The Kraft Heinz Company (KHC) Presents at 2023 CAGNY Conference (Transcript)

The Kraft Heinz Company (NASDAQ:KHC) 2023 CAGNY Conference Call February 21, 2023 11:00 AM ET

Company Participants

Miguel Patricio - CEO

Carlos Abrams-Rivera - EVP and President, North America

Rafael de Oliveira - EVP and Zone President, International Markets

Andre Maciel - EVP and Global CFO

Conference Call Participants

Jonathan Feeney - Consumer Edge Research

Jonathan Feeney

Welcome. If you can all find your seats, please. I'm Conference Co-Chair, Jonathan Feeney. I want to add my welcome to 2023 CAGNY. It's great to be back. Once again, we're very pleased to welcome the management of Kraft Heinz.

And before we get started, I want to take this opportunity to thank them very much for the launch of their sponsoring outside. It's going to be delicious and very much appreciated. Thank you.

I also want to note related to that, the management team will be taking their questions. They will be waiting for you out at the lunch. There'll be no formal Q&A in here. The lunch -- the questions will be taken out at lunch, so be ready for those.

One final reminder, we have a break. You can leave all your things here. Coty presents at 1:00 p.m. Be back in your seats at 1:00 p.m., but you could leave all your things securely in here.

So like I said, we're very pleased to welcome our next presenting company, Kraft Heinz. In 2019, they hired Miguel Patricio to turn around the company. In Miguel's words, the ambition was to transform Kraft Heinz by bringing together 2 forces, scale and agility.

Those forces could make the business much more relevant than it's been, much more efficient and deliver better results. Roughly 3 years, 1 pandemic and many, many points of inflation later, it's hard not to be impressed with the progress Kraft Heinz and its new management team have made. And today, we look forward to hearing what lies ahead.

I'll turn it over now to Chairman and CEO, Miguel Patricio. Miguel, thank you, and welcome.

Miguel Patricio

Well, thank you, and good morning, everyone. I'm very excited to be here with you and my team is as well, not only the team that is here, but a much bigger group that will have the chance to interact with you during lunch time.

As Jon mentioned, we have been hard at work transforming Kraft Heinz for the last 3 years. In my opinion, we have made a tremendous progress on our journey. We reset our company's foundation in 2020. We fully deployed our new operating model by 2021, and we entered the final stage of our transformation last year to accelerate profitable growth. I'm thrilled about the momentum we have as we enter in 2023 and even more excited about where we are going.

And while our PE multiple has improved since 2019, we are still well below our peer average. Our success is not yet being fully recognized by the market, which reflects, of course, a big opportunity, and that is exciting for all of us.

Yes, we have achieved a great deal in a short time, and that is good, but it's not good enough. Instead, at Kraft Heinz, we choose greatness, and greatness for us means that we have best-in-class execution, consistent performance that all our stakeholders, from investors, to customers, to consumers, to employees can count on.

We are pursuing top-tier returns for shareholders through a combination of accelerated profit growth, strong adjusted EBITDA and cash generation. To date, that would reflect our 6% to 8% long-term adjusted EPS growth algorithm, combined with our 4% dividend yield.

More than ever, I believe we all have the ingredients in place to achieve greatness. We have a clear path forward. The first and main ingredient is, of course, having the strongest portfolio of iconic brands in our industry, brands that our consumers love, with 6 of our brands having more than $1 billion in net sales and a household penetration that is over 97% in U.S.

Our brand portfolio also gives us the advantage of scale with the ability to invest in new capabilities and innovations in a big way that smaller competitors cannot afford. To prioritize investments more on the most attractive product platforms, we designated portfolio roles. We call this portfolio roles Grow, Energize and Stabilize.

Our products within Grow role are comprised of large and growing brands with strong margins in attractive markets. They represent about 65% of our sales globally, and this includes a portfolio of iconic brands such Heinz, Philadelphia, Lunchables, Kraft Mac & Cheese.

The piece of sales growth and margins of these platforms are higher than Kraft Heinz's average, are higher even than the industry averages. Here we will invest aggressively to capture the significant white space and market share opportunities we see ahead.

