Q1 2021 Kraft Heinz Co Earnings Call

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Ladies and gentlemen, thank you for standing by and welcome to the Kraft Heinz Company first quarter results Conference call. At this time all participants are in a listen only mode. Later, we will conduct the question and answers ex session at <unk>.

Instructions will follow at that time, if you don't want to hear it require assistance during the conference. Please press Star zero.

I'd now like to turn the conference over to your host Mr. Chris <unk> head of global Investor Relations for the Kraft Heinz Company. Please go ahead Sir.

Thank you and Hello, everyone. This is Chris Jakubik head of global Investor Relations had the Kraft Heinz company and welcome to our Q&A session for our first quarter.

On the business update.

As you know during the remarks today, we will make some forward looking statements that are based on how we see things today actual results may differ due to risks and uncertainties and these are discussed in our press release and our filings with the SEC. We will also discuss the non-GAAP financial measure of this today during the call and these non-GAAP financial measures should not be considered a replacement for and should be.

Debt together with GAAP results and you can find the GAAP to non-GAAP reconciliations within our earnings release.

Before we begin I'm going to hand, it over to our CEO Miguel Patricio for a few quick opening remarks yeah.

Well, thank you Chris.

I just wanted to start out with cash in today with a few over all of the Tox for.

The debt we have had the very very encouraging start of the year.

Both topline and Bottomline.

With our strongest growth in priority platforms and markets.

Especially in the developed countries with the very strong from result.

We had a we were able to hold household penetration gains.

And as markets begin to open.

And effectively managing inflation and supply constraints.

We are also very encouraged.

Our progress with initiatives to accelerate our advantage.

And the different areas like in marketing can be more agile and more creative.

In retail and foodservice joint business plans.

And in the Lockheed capacity.

In in grow and energize platforms.

And also on on on bringing efficiencies growth efficiency gains that we continue to tracking to be about $400 million in the year.

That said, we feel that it's still too early to change our outlook for the full year.

You could expect 2021 financials to be ahead of our strategic plan.

We are expecting mid single digit growth in Q2 2021.

Versus the same period the 19.

At the same time, we should see stronger, but manageable the place in the beginning in Q2.

Finally.

We are pleased with additional financial flexibility that we are building.

We continued to aggressively reduce debt and our the divestitures are on track to further increase flexibility.

Okay.

I will now.

I hand, it back to the operator, and we can start the Q&A.

Thank you at this time, if you would like to ask the question. Please press Star then the number one on your telephone keypad again that is star one.

Your first question comes from the line of Andrew Lazar with Barclays.

Yeah.

Yes.

Miguel I know that.

Organic sales growth guidance for <unk>, it is a bit better than what consensus was expecting.

But it does represent a notable sequential deceleration.

Versus the 2019 and I'm trying to get a sense of is this I assume this is primarily just on.

<unk> was quite a bit stronger than you probably thought and maybe youre also trying to be thinking through and being prudent about what further sort of reopening and mobility means for for sales trends going forward.

And then I was hoping maybe rafa just commenting briefly on just how we see the durability of the emerging market emerging market strength that we saw on the quarter. Thank you.

Hi, Andrew Thank you for the question.

Now keep in mind debt in the second quarter, we are going to have a.

Different mix for.

Service will be stronger.

And the.

And for sure with the opening.

Of the the markets because of COVID-19.

Eddie.

On the mix will change and so debt is one of the reasons the second reason.

So, let's remember the Mcafee debt it was.

The numbers of 19 and that is not in the numbers of 'twenty one.

And that has.

A strong impact I don't know if <unk>.

Pablo you want to complement the question before passing to have IL.

Hi, Thank you I would like to.

The point I know.

We are calling down versus the prior year of low single digit the gold fan <unk>.

The impact of Mac cafes.

1.1 percentage point, so it's not that dramatic of a deterioration of adult.

You are saying that we are seeing the reopening of the developed markets and days on mixing backs that we're going to feel the.

Quarter.

That said, yes, the first quarter was a very strong.

<unk> as you mentioned in terms of the net sales.

When compared with 19 of Phi out please.

Yes, Hi, Andrew Thanks, Thanks for the question I mean for us emerging markets consumption of the house has held up relatively well during the pandemic kind of lets say two key reasons one is the variability.

All of our customer servicing across the international has been quite consistent.

Doing and doing the whole pandemic.

But also like the focus right. The second of the focus we remain very focused on the emerging market strategy center on our own.

For the vision platform and combined with localized the proof on go to market expansion of model.

This has been performing quite well there are two factors.

The two factors helped us.

During the pandemic right.

You can see on the results add debt.

Point of share of <unk>.

Genie share also during the last three quarters and the rules. So we do expect this momentum to continue.

As we move throughout the year and the.

Based on the strong initiatives that we discussed during tagging.

Great. Thanks very much.

Your next question comes from the line of Robert Moscow with credit <unk>.

Sweet.

Hi, Thanks for the question.

I was wondering if you look at your U S retail mix as.

Maybe more exposed than some of your peers to kids going back to school.

You know you have Mac and cheese, there you have Kraft singles Oscar Mayer of lunch meats, and that's a lot of.

Parents, making lunches for their kids when they're at home.

When theyre going back to full time schooling.

Do you think that these brands will face more than normal headwinds or does it somehow kind of.

Is it does it.

Makeup for itself somewhere along the way thanks.

Okay.

Well first of all thank you for the question.

We feel good about controlling the controllable.

If you think about the gains we have made in household penetration the deals are coming from younger more diverse families.

And we've seen that those families that actually increasing the <unk>.

