KHC - The Kraft Heinz Company (KHC) Presents at Bernstein's 39th Annual Strategic Decisions Conference 2023 (Transcript)

2023-06-01 16:43:07 ET

The Kraft Heinz Company (KHC)

Bernstein's 39th Annual Strategic Decisions Conference 2023 Call

June 01, 2023, 01:30 PM ET

Company Participants

Miguel Patricio - Chief Executive Officer

Conference Call Participants

Alexia Howard - Bernstein

Presentation

Alexia Howard

Good afternoon, everyone. I'm Alexia Howard with Bernstein covering the U.S. food sector. And it's my very great pleasure to be joined by Miguel Patricio, the CEO of Kraft Heinz since 2019.

I think it's no understatement to say that Kraft Heinz was kind of in free fall when Miguel took the helm after. And after six years or so of upheaval, the company is bouncing back and proving very resilient, particularly during the pandemic, the recent supply chain disruptions, and most recently, the very hefty inflation that we're experiencing right now. I'm particularly struck by the company's AGILE@SCALE initiatives that are enabling the company to respond more rapidly to opportunities in a dynamic environment as well as partnering with external best of breed companies like NotCo and Microsoft to turbocharge capabilities where needed.

With that, I'll hand it over to Miguel to provide some opening remarks. And for anybody in the audience, if you have questions, please type them into the Pigeonhole, and we'll weave those into the conversation. Thank you so much for being here.

Miguel Patricio

Thank you, Alexia, and thank you all for being here with us.

Last year, I was here with you. And the conversation was about how Kraft Heinz was four years ago that we were worse in class and how we felt that we were, like, on a hole and had to get out of the hole. And that -- last year, I told you, we're no longer in that hole. We left the hole. We are proud of the journey. We are -- we feel we are a good company, and we evolved immensely during these years.

But good is not good enough, and we have to aim to be great. I mean, if we high-five too much on -- just on the evolution that we had here, we'll miss a big opportunity to become a much better company. And this is where basically we are, Alexia, is rethinking our company to get to this journey, ambition that we have, this greatness ambition.

We are in -- after three years, last three years, in kind of a crisis mode, every year with a different reason, but we have reasons to be optimistic. We had a good start of the year. Had good expansion in margin, a 120 basis points of margin improvements in the first quarter. Decent top-line and bottom-line, and there's a lot to come still. But this journey of greatness is where we have our mind.

Question-and-Answer Session

Q - Alexia Howard

Great. So, you mentioned that we met here on this stage last year. And last year, you talked about pivoting from inorganic growth before you arrived and financial leadership under the previous management team to organic growth and marketing and innovation capabilities on your watch. How did you rewire the organization to make that shift? And was it switching up people? Was it processes, information, structure, incentives? How did you do it?

Miguel Patricio

I think it's a little bit of everything. But I have to say that it's a massive change, because it's so big that becomes the cultural change. I mean, when you have a company that is wired on only on inorganic growth, the capabilities that you need are very, very different from when you are wired for organic growth. And, of course, all these inorganic coming to feed the organic, but, like, having an obsession about organic growth.

And looking backwards now and talking about the changes that happened, I think I would use a couple of our values, the values that we define our culture since it's such a big cultural change, to bring -- to give you an idea of what has been happening.

So, starting with the consumer. I mean, when you have an inorganic growth mindset or plan organic growth is not important. And and as a consequence, marketing and R&D were not top priorities for us. And we had to elevate these two functions a big time. And today, we invested a lot of creativity and talent. We created our own digital agencies. That is the only way nowadays to produce content in the speed that the consumers require.

We are embarking on a very different moment today on innovation. We announced that we have an ambition to bring $2 billion of incremental net sales in the next five years from innovation. It's something that we still have to prove to you and to ourselves that we can do because we haven't done it yet. There's a big change in innovation as well. And brands, I mean, we've been renovating our brands and investing more and better in our brands. But that's a big change. Big, big, big change.

Another big change is on our value that we call 'we dare to do better every day', which is about bringing efficiencies to the company. And efficiencies also is a big change in mindset, because before, efficiencies were more on having very low costs. And when you're talking about efficiencies, really about how to do better every day, how to continuous improvement. And on that, we we've done a lot.

