Kraft Heinz Co (KHC) Annual Deutsche Bank Global Consumer Conference Call Transcript

Kraft Heinz Co (NASDAQ:KHC) Annual Deutsche Bank Global Consumer Conference Call June 7, 2023 8:45 AM ET

Company Participants

Andre Maciel – EVP & Global CFO

Rafael de Oliveira – EVP & Zone President, International Markets

Carlos Abrams-Rivera – EVP & President, North America

Conference Call Participants

Steve Powers – Deutsche Bank

Steve Powers

All right, everybody. Welcome back. Thank you. And thanks, especially Kraft Heinz, for returning to the conference. We’ve got a full stage here today. So I want to introduce and thank personally, we’ll go over here, Andre Maciel, Executive Vice President and Chief Financial Officer. We have Carlos Abrams-Rivera, Executive Vice President, and President of the North America Zone; and Rafael Oliveira, Executive Vice President and President of the International markets. So between the 3 of them, we’re going to cover all the financial questions and we’re going to cover the whole world geographically. So thank you, again, all 3 of you for being here.

Andre Maciel

Thanks for inviting us.

Question-and-Answer Session

Q – Steve Powers

I guess, let’s just set a broad context. You’re coming off another good quarter in the first quarter, and I think trends quarter-to-date have been pretty solid based on the consumption data we track. That first quarter allowed you — you exceeded expectations, allowed you to reaffirm the full year organic growth while raising guidance for gross margin expansion, EBITDA and EPS. Again, a very solid start to the year.

As you reflect on that and think about trends to date and the path ahead, how overall do you feel about how the business is performing. And where do you guys see the most sort of near- to medium-term opportunity?

Andre Maciel

Okay. No, thanks for the question. I’ll take that. Andre speaking here, for those listening. So the business is performing quite well, and that’s what gave us confidence in Q1 to not only raise the guidance on EBITDA and EPS while at the same time, increasing the investment behind market and R&D, $100 million to $150 million on top of what we already have built in the plan, taking us to double-digit market investment on a year-over-year basis.

We continue to grow in the 3 pillars of growth, as you saw during earnings. Our emerging markets doing extremely well. Foodservice, also very strong growth. The growth platforms in the U.S., particularly sauces and convenient meals doing also very well. Obviously, there is some choppiness happening, also a lot — since after we took the price increase as price gaps have expanded. But I think the fundamentals of the business and the 3 pillars of growth continue to do very well.

Steve Powers

Okay. We’re going to get to some specifics, including price, surprise, surprise. But I guess before we get to the current environment looking ahead, let’s — if we look back to 2019, just a tremendous amount of change that was put in place in ’19 and just in time, because 2020 required a lot of things that I don’t think were in place before 2019.

So as you guys reflect on those decisions and the steps you’ve taken since, what do you think were the most important decisions? What were the most critical? And where do you think maybe the market under-appreciates just how different today’s Kraft Heinz is from the Kraft Heinz of the prior decade.

Carlos Abrams-Rivera

I can — maybe I can start. And then Rafa, if you want to jump since you’ve been in this journey fairly well, and Carlos here. I would say is, first of all, we needed to understand that after 2019, a number of things happened not just the pandemic. It was also the fact that we were coming from a different strategy as a company, really driving inorganic growth. And now a company that was going to be rebuilt with a focus on the consumer and organic growth.

And I think Miguel, who joined the company in mid-2019, I think his big focus was let’s make sure we have the right people for the job that we needed to get done. So there was a number of changes that were made, both in the way the structure was done as well as capabilities that we brought to the company with the different people that we brought into the company. And I think that has been helpful in terms of us building the fundamentals in which we can then grow the company have the aspirations that we have.

The other piece I would say too is structurally how the operating model kind of change. There may be something that is — it may not be easy to see from the outside, but we’re a company that — the business that are around North America, we have 3 business units and — and those business units we’re only looking at only to a commercial margins. So they were basically looking at standard cost.

