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%.”

Kraft Heinz 4Q16 Earnings Call Notes

Bernardo Vieira Hees

Persistent foreign exchange headwind

“Headwinds remain from highly competitive retail markets to persistent foreign exchange headwind, especially in Europe.”

George Zoghbi

Deflation should turn to inflation

“First, in measured channel, the negative impact from commodity deflation on category growth persisted during 2016 and longer than we originally thought, although, we currently expect that this is likely to turn to inflation as 2017 progresses. ”

Paulo Basilio

Reached bottom on commodities

” price was higher for the year and in Q4, despite persistent headwinds from deflation in key commodities. Although, it appears, we’ve now reached the bottom on commodities and are likely to have to contend with commodity inflation beginning in Q1 of this year. ”

2017 is likely to be an inflation year

“Hi, Jason, this is Paulo. So when we said in terms of the commodity, we said that in 2016 we had a deflationary year. We mentioned at the beginning – not the beginning, in the mid of the year that we would expect this benefit to stay but it didn’t. And in 2017, when we take a look at the spot and forward rates, we’re likely to see year-over-year inflation. And we’re already seeing that in cheese, coffee, bacon, as George mentioned. So that’s what we are today.

Kraft Heinz (KHC) 3Q16 Earnings Call Notes

KHC plans to modernize its meat business like it did its cheese business

“What we’re trying to do, we’re trying to get two things at once. One, modernize the manufacturing capability and the technology to be able to make the products of the future rather than the products of the past. And two, try to get a cost advantage compared to anyone in the marketplace and we believe we are in a strong position to do so. It’s just going to take a little bit of time for us to complete that project, and once we’re out of it, no different to the model we did in cheese when we modernized and reduced our costs and we became world-class, cost effective in it. The meat business would be in a similar situation.” George Zoghbi – The Kraft Heinz Co.


Investment is across the board, not just in meat

“It’s a very good question. Yes, there are. Actually, meat, while meat has taken the lion’s share of our footprint investment, there are a number of other manufacturing sites where we are making investments. As a matter of fact, about 15% of our active lines are affected between transfers, decommissioning old lines and installing new ones. What we’re also doing, we are outsourcing a number of non-core low volume SKUs across the board, and we are in-sourcing some higher volume SKUs, again across the board, not exclusive to meat. And we’re also reducing the number of warehouses and distribution centers. So all together, it’s a very large investment across the entire network. The meat happened to have the larger portion of it, but we’re doing it across the board.”  George Zoghbi – The Kraft Heinz Co.


Data analytics are being used to determine promotional activity

“What we’re finding though, it’s not just the promotional activities or the sales generated from promotional activities, rather than the return that we get from promotional activity. We have become, through data analytics, lot more competent in the ability to select which promotion and which category with which account. And we’re finding very, very different returns. And that, by itself, is allowing us to actually do more with that.” George Zoghbi – The Kraft Heinz Co.

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.”

Kraft Heinz (KHC) Q2 2016 Earnings Call

Kraft Heinz (KHC) CEO Bernardo Hees said he is somewhat satisfied with the company’s recent performance but he thinks they can do better 

“On our last call I said that we’re off to a good start. Good. Not great. And I think that’s how I should describe the first half of the year as well. It’s true when you look at our top line performance and our progress in delivering profitable sales growth. The investments we have made in our global sauces franchise continued to improve category growth or market share gains in United States, Canada and Europe.”

Cited the competitive environment in the food sector as intense right now

“As an industry we are in an environment where retail competition is intensified in our biggest and most mature markets, including the United States, Canada, the U.K., Continental Europe and Australia. Nowhere this is more true than the U.K. where key category declines have been at significant drag in the first half even though our market share trends have been improving. In this market, we must remain disciplined with our go-to-market activities, constantly balancing price, promotion and distribution while we innovate to build our brands and drive profitable growth. And as we have seen, this sometimes leads to a bumpy ride on a quarter-to-quarter basis.”

Two biggest geographic regions, US & Europe, shrunk on an organic revenue basis

“But 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. Specifically in two of our biggest segments, we were down on an organic basis. Down roughly 1% for the first half in the United States, and down 3% in Europe, resulting in 0.3% total company organic growth for the first six months. So as far as top line goes, like I said, okay, not great.”