I mean, I'll give you three examples. In supply chain, we announced that we would bring $2 billion in five years. Now, we raised this number to $2.5 billion, which is basically gross savings, not the reduction of fixed costs in COGS. It's a very different mentality and a very different way to get there. Revenue management. I mean, revenue management today, we have very good team on revenue management. We centralized the entire function. It was all across the company in silos. And so, now we have 60 people that live and die on improving ROIs on revenue management. And, also, innovation, doing innovation every day. These are three good examples of that.

On people, the organization today is very different. We evolved immensely. I mean, to keep you -- to give you an idea, four years ago, 40% of our organization told us on our engagement survey that they wouldn't recommend the company for a friend or family member. So, it was huge disengagement in the company. These were the factors. But today, that number is just 7%. And we were able -- this was -- my first fear was we'll never going to be able to attract great talent who will -- with the reputation we have right now who will join us. And for our surprise, actually, we've been able to attract a lot of incredible talent. I think that the reason for that is that a lot of people like me that like change and transformation, they were wired in a different way, and we were able to build a great team.

And, finally, ownership. So, the value that we say we own it. And here, the company was super, super silent. We had, if I'm not mistaken, the entire company, 50 different entities with different targets. And so, we were not there to maximize the company. We are there to maximize our business. So, the enemy was inside the company. Today, we only have one entity and everybody is with one thing in mind, which is to maximize the value of the company.

And, also, big change on thinking long term. I mean, today, we are concluding right now our -- the first time we do a 10-year plan, which is critical for us to understand the future. I was here before talking with Alexia that -- we were talking about China as she was asking me about baby food in China, and I was saying, if we had done this 10-year plan 10 years ago, we would have understood that birth rate would decrease incredibly and we would have sold that business. And we would have understood that pet food would increase exponentially because Chinese are having more pets and less babies, and we could -- but if you don't really understand what future looks like in the long term, it's impossible to do.

So, these are just examples, Alexia, of long -- sorry for the long answer, but it's examples of how we are rewiring the company.

Alexia Howard

Makes sense. Last year, you announced a new long-term growth algorithm. Can you speak about the biggest avenues for growth and progress on each one?

Miguel Patricio

Sure. So, we -- the long-term algorithm comes with choices, right, strategy and choices. And the choices for us for growth are that we are going to grow from Emerging Markets, from Foodservice, or Away From Home, as we call it and from the growth platforms in U.S. and growth platforms being what we call Taste Elevation and Convenience Meals. And this comes with big consequences, right? So, our resources are behind that. And the growth is going to be one-third, one-third, one-third, right? And it's happening.

I mean, just first quarter, we had incredible growth in Foodservice. We grew it 30%, and Emerging Markets 23%. And it's exciting what we're seeing. I mean, in Emerging Markets, we think that there's much more opportunity. We have a business -- we have a model for growth that is based on land grabbing, on distribution, is based on equity. So, we're investing behind the brands, and also innovation, how to grow the portfolio of brands and specifically behind Heinz.

And so, we are very excited with the countries where we are, that we are implementing this business model or this growth model. But we are concerned about the countries where we are not, right? And in that sense, we recently announced a partnership -- and partnerships is maybe one thing for us to talk more because we are very excited with all the partnerships we are developing. You mentioned one, the NotCo. But we announced a partnership with ABI, Anheuser-Busch InBev, in Latin America to distribute our products in countries where we don't have distribution. And this we want in Emerging Markets to take us to the next level to countries where we are not present and start this growth model from zero literally and gain critical mass, then we can build the factory and can grow faster. Still to be proven. It's a test. But so far, so good, doing very well.

On Foodservice, foodservice is an area of the company that was forgotten. There was a small area of the company with not a lot of talent, absolutely no innovation. And we thought that this was one of the biggest opportunities we have. And why? On average, foodservice is not very profitable, because 80% of Foodservice is back of the house and back of the house is basic commodities, right, to sell pizza sauce for the chain and it doesn't have a brand, so it's a commodity. But not for us. For us, 50% of our sales are on what we call front of the house, right? When you go to a restaurant, there's a ketchup bottle on the table. And that is very important because that is very profitable. So that was the first reason why we are doubling down.

The second is because this is the best way to penetrate in our consumers, gaining penetration, because the taste of ketchup here or the taste of mustard or the taste of mayo in other countries, you start teaching the consumer, what products to have. And so, strategically, it's very important that we have this interaction in restaurants and then the consumer brings it home. So, Foodservice is doing also very well, both in North America and in international. And we are super excited.