And the supply chain teams, we’re looking at anything below that, which meant that if you had to deal with inflation or any savings were not coming, productivity wasn’t coming, the people in the business unit didn’t care because it was not in their reward system. So we needed to make sure we want — we put it all together to make sure the operating model was looking from the top line all the way to the bottom line.

And then we also have to make sure we elevate certain functions in the company. Marketing was reporting 2 level down for me, with people who probably have the right capabilities for what the company we want it to be. So we know to have those now reporting in to me directly. R&D was also reporting 2 level down. We have brought new people to lead R&D now reporting directly into me.

So the number — and then I would say the third piece, which is part of our growth pillars is we took what was a Foodservice business that was more like a hobby. I think that’s Kraft Heinz at one point, to make it truly a way in which we can drive innovation for the company and really get us more closely to consumer insights as well, too. So I think those are 2 big areas. I don’t know, Rafa, if you want to talk about maybe some of the other changes?

Rafael de Oliveira

Yes. The other — the other thing I would complement is the mindset shift, and really shift to a mindset of continuous improvement. And you’ve seen, like we said a couple of years ago, a target of $2 billion savings, which we increased in the Q1 to $2.5 billion savings. So — but really the mindset of constantly searching for efficiencies that could be invested back into the business. And the part investing back to the business is really important because really becoming much more marketing-centric organization.

And this is reflected, Carlos explained a few of the things from the layers of the organization, but also, for example, today, we have 9 what we call the kitchen is our internal marketing agency. We have 9 across the globe, which allows us to have like social listening connection to the consumer data points, so a lot of investment on technology and also to generate assets, marketing that bespoke tailor made much more efficient and to test those very fast and adapt according to different types of consumers or tribes, as we call in consumer language.

So all these investments really changed the mindset of the company to a much more focus on putting the brands on the top of everything we do and tried to enhance and develop those brands globally. So — like — that’s a big shift, I mean, that happened internally, and it’s reflecting on it. I mean — on the marketing side, for example, we start getting a lot more awards, recognition for our creativity, which again, awards don’t pay the bills, right? This is not what we are there for. But they are recognition that how we are changing the company inside. That’s what — it’s very important for us.

Steve Powers

Okay. Carlos, you mentioned Foodservice but also emerging markets. I think those 2, say, pillars of growth, are perhaps underappreciated by the markets. We watch U.S. Nielsen data like a hawk, and then we kind of forget about everything else. I guess maybe enlighten us, enlighten everybody about what really — why those 2 pillars are such great opportunities for Kraft Heinz and what you’re doing to exploit them?

Rafael de Oliveira

Maybe I’ll start and then pass on to Carlos. I’ll start with the emerging markets piece. Yes, you remember a year ago came here, we started talking like how this emerging market is really changing. And we are very proud that we continue to deliver on it. I mean just to put it in perspective, emerging markets today is only 10% of our total turnover. So it’s relatively small. We’ve been growing consistently double digits. In fact, Q1 consistently over the years, like in the next last 4 years, Q1 we grew 23% in emerging markets. We expect to continue this double-digit trend for much more longer time to come.

And this is based on 2 key pillars. I mean if you think we — about 4, 5 years ago, we started a go-to-market model that we developed in Brazil. And we really — it’s very data-oriented, how we map — the framework is the same, but then with tailor made in each market. So we go very deep into analysis how to map the country, how to — what’s the right distribution model, what’s the — how many merchandises we need, what’s the right portfolio, what’s the profitability depending on the region.

So we go in a lot of data analysis. Once we define the model, we roll over across the country, and we go manic on execution, how to execute this perfectly, ending with a perfect store, like how do you make the store merchandise in a perfect way with image recognition, feeding this information back to the model to continuously improve.

And so we started this model 5 years ago. It worked brilliantly well. We started rolling out, so we call a repeatable model now. We are — have implemented or are implementing more than 90% of the emerging markets we are present. So we are very confident that this will continue — and in every market that we implemented, the growth actually accelerates much further.