Our Energize role represents about 15% of Kraft Heinz sales. We have a strong market position with our Oscar Mayer brand, holding the #1 or #2 position across our core category and generating significant EBITDA dollars. Here we have renovated our products and our marketing communications.

Our Stabilize role represents about 20% of our sales. Flavor Hydration and Indulgent Desserts platform live here, with brands, including MiO, Kool-Aid, Capri Sun and Jell-O.

With high consumer loyalty and average margins, we are investing selectively as needed to maintain sales, while generating significant cash flow to fuel growth. As you can see, we have been repositioning our portfolio for growth and expect these platforms to become at least 70% of our global business. With over 90% of our future growth coming from our growth platforms, we are prioritizing investments in these platforms.

Within our Grow platforms, two are particularly attractive and are driving the bulk of future profitable growth. They are Taste Elevation and Easy Meals. With over $8 billion in net sales, Taste Elevation is our largest platform and represents approximately 30% of our portfolio.

We operate in 37 countries and sell Taste Elevation in over 70 countries. Worldwide, approximately 2/3 of our Taste Elevation portfolio holds the #1 or #2 share position in the markets we serve. We see a lot of opportunity here as we expect the industry to grow approximately 25% over the next 4 years.

Easy Meals is our other priority platform with over $5 billion in net sales. It represents approximately 20% of our portfolio, with approximately 3/4 of retail sales coming from brands in #1 or #2 positions. There is also significant opportunities here, as we expect this category to grow approximately 10% over the next 4 years. Easy Meals is also less exposed to private label than the rest of portfolio.

Beyond Taste Elevation and Easy Meals, our Philadelphia and Lunchables business fall within Grow, where we have very strong brand equity, differentiation and market share. With our portfolio of iconic brands, most of which have been renovated, we are poised to drive accelerated profitable growth.

As strong as our portfolio is today, we are committed to optimizing it. We are focused on opportunities that are aligned with our strategy and have the highest probability of success. We will focus on areas that enhance our geographic profile, align with our growth platforms, accelerate top line growth with strong gross margins and provide new capabilities. And you can see there what we have done so far.

And of course, our transformation would not be possible without our people. First, our Board is evolving with very diverse and rich background. We have 91% Independent Directors, with 3G no longer on the Board and Berkshire as an anchor stockholder. 36% of our members are women, and 27% are people of color.

And our employees are more engaged than ever. When I started, over 40% of our employees said they wouldn't recommend our company as a place to work. Yes, that was unacceptable. Today, it's a 7%, an incredible improvement. And we continue to make great strides on diversity, belonging and inclusion. It's our team that's making all this change happen and driving our path forward.

With our portfolio, power portfolio, and our diverse and talent teams, we will be growing across our 3 growth pillars. Approximately 1/3 of total company growth will come from our growth platforms in U.S. retail, 1/3 will come from foodservice and 1/3 from emerging markets. And the 2/3 of growth coming from foodservice and emerging markets will be largely volume growth, as we gain new consumers and customers. Let's take a look at each one of them.

U.S. retail is the core of our business. Growth platforms within U.S. retail represents about 35% of our revenue and is a place we absolutely must win. In the U.S., well, we have a significant scale in manufacturing and within our sales organization, and we have a strong iconic portfolio of brands, particularly within the Grow platforms.

In fact, 75% of our total retail sales are in categories where we have #1 or #2 market share. And because of this, we are prioritizing investments in this core pillar. As a result, we expect to grow market share going forward. More to come on this from Carlos.

Foodservice is our second growth pillar and is a strategically important channel for 3 main reasons. First, it grows faster. Historically, foodservice industry growth outpaces the retail industry by 50%. Second, it gives us faster access to consumer insights. And that means we can develop a faster innovation pipeline and get products into market quicker. And third, foodservice is a critical consumer facing, brand building lever in front of the house. We are underpenetrated in foodservice in both zones, and we expect to grow the business at a 7% CAGR. You'll be hearing more about this from both Carlos and Rafa.