In U.S. retail, this is a tough moment in U.S. retail, but we are growing, and especially on what we call the growth platforms. In the first quarter, we grow share as well, which is Taste Elevation and Easy Meals.

So, this is a long-term strategy. We have to prove ourselves every quarter and then every year. But so far so good. We are excited with how we are doing.

Alexia Howard

Right. I've got a question from the audience here. You mentioned ABI, and I apologize to the tangent here. But what lessons are there for the staples companies generally from the recent customer backlash over their recent ad campaign?

Miguel Patricio

Be careful here. I don't want to talk about my ex company. But I think that -- there are a lot of lessons, and I think companies have to really to learn from their mistakes and from other companies' mistakes. And I put my team around the table to discuss this case and reflect about, first, could that happen to us, and if it had happened to us, what would we have done different. And I think that is crucial for all of us. If we cannot avoid this conversation, then we have to learn -- prefer to learn from other's mistakes. But we also make mistakes, and we also learn from ours. Otherwise, we making them again.

Alexia Howard

Fair enough. Yes. Last year, when we were chatting, you talked about 25 multifunctional pods of 12 people each being deployed to address high-priority opportunities under the AGILE@SCALE program. How do you decide which projects to prioritize and which to defer or drop under that program?

Miguel Patricio

Alexia, this is a part of the company that I'm so, so excited about. We have today 32 pods and we expect to finish the year with 36 pods. And answering your question -- or before answering your question on ROI, on how we define which is ROI, but I'll give you more color, just want to bring to the audience what is this AGILE@SCALE idea, because it's not so obvious the name.

The idea comes from the fact that especially consumer goods companies were born in an era where it is not a digital era for sure and to organize themselves and with the size of the growth, they put structures, they put processes and they become slow. We were very slow. I mean, we are still very slow in some areas of the company, others not. And the way to attack that for us was reorganizing ourselves. And these are the pods. These pods, they are defined by ROI. So, everybody now wants the pods to solve their problems. If I'm the brand manager of hotdogs in Oscar Mayer, I want them to find a solution for it, but that's not how it works. We define in a very methodical way what are the ROIs of this -- of the projects, and then, we put a group of 12 people working to solve this case. It can be a problem or an opportunity. We have pods today work in logistics, in innovation, in manufacturing, in sales, I mean -- in finance, I guess, in all areas of the company.

And just an example of innovation, we have today 12 pods, which means 124 people working on disruptive innovation. We have in some of these pods people working from inside the company, sometimes from outside of the company. So, like an example, we are going through a big change in manufacturing and we have Microsoft, which is our big partner in -- on digital solutions working with us inside the company, finding faster solutions for our problems or for our solutions.

And this is very, very exciting, because we are having concrete results. I mean, like talking about innovation products that used to take two, three years to develop, now they're taking six months, or revenue management that this year alone, we're able to improve the ROI on the promotions we have by 10 percentage points, not 10%, 10 percentage points, using artificial intelligence to find the best mix for this region, for this supermarket, what to do and how to do. And I could go on and on and tell you about supply chain, et cetera, but I'm very, very excited with the transformation that this is bringing to our company.

We have today, so -- 32 pods with 12 people each, but we have already 80% of the U.S. organization all trained in agile. And this changes the way that you start thinking and working. Again, we were a company in the past very siloed and the pod is the opposite of that. It's people working. When I have a pod working on innovation of a specifically thing, this is the only thing those 12 people do, they don't do anything else. They are 100% of their time dedicated to fix or to solve that opportunity or that problem. So, it's exciting, a lot of concrete examples.

Alexia Howard

Makes sense. I know you've talked in the past about how focusing on the percentage of sales from new products introduced over the last year or the last three years can lead to bad outcomes if it degenerates into an endless churn of cannibalistic line extensions. So, how do you prioritize what R&D projects get done? And what metrics do you use to assess the progress of your R&D group?

Miguel Patricio

Yes, I'd want to reflect with the group that incentives. It's obvious, but it's always good to remember to remind us that incentives can be incredibly good or incredibly bad, so if you have the wrong incentives. And I think that in the past, the incentives behind innovation were sales coming from -- a percentage of sales coming from innovation. And what that created was everybody doing stuff. Stuff, I mean now I need -- I'll give you two examples.

There was a year that we launched five new salad dressing brands, the five failed. And why? Because, there were five new innovations that there was a target for salad dressing, right? And this is very dangerous. I mean, this cannot happen. We need to have a lot of discipline on defining what to innovate and how to innovate and what are the incentives behind. So the incentives today are really on incremental innovation. If it's not incremental, it doesn't value. It's not on one-year basis, so it's a compound of three years.