So this is the key pillar. And again, when we look at long term today in emerging markets, especially Taste Elevation, which is our core platform, Taste Elevation being sauces and the adjacencies, we’re only 5% market share. So if you think of developed markets, we have 10% market share, which is too low. 10% is too low, but 5% is half of it.

So I mean, you can imagine how much space we still have to grow. So that’s why just this pillar alone gives us a lot of confidence that we’re going to have growth for years to come with this model. But there is a second part of it, which is the brand development. And we are very fortunate to have Heinz in our portfolio. Heinz is the key pillar. I mean, the awareness of Heinz globally is about 80% in many — 85% globally in many markets, above 97%, 99%. But even in countries that we don’t have any presence, people know of Heinz.

So that gives us a head start. Because then you’re starting a go-to-market model, if I invest in a brand developing a brand that people recognize. So you just have to go through the marketing funnel and convert this into purchase. So doing those 2 things together, I mean, we’re very confident on the emerging market. I continue to be confident that the emerging market will continue to deliver. So that’s the first one.

I’ll go quickly on the Foodservice, I’ll let Carlos speak more about it. But again, Foodservice, a key pillar for us on consumer insights, how you get consumers insight, how do you get connection to consumer, how you test innovation. So extremely important from that sense. I mean, it’s a channel that we — different than the — it grows the industry itself, grows faster than retail. Foodservice on average, the growth rate is about 50% higher than the growth rate of retail.

And we, as a presence of Foodservice, we have a business of about 50% front of the house, 50% back of the house. While the industry overall is about 70% back of the house, front of the house give us not only this brand exposure and impressions, but also better returns because the brand have better margins because it’s brand dependent. So again, Foodservice has been a growth pillar, continues to be, bringing into the forefront of the company, of the importance of the company. And developing these 2 chefs, I think how we built a network of chefs that enhanced a lot of conversation with customers.

You get out of the procurement discussion of just buying the cheapest to how do you develop products together, how do you develop sauces together, bring that to retail for the successful one to sell in retail. And the global partnerships. Many times, we are competing with local players that don’t have this global network where we can see. We pick a product that worked really well in Asia, we developed for KFC. We can go and tell KFC in the U.K. to do the same product. Surprisingly enough, they don’t really have that connectivity and we can provide, or Burger King did a great product in Spain, we can — how do we make the same in Brazil? So this network of global with the chefs is enabling us to grow significantly. Maybe you want to complement.

Carlos Abrams-Rivera

Sure. But let me start with emerging markets, which I’m also very confident about — because I think what Rafa has done is kind of build a model that it has — there is a latent demand for a Heinz brand to everyone in the world — in a world that is basically flat. We can see that. And then the fact that we able to grow it and expand margins as we do that.

And then in away from home, I mentioned that the business was almost like a hobby, like a channel that was forgotten in North America, and it starts with people. So we brought the right people and the right caliber of people to lead the business. We changed the structure of the business to make sure we are focused on how do we go-to-market in a way that allows us to be more efficient, and be also more connected to the rest of the retail organization.

And I say that — to say, before away from home in North America was a separate kind of business, we actually brought it into 1 of the 3 business units that are run. So that way, when we do their marketing, we’re actually doing it connected. So that way, when there’s a promotion or advertising that’s happening from — in our restaurants, working with the operators, can be redeployed as well as in retail.

That also is true for innovation. So as we think about us being able to use the away-from-home in the Foodservice business as a way for us to kind of trial the innovation that we can then bring into retail as well, that is part of an how we think differently about that channel now. And the good news is we are growing — we are growing share. We are actually expanding margin. And we also now are able to have a business a little more focused than it used to be.

Just to give you a statistics here. I think from 2019 to now, we have reduced about 50% of the amount of SKUs that we had in Foodservice. At the same time, we’re growing the business. And the reality is that we had a business that was so inefficient that was clearing all the supply waste because we were not working with the right people and to focus on our portfolio. So they have changed now in a way that now we can feel that we can continue to grow and then push into new channels that also are margin accretive.

