Q1 2020 Earnings Call

With a few thoughts about purpose.

To be leading one of the largest food companies in the world at the moment of an unprecedented prices is at the same time, a privilege and a big responsibility.

Not only a big responsibility to our consumers and customers.

But the big responsibility with our employees.

Our in place on the front lines producing distributing.

And selling our products.

Our teams understand exactly and have embraced our sense of duty.

They are proud to be feeding the world.

Certainly our purpose has become much more reviews.

To keep feeding the world.

At the start of the year. If you recall our main objective for 2020 was to lay the foundation for the future growth.

The first step in a city stage turned around.

I can only today.

It's turning out to be test sets and so much more.

In February.

I said essentially agreements for our turn around were in place.

People with deep experience in key roles to drive functional excellence.

Active on where consumers are going and how we can win.

Productivity initiatives with detailed jobs to be done.

And the financial profile with strong free cash flow going forward.

I think we see each one.

With this on every front.

In what we call over today.

From our coffee 19 response, where our people are rising to the challenge.

To Q1 results that shows the underlying business in line with initial expectations and how we have met an unexpected spike in demand that increased consumption of our brands.

Our turnaround progress for 2020.

Which is on track even as we adapted to this unprecedented call to action.

Making is cautiously optimistic for the rest of the year.

And the fact that we are turning.

Our strategic plans into action.

By all strains of working visually.

As many of you have wrote the next several months will.

Pardon.

In a nutshell.

Our response to this pandemic, so far and our people are rising to the challenge is showing our self.

Of.

The rest of the World just how strong the company really.

In procurement. The team has worked over time to make sure we had adequate supplies to meet demand.

They were building scenario is a very early when things for stuff.

That is happening in China.

Crazy inventories of critical materials and finding your excess.

Theres no question that we are meeting peak demand today, because we did a great job anticipating the future.

As I'm sure you can imagine this situation continues to evolve rapidly, but I feel certain that have the right team in place to prepare our business for what's ahead.

In late February we establish.

Our global Kraft Heinz grown a virus task force.

To actively monitor the coffee 19 outbreak worldwide Andy.

As a real heroes in all this.

And they are taking your business to the next level.

Laura.

All in our plants has never been so high and I cannot say in less about our people's commitment.

Our teams are producing with pride and per.

Working smart by eliminating those products with significant change over time in order to boost production.

Yes.

Sales not only has the team deployed itself more broadly to assist distribution and stock key retail shelves.

But they have done an excellent job optimizing channel and asking you mix to make sure we get the right products where the.

They are needed the most.

And this has gone a long way in improving our collaboration and continuity with our retail partners something we can build further.

On once we have passed this crisis.

All righty shared service human resources reallocation and legal teams have been anticipating our needs.

Mr. Curiously three enable industry, leading execution and their multiple scenarios.

Overall, our business strong.

Our operating to peak capacity performing at World class level, and leveraging our industry, leading safety quality and hedging practices.

Our tire organization is displaying a deal it is demand forecasts and news flow can change scenarios multiple times per day.

Going forward as we will talk about later this crisis is causing us to.

Accelerate our supply chain the complexity efforts.

Prioritizing our merchandising calendars.

Rebalance our marketing efforts.

I think.

An important moment, where our culture of accountability.

The speed and agility, our lean structure can bring.

And our scale to be everywhere for consumers in times of uncertainty.

Can be a real differentiator for growth.

Hi.

Part of our strategy development was to get our market this thinking about the signature.

Building the fuel.

To ask themselves what will happen next.

Behaviors will change.

Now we have to think about future consumption if.

40% of fibrosis leave alone and will eat.

Yes.

Turning to financial impact.

Weve.

Then our best quantified the impact from the recent spike in demand.

Although we are Nolads. This does not again with our typical level of precision.

On a net basis, we estimate that the additional demand that we are experience as a result of covered 19 resulted in about six to seven points of incremental organic growth in the first quarter.

And with the contribution of nine to 10 points of additional EBITDA growth.

Looking forward.

While Kraft Heinz our trust and our peers.

We continue to operate in an environment of significant uncertainty.

There are four expectations, we have a high degree of confidence in sharing.

First and foremost we think it will be critical for our brands.

To reassert their advent obscene taste performance value and reliability.

So we will continue to step up investments behind our brands.

And the work that's been done behind our new strategic plan.

Given us a head start on this front.

Second we expect our foodservice sales.

To decline between 30% and 70% in each of our geographic zones, the bidding on channel mix as well as the creativity and agility both.

We and our customers display during this period.

And keep in mind that foodservice represents roughly 15% of our net sales in each of our business segments.

Third.

Perhaps the most important.

The scenario planning, we do regarding both at home consumption trends and the likelihood for global recession.