And we don't do innovation more like we did in the past, like, "Okay, so what's the target this year? It's 100. But what's the trend? The trend is 80. Oh, so, I have a gap of 20. So, let's innovate 20." So, everything has to be big and has to go national, and we have to pray for these things to stick on the wall and work, and guess what, that's not how innovation works. And so, we put very strict rules on how to launch innovation. And it's always -- we launch in a smaller area, you learn from it, you hear the feedback.

So, let me give you an example. We launched Heinz Pasta Sauce in U.K., huge success, by the way. We launched [indiscernible] we see the response from the consumers, first in terms of mix, which ones do very well, which ones don't. The ones that don't, drop them. Why they don't? Is there anything we can improve in the product? Yes, okay. So, we launch. And when we are ready, then we now launch it to retail. And the same here in U.S. So, a very different way at looking at innovation.

Again, on innovation, we still have to prove to yourselves and to ourselves that we can really be best-in-class or great in innovation, which is not the case today, but I'm very excited with what's coming with the pipeline we have ahead and how we are evolving in this arena.

Alexia Howard

Makes sense. Can you provide an update on your capital allocation plans, the cash, I guess? And can you rank order where the dividend...

Miguel Patricio

On what? Sorry.

Alexia Howard

Just the capital allocation uses of cash and particularly where the dividend sits in the order?

Miguel Patricio

Yes. So, capital allocation is a very important subject in our company and especially with a shareholder called Berkshire that has almost 30% of the company. So, it is a -- as you can imagine, it is a very hot topic for us and has to be, right, and it has to be. We are learning a lot from the way that they're thinking that sense.

Yes, dividends continue being extremely important and will continue to be. And -- but not only dividends, I mean, we want to keep our investment grade status that we conquered back in record time. I mean just to remember, in this journey from the hole to the good, right? We were just four years ago, our debt was 5.7 times, if I'm not mistaken. And we were downgraded to high yields. Now, we are at BBB. In record time, we were back to where we have to be. And we want to continue that way.

Organic growth. So, you saw us increasing, in the last three years, CapEx by about 30%. And that is because we have a lot of opportunities inside our company. I mean, CapEx to innovate more; CapEx to -- for automation and reducing costs, especially to labor, which has become especially in U.S. a critical issue; CapEx for improving the outcome of our factories and for capacity in some cases as well. So, we continue capital allocation, investing in our own company continues to be a big part of it.

Alexia Howard

And in terms of the dividend, where would that sit in the pecking order?

Miguel Patricio

I would say that's top of the list.

Alexia Howard

Okay, that's helpful. You made a number of notable divestments, natural cheese, the Planters' nuts line. Any plans for further reshaping of the portfolio through further divestments or areas where you'd like to acquire now that you've reduced your leverage?

Miguel Patricio

Yes. Look, I always say that -- I worked for 21 years for the company, you're mentioning before. And in the beer category, there are brands that are 1,000 years old. And I can assure you that if you were drinking beer 1,000 years old, the consumer needs to drink that beer -- those beers were very similar to the consumer needs today. In food, that is so different. I mean, the way we were eating just 10 years ago is radically different from what we are eating today. And the consumer needs evolve very, very fast.

Good proof is the example I just gave you about pet food and baby food in China. So, you have to adjust your portfolio always. You have always to be looking at how to adjust your portfolio. In an ideal world, you have to sell what you predict is going to start declining before declining, and you have to buy what -- before it starts growing, which is hard, but it's not impossible. I mean these two examples I just gave about China, it could be predicted.

And so, we want to continue reshaping our portfolio, yes, on both sides, right? Always with discipline on selling and buying. I mean, we acquired four small companies last year. It's not a coincidence that three out of the four were in Emerging Markets. It's not a coincidence that four out of the four were in Taste Elevation, because that's how the M&A strategy has to be, of course, in accordance with your strategy.

But yes, you can expect portfolio to continue improving as it has to be in any food company constantly because of the speed that food adjusts or changes across the world.

Alexia Howard

Makes sense. We're seeing an uptick in private label market share. I've got a couple of private label questions that have come in. Now the assumption is that promotions will increase across food companies in order to compete with private label and limit trade down from branded to private label. Can you really expand your gross margins with the assumption that promotional activity will be elevated?