Kraft Heinz (KHC) Chief Operating Officer Georges El-Zogbhi laid out their priorities for the rest of the year

“For the balance of the year, our key objectives will be two-fold. First, we must continue to execute our footprint integration while minimizing disruption. Second, we will step up our in-store activity, including a strong agenda of new product introduction we have planned for the second half. Look for new product introductions in our desserts, cheese and frozen categories in the months ahead, which follow the rollout of our new Devour frozen meal this past month.”

Kraft Heinz (KHC) Chief Operating Officer Georges El-Zogbhi said the packaged food environment has decelerated further

“The challenging environment is nothing new. However, it accelerated a little bit over the past 12 months or so. And the way we are dealing with that is by investing more in new product development program in line with where consumer trends are now, and where they are going in the future. And we’re increasing our investment and supporting our big brands. This is the best way to deal with consumer. The one thing we’re not doing is throwing money to try to get quick sales. We are resisting that temptation, and we believe it’s better for us in the long term to invest in sustainable growth.”



3G Capital Founder Jorge Paolo Lemann Interview

Jorge Paolo Lemann, Founder of 3G Capital, which is responsible for the takeover and ownership of Budweiser, Burger King, Kraft, Tim Hortons, Heinz, explained his strength is assembling teams

“I’m no financial genius.  What I do best, which is sort of a surprise to me, is put teams of people together, finding great people, incentivizing them, working together with them, giving them a chance to shine, enabling them.  That’s the most important thing that I did.  That’s what I’ve found I do well.  And that’s not a skill that I knew I had.  You have to attract the best possible team.”

Jorge Paolo Lemann, Founder of 3G Capital, on attracting talent

“The people factor is something that you really have to work hard at.  Most people think of business as selling a product and you have a very good product to sell or you have a special strategy and after I found out that attracting good people to work with me, I found out that it was more powerful than what you were doing or what the product was.  As a team, you will find something interesting to do.”



Source: Jorge Paolo Lemann Interview, April 27, 2016


Kraft Heinz (KHC) Q1 2016 Earnings

Kraft Heinz (KHC) CEO Bernardo Hees said some of their categories are underperforming their expectations

“We’re off to a good start, good not great. As expected, some headwinds hung around, including consumption trends in some key categories that held us back.  On our last call, we spoke about plans to address categories such as U.K. soups, U.S. mac & cheese, ready-to-drink beverage, and frozen nutritional meals. And while we’re making progress against those opportunities and expect better performance as the year unfolds, they held back our results in Q1.”

Said the retail food environment is still difficult

“We were also able to improve our sales and go-to-market execution in what remains a challenging retail environment.”

Saw strength in the dollar store and club channel 

“We saw solid growth in our foodservice business and non-traditional retail channels like club and dollar stores. This is consistent with the business development or whitespace opportunities I mentioned on our last call. Much of it has been enabled by the combination of the Kraft and Heinz foodservice teams, and we should continue growing in coming quarters.”

Said that some of their categories are missing the mark from a consumer trends point of view

“I think where we are underperforming, it’s largely sometimes we are missing the mark from a consumer trends point of view rather than having a different business model. Our business model applies to all categories similarly. So from a relationship with retailers, we believe we have a very strong relationship, we have a positive relationship and we see a positive outlook there. The most important things between us and our retailers and in my discussion with many of them was whether we can maintain the service level up or not. And we have demonstrated not only we can maintain the service level and the Case Fill Rate, but we actually increased it and we feel good about that.”

Doesn’t expect the US market to grow significantly from here

“There are a lot of headwind coming at us as you know that is putting downward pressure on sales, because historically in the U.S. market the growth did not come from volume. If you look back for the last number of years, it came from inflation and that inflation was based on commodities inflation.  Now, we are living in an environment where there is no inflation in commodities, so it is harder to be able to say, to have a bullish approach to grow. What we said, and we’ll continue to maintain, that we would have stable top line. And as you know, we have an exposure to a large number of commodities, so it’s very hard to put exact number to it, but we feel that stability for us is a very good outcome.”