Finally, emerging markets is our third growth pillar. This represents a huge opportunity for us, with industry growth expecting to be at approximately 4%, outpacing growth in developed markets. We have significant distribution opportunities across markets, and share is still relatively low. Emerging markets currently represent about 10% of our revenue, and we expect to grow at the 13% CAGR. Rafa will give you more color on how we will drive that growth.

As you can see, there is a lot of opportunity here. We expect each one that will contribute approximately 1/3 of total expected top line growth in our long-term algorithm of 2% to 3%.

Now to be great, we need to make our portfolio live up to its potential to capture the full opportunity, which brings me to the other key ingredients of our final transformation phase, our enablers. Our teams have made incredible advancements across innovation, marketing and sales to build scalable, sustainable solutions to gain market share.

Now every CPG company innovates, markets and sells, but it's how we are going to market that will differentiate us, and that is what we call AGILE@SCALE. We have put agile disciplines and digital solutions in place to transform the business from sourcing of ingredients to the factory floor, to the shopping cart, to our -- to your kitchen table.

We are also teaming up with industry-leading partners to drive speed, quality and capabilities across the value chain, including Microsoft, Google and NotCo, and a new partner that you will be hearing more in about few minutes.

This is a way of working that is new to CPG. And I'm also -- I'm super excited to share with you especially what our teams have been busy building. Take a look at this video that highlights some of our new digital products. And then it's over to Carlos and Rafa to show you how we are using these tools and the exciting growth potential ahead.

[Audio/Video Presentation]

Carlos Abrams-Rivera

Well, first of all, thank you, Miguel. Hopefully, you get to see it is a different Kraft Heinz. I'm super excited to be here with you today.

We find ourselves at Kraft Heinz on an inflection point in our business. Over the last few years, we've built a strong foundation for growth, renovated our entire portfolio of iconic brands, and we put consumers at the center, solving for pain point that nobody else has solved and innovating faster. We are thinking of meals in a whole new way. We are shattering the notion that convenience requires a trade-off, that healthy food can be cravable.

We created homegrown AI-enabled solutions to accelerate all parts of the business. We transformed marketing and optimize sales execution. But by the way, this didn't happen overnight. It required a whole mindset shift. We are showing grit and agility. And by the way, this is just the beginning.

Now how are we going to do this? Through our key enablers. We first had to focus on our core products. In fact, we renovated nearly all of our brands, starting that transformation 3 years ago. We follow a brand design to value approach with a focus on the consumer first. We eliminate product attributes that don't matter to them, and we add attributes that are important to them. We then connect with consumers with better quality, better presentation and better marketing.

Now these renovations have strengthened our brands, improved the top line and generated share growth. Let me see -- take an example of what we've done with Lunchables. Lunchables is all about empowering kids and driving creativity and fun. Now for parents, it's also about feeling good about what they feed their kids. And those 2 forces are what have drove the Lunchables renovation.

For parents, we have improved our nutritional profile with high protein content and our 100% freshness guarantee, plus our pledge to have 100% recycled packaging by 2025. Our Lunchables campaign is actually food, fun and exciting kid's creativity. The result of our comprehensive renovation speak for themselves, with plus 21% unit growth and another 4-point unit share growth during the back-to-school season.

Now that we have renovated our core, we are ready to now innovate to meet the future needs of our consumers. We're taking that consumer-centric approach like we did in brand design to value, and we now are innovating an entirely different way using innovation in an agile manner with one innovation engine. For each project, we have a cross-functional dedicated team that uses agile ways of working to develop products better and faster.

Innovation will drive the majority of our growth across our North America business, as we target $2 billion in incremental net sales by 2027. Now this growth will come from 3 priority consumer spaces: exploration and authenticity; quick with quality; and holistic wellness. Let's look at each of them.

First, exploration and authenticity. Consumers are looking for new flavor and authentic cuisines to break from their routine, so we have identified 3 specific areas. First, in personalized sauces, we are building on the growing consumer trend of customization with the strength of our brands. Second, in Just Spices, we are launching Just Spices in the U.S. market first in direct-to-consumer channel and then expanding into retail to bring modern culinary-led solutions to their stores. And third, our Mexican strategy. Mexican food is loved by consumers across the world. So now let's go deeper on this.