Miguel Patricio

The answer is yes, we can, and we will. Our expectation is to improve margins this year between 125 basis points and 175 basis points. And we are confident about that. And why are we confident? For many reasons. I mean -- and I will start with incentives.

So, the company today, all employees have a target on gross margin. And we are really going deeper on how to improve gross margins. And why gross margin is so important, because it's the only way to feed the growth of the company. If you have higher gross margin, you can reinvest back in SG&A, marketing and R&D as we are. If your margin reduces every year, then that's impossible to do. So it's as obvious as what I'm saying.

And now, why we are confident? We are confident because we are working better in mix. We are confident because of price. We are confident because we have a cost reduction higher than we were expecting at this moment of the year. And yes, I think that's -- we will deliver the gross margin.

Alexia Howard

And just a question that's come in from the audience. Have the price gaps between your brands and private label narrowed recently?

Miguel Patricio

The price gaps, yes. So, we had a price gap increase recently when we increased prices this year compared in the first quarter, right? So, it increased. We are still expecting the private label to increase their prices. Normally, it takes a little bit more time for private label to increase prices than brands, but we are also counting in the year with an increase on promotion. Of course, there are categories that are more elastic than others. And so, you have to use resources from one side on the other side. Now, good news is that, for us, this is one of the areas that we had the biggest transformation in the company.

Revenue management today and with pods on revenue management and with artificial intelligence helping us to maximize the resources, we are in a very different place than we were in the past on deploying resources and with much more discipline. We are not going to do promotions with negative ROIs that was very common in the past. So, I think that we can be -- although increasing the promotional activity in the remaining part of the year, still achieve the gross margin that we were talking about, still invest in our brands. So yes, this is how we are predicting the year this year.

Alexia Howard

Makes sense. One more on -- there's a lot of questions on pricing, just one more. How have the inflationary discussions around pricing evolved with large retailers?

Miguel Patricio

Discussions on price increase?

Alexia Howard

Yes, particularly with the larger retailers.

Miguel Patricio

I think that we were prepared for a much more -- much tougher conversation than actually we had, because different from previous years, when -- as always inflation, but inflation doesn't come everywhere. Inflation comes in coffee, because the crop of coffee was very bad, and on ketchup, because the crop of tomatoes was very bad. And this isolated discussions with the big trade or the small trade is very tough, because in their mind, it's like, "Okay, coffee increased, but compensate here with something else." This year and last year, the inflation is across the board. I mean, last year, COGS inflation was 20%, right? And this was for everyone. It was for them as well.

So -- and also, I think that we were much better prepared for these conversations. I think we have a much, much stronger team than we had in previous years or we had four years ago. So, we were much better prepared. So, I would say that having conversations on price is never easy, never, price increase. But the accomplishments were good, took less time, and we achieved the results that we wanted. I wanted to say that we basically have all the price increases that we had forecasted for the year done. And I know there are a lot of companies that still have to do a lot of price increases during the year, our is done.

Alexia Howard

That must be a relief. Okay. Can we move on to the topic of...

Miguel Patricio

And successfully.

Alexia Howard

Absolutely. Can we move on to the topic of ESG? What are your top priorities or areas of focus there?

Miguel Patricio

Yes. So ESG, I mean, you can imagine with a complex portfolio that we have, ESG touches a lot of different parts of the business. I'll tell you the three that I think are the big priorities and where personally I even have targets on. So, one of my five personal targets is on ESG.

And they are -- the first one is carbon emissions, and this is for the whole industry, the most complicated one. I mean, we are committed to be carbon neutral by 2050, and it's a long way to go, but it's a big homework to be done and a lot to learn, right? And so, the good news is now we know where we are, we didn't know. So, now we know where we are exactly by product, by factory, by supplier, by everything. And so, we can build the actions plan behind that. But it's a long-term commitment or target that we have to start immediately us and everyone else, because if we don't, we will have serious consequences.

The second one is on packaging and especially plastic. The food industry is a big sinner in terms of plastic. And we have to find solutions for that. We have a commitment to have until 2025 only recyclable or recycled or compostable or reusable plastic in our products. If you had asked me this question last year, I would be saying that I don't think we could achieve that. I think today, I'm much more optimistic. And the reason for that is that we apparently found the solution for the ketchup pouches that is recyclable. And also for the pouches of Capri Sun that today are not. So with that, I think we are going to achieve that. That's very important.

