Kraft Heinz 2Q17 Earnings Call Notes

Bernardo Vieira Hees – The Kraft Heinz Co.

Clearly not everything went our way

“it’s important to recognize that clearly not everything went our way in the first half. Canada, India and commodity cost in United States are just a few examples.”

Paulo Luiz Araújo Basílio – The Kraft Heinz Co.

Measuring consumption is not as simple as it used to be

Thank you. I mean, this is – let me cut the question into two parts. It’s a little bit complicated. First, we still have to rely on AC Nielsen. However, the coverage of AC Nielsen has shrunk to where we are selling our product. So with the changing retail landscape, measuring consumption is not as simple as it used to be. AC Nielsen cover mainly scanned or a non-census data within traditional and some – and clubs. However, there is significant growth going on in hard discounters and some big major club players that are not covered by Nielsen and almost the entire e-commerce channel is not covered by AC Nielsen, so just to give you an idea as I mentioned in my remark, rate from small base of 1%, our ecommerce channel is growing at 60%.”

McCormick & Co 4Q16 Earnings Call Notes

Lawrence Kurzius – President and CEO

Saw a slowdown then an uptick

“As has been widely recognized by food analysts and investors, U.S. consumer purchases for center-of-store food were soft in the first quarter, especially in February. This is based on retail consumption reports for the period which showed a measurable year-on-year deceleration across many categories.

While retail sales growth of spices and seasonings exceeded the performance of most center-of-store categories, continuing to display its relative strength, our category was impacted by the industry slowdown as well. We believe that this short-term slowdown can be attributed to a confluence of factors, including unseasonable weather, a late Easter and the timing of income tax refund payments, which are likely temporary.

In fact, a few weeks into our second quarter we have seen an uptick in our sales of U.S. consumer products. Our outlook for U.S. sales of spices and seasonings for the balance of the year remains strong and unchanged from our prior projections.”

Believe that transitory issues affected us

“What we didn’t anticipate was the slower industry sales in the U.S., which as we’ve discussed on the call we think are really due to transitory factors. We don’t see anything in our data going into March. I know we’re getting into second quarter here, but we don’t see anything in our data going into March to suggest the slowness that we saw in January and February as continuing. And for the reasons that we gave on the call, we think that it is transitory and the timing of tax payments. I think Lent had a big impact on us. Our business has a very high index to Hispanic consumers who are more catholic. The later Easter made all of Lent fall outside of the quarter and we’re certainly seeing the reversal of that in March. And then the weather that was out of sync with the season where it was just very warm and that discourages consumption of the cold weather items that normally we sell a lot of during that time of year, chili, gravy and all of the things that go along with that.”

Loss of shelf space at one retailer is big impact

“That is really the story in the UK, Evan, is that one retailer – it’s a very concentrated market, so the customers are larger and they all matter and has a big impact not just on our UK business but it’s big enough that it impacts our EMEA business as a whole. The change in shelf space and items in distribution with that retailer really occurred during the fourth quarter of last year. And so that’s an unfavorable comparison that we’re going to carry for that region for the whole year. I will also say that that’s really baked into our thinking that 5% to 7% constant currency. We’ve got a great story in other markets and other markets in that market. We continue to invest in marketing in the UK even with this change because it’s important to show both that customer and the other customers in the market and frankly the consumer the relevance and importance of our brands”

Change in timing of refunds has a real impact

“I don’t want to underestimate the impact that the change in U.S. income tax refund policy has had pushing those refunds later, especially for consumers at the lower end of the economic spectrum who tend to spend those refunds. Often that’s their earned income coming back to them, those go into regular household consumption and I think it has the same kind of impact as a change in SNAP payments.”

Nestle 2Q16 Earnings Call Notes

Nestlé (NSRGY) Q2 2016 Results

François Roger

Pricing challenging

As anticipated, the pricing environment remains challenging. We had deflation in developed markets and low commodity pricing overall. We expect stronger pricing in H2 though. We started to take selective price increases in some categories and geographies. ”

China food and beverage decelerated to zero growth

“In China, the food and beverage market overall saw its growth decelerating to basically zero growth. In that context, we had solid performance for products like Nescafe soluble coffee, chocolate with good product renovation and good retail execution, a good example of it is the attractive performance that we had with Shark wafer. ”

China nutrition demand clearly slowing

“In China, the demand is clearly slowing. The market itself in China used to enjoy a double-digit growth and is now into low single digits. In our premium on mainstream ranges where we have NAN and S-26 GOLD, we clearly see a softer demand with much more price competition, and the situation is certainly little bit more complicated there, while on the other hand in the super-premium segment where we are represent with ILLUMA, we are growing north of 30%. Overall in China for nutrition, we are slightly gaining market share.”