Yes.

We will be key to our near term growth and profitability.

As well as both building more strategic column.

For active and long term relationships with our customers.

And finally, I will tell you that lead to not to believe Q2 consumption patterns will be a reliable first indicator of what the new normal.

Variables like at home versus away from home.

A recession versus growth.

We will likely become clearer as the second half of the year unfolds.

Obviously all of these will play out differently by country in each one of the segments.

So at this point.

I will hand, it off so.

Well Carlson Paulo can't discuss our business and financial results and outlook.

And then I will return with few words on our Investor Day before we go took una.

With that I'm delighted to introduce you to Carlos Abrams Rivera.

The new leader of our United States business.

Well to say that Carlos.

Has hit the ground the running.

I would definitely be an understatement.

Carlos.

Thanks for the kind words coming in.

The last 90 days have been challenging and even more rewarding than anticipated.

I was familiar with most of the business.

I understood the opportunity for change.

Respond to the crisis has only strengthen my believed occur times anything unique position to serve families with trusted brands.

At a strong sense of ownership and clarity of purpose to feed the world and demonstrating agility to rise to the challenge of the moment.

You would expect.

My first month getting to know the team assessing our capabilities doing some deep dive underperforming business and shaping a new consent Sue.

Great.

So I was expecting micros interacting with you will be to talk about the new integrated business plans were installing to improve our forecasting reduced weights and sharpen our strategic direction.

Well, the beginning of our sales transformation and steps were taken to accelerate marketing excellent.

But these last two months of adding extra layer crises manage.

Given that in many ways is accelerating our turnaround he has caused us to move faster too.

Eight weeks biomanufacturing to maximize throughput.

Reevaluate, our merchandising strategies shift their marketing spending and adjuster messaging and strengthen our collaboration with our suppliers and customers.

I will finish my initial observed.

Patients were saying what a privilege it is to work with thousands of colleagues who they anite are doing what's needed to make up.

Our trusted brands available all across our country.

Being amazed by the work of our teams.

Nothing captured this better than the message there was more from our factories, we got you America.

We were also expire we amplify their voices by bringing the Spiritualized Bill for all America to see on our cash that we go to America AD campaign.

Now in terms of our Q1 results for the use segment. We initially expected Q1 sales to be pressure from a combination of pricing to offset dairy and meat inflation.

Weak with natural cheese cost of goods in frozen meals in particular is down roughly two points.

In March however, this training reversed consumptions in cheese meat and most every category for them that accelerated.

Well good services sales fell more than 20% versus last year.

As a result, Q1 organic growth was 6.4% and return to profitability. We initially expected a mid single digit declining adjusted EBITDA for Q1, instead, we grew roughly 6%.

Looking forward right now, we think organic top line growth.

Thank you two will be in the mid single digit range.

And this is based on our and our expectation for.

Retail takeaway to continue boosted by retail customer rebuilding inventory and with the foodservice sales declined by roughly two thirds.

However, we caution you expecting a similar topline growth in the second half of the year. This is because of some.

Forward and Paul to talk through results for the rest of the business and where we expect to go from here on the financial front.

Okay.

Thank you Carlos and good morning, everyone.

I'll start with our new International segment.

We came into the year expecting Q1 organic sales to reflect growth in Asia, and Latin America offset by product is continuing.

Patient in Australia, New Zealand.

And that EBITDA, we expected a decline versus prior year, driven by Jerry over supply chain inflation, mainly in Australia, and New Zealand.

Instead.

One organic net sales grew nearly 7%.

And constant currency adjusted EBITDA grew 7.3%.

This was driven by Covidien I'd related sales.

Early in developed countries, where disposable incomes allowed for greater stock up specifically.

Western Europe, Australia, and New Zealand.

Okay.

France gain market share in most categories in most countries.

And we expect solidly retail sales momentum to continue.

However, foodservices sales higher degrees in the near term.

And we expect Q2 foodservice sales.

Good declined 30% to 50% versus prior year.

Turning to cash.

Canada.

We initially expected Q1 organic sales to be down significantly from a combination off.

Lower pricing.

To both a higher level off trade activity as well as the tiny off trade expenses valves for the first quarter last year.

Lower volume driven by lower comp.

Obviously shipments, including our exit from MCE fair at the start of the year.

And we expected constant currency adjusted EBITDA to decline significantly versus.

The prior year.

Stability was his appointee due to a combination of additional supply chain costs and the timing of trade expenses.

As I 70 fab.

Very more work needs to be done two third underlying trends in Canada around and we expect this to happen as the year progress.

For Q2.

While we expect further benefit from greater at home consumption organic net sales are still likely to declined low single digits as foodservice are expected to decline significantly versus the prior.