So over the last few months, we talked about that in, for example, taking lunchables, and redeploy it in a way that we can actually now — reformulate in a way that we can go to schools, go into more hospitalities and other areas that we in the past haven’t been able to go to, but now also have an improving margins. That is part how we think differently about that business, how we think it’s 1/3 of our future growth for the company.

Steve Powers

Great. So I’m about to ask you a bunch of questions about economic deterioration in the U.S. and the implications for your business. But as I think about the Foodservice dynamic, I mean moving into more — more of schools and institutional kind of accounts as opposed to retail accounts will help that theoretically. But how do you think about the economic sensitivity of the Foodservice business?

Carlos Abrams-Rivera

Listen, we have been taking a bit more pricing in Foodservice than in retail. And so far, that has held. And I think the channel that historically have been growing 50% more than retail. So for us, it’s a business that so far have continued to prove that it can — we can be able to price the price.

And part of the reason for that is because we’re playing with our brands that are very much iconic brands, right? They are brands that are many times — the rest of operators want to make sure that in front of the house. So we can add value by the presence that we have in our — with our brands, and because we’re bringing innovation.

Two weeks ago, we were at the National Restaurant Association in Chicago, and we debuted a number of innovation there for the retailer. Hopefully, you saw some of those the Heinz remix. We’re now — from one machine, you can develop 200 different sauces. I think a lot of press got around that. But maybe what didn’t get talked about so much is that we actually didn’t get data from that to actually understand what are the better flavor combinations and then we can use to drive to the retail.

But it’s also about efficiency. It’s us, there was another innovation that we launched at the National Restaurant Association, which is — we created this kind of tab, almost like a beer tub, where we can control the portion, control with the tab. And what allows us to do is to say, okay, for each operator, we can customize to the information that the size that you want. So if 5 guys want to have a half an ounce and Wendy’s has to have 1 ounce of ketchup, we can — we can customize that to drive innovation for them and efficiency, but also we get the data to understand how consumers are using the different condiments in different products. And that allows them to have the full ecosystem of understanding. We’re bringing, adding value to the operators, but also then getting information that eventually will make us stronger too.

Andre Maciel

And 2 things I’ll add here is we have been doing a lot of efforts as well in terms of gross margin of this business is quite healthy as well, in part because of the portfolio that we sell, which is mostly sauces in case of international sauces and cream cheese in North America, which have very good margins. All the effort behind that rationalization allow us to be more efficient and how we run the factories also been helping to have a lower cost structure. So those machines are healthy.

And I don’t know if that’s where you’re also hinting, but the interesting phenomenon happening right now because with the economic situation, what we see as consumers, they are spending the same amount of Foodservice that they were spending before, in fewer visits. So what’s happening is the dollar consumption is preserving the Foodservice, but at the same time, people spending more time at home, which is also helping the number — increase the number of applications in food at home, which end up helping both.

Steve Powers

Okay, okay. So pricing, economic fatigue and this deceleration, big topics of this week. I’m sure you’ve heard them in the hallways and in your meetings. You’ve got — you’ve done like many companies have done a really good job of pushing through a good amount of price the last few years. And on top of that, flexing revenue growth management to optimize how that pricing is received by consumers.

As you go forward: A, do you think there’s more room for price and price increases, I’m focusing on the U.S.? Or is revenue growth management can become that much more important? And how do you respond to the capable concern amongst investors that as the consumer weakens, there’s going to be more downward pressure on price by both consumers and retailers, then that’s going to put pressure on CPG companies to keep pricing even positive as we go forward.

Carlos Abrams-Rivera

I think I come to 4 questions in there, but let me start, and then we’re going to see where we want to go. What I’ll say is, first of all, for this year, we — in the U.S., we passed all the pricing we’re going to pass, right? So unless there’s some dynamic condition, that something inflation happens that we don’t foresee, we pass all the pricing both across North America, but also international.

So — and that — we did that the last round of pricing. We took full pricing last year, full pricing, rounds of pricing last year in U.S. This year, we did it in February. And that was not everybody followed, but for us, it was about making sure we protect the margin to support our long-term algorithm. And again, it was passed to retailers.