Miscellaneous Earnings Call Notes 11.12.15

Chicago Bridge & Iron NV (CBI) Philip K. Asherman on Q3 2015 Results

Technology group turning around after slow start to this year

“In our Technology Group, after a slow start this year due to economic headwinds in China and a strong dollar elsewhere, the technology market is turning around.”

The Kraft Heinz (KHC) Bernardo Vieira Hees on Q3 2015 Results

ZBB is more than just a one time event

“The way we like to think ZBB, to be honest, is much less as a one-time event and much more as a systematic approach of doing business. It’s really fighting for the penny in the terms of capturing all the opportunities that allows us to be in a position that you can reinvest more behind working dollars, behind our people, behind our products, behind our brands and so on. So it’s not only a program, but it is really a business tool that we apply in different ways.”

USA Trucks’ (USAK) CEO Tom Glaser on Q3 2015 Results

Environment has been ok, holding up well

“I think it’s holding up well, to be honest with you. The volume hasn’t been exciting like it was last year but it’s consistent, it’s okay volume. As far as pricing, and probably not going to be as aggressive as some of our competitors in saying they are looking at 3% to 5%. We’re looking at probably 2% to 3%, and that’s pretty aggressive given the fact that our last two years”

AP Moeller-Maersk’s (AMKAF) CEO Nils Andersen on Q3 2015 Results

Container shipping rates have deteriorated in 2H

“Essentially, what is basically driving the change in our forecast is that the fundamentals in the container shipping have deteriorated in the second half of Q3; the rates have dropped quite significantly. So on average, the rates are or were 20% or 19.3% to be exact I believe, below last year’s and that became worse during the quarter. So September and October did not give any hopes for an immediate recovery and that’s why we adjusted downwards.’

Capacity has grown faster than demand

“So the challenge in the container business is not new. We’re struggling with all capacity; capacity has grown approximately 9% compared to Q3 last year and the market has only grown 1%. I think the low growth has taken everybody by surprise. At least it was below what we expected and definitely did not meet our hopes for the peak season.”

ArcelorMittal’s (MT) CEO Lakshmi Mittal on Q3 2015 Results

Expecting global steel consumption to decline by 1.5-2%

“This shortfall in volumes reflects the exceptionally challenging market we have faced so far in the second-half of this year. With the exception of Europe, all major markets have seen apparent demand contract in 2015. We are now forecasting global apparent steel consumption to decline by between 1.5% up to 2% this year. China, the ongoing weakness in real estate and machinery end-markets has caused a contraction of real demand by around 3% up to 4% this year.”

Chinese production is sticky but they have no structural cost advantage

“Chinese steel production is sticky, so exports have increased. Here the volumes, price, excluding China have declined to less than $300 per tonne. But this is not a profitable business model for Chinese mills as they have no structural cost advantages. This is highlighted by Sesa reports that mills lost an average of $35 per tonne in the third quarter.”

Customers are holding off on buying while prices are falling

“My view is that this is unsustainable. In order to arrest these losses, steel prices in China need to increase, either as a result of improved demand or as a result of production curtailment. The weak international price environment is eroding prices in our core domestic markets, also prompting customers to hold off on their order and their inventories down, so apparent demand has been running below real demand. And expected stabilization of prices will bring steel buyers back to the table. There is already some indication of this happening at the margin. ”

Hertz Global Holdings (HTZ) John P. Tague on Q3 2015 Results

Rise sharing impact has been less than “logical worriers” might expect

“As it relates to ride-sharing, we’ll talk a little bit about that next week. I think if you look at the highest concentration of ride-sharing markets, New York, San Francisco, and LA, in New York, you’d see an impact or at least what appears to be an impact. I think it would be hard in Los Angeles and San Francisco, given the overall industry trends, to draw a conclusion that there has been much of an impact, although obviously growth would have been higher for the industry without it. So, look, I think the impact continues to be less than the logical worriers might expect.”

The Priceline Group (PCLN) Darren Richard Huston on Q3 2015 Results

Travel is an inherently non-local business

“The case of China is a good reminder that travel is inherently a non-local business. It’s a global scale combined with win-win partnerships like we have with Ctrip, are critical for our mutual success.”