Kraft Heinz 2Q16 Earnings Call Notes

The Kraft Heinz (KHC) Bernardo Vieira Hees on Q2 2016 Results

A number of categories where consumption trends going against us

“our biggest challenge remains the fact that you continue to have a number of categories where consumption trends are working against us. And while we’re making progress against those opportunities and expect better performance going forward, our organic sales growth during the first half of the year was held back.”

Coffee market is a tale of two segments, pod and roast/ground

“The pods is a very healthy business. And it’s been growing now for years. However, the growth has subsided a little bit. It moved from the double-digits that we all used to see to mid-single digit growth. And that is a very healthy category. And as you know, we innovated greatly in this category over the past few years. And we continue to do so. In roast and ground, the category has been in persistent decline for quite some time, as consumers are moving into the more premium and the pods business. The way we are dealing with this, we will bring some innovation to this category.”

Pepsi 2Q16 Earnings Call Notes

PepsiCo CEO (PEP) Indra Nooyi on Q2 2016 Results – Earnings Call Transcript

2% volume growth

I’m pleased to report that our businesses continued to perform well in the second quarter. We had more than 2% organic volume growth in both global snacks and global beverages. While foreign exchange translations continue to pressure our reported revenue results, we delivered more than 3% organic revenue growth led by Frito-Lay North America, AMENA and Latin America.

Focused on five things

there are five things we focused on to deliver in what continues to be a challenging macro-environment. First, consumer-centric relentless innovation; second, connecting with digital age consumers in new ways; third, being a true growth partner to our customers; fourth, flawless end-to-end execution; and fifth, a maniacal focus on productivity.

Strategy has been to expand in the snack category

Look, the macro snack category is a big category. And we’re only playing in the salty snack category, expanding into savory snacks. And our goal, if you go back maybe 15 years ago, and we’ve been consistent in this strategy, we’ve always said, grow the core, add more inch out of the core. We’ve used these words. And that’s what Frito-Lay has been doing, solidify our position in salty snacks and start to step out of the core into other savory snacks and then start to take on other occasions from the overall macro snack category.

Mexico is actually doing well

Mexico is actually doing well. The strength of the dollar, the increased remittances into Mexico doing well, the country actually is one of the brighter stars in the whole Latin American economy. So we feel good about our business in Mexico

The marketplace for soft drinks has fragmented, making distribution even more important

Now, let me just say, the marketplace is fragmenting. Forget Pepsi or Diet Pepsi or the cola category, any new category that’s expanding is becoming niche, more fragmented. And that’s why it was important for us to own the distribution system because once you have control over the distribution system, you can pump a lot of niche products through it, all our craft products, all of those are low-volume products. So we have to learn how to handle complexity, not walk away from it.

The beverage market is larger than just Carbonated Soft Drinks

think, Caroline, and we talked about it in the Q1 earnings call, it is critically important that all of you change your frame of reference in the beverage market from cola to CSDs to LRBs. 30 years ago, it was colas. 25 years ago, it was CSDs. 15 years ago, it was CSDs. It’s been LRB for the last decade or so. And I think the sooner we can shift our frame of reference, the better it is because just beating a category that is in secular decline, just beating that all the time is not a game to play, that’s not a game that is going to guarantee good results. If we play this rich LRB game, multi-category, placing the bets where the growth is and where the consumer is going, I think we’re better off. So my request to you and all of you who are tracking the company in this category, expand your aperture. LRB is the game to play. That’s the game we’re playing and we watch LRB share very, very carefully.

Hugh Johnston CFO

The macro has been more stable than the guidance that we gave

When we give guidance, our intention is always to hit it and perhaps beat it. Now that we’re halfway through the year, I think we’ve seen two things. One, the macros are operating in a consistent steady way, so there has not been a deterioration, which, obviously, is to our benefit relative to our expectations.

Snack foods are recession resistant

frankly, that’s what you’ve seen, is this portfolio now, regardless of economic cycle, regardless of consumer sentiment, regardless of consumer trends in chips, seems to be capable and has been capable delivering good, strong performance throughout all of those shifts.