What I would say is as we go forward is you mentioned the revenue management. And to me is that continues to be paramount on how we continue to drive the business going forward. We have made a significant amount of investments in terms of technology and AI in order for us to have better return on that investment we make in any promotion. So you’re not going to see us do things that are about going deep in discounting where it no longer makes sense. And we’re not going to return back to 2019 levels in which we were going to do this deep promotions that many times actually returned negative ROI.

And I have Andre, maybe you can spend a little more time on the revenue management, the things we’re doing. But the other thing I would say is what customers want to do is how do they add value to their consumers. Ultimately, that’s what this is all about. And I think the benefit that Kraft Heinz had is that we have the scale to bring value in different ways. In the U.S., we’re going to be able to celebrate July 4th. That’s an opportunity for us to say to the consumer, we can bring the bundle of solutions that if you want to grill, we can sell you everything from the Kraft Singles to the Hot Dogs to the Heinz ketchup that you’re going to put in your — for your grilling with your family.

That idea I was saying to customers, how we’re going to grow the allocation because we’re going to come in with a bundle of solutions in a way that benefit the family. But that is how do we make sure that we provide a family of 4 a great solution for lunches for the week with $20, because we can bring our Kraft mayonnaise with their private label Tuna in a way that can serve a number of people. That is value added that we can bring to their consumers.

So those are the conversations we’re having with the retailers, is how do we continue to bring those bundles of value that allow you to kind of continue to drive the traffic in the stores that you want to make. And Andre, if you want to talk about revenue management.

Andre Maciel

You hit a lot of the most important topics. I would say beyond that is pricings are muscle that incult a company should be using on an ongoing basis. There are some sectors with the food and beverage that have been very successful in doing that on a consistent basis. Like the beverage industry, in particular, alcoholic and non-alcoholic has done a very good job over the years of doing that. So I think that’s a good practice.

I believe that as we continue to head forward, not only straight list price increases, but also leveraging better mix is something that even in Europe, for example, is not in new year over the past several years, where it’s more difficult to pass a straight price increase. We are introducing new pack sizes at good price points as a mechanism to put the price, we’re going to continue to mix — I think mix use a smarter way.

And make promotions work better and better in cohort the investments we have made as to remind people at in the U.S. I only have 60 people fully dedicated to pricing — earning pricing strategy, promo optimization. We have invested like good millions of dollars in developing our own trade promotion system. We have visibility in real-time for 100,000 promotions that we ran per year in the United States. And we have been using technology to improve the quality of our elasticities, which have unfolded, untapped a lot of opportunities in order to get the promotions.

So making those dollars work better for us than the retailer — it continues to be a big, big opportunity for us. We still have quite a number of promotions that really, from a pure financial standpoint, don’t make sense for us and retailers. We have started now to entertain using AI to create automatic calendars. So we are in early prototypes, but we can see the technology now exist that allow us to bring that we scale.

So there are things that we are working as well that probably will come to fruition also in 1, 2 years from now. But we are already benefiting from those investments that we’ve made. Like on a year-over-year basis, our average promotion ROI already improved at 10 percentage points, and is 15 percentage points since the pre-pandemic level.

Carlos Abrams-Rivera

And I think you started talking about one of the questions at the beginning, how different being from 2019. And I’ll tell you, this idea was to continue to invest in revenue management in order for us to be smarter. This is kind of top tier in the industry. This is not like we were bad and now we’re good. This is like we were not in a good place. Now we’re actually the top of the house in terms of how we are reading this information in a way that allows us to not only think through that particular event and that particular customer, but what is the cross cannibalization that may be happening with other customers, in a way to make sure that when we do those investments are done with this path of Kraft Heinz and what’s going to benefit more for us.

Steve Powers

Okay. Great. So in summary, how do you see a risk that — I mean, as list prices become harder to come by, and as promotions likely increase because companies have more flexibility with supply, so promotions are going to come back even if it’s more judicious in the past. Is there a risk that, that gets out of control and pricing ends up negative? Do you worry about that? Because investors do.