In our Mexican strategy, we will offer options for consumers from end to end across sauces, snacks, meals. For Delimex, in particular, we are collaborating with suppliers to facility innovation, ideation and development.

This strategy is bringing commercialization that previously had taken 3 years down to 6 months. And today at lunch, you have a chance to taste our delicious DelimexTaquitos with improved quality and nearly double the filling. Our products and our marketing all inspired by what you should see in the streets of Mexico.

Our second priority is quick with quality. Now we know consumers are looking for high-quality food that is convenient to prepare. So here we're focusing on 2 areas. First, what we call crisp. Now how many of you have put something in the microwave, then you pull it out and think it's a hot mess? So we actually have solved that pain point, and we will be demoing this during lunch time. Now crisp is not a one-off product with an ownable, patent technology that would allow us to expand into many categories.

And then there's Home Bake. Think about all the dishes cooking together in the same oven for 30 minutes with just the push of a button. All of them, each of those dishes, will come out together and look exactly and taste just like homemade. That's the magic that we have with Home Bake.

And with Home Bake, we are solving another pain point for consumers. Families can choose from their favorite main, side or veggie dishes. We are using an ownable technology platform that delivers its new to the world taste and convenience. And again, you'll be able to try some for yourself at lunch, so you'll see that it's just like homemade.

Our third priority growth pace is holistic wellness. We know consumers are looking for food to enhance their health and improve their physical wellness. So here we are focused on simple ingredient that tastes delicious. First is Primal Kitchen. It's the best for you option in many pantry staples. And with Kraft Heinz scale, we can expand the business with the economics that make sense.

Also within our holistic wellness is our joint venture with NotCo. And here we are pairing our iconic brands and our distribution and commercial capabilities with NotCo's AI-driven innovation process. With NotCo, we are democratizing plant-based foods, making our products available for all dietary needs. Now this ownable AI-based innovation algorithm allows us to innovate quickly and deliver great taste and product performance, and we're developing it with agility. Let me give you an example.

Our NotCo cheese was developed in less than 8 months. And today at lunch, I'll invite you to try the Kraft NotCheese or NotMayo on your veggie burgers during the time we break.

Now some of the products I just spoke about are ready to scale, like Home Bake and Primal Kitchen, while others, like Crisp and NotCo cheese, are in test market as we speak. But all of them are showing that the innovation pipeline is working at Kraft Heinz.

Repeat for Home Bake consumers that tried the product is 92%. Trial and repeat are beating all benchmarks set by top frozen meal lunches of the past decade. And in Primal Kitchen, we have grown the business over 2x since we acquired it. We are now feeding to test and learn about Crisp and NotCo and making adjustment when necessary. For Crisp, 80% of test consumers said we are over-delivering on their expectation of what a grilled cheese should taste like. And the test market results on our NotCheese have been 6x our original forecast. In fact, it is the top-selling plant-based cheese everywhere that it is listed.

So you see that our priority consumer space is aligned to our priority growth platform that Miguel spoke about, taste elevation and easy meals. And of course, to build a successful innovation, disruptive marketing is just as critical. We have a better marketing team with better insights, creating better content. That inspires consumers to share with others and increase the air media, which is actually free. Now take a look at what our teams have been able to do.

[Presentation]

Carlos Abrams-Rivera

Hopefully, you will agree that is amazing work. And let me share a highlight from 2022. Our engagement rate grew approximately 7%, which is more than 7x faster than the average growth rate. 100% of our activation garnered at least 98% neutral or positive sentiment. And 2022 was the most awarded year-to-date for Kraft Heinz and a 45% increase versus last year, and 7 of our activation garnered over 1 billion in earned media impressions each.

And building upon this great marketing, we need to win at the moment of truth with excellent sales execution. Now you heard earlier about insights to action. I want to highlight what a game changer it is. Think of insights to action as a fantasy football app, and I know some of you do.