McCormick 2Q16 Earnings Call Notes

Lawrence Kurzius

Lower retail price points helping to drive sales

” retail sales grew 6% for the category and 7% for McCormick brand spices and seasonings. There are three key messages here. First, we gained category share on a unit basis. Second, the McCormick brand is helping drive the unit category increase. And third, this is evidence that certain retailers are implementing our recommendations to lower retail price points on the McCormick brand.”

New CFO

” Mike brings to this role a deep knowledge of the company and experience as a finance leader in both corporate and operational roles, including those in North America and in our EMEA region and across both Consumer and Industrial segments. In each of these roles, he has been a – he has a proven track record of creating value and growth.”

We do better with millenials than boomers

“I think also, our brands are and our product – really our category is in line with the way consumers want to eat today. And as consumers cook at home more and are more ambitious about the things that they cook, our brand is a big beneficiary of that. I think that we have a bit of a natural tailwind from two sources. One is the new dietary guidelines news that came out this year. That has really encouraged consumers to make greater use of herbs and spices. That’s a positive for our category, but as the leader in the category, we are a very big beneficiary of that. And then the second thing is that we actually do better with Millennials than we do with boomers. And so as Millenials come to be a bigger part of the shopper universe, that is actually a natural tailwind for us, which is different than some of our food company peers.”

Increased use of spices as CPG companies try to create cleaner labels

” All of the CPG companies are trying to improve their portfolios with cleaner labels, healthier sounding ingredients, statements. No one wants to have a flavor in there that they have to call a flavor. And many of the – of our consumer products go to customers, we are trying to reduce sodium, reduce MSG, take out sugar. And so, that’s about 40% of our briefs globally.”

Gordon Stetz

Impact of Brexit will be on currency

“Regarding last week’s referendum outcome on Brexit, the immediate impact to our business will be currency rates. Early this week, we reevaluated our guidance and determined that a 3% impact from currency is our best estimate at this point in time. Any longer term impact on our business will depend in part on the outcome of tariff, trade and regulatory negotiations. As a point of reference, our sales in the UK were 8% of total company sales in fiscal 2015. As a final remark on our outlook, we are on track for another year of strong cash flow for fiscal year 2016 with higher adjusted net income and actions underway to improve our working capital.”

Pepsi 3Q15 Earnings Call Notes

Indra Nooyi – Chairman and CEO

Constant currency op profit +12%

“In the third quarter, organic revenue grew 7.4%, with Global Snacks up 10% and Global Beverages up 5%. Core gross margin improved by 120 basis points. Core constant currency operating profit increased 12% and core constant currency EPS increased 14%.”

Managing what we can control in developing markets

“Now turning to our international market. In our developing and emerging markets, although we continue to face volatile and challenging macros in a number of these markets, we’re managing what we can control”

Digital technologies disrupting our business

“With volatile macros globally, and increasingly competitive landscape with digital technologies disrupting many aspects of our business, productivity has never been more important”

Increased automation

“increased automation. We have installed packaging automation across approximately a third of our snacks plant worldwide enabling us to reduce packaging label costs in these facilities by at least 50%.”

We are optimizing our manufacturing footprint

“we are optimizing our global manufacturing footprint. Since 2010, we have reduced the number of company-owned beverage plants in North America by 23%. At the same time, we’ve increased our capacity utilization by 20%.”

Implementing our own version of zero based budgeting

“we have also embarked on our version of zero-based budgeting, something we call smart spending. You know, we studied ZBB in great detail and we realized that implementing it as currently designed, ran the risk of starting resources to drive topline growth initiatives. Our version of ZBB or smart spending as we call it focuses on rightsizing our operating expenses, now that we are beginning to see benefits from our technology investments and global coordination, while ring-fencing top line driving resources to focus more on deriving additional effectiveness from them.”

The Macro volatility is here to stay

“somehow we balance the portfolio to deliver the results but the macro volatility is here to stay.”

Soft drink market is under pressure from volume standpoint but not value thanks to “good pricing”

“The US beverage environment is pretty good actually. There is good portfolio management happening in the industry and I would say that the CSD market continues to be under pressure from a volume perspective. From a value perspective, because of good revenue management and good pricing in the industry, the value numbers are way better than the volume numbers”

Having control of manufacturing and distribution becomes critical

“Innovation is becoming more fragmented and the life cycle of innovation is being shorter and the trade becoming more and more complex. Having control of the manufacturing and distribution systems becomes critical.”