Carlos Abrams-Rivera

Well, I worry about the things that I can control. And for us is we’re building a virtuous cycle of growth that is dependent on having the strong gross margin expansion as we continue, and that is predicated in the LTA. And I think for us is maintaining the discipline of our thinking and making sure that no one particular moment disrupts what we’re building here, because we’re building here not for the next quarter, but we’re being here for years to come.

Steve Powers

Great. So one of the things that allows you to kind of maintain that momentum is just the quality and pacing of your innovation, which I think has also been a big point of focus and improvement. I think you’ve got a sell side — headquarter’s visit coming up in a few weeks to highlight some of this.

But I guess what are you doing? What’s the one way to kind of articulate what you’re doing differently today than you were 3-plus years ago to drive more effectiveness out of that innovation pipeline?

Carlos Abrams-Rivera

What I’ll say is, first of all, innovation begins with having the right consumer insights. And for us, in 2019, we were not building that kind of muscle of consumer insights, we have done now. That led us to first focus on how do we renovate our products.

In North America, we have now renovated about 90% of our products to make sure they are truly relevant for today’s consumers, and they can continue to grow with us. And now that we have this muscle we’ll continue to do that. So that’s one part of the innovation. The other part of the innovation is also thinking through how we are going to bring new-to-the-world ideas, and we have now organized under the umbrella of Agile scale, Agile innovation teams that are focused on bringing disruptive innovation to market.

And when you come to schedule, you’ll see a few of those and tested some of the things that we’re bringing in that are new-to-the-world ideas in which we’re bringing our ownable technology. And I’ll give you an example of our crisp for the microwave that is the ideal. The first foray will be something around putting a grilled cheese sandwich that you can put in the microwave, and it will take just like you just put it in the stove top.

That is a technology that we have ownership to that we allow them to take it through different formats into different solutions with consumers, and you’ll get to see a little bit of that. But it’s also creating a partnership that allows us to accelerate that innovation. So in cases in which we understand the consumer insight, we understand the opportunity, we may be looking at outside who are the people who can help us achieve that better.

So in a situation where we did a joint vendor-ship — joint partnership with NotCo, for us to create kind of this JV that helped us go into market with our brands going into plan base, we already done in test market our Kraft Singles, Not Singles, Not Cheese, that allows us to go into now a whole new space by taking our brands and making democratizing essentially plan base. We’re going to be doing that too with Mac & Cheese. We’re going to be doing that with a number of other categories that are up to come and you’ll see more that when we get together. But that is an idea of us understanding where we want to go, how we want to grow and then bring also new-to-the-world ideas that only we can do given our scale, too. I don’t know, Rafa, if you can…

Rafael de Oliveira

I wouldn’t add a lot of difference. It’s just like see we spend a lot of time seeing where our brands can take us. So to give a couple of examples, we — we have this fantastic baked beans business in the U.K., which has been there for 100 years. I mean, really is a staple in the British food.

But we realize — like looking at it, building on the insights, building on the strength of the brand saying, okay, beans is actually a fantastic super food. It’s like low in fat, low sugar, high protein. So what else can we do with those beans? So we created something internally called like a Beanz Liberation.

And we start exploring like how do you take the beans out of the can and start creating products around the beans. So we launched the Beanz Burger. We launched the Beanz Houmouz. We are about to do another Beanz Bars, snack bars. So different types of exercise building around the strength of the brand, the equity of the brand, that is like giving us fruition.

So this is how — and this is just one example, okay? We have — like, for example, we might have seen in the U.K., the pasta sauce getting to pasta sauce, a category that was quite sleepy. We came with a very disruptive market and saying 150 years late. So we are 150 years ridiculously late on the pasta sauce.

But we came with pasta sauce, there are like, in a few months, we got 10% share of the category and building. And right now, we launched the partnership in the same way Carlos described a partnership with Absolute, more marketing on but launching Absolute Pasta or a vodka, which are the very popular ones. So launching a pasta sauce, Heinz pasta sauce with Absolute.