You all want the advanced data and insights to optimize your lineup. You want past performance information on your competition and even the weather conditions to make sure that you are leveraging all the data to capture a win.

Similarly, insights to action harmonize its category, shopper and supply chain data sources and analytics into a single source of truth that allows our sales team to identify the most impactful opportunities to capture a win. And then we share those with our customers in real time.

All the advancements we have been making have strengthened our customer relationship. As Barbara Connors from Kroger says, "We have unlocked the ability to understand the unmet needs of consumers." Or Anthony Suggs at Albertsons that says we are bringing actionable insights to grow their business. Or Brian Hartshorn at Dollar General that highlights Kraft Heinz as a strategic partner for their growth.

As the result of these stronger customer relationship and these investments we're making in the U.S. retail, we expect to gain market share and contribute 1 percentage point of top line growth on an annual basis.

Let's now turn into foodservice, a global opportunity in which we believe we can grow at a 7% compound annual growth rate. As Miguel described earlier, foodservice is an attractive channel and Kraft Heinz has some specific advantage and opportunities.

One big advantage that we have is our approximately 50-50 split between front of the house and back of the house. The average front of the house business for our peers is about 25%. Our front of the house presence give us a critical brand building level that others just simply do not have. This drives additional sales, not only for foodservice, but in retail as well.

In North America, we have transformed our foodservice organization with new leadership, simplifying and renovating our foodservice portfolio, expanding distribution, investing in capacity and improving service levels, and we still have a lot of opportunity for growth.

For example, we are only in 25 of the top 50 QSRs in the U.S., with only about 1 SKU, in many cases. So given our breadth and quality of our product portfolio, we have significant distribution opportunities that we are actively pursuing.

So we will win in foodservice through a 3-pronged approach. Number 1 is innovation, testing and scaling up. Number 2 is maximizing our core business. And 3 is entering new channel. So first, we will drive innovation by testing, learning and scaling up. So here example, a program that we call Heinz Sauce Drops. We are launching creative, new-to-the-world sauces as a limited time offer with select influential fried chicken partners, similar to how shoe drops work for a company like Nike.

As the sauce rises to the top, we will then scale it up. And if they continue to do well, we will launch nationally and potentially in retail. So this approach of testing, learning and launching innovation would accelerate growth and derisk our capital investments.

Second, we will maximize the core. We strategically reduced our number of SKUs since 2019 by approximately 50%. And despite that, TDPs were up in 2022 versus 2019. So consumer pool can drive significantly new business for foodservice customers. Let me give you an example.

We recently executed a Tip for Heinz campaign, where consumers dining at restaurants that don't offer Heinz ketchup, I know there's a few, could leave an extra $1 tip for Heinz on their receipts. And they can share it online for a chance to win a reimbursement or have their paid -- their bill paid in full. This campaign drove over 100 million impressions and 48 air placements. And most importantly, over 160 customers initiated conversations to switch to our iconic Heinz Ketchup.

Finally, we are expanding our foodservice offering into new channels. First, our Lunchables brands are going to school. That's right. We commercialized 2 SKUs with improved nutrition that are complying with the National School Lunch Program, and we expect them to be in K-12 schools this fall.

We're also investing in digital channels. KH Direct is a Kraft Heinz owned B2B e-commerce platform that delivers products direct to foodservice customers. This digital sales solutions create a community for small businesses and give us valuable first-party data. We've launched a test market in 2022, and we plan to launch in 3 additional markets in 2023. So combined opportunity and advantage we have and our expanding channels in foodservice, and we have what it takes to contribute to the target of 7% CAGR.

Now let me pass it over to Rafa to discuss international foodservice and emerging markets. Rafa?

Rafael de Oliveira

Thank you, Carlos. Good morning, everyone. Today, I'll be discussing 2 of our growth pillars, international foodservice and emerging markets. Both had industry-leading growth over the last 3 years, but we are just getting started.

Let's start with foodservice. We've got big plans to accelerate growth and increase net sales across international foodservice by more than 70% over the next 4 years, bringing this segment to over $2 billion. But how?