Everyone should start focusing on the LRB (Liquid Refreshment Beverage) not just CSD market

“I think focusing just on CSDs is actually a thing of the past and I would strongly suggest everybody looks at total LRB, because that’s the right way to look at the market going forward.”

Hugh Johnston – CFO

Expect a 10-11 point impact from Forex

“We now expect foreign exchange translation to negatively impact net revenue and core earnings per share growth by approximately 10 and 11 percentage points respectively based on current market consensus rates. Taking our 2014 core EPS of $4.63 and applying our guidance and current market consensus of foreign exchange impact implies 2015 core EPS of approximately $4.54.”

McCormick and Co 3Q15 Earnings Call Notes

Alan Wilson – Chairman and CEO

More conservative profit outlook thanks to acquisition and peso weakness

“We’ve a more conservative outlook for adjusted earnings per share than we had back in early July reflecting the impact of Kohinoor and the recent decline in the Mexican Peso, which affects income from our McCormick to Mexico joint venture. We recognize our profit growth in 2015 is below our long-term target of 9% to 11%. But overall, we feel good about our performance this year and our ability to address these specific headwinds.”

Products are on trend

“Our products are on trend with today’s consumer. Across nearly all of our markets, people are exploring new flavors, seeking fresh simple ingredients, focused on source and quality and working to improve their wellness.”

FX obviously still a large headwind

“FX obviously is a large headwind on a reported basis because that obviously has been a factor on both the reported top line and bottom line. So that obviously is when we continue to wrestle with and as you heard in my comments it’s gotten slightly worse on the operating income line as we’ve upped the negative impact on the total company to 4% versus the prior three.”

Investing behind a purity campaign

“We’re seeing good topline performances as we’ve talked about, but we’re also investing behind a purity campaign, which is fundamentally that fresh tastes better and our pure tastes better and so we believe that’s the message that’s resonating with consumers and we want to make sure that we have enough engine in the tank for what is our most important quarter of the year.”

It costs more money to produce organic ingredients

“this is not going to add to our fixed cost structure in any meaningful way that we’ve already got a great deal of capability around organic. But raw material themselves are undeniably more expensive than regular spices and that’s reflected in the premium price that organic products command in the market place. It’s not just a scarcity issue, it costs more money to produce organic ingredients and products”

We saw extreme commodity price inflation in 09,10,11,12

specifically to pricing what we saw in 2009, ’10 and ’11 and ’12 was extreme commodity inflation”

We’ve taken a pause on pricing

“we’re really focused on is getting our price thresholds right in the marketplace and that’s not unique to the U.S. it’s around the world. And so we’ve taken a pause a bit on pricing. We’ve taken some pricing to offset currency in some of our markets, but our focus has been more on getting the right price thresholds and making sure that we’re not giving consumers or customers a reason to go somewhere else.”

Industrial business skews to different menu items US vs OUS

“We tend to be in the U.S. on the core menu items and outside the U.S. more on the product innovation and limited time offers, which is why we’re seeing a little bit of a disparity in the results.”

Gordon Stetz – EVP and CFO

Lawrence Kurzius – President and COO

1/3 of global advertising will be digital

“In 2015, we’re planning for digital marketing to reach one third of our global advertising, up from 11% in 2010. We put a lot of effort and resources into staying at the forefront of digital and eCommerce and these investments are paying off.”

Amazon’s supplier of the year for grocery

“For the eCommerce channel, we’re equally proud of the recent award from Amazon which named McCormick Supplier of The Year for grocery.”

Mike Smith – SVP, Corporate Finance

Hormel Foods FY 3Q15 Earnings Call Notes

Supply shortages in Turkey and deflation in pork

“Sales were lower due to turkey supply shortages in our Jennie-O Turkey Store segment and price deflation in the pork markets, primarily impacting sales within our Refrigerated Foods and International segments.

Pork prices down 40% y/y

“To illustrate the dramatic change in pork markets, the average USDA pork cutoff price in July of 2014 was $133 compared to $83 in July of 2015, almost a 40% decrease. While across the company our team is generally focused on our goal of 5% top line growth, in this particular market scenario, volume growth may be the more appropriate metric by which to gauge results.”

Profit at Jennie O down 45% impacted by avian flu

“Jennie-O Turkey Store segment profit decreased 45% and sales decreased 12%. Results were impacted by high pathogen avian influenza, as flocks lost earlier this year created large volume shortfalls in operations and sales. We have now repopulated approximately two-thirds of the farms’ previously impacted and we expect to complete the repopulation process during the fourth quarter.”