So this type of thing, again, putting the consumer insights into the — into the front of the space, building around our brands, there is a lot. And there’s more building, telling you the ones that we already have with.

Carlos Abrams-Rivera

The point about Heinz, I think, is an important one, because it comes from us defining Taste Elevation as a place we want to grow. And then thinking what is the frame of reference in which we can grow that brand.

I think you see that in U.K. as a good model or a blueprint for how you do that. If you take North America, for example, our Taste Elevation business, now the frame of reference in which we compete is about $36 billion. That’s twice what it was just a couple of years ago. So we identified a bigger pool in which we can play everywhere from hot sauces to spices. Now today, we’re only $2.5 billion. So that gives you a sense for how we are thinking about us potentially stretching our brands into new spaces, by us thinking differently about the frame of reference.

Steve Powers

Yes. Okay. And — what about the speed of it? Are you able to — is your — do you have metrics around the average kind of go-to-market time from concept to product today versus where you were? I’m sure it varies in the range. But on average, are you faster as well as more focused?

Rafael de Oliveira

Significantly, yes. I mean I touched about the kitchen of our internal agency. This is not just a marketing, right? The reality is it has enabled us to listen to the consumer, get those insights and react on a speed that I mean was not thought of before. We would take 18 months to 2 years to do an innovation, which is taking out a few months.

Example for you, we launched a sauce, recently a hot sauce with Ed Sheeran, the musician, which, in fact, like we — in a conversation with him, he is a mega, like a Heinz ketchup fan. He has a tattoo of Heinz ketchup in — literally, we didn’t pay for it. He did it himself years ago. But he has a Heinz ketchup tattoo in his forearm. And on a conversation with him thinking of a collaboration for ketchup, he mentioned that he liked hot sauce. Within a week, we were able to send him a prototype of like what do you think about this? He loved the idea. Within 6 months, we are in the market. Now we’re starting to ramp up, and we’re going to launch depending on the market where his concerts are. So there is a whole ramp-up in the next year or so. But again, it’s the reflection of how we are much more connected with consumers that are asking for, what opportunities of partnership and then reacting this much quicker with our R&D.

Carlos Abrams-Rivera

Under the ideal scale under umbrella, we organize ourselves different, too, to drive innovation differently and with a different speed. And this is a play where we’re definitely bad. I would say we’re actually good now, but we still have even more opportunity as we go forward.

But it’s like today, for example, when we launched the NotCo Kraft Singles, that was a product that we think 8 months we got to marketplace. But it’s more than just that, we are basically taking the concept of Agile and you see it in technology companies. The idea was going with an MBP, right, a minimum bottle of product that we can launch in the market, do the testing, learn and then go expand nationally.

And our retailers actually have been very much a partner in this. For us to take a product like we have an innovation that we’ll be going deeper on that we’ll have time today to about it is home baked. We tested with one retailer for about 8 weeks. We learned a lot, then that allows us to go into a national market based on the learnings that we have.

We’re applying the same methodology of the technology companies use to the way we’re going to drive innovation to make sure we have speed. The last thing I would say about innovation, though, is if I think about — for people who may not see Kraft Heinz every day, our innovation — the quality and the amount of innovation coming from Kraft Heinz that are truly sticky in terms of the marketplace and incremental. I think that would be one of those signs as you can see, we are in a path to greatness. I think for me, one is that — I think the idea was how we continue to shift our products to our portfolio to more of our growth platforms.

So if I think about our growth platform into 2019, they represented about 50% of our portfolio. In our 5-year plan, there should be almost 3/4 of the portfolio. That’s another multiples that we are getting to the kind of the transformational aspect of what we want to get. And I think you’ll see us continue to make those investments in order to make sure that we get there. You’ll see that already in the amount of marketing and R&D that we’re spending. And you’ll continue to see us not only spend in the marketing level, but also improving the quality of the market .