Well, first, through global partnerships. Like in North America, we are leveraging our global scale to support our customers, while tailoring for local execution. We are leveraging successful local insights to scale up across multiple markets. So here is an example.

Heinz selection is our brand platform for independent burger houses. We launched it 3 years ago in Brazil to drive distribution and consistent execution in this growing segment, and it worked. So we scaled it. Today, we are already in 14 countries with over 1,000 outlets and is still growing.

Here is our other wining ingredient for foodservice, our chef-led model, our secret sauce. Everyone you see in this picture is a Kraft Heinz chef with real life culinary experience. Right now, we've got over 30 chefs around the world.

Without a chef, it's easy to find ourselves in a largely price-led transactional discussion with customers. But when you bring a chef into the conversation, we can listen differently to our customer needs and to cocreate many concepts fit for their specific products.

I saw this in action recently in Spain when one of our chefs cooked for our customers -- one customer using our products and their ingredients in the menu. The experience was so tailored and so food forward. Their customers left with a commitment on the spot to develop a new branded product.

This is why we are confident we will continue growing quickly, continue to outpace the industry by 3x and adding over $800 million on net sales in international alone over the next 4 years.

So now let's take a closer look at our third exciting pillar, emerging markets. We are growing very rapidly in emerging markets, but still only represents less than 10% of our global sales. We have a huge opportunity.

Let's take our key growth platform, Taste Elevation, as an example. There's $60 billion market up for grabs. And the CAGR has been growing at a rate of 6% every year. We've been growing twice that fast and still only hold 5% share of Taste Elevation market in emerging markets versus 13% in developed markets. It's obvious. There's so much more opportunity to go after.

We have the right to win in Taste Elevation within emerging markets. First, we already have significant presence across our priority markets physically in over 30 countries. We also have one of the most famous brands in the world, Heinz, which commands top brand awareness in 90% of the emerging markets in which we play.

In 80% of the emerging markets we are in, we are gaining share. With the help of our local jewel brands like Master in China, ABC in Indonesia and Hemmer in Brazil. So we have the scale, the brands, the insights and capabilities to win in Taste Elevation within emerging markets, and that's all boosted by our proprietary go-to-market model, which is helping us to win distribution in strategic areas.

So here's how it works. We first use technology and a lot of data mining to scope a market challenge and opportunities. From a global model, we then tailor for each market, identifying factors like size of the opportunity, ideal organizational structure, optimal portfolio and sales force optimization. And for example, whether it's going directly to point of sale or working with distributors.

With all that is mapped, we then focused on the perfect execution, hiring sales teams with insights to help real-time decisions, influencing points of sales and measuring results. Our learnings then feedback into the model, improving with every use, and results have been very strong. In markets where we implemented the model, we've seen accelerated growth, reaching over 20% in Brazil, Mexico and Russia, for example.

We started this in Brazil in 2019. Distribution has grown by over 40% since then from about 50,000 points of sales to over 70,000. This has fueled like 19% top line CAGR, while improving EBITDA by 4 points -- EBITDA margin by 4 points.

And this is just the start. In Brazil, for example, there's about 450,000 points of sales in retail alone. As we gain further scale and enhance our portfolio, distribution keeps getting optimized.

In Indonesia, for example, we are using the model to provide the perfect shelf recommendations for the web or the traditional market for retailers. We are also co-creating merchandising strategies and advising on best product assortment for specific areas. It is how we are building and strengthening the trust with retailers. By the end of 2023, we plan to cover 90% of our emerging markets with our go-to-market model. It's working, and we're excited still with a lot of prospects ahead.

Another way we are looking to enter into emerging markets is through smart partnerships. Like this strategic one with BEES, a B2B e-commerce platform created by AB InBev. Through this partnership, we will lean into the reliability of AB InBev distribution network, particularly in countries where we have a small or no presence, while localizing and customizing our approach.

The partnership will be another catalyst for our emerging market strategy, with our ambitions to unlock over 1 million potential new points of sales in Latin America alone.

