.

And just a follow-up question on your outlook for volumes improving in the back half. You pointed to moderating pricing growth as one of the drivers, but in the second quarter, pricing already moved past its peak, although volumes still softened.

So why do you think that volumes will get better from here, considering the competitive environment and some of the macro headwinds you highlighted, like the student loan repayment resuming? And I guess just related to that, how much of a driver do you think that the innovation that you talked about can be for volumes?

Thanks.

Yes. Look, our price – our price in Q2 as you saw was close to 11%, and the reason why we saw higher elasticity and higher volume decline as I said before is because of the expanded price gaps.

Now moving forward, these price gaps are not getting worse. If anything, they are slightly getting better.

So as you head into the second half, as we continue to lap price, we still have valuable price that happened last year, so that you're going to be lapping starting now in Q3, and even we had another round that implemented Q4 last year. So we have two rounds of price still to lap in the United States alone.

So beyond the pricing side, there are other things linked to our action plans that will help us to step up the share level that we are at today. I think Carlos can speak about that.

The one thing I guess I would add to that too is that, if you think about innovation, it's not just kind of the launching innovation, but what the innovation allows you to actually perform in market. So when I mention things like us being able to improve our presence and expanding our shelving on things like Lunchables because of the innovation.

And in Lunchables for example, we are going to new locations. So we're doing – already announced yesterday, we're doing pilots on taking Lunchables into the pro section; we're launching innovation in schools; we are expanding our presence in vending.

All that actually helps us strengthen our overall kind of performance in stores. We also are doing that in Philadelphia cream cheese.

If you think about a year – a year ago, this is actually going to be the first holiday season in which we're going to go into the holidays with full service on Philadelphia cream cheese and that's true for the last several years. So now we have an opportunity to actually truly kind of leverage our power of our brand, make sure we build that kind of our shelf display, as we go into this one of the most important seasons for Philadelphia business.

And we also changed to that too in coffee. I mentioned earlier, the fact that we had a new line with IHOP in terms of bringing coffee, a new IHOP coffee into the stores.

That actually allows us to also expand our coffee category into the stores and actually win additional spaces as we go into the second half of the year. So the innovation plays a couple of roles.

It both attracts consumers and shapes our category to grow, but it also helps us expand our presence in order to increase the volume as well.

So volume expected to improve as a function of lapping prices from last year. We still have two rounds to lap.

Innovation ramping up. Shelf resets in the fall.

That I think would be favorable to us, that's the expectation and service level recovery, particularly in cold cuts.

Got it. Thank you.

Hi. Thank you for taking our questions.

I just want to focus on gross margin and specifically your inflation outlook. What's driving you to move your inflation outlook lower this year?

So commodities in general continue to come down, and as hedges roll off and our contracts get adjusted, some of them are based on indexes. We are seeing costs continue to move favorably, which has been allowing us to expand the gross margin, and by consequence has been allowing us to accelerate the investment behind the business, particularly in marketing, R&D and technology.

[Cross Talk]

Any particular commodities?

That are declining?

Yes. That you would call out, that’s driving that.

I don't think there is a particular one. I mean our portfolio is large, there are so many commodities in the business.

There is a general movement of commodities coming down. The exceptions to that sale are tomato, potato, that have bad crops, and sweetness.

Other than that, we are seeing generally commodities moving favorably.

Understood. And then in light of the declining commodities or your outlook for inflation, do you think you took too much price, given you said you took price ahead of competitors and they have not followed?

And then I'll pass it on.

No. I would say…

Let me answer that one. I would do everything again.

We’ve had very high inflation, and we are leaders in the vast majority of categories where we play, and it's our role as leaders to try to compensate these price increases with – this inflation with price increase. So I would do everything again.

I mean, we can always go back on price if we think we have to or when we have to, but we had to lead price increases. So yes, that would be my answer to you.

And the only thing I would say is remember that we never get to be very systematic in terms of pricing to offset the inflation, and that's what we have done. We have no price ahead of inflation.

If you look at our gross margin in Q2, it's still slightly below 2021 levels. And the other thing that is worth mentioning in the gross margin, we showed that in prepared remarks.

Our efficiency plan is trending very well, and we are ahead of – we are pacing ahead of the $500 million that we have said we’ll deliver by the year, so another good news.

Let me build on that point from Andre. I think that the only sustainable way to keep increasing our investments behind the brand and to grow our volumes and shares for the future is by improving gross margins and investing back in marketing, R&D and technology, which is exactly what we are doing.

Because we had very high, very good gross margin this quarter, we could increase marketing this quarter by 23%. We could increase R&D by 10%.

We could increase our investments in technology. And as Andre said, that was possible because in one side, yes, we had price increases, but on the other side, because we are every month delivering more and more efficiencies in supply, we're excited with that part as well and that's my answer.

And I expect that people noted the difference as well, how they are operating, because we have been intentionally opting to use those resources, to put back in the long term behind marketing and technology. We could have opted to be adding more promotions, but that would not make sense, because we’d be adding promotions to low return.

We are thinking about the long term here. I hope people note the difference of how they are being – they are getting the big base very different.

And that will wrap it up for today's Q&A session. Thank you all for your questions.

I will turn it over to Miguel, who will just kind of wrap up the call for us.

I just want to thank you all for the time and for the attention and the patience with us. So thank you so much, and hope to talk to you and to see you very soon.