The third one is on nutrition. And probably this should be my -- in order of priority should be the first one since we are a food company. And on nutrition, we are very, very, very concerned and acting towards sugar and salt reduction. And you know that this is sometimes very hard because sugar and salt are incredible natural preservatives for food, right? So, it gets to a point that not to reduce salt and sugar, you have to reduce the shelf life of your product. So, you start having problems.

And when we are finding solutions -- I mean, in this case, using other natural preservatives to balance the equation of sugar and salt. So things like hops that are used in beer is the natural preservative for beer that we are testing and finding solutions with balance, on reducing sugar, reducing salt, increasing hops and other natural ingredients. And we are finding pretty incredible things.

This year, specifically, Alexia, we reduced the sugar content of our Capri Sun by 40%, which is, if I'm not mistaken, something crazy like 40 million pounds of sugar per year that we take from kids in the United States. We are leaders in juices for kids, and this is big, right?

So yes, nutrition is on top of our agenda. And yes, we have -- there's a long way to go, but that is very high in our agenda.

Alexia Howard

Great. Supply chain disruptions and input cost inflation, you talked a little bit about this already, appear to be improving now across the industry, service levels coming back a little bit. Are there any lingering issues at Kraft Heinz?

Miguel Patricio

So first Q, we announced that we had service level in the mid-90s, which is a huge improvement versus where we were during COVID, and we had another improvement in this second quarter. So, we are -- service level at much higher levels. The problems we had in the first quarter and some are still in the second quarter, one is related to the crop of potatoes. Potato crop this year was horrible and everybody that has potatoes is struggling. We have Ore-Ida, which is the leader on French fries. So this is -- this for us is a concern. We could be selling much more than we are if we had potatoes and everybody else.

We also had problems with labor in one of our factories, specifically on cold cuts in a place that is hard to get labor. We will be okay until the end of second quarter on that one. So, we are improving now from a critical situation to the end of second quarter will be normal. Every month getting better.

And the third one was on Philadelphia Cream Cheese, on a packaging shortage that we had. And that was really disappointing, because 40% -- believe it or not, 40% of consumption of our usage of Philadelphia or cream cheese is for cheesecakes, 40% right? And as you probably can imagine, you don't do cheesecakes every day at home, but you do during holidays, right? So, the number one day or week for us is Thanksgiving; second is Easter. And during Easter, we could not promote. It was the first time ever that we didn't promote during Easter, which was a problem for us, but we didn't have capacity, and that decreased our CFR, but also our share that we suffered. Good news is that this is behind us, and we are back to normal on cream cheese.

So the situation on supply chain, I think is pretty much normalized, I would say.

Alexia Howard

Great. One more that's come in. Going back to the question of innovation, does renewing the innovation culture at Kraft Heinz change the short- and/or long-term margin profile of the company?

Miguel Patricio

This is a very important point. I mean -- because there's always the dilemma about the innovation coming with a lower margin. I personally don't like that. I tolerate it on the short term, because sometimes you innovate through third-party manufacturers, but the way to do it is always having the discipline on always seeing the end of the tunnel. So, okay, I'll go to the first moment, but when we internalize that, what's the margin and -- because otherwise, you'll have a lot of margin dilution with innovation. So, we have to be very pragmatic, very disciplined about innovation and margin.

Alexia Howard

Makes sense. You recently announced a higher savings -- gross cost saving target of $2.5 billion by 2027, which is on average about $100 million more per year than you had before. Where are the largest areas of opportunity going forward? And are there new capabilities you need to build to get at these opportunities?

Miguel Patricio

So, this is a nice story for us from where we started to where we are, but also the possibilities for the future. So, $500 million will be about 3% of COGS. Four years ago, we didn't have gross savings, because the savings coming from COGS were much more on closing factories, but not really coming from efficiencies. And so, we put first the targets on bringing $400 million per year. We knew the address, but we didn't know exactly the ZIP code at the time, but we achieved it, these targets in the first three years. And today, we feel confident to go to $500 million, which is 3% of COGS. But really great. So everything we do now, we define what greatness looks like. And greatness in gross savings is more about 4%, not 3%. And so now we want to get to 3%. And when you get to 3%, then we'll go to the 4%. So there's a lot to be extracted from here.

Big areas here. So, one is automation. So, especially in countries like U.S. with still the situation on labor, the way it is, so there's deflation in COGS, but there's no deflation in labor. These projects become very, very important, right? So, I'll give you an example. I mean Lunchables is -- our Lunchables factory is basically manual, and we can automate that. And that's huge saving that we can bring.