But it doesn't end up there. Innovation remains just as important. We are focusing on agile, insight-led innovation to delight our consumers and lead the future of food, and here is a great example. Today, we announced the launch of Tingly Ted's, a new hot sauce brand created in collaboration with Ed Sheeran. I have a bottle here, and you can see on the lunch as well.

When Ed mentioned he was looking for the ketchup of hot sauces, we jumped at the chance to make his vision a reality. You can check it out on social media. It's another great example of how we are using smart partnerships and collaborations to grow our portfolio of brands across the globe, and it's delicious as well.

It's incredible time for international foodservice and emerging markets. We have been accelerating growth in the last 3 years to double digits. But the best part, there's still a lot more space to grow, and we are prepared to grab it. We continue to leverage our chef-led and go-to-market models, while innovating with partnerships in order to deliver on the enormous opportunity there still ahead.

Andre, over to you.

Andre Maciel

Thank you, Rafa. Good morning, everyone. Thanks, everybody. Okay. So now that you have seen our enablers for growth, let's take a look at how we are funding these investments.

Here too, AGILE@SCALE and strategic partnerships help us generate efficiencies to fund our investments with agile disciplines and digital solutions in place. Let's take a closer look at each one of them.

The first one is revenue management. This encompasses pricing strategy, price stack architecture, mix management and promotion optimization, and we're evolving in all these areas. We have created a dedicated structure at our global center of excellence and in each zone to be fully focused on this critical lever.

In North America, for example, we have about 50 people 100% dedicated to revenue management. At the same time, we have been investing in digital solutions, including a proprietary trade management system. Let me give you one example of what we have been working on.

Our proprietary trade management system give us real-time access to detailed information on approximately 100,000 promotional events in the United States alone. We then created digital tools that leverage the large amounts of data to provide insights and recommendations in a simple way.

We also developed a more sophisticated elasticity model, which contemplates cannibalization between products, cannibalization among retailers and consumer-pantry loading. These new elasticities review a whole set of new opportunities for us to better deploy our promotional dollars, as events that we thought were good for us and will tell us they were actually not.

The solutions we built also help us to define what are the right items to promote at which type of discounts, the best time of the year to promote them and the best promotional tactic. And the progress so far has been great. We started from a base in 2019 when the average of all the promotions yielded a negative ROI.

And with the actions we have taken, we turned the average ROI to positive, improving about 20 percentage points in the last 2 years. However, we still have a meaningful number of promotions with negative ROI, so there is a significant opportunity still ahead of us to redeploy our promotional dollars to drive growth.

The second source of funding is supply chain efficiencies. We have made significant progress to deliver results by focusing on sustainable initiatives that don't disrupt the top line. For the last 3 years, we have unlocked an average of $435 million in efficiencies and are positioned to accelerate this pace to an average of $500 million between 2023 and 2027, driving efficiencies of approximately 3% of COGS annually, or $2.5 billion by 2027.

This enhances our original $2 billion target, but still below the 4% benchmark, so we will continue to strive for more. We are tackling all aspects of our supply chain, including network optimization, line automation and OEE enhancements, among others.

Speaking of OEE enhancement, that's one of our key focus areas. For 2019, OEE was less than 60%. That means that our installed manufacturing capacity gets limited because 40% of the time, the equipment was not running due to maintenance, changeovers sanitation, lack of labor, et cetera. Since then, we have made improvements. And despite pandemic-related challenges, we are able to get to the mid-60s. However, our goal should be best in class over the next 5 years and reach the mid-70s.

We expect this improvement to drive over $150 million in efficiencies globally. And by maximizing the throughput of assets that we already have, we can focus our CapEx on growth projects. Let me provide you with an example.

And with our control towers, which we call the Kraft Heinz Lighthouse, we installed sensors across the factory and use real-time data to make timely decisions and make corrections when necessary. We currently have 2 large factories in pilot mode, and the goal is to expand the solution to our largest factories, or about 65% of the business by the end of 2024.