Steve Powers

A few minutes left. I want to hit a couple of topics if we can. Supply chain management. I mentioned earlier that supply chains overall are getting better. Haven’t been perfect, right? Historically you’ve had some supply issues this year, brands like Oscar Meyer and Ore-Ida and Philadelphia. What do you — how would you find the status of your supply chain now? Are those recent bottlenecks resolved? Are there new ones that have cropped up? What’s your confidence that you can operate it at high levels of service, going forward?

Carlos Abrams-Rivera

Well, Stephen, hopefully, there’s no new ones that you’re going to tell me about, because when I left, Chicago, everything was okay. What I would say is, today, overall, our service is about high 90s. So we are actually back to overall good levels. Now I would say there’s still a couple of exceptions, and I think you hit on some of them. Cold cuts is one that we’re still in above the mid-80s. So there’s still opportunity. And we have said publicly that we want to get back to start within the business by the end of summer, so sometime in Q3, and that still remains our goal.

Potatoes is a little bit of a crop situation that is affecting everybody. So we are not able to service, I think the way we want, the Ore-Ida business. At the same time, we believe we have the right plan for the second half of the year to truly unleash kind of what Ore-Ida business, as we are now in a better position with a new crop coming in and us having a stronger partnership to be able to use that material.

I think you may have seen that about a year ago, we partnered as a JV with our Simplot, which is the largest potato manufacturer in the world that allows us to actually use their resources in order for us then to now where we have the right ingredient for us to kind of deploy more faster and more broadly.

Steve Powers

Great. And then real quick, I think it’s a quick answer. Hopefully, it is. Andre, you’re down to — you’re operating at about 3x net debt to EBITDA, which is right around within stated targets. I guess as you think about incremental capital allocation in this environment, high interest rates, does it change at all? Does the current environment change at all your bias as to how that capital is deployed?

Andre Maciel

No, not really. So the [indiscernible] are the same that we have communicated before. So maintaining the dividends that we have — and having a good net debt ratio is — or amount committed to that, maintain investment grade, then prioritizing the investments behind the organic business.

I think you’re hearing today, we have so many opportunities across the company. So we have been prioritizing capital there. If you have excess cash above that, which is not going to be the situation for this year, at some point we will consider returning more to shareholders. And M&A is always something that is opportunistic. Different in the past, it helps to strengthen the organic strategy, help us accelerate our top line growth. Also with good discipline on multiple, but no changes.

Steve Powers

Great. I’ll be quick. We’re just about out of time. So I’ll give you guys the last word. We’ve covered a lot. There’s a lot more to cover. What do you think investors should keep most top of mind as they think about Kraft Heinz and make their investment decisions?

Andre Maciel

I will say that I hope people see over and over that we are a much better company. And we have a clear strategy. We are confident it is the right strategy. We have been delivering against that, have been very consistent to what we’re doing.

We have 3 key pillars of growth that I don’t think that people fully appreciate the size of the opportunity. I hope you heard a little bit today from Rafa and Carlos about the amount of opportunities ahead of us on the top line side. We have made severe changes to the operating model that also people don’t fully appreciate the impact that it has, breaking down silos, realigning incentives around the company, elevating core capabilities like market and R&D to the forefront of the company.

And we have changed — we have a big change in my side in the company. I think Rafa alluded to that. We are a lot, lot more long-term oriented. We’re not here to manage the month or manage the quarter. We are here doing the right thing for the long term. We have been consistently increasing the investments behind marketing R&D. We see technology as a true competitive advantage that this company has. How many other companies in the sector that have more than 150 people only behind data science with Masters, machine learning specialists being deployed across all the areas of the business. So that’s very unique. And we have better discipline in how we’re deploying capital.

And that’s another area that we evolved a lot and how we’ve been looking [indiscernible] across our entire portfolio. We broke down our portfolio in a lot of sales and make sure that we’re deploying capital against those places that have the opportunity for top line growth and then providing very solid returns to the business. So there’s a lot going on, and I think it’s an exciting time to be in the company.

Steve Powers

Great. Andre, Carlos, Rafael, thank you all. Thank you all for joining us. Thank you. Have a great conference.