We’re doing a lot more business with Facebook. But Goog still the leader in intent based marketing

“we have been doing more and more business with Facebook. Most of it though is in the category or re-messaging or re-targeting. It’s not really in the big sweet spot which is intent-based marketing. That’s really what search gives you is intent-based marketing. Somebody types in, I want a hotel in New York, and then you are responding to that request. But the folks at Facebook very much understand this. They’re working to try to win that kind of businesses. It’s direct response business, it’s a big prize for any marketing channel, and we’re also trying to work with other large audience versus in Silicon Valley to try to get out that Holy Grail of intent-based marketing.”

Dean Foods (DF) Gregg A. Tanner on Q3 2015 Results

Milk supply is expanding faster than demand

“The EU is a leading contributor as their milk production has increased year-over-year by more than 2.5%, largely due to the elimination of the milk quotas at the end of March. This is particularly meaningful when one considers that the overall size of the European dairy production is approximately seven times larger than that of New Zealand and over one-and-a-half times larger than that of the U.S. Moreover, we see China’s milk supply expanding faster than their weaker consumption and a continuation of the Russian import ban. In the U.S., we continue to see ongoing domestic supply momentum due to a slightly larger herd and productivity growth more than offsetting the impact of the continued drought in California. These supply and demand factors should contribute to a relatively benign dairy environment over the short term.”

The health of the dairy category is as good as it’s been

“The health of the dairy category is probably as good as it’s been in my career at Dean Foods and while lower priced milk in terms of both cost and prices at retail is helping support that, I also believe that the abatement of certain secular headwinds, which we discussed in depth last quarter, is contributing. ”

D.R. Horton (DHI) David V. Auld on Q4 2015 Results

No question labor is tight

“Stephen, David. No question; labor is tight. The reports coming out of other builders – I mean, we’re not immune to it. I think we have mitigated it by having the best operating team in the industry. And the relationships that our people have with vendors, suppliers put us at the front of the line. So it flows back to the time with a company, time in a market.”

Controlling costs is really about people

“You guys are going to get tired of me saying this, but it really is the people. We got the – one of the toughest markets, toughest weather conditions, toughest labor markets, is our Dallas-Fort Worth area. And those two guys, because they have been in the market for 20-plus years, because they have a direct relationship with the vendors and suppliers, make a call and get people to show up. And you just can’t put a – you can’t quantify that and put it into a model.”

We still think there’s legs left in this cycle

“I would say we still think that there’s legs left in this cycle. I mean, we’re not even close to what is a historical demand. So we’re trying to be very judicious and value the capital we have.”

The WhiteWave Foods (WWAV) Gregg L. Engles on Q3 2015 Results

Almond milk sales growth has slowed but is still strong

“These are category growths that are very strong, they’re certainly not what we saw last year where we saw growth, where we still had the expansion of Almond, but it has been mid single-digits over the past several quarters, and we now have a category here that’s approaching $1.4 billion in overall retail sales.”

New distribution channel creates new manufacturing challenges

“I will add to that Ken, that this move into the immediately consumable beverage in the away-from-home market requires some slightly different manufacturing capabilities than we have. So we’re going to have build those – up those products, really want to be aseptic, so they can be distributed in a non-refrigerated way. You can make it work – refrigerated, but it’s somewhat more challenging.”

Energizer Holdings (ENR) Alan R. Hoskins on Q4 2015 Results

Seeing signs of stabilization in the battery category

“First, we continue to see signs of stabilization within the battery category. Value and volumes were essentially flat over the latest 12 weeks and 52 weeks. This is an improvement over the trends we’ve seen in prior years”

TV is still the best ROI for us on advertising dollars

“We were able to understand the return we get on each of those particular mediums. I can tell you that today, given both the effectiveness of our copy, the strength of our brand and the fact that we have global icons, TV is still the best ROI for us. But you will see us over time continue to migrate to shifts in mix of how we approach consumers and shoppers depending on what it is we’re launching, the marketing news that we’re bringing to the market and, again, continued ROI rates on each of those individual investments depending on what’s in the mix. ”