Cytostport (Muscle Milk) operating profit +79%

“Our Specialty Foods segment reported a robust operating profit increase of 79%. Improvements to the cost structure in the CytoSport and Century Foods operations, along with stronger performance in our Specialty Products business benefited results this quarter. Specialty Foods segment sales increased 31%, largely driven by the recently acquired CytoSport business. The CytoSport team has achieved additional distribution of MUSCLE MILK protein nutrition products with big gains coming from one of our more recent product introductions, MUSCLE MILK PRO SERIES.”

Acquired Applegate

“Yeah. I’ll take the first part. We’re still very excited about Applegate. As you point out, I mean, it’s been a month, counting today, and if you really look at the quarterly results, I mean, you’re talking barely even a couple of weeks of results. However, if you just look at the general business trends, they’re still rocking along at double-digit growth rates and we’re very excited about the ability of that franchise to connect with consumers.”

Comments on Avian Influenza

“We are filling up the barns but there clearly is at least a little bit of risk associated with that. We’ve heard a similar theory as to perhaps birds go south faster than they come north and they may not linger as long in the areas, and so that might be a positive factor. But I mean, at this point, it’s just such a wild card. I mean, this was an unprecedented incident already. We’re trying to learn from it, the government’s trying to learn from it. It could hit other parts of the country, it could hit another time of the year, it could go away, it could come back in a smaller manner.

And so, we’re trying to be ready for any contingency. And the best I can tell you right now is we haven’t had a system outbreak since early June and that frankly even if something did hit this fall, it won’t affect 2015 results. Because I mean, you just wouldn’t see the loss of bird flow that quickly. But by the time we’re talking again in November, we should have a much better sense of whether something seems to be occurring on a fall basis this year or not and what potential impact that might have. Even if nothing occurs, however, and as we indicated the last call, I mean with the 22-week lifespan and with egg shortages and so forth, I mean, we’re expecting volume struggles even in the first half of next year until we cycle through this”

Bird loss was 20%

“The bird loss, if you will, ended the system near 20%. And then when you netted it out and there’s some price differential here, I mean, it was a 12% sales drop. So, we were able to buy in some meat, mostly on the dark meat side during the quarter in order to try to mitigate that effect”

Lower volume hits margins when you have fixed costs

“When you’re that short in volume in your plants, that creates all sorts of overhead issues. When you literally don’t have products to sell, I mean, you’re losing that margin and that volume.”

We want to control our own destiny when it comes to pork supply

“our philosophy when it comes to pork is we do want to control our own destiny and we have for years, so even years ago when Oscar Mayer and Sara Lee chose to get out of being vertical in hog processing and rely on others for their meat supply, we made the decision to stick with it. And frankly, as the industry consolidates, to me that decision is even more firm that we need to be able to control our own destiny. That being said, we’ve never tried to be one of the big players when it comes to pork slaughter.”

Nestle 2Q15 Earnings Call Notes

Environment across EMENA remains volatile

“The environment across the Zone remains volatile, with inflationary conditions in certain European markets — Eastern European markets, leading to price increases and volume pressure. On the other hand, in many parts of Western Europe, our organic growth was mainly driven by volume, as pricing was negative in a deflationary environment. Additionally, political and economic uncertainties in parts of Eastern Europe and Middle East were also challenging. In that context, EMENA’s results were strong in the first half of the year. ”

China is difficult as you all know

“Let’s move to China now. The overall economic situation is difficult and I’m sure that you have read and seen that as well. That also impacts our business there. Nevertheless, we continued our efforts to update our portfolio in line with fast changing consumer expectations.”

The environment in China is very volatile right now

“Regarding China, we are experiencing an interesting growth. Actually, if you look at the last three months we were having mid-single-digit growth in China, which is good, which is satisfactory. And there, once again, we see an improvement, which we are very pleased with, post cleaning of some inventory issues. So we are pleased with that. That being said, I want to be careful. As you saw and as you read and as you heard over the last couple of days, there is a lot of volatility today in China. So we are satisfied with what we have seen and the turnaround that we see in China. That being said, we are very careful about the outlook, given the volatile trading environment.”

Pricing is a local decision

“we are operating in an environment where we’ve got places around the world with deflationary conditions. We’ve got places with inflationary conditions. And this is also why we always say pricing is a local decision is because we have to act within the local conditions. We have to act within the local strength of our brand, within actions of our competitors, within the strategies of the retailers as well. So, there are many components that go into pricing.”