A year.

And we have the ongoing backed off Dymek FX.

At the same time, while adjusted EBITDA should decline due to divestiture impact and Mega for exit EBITDA margin should begin to return to prior year levels in Q2.

As both pricing and supply chain performance improves sequentially.

Turning to total company performance I do not want to repeat what we've discussed already.

Only to highlight three key points.

First.

While Q1 organic net sales growth was consistent with the approximately 6% growth we forecast at the beginning of the month.

Adjusted EBITDA gaming headset.

What better than expected.

Yes, roughly flat on a constant currency basis.

Although we still not reflecting the full benefit of the incremental sales in the quarter.

The second thing to highlight.

Relates to adjusted EPS.

We are the items below EBITDA, although unfavorable year on year were largely.

So we should see the free cash flow benefit from higher sales show up later this year.

Which brings me to our financial outlook.

Like most companies today it seems to have more scenarios the uncertainties as we look at the remaining of the year.

At the same time, there are number of things, we can forecast and therefore set the base that we cannot be date as the year progressive.

For instance, we still believe very planning, we're getting border you're off progress in the multiyear Turner up.

While we envision.

Recall that we set three pilots Fort Wayne.

Establish a strong base of sales and earnings.

To rebuild underlying business momentum.

And continue to reduce debt, while maintaining our current dividend.

All these priorities are on track.

Even as we adapt to the new challenges.

In addition, the negative year over year effects from divestitures.

This is exits and the normalization of certain costs and business trends that we outlined in February held back our first quarter results largely as expected.

And we continue to think these same factors will continue to hold back our results for the remaining of the.

We do expect.

The Q1 feedback from greater Covidien I'd related demand, both sales and EBITDA that Miguel outlined earlier will be additive to the full year 2020 financial.

Big patients we laid out in February.

And below EBITDA for the full year, we continued.

We expect a roughly 38 cents headwind.

Reflecting an effective tax rate above our original planning to 22% range due to current UK tax view under consideration I.

Hi, slightly higher interest expense due to our revolver draw down.

To be offset by more favorable other income versus our prior expectation.

Ill also note that if the change in UK tax law does occur in Q.

And while a stronger Q2 should mean greater upside for the full year at this point it remains a highly.

So environment.

And if there is therefore difficult to become significantly more optimistic about the second half.

On one hand, there'll be no pause in our initiatives to focus on.

Divestments, we strengthened brand support to behind our flagship brands and capture efficiencies.

And we'll continue to refine our merchandising calendars against available capacity to execute.

On the other hand, we see three discrete factors that we will hold back second half EBITDA.

First is the backup.

For exit that is already underway in Canada, but begins in the United States in July.

Second is incentive compensation also mentioned on our prior call.

Third.

Its currency translation, particularly given the recent dollar strength.

Together. These factors currently represent an approximately 700 basis point headwind Lora second half results versus the prior year.

In addition to that we see a number of risks that are currently difficult to quantify.

Including Foodservices sales and there are certain base of recovery.

Potential for consumer pantry loading and supply disruptions as.

As well as the possibility that the recent key commodity.

It's a deflationary or see in the market could turn into greater commodity volatility and therefore not benefits profitability.

Patient, we strengthened our balance sheet.

And our due to the capital allocation priorities, we laid out earlier this year.

Yes.

This includes maintaining our typical.

So with your posture as it relates to liquidity.

We do believe is even more important as you focus on making sure all our product.

As we may available to public during this challenging times.

It also reflects our expectation that free cash generation as a percentage off net income is it still expected to go up versus last year.

And even though we are holding BLRA capex of $750 million for the year.

We now expect to generate more cash than originally expected in excess of our normal dividend payout in 2020.

So we really strong position to continue reducing our debt and look for opportunities to further improve or liquidity, while we maintain our currency driven.

With that I'll turn it back to Miguel for a preview of our Investor day.

Thank you Paul.

As you know we have been developing our new strategy, transforming our capabilities and making needed investments in the business formats.

And no one was more anxious to share our work then we were.

But uncertainties that has entered with covidien.

I have given rise to a heightened attention on the next five months.

The next five years.

Frankly, it has made it more than appropriate for us.

And the brother industry to revisit assumptions, some strategic priorities and for us to revise the pacing of our savings and investments expectations.

So we decided to move this event to September.

To do things was and do them in a holistic way.

In September we want our new leadership team to share our perspective on the unique assets and advantages we are building from.

Key findings and the paradigm shift we are employing and the new operating model, we are putting into place.

And of course give you a chance to ask questions to our brother Tim.

We will walk through the extensive review we've done by category by category I didn't market.

To build consumer understanding that has led to the we sites.

Are we think our portfolio fits today's consumer.

And how.