Another one is logistic footprint. We have a very complicated logistic footprint in the country. We have about 80 warehouses. Today, only 5% of our logistics are done through railroads. And that's not good. I mean, we should have far less of these warehouses, to do far more of rail road, and the reason why is because they are far away from the railroads, right? So, we are -- have a big project in that sense.

These are two examples, footprint -- and I'll give you a third one, very important one. The efficiencies in our lines. So, we measure OEE. I'm not sure if you are all familiar with what OEE means. But basically, in a very simple way, mentioned that a factory works 365 days a year, 24 hours a day, that would be OEE of 100%, right? So if you -- your OEE is just 50%, that means that your factory is not working 50% of the time. Why? Well, because brokage, because of maintenance, because of changeovers, because of many, many things, because of bad planning. Our OEE four years ago was very low, was in the mid-50%s. Today, it's in the mid-60%s. So, huge improvement in OEE and a big obsession.

And this idea about efficiencies and doing better every day and raising the bar every day and learning from each other, this is sustainable, and you can do it for the rest of your life. I mean, cost-cutting, you cannot. And this is a good example of what this means. But the best-in-class is actually 75%, and we have factories today. So, mid-60%s is the average, but we have factories with 85%. We have factors with 50%, right?

So, learning from each other, raising the bar, have programs that are common to all our factories, which was not the case before. So, having a management system, way to manage and learn benchmark is another way. So today, we feel very optimistic that we can achieve this $500 million number.

Alexia Howard

Great. Coming into the home stretch here, final question. If we as investors were sitting in or out there in 2033, so 10 years from now, and we were looking back on everything that Kraft Heinz had accomplished over the last decade, what would you say was the one big thing that we had no idea was coming back in 2023 that made a huge difference to the trajectory of the company?

Miguel Patricio

Can I say two, instead of one?

Alexia Howard

Of course.

Miguel Patricio

I think, one you are seeing and one you are not seeing, but you're going to see it big time in 10 years from now. When we say that the growth of the company will come two-thirds from Emerging Markets and from Foodservice and also from these platforms of growth in Taste Elevation and Convenience Meals, I think in 10 years from now, this is going to be gigantic. And you're going to look and say, "Wow, this -- yes, this is the size or this is how the company was transformed." We're going to be a very, very, very different focused company, and that's what we are building. And this is the one you see, but it's hard either to believe or project the meaning of that.

And I think the one that is harder for you to see, but you're going to see in 10 years from now and you're going to say, "Wow, look at that" is really the transformation that is happening in the company today internally and the way that we are rethinking, rewiring, the level of ambition that we have, the quality of the talents that we have, how we changed the incentives and broke silos, how we have people now cooperating, either through the -- and didn't have before either through the pods or not the pods, but how we are building the company a very different, right? It's pretty big. And I hope in the near future, we have the chance for you to touch these things, because it's very hard to talk about it. You have to see it and feel it and bringing to life some of these examples. Alexia, I would love to have you in Chicago and have conversations with people and see the examples of things that are happening.

I mean, just to finish with an example. I think two weeks ago, we had this national restaurant convention, which we had not participated in the last 15 years, which is basically everything for foodservice and why we -- it was not priority. And we unveiled a couple of solutions, a couple of innovations in Foodservice or Away From Home. And one of them you may have seen on the media is this crazy incredible machine that you prepare your own sauce. Have you seen it? No. It's incredible.

I mean, you define the base. So, I want ketchup or ranch or mayo or mustard. But now I want to add a mango flavor to this ketchup and also some spiciness, so I'm going to put some hot sauce, but I don't like it too strong. So, let me put more on middle or mild. We have 200 other combinations that you define. It is great. Or on another innovation there, the new towers for sauces, for QSRs that have been the same forever with these big bulk boxes that now we are reinventing in bringing this to life.

So, this sense, this ambition, this innovation, I think it's spread throughout the whole organization, even in places where we never had like Foodservice.

Alexia Howard

Great. Thank you very much. I'd love to come out to Chicago for a visit and see it all in action. Thank you so much for being here for a great conversation, and thank you all for being here in the audience as well.

Miguel Patricio

My pleasure. Thanks for being here with us.

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The Kraft Heinz Company (KHC) Presents at Bernstein's 39th Annual Strategic Decisions Conference 2023 (Transcript)