In addition to the efficiency generated with our supply chain, we will continue to optimize our working capital. We expect most of the improvement in working capital to come from inventory. To improve inventory, we are continuing our SKU decomplexity program you've heard a little bit from Carlos today. We started to implement a new logistics network and have invested in new technology to dramatically improve our supply planning using OMP as a solution and our demand planning, leveraging AI capabilities from online.

These investments will not only help to reduce inventory, but also reduce COGS and improve service levels. Let's hear more about our AI-generated demand planning 2, which we call Kraft-Heinz Hive.

[Presentation]

Andre Maciel

Consider all that we have discussed today, you may be asking, what does the growth and profitability look like for Kraft Heinz? Well, this is the current long-term algorithm. We first introduced it one year ago at this conference. And we expect to hit elements of the long-term algorithm already in 2023, while others will be reached in future years.

Specifically, as Miguel mentioned before, we are expecting 2% to 3% organic net sales growth to be driven by each 1 of our 3 pillars of growth. For 2023, we expect to be above algorithm based on our guidance of 4% to 6% organic net sales growth. This will be primarily inflation and price driven in 2023. But in future years, we expect to reach the sales pace through a balance of volume and price.

On the adjusted EBITDA, our long-term growth algorithm calls for 4% to 6% growth. This will be driven by increasing organic net sales while preserving our top-tier adjusted EBITDA margin. And for that to happen, we plan to continue to increase our investments for growth, particularly in marketing, R&D and technology.

Funding for these investments come entirely from adjusted gross profit margin expansion, and this expansion comes from our revenue management actions offsetting inflation and with growth efficiencies that I just took you through being used to fund mix and the growth investments.

For 2023, we expect constant currency adjusted EBITDA to be up 2% to 4%, or approximately 4% to 6% excluding the impact of lapping the 53rd week. And beyond 2023, we expect to beat on our goal.

From an adjusted EPS perspective, our long-term algorithm calls for 6% to 8% growth. This growth essentially comes from adjusted EBITDA growth and lower interest expense. Let me remind you that 100% of our debt is fixed at relatively low rates. Over the next couple of years, we expect to be below algorithm as a consequence of a step-up in depreciation linked to the increased CapEx investments we are making to drive growth. But by 2025, we expect the bulk of this increased level of investment should be behind us, allowing us then to achieve the long-term algorithm.

Finally, our long-term algorithm calls for approximately 100% free cash flow conversion. In 2023, we expect to be around 80% as working capital improves in comparison to last year, but we ramp up CapEx investment. We expect CapEx to be around 4% for 2023 and '24, winding down after that.

We also expect lower interest rates as we move towards our net leverage target of approximately 3x. We expect to beat our algorithm for free cash flow conversion by 2025.

From a capital allocation standpoint, Kraft Heinz is committed to provide stockholders with a strong return of capital. And we are very pleased with the rating upgrades from both S&P to BBB and Moody's to Baa2, following Fitch's upgraded BBB at the end of 2022.

We expect to continue to fund a highly competitive dividend and maintain investment grade as top priorities. And after that, as we said before, we will prioritize investing organic growth initiatives to drive the business, continue to pay down debt to achieve net leverage of approximately 3x, managing our portfolio while maintaining strong price discipline and returning more to stockholders when excess cash is consistently available.

With that, let me hand over to Miguel to wrap up.

Miguel Patricio

I know, Jon, just 1 minute to finish. We're finished. I just want to invite you to have lunch with us. We brought a big group. We are going to have 4 tables: one with myself; one with Andres, our CFO. Then Carlos, President for U.S. We will have the Head of Sales, Cory. We'll have Pedro, the President for Taste Elevation and his Chief Growth Officer and the Chief Strategy Officer. So you can go more in depth about U.S.

Rafael will have the President for U.K., which is our second biggest market, Jojo. And the President for Latin America, Bruno with him. So you can ask them questions related to that.

I will be with the IR team. So have a delicious meal and ask us all the questions you eventually have. Thank you so much. Thank you.

Jonathan Feeney

Thank you, Miguel. Thanks once again for lunch.

Question-and-Answer Session

End of Q&A