Consumption across the different day parts and debt happening, whether it's the Mac and cheese, where the diagnose commodity HUD the very consistent plus.

Even if you think about brands the typically.

The use of school like alone to both where actually the also seeing gains on those even though over the last six months.

So what I will say is our focus on continue to retain the new households, regardless of the circumstances it working and it would be the things that will continue to move forward.

Yes.

Okay. Thanks.

Your next question comes from the line of Bryan Spillane with Bank of America.

I've got two questions related to two inflation on the first one I think the guidance is for mid single digit cost inflation and just wanted to get an understanding there of is that gross inflation or is that net of of <unk>.

Cost savings and if not just if you can give us the breakdown between the gross inflation versus net inflation.

Brian Thanks for the question so.

The guidance that we provided in mid single digits is growth.

Growth so is that the extent the drop of our total Cogs as growth at gross inflation okay.

Actually we are see a debt.

Debt it would be now in all the countries.

On the low end of the mid single digit the range.

And that's all of the O N. What when do you see this happening today.

As we've mentioned before we also saw.

As many peers of the escalation of the deflation since our last call, but when we add as we mentioned our hour cost efficiencies that we highlighted around.

Debt, we still see like a $400 million in efficiencies in the.

The in Dallas supply chain.

And all of the lab of debt, we have for our revenue management, we believe that the final number will be manageable for the company.

Thank you and then if I could follow up Ralph just for you just in terms of inflation could you just give us a little bit of perspective on.

What tools you have available, especially in developing markets, but also in Europe.

In terms of managing inflation. So is it a different I guess in terms of the way that you'll you'll work through inflation in your markets than what we'll see in North America.

Yes, Hi, Brian Yes look so let me break down the two in the emerging markets I mean.

Ken the acceptance of price of pricing is better right because inflation is on more normal on the local economies in developed markets. I mean, what I can tell you is we've already successfully close the negotiations with all our key retail partners, especially in key countries like France, Germany, and we meant to achieve.

The pricing and in premium innovation.

Behind the brands that we need it. So so we feel quite confident about about debt.

In terms of comparison, you said comparing to the U S. I mean debt, that's even the end and differences right.

Similar to the North America, the costs have moved against us.

In the ingredients and packaging, but different than North America for all logistics is not the major contribution to inflation and kind of the Pasha.

So in terms of numbers. This is what the inline with blood policy said comparable to mid single digit range for the for the total kind of.

Okay. Thank you.

Your next question comes from the line of Rob Dickerson with Jefferies.

Great. Thank you so much.

But it's sort of a.

The real question debt of around your innovation plan marketing plans kind of be the the SKU rationalization right. So yeah.

As we've heard for over a year right. There's been a lot of optimizations of the retailers the kind of focus on those core skus right in to the.

Essentially maximize the benefits of velocity and scale of which you also speak to.

All the time, so I'm just curious you know as you kind of.

Look forward.

The kind of around that create a development of the innovation or the sizable pieces of the portfolio that you kind of force the rationalizing.

Such that those those tails come off new innovation comes in but still focused on the core on those high velocity items.

Yeah.

Let me, let me answer the question and I ask Carlos the complement.

Thoughts.

We see this is of great we have seen and we the pieces.

The great opportunity for us.

On to exactly to focus on on that skews with higher rotation.

And now so from a supply standpoint to improve efficiencies in our factories.

And also on costs. So we see these this move is it.

Very positive.

The Carlos do on a comment more precisely in terms of numbers of what's going on ahead of us.

Sure maybe out of what I would say is a lot of the we have done.

So if you'd go as we go into this year, we have reduced ROE of 20% of ours to use versus what we had in 19.

And I think this has been done to duration with the retail partners. So we're building together kind of a level of trust and transparency to make sure that we.

Focus on the core the drive better velocity and actually allows us to have better service with our customers. So overall I feel good about where we are in the progress we have made into the area.

Thanks.

Okay.

Thanks.

Your next question comes from the line of Alexia Howard with Bernstein.

Good morning, everyone can you hear me okay.

Yes.

Perfect and so on.

I wanted to talk about the on the promotional on a path from here you talked I think in the prepared remarks about pulling back on promotions in January and February during Q1.

Does that mean that we're likely to see on more elevated the level of promotion year on year, given the pullback that happened last year on what.

Does that mean for the next probably net pricing over the next couple of quarters.

Thank you and I'll pass it on.

Okay.

I can start I mean, the me at least give you a perspective to first of all about the overall view of how we're thinking about on pricing and how that fits in terms of our promotions.

I can tell you is I feel good about our ability to pass through on a cost inflation and as we see it and what we need to do it.

One of them.

Hum.

We left the guidance.

Yeah Yeah.

Uh huh.

Hello.

So let me just.

Pick up on that.

Carlos throws out a little bit.

Alexia, so we've kind of come back, but I think.

Sure.

This was the.

I was going is.

In terms of the.

What we're seeing going on in.

In the marketplace and other than what we see unfolding as.

In Q1.

We were able to sort of build further on.

Sorry, Carlos a bunch of what why don't you go ahead, please close out.

At the start there.

Sorry, my apologies.

Hopefully you can hear me okay now.

Sounds great Okay.

[laughter] listen.

This is the new world that we're still working through so I appreciate the patience.

I was getting at it.

Within the countries of our of our pricing on we're looking at do know that in the if you think about on quarters.

And then on the last eight quarters, we actually were able to actually drive pricing up all of its contribution to our net sales. So we are seeing the iconic brands are actually showing the pricing power now when you look at going forward, we will return to supporting key promotional window. So if you think about coming out of Memorial day, We also.

Gonna be making sure that we show up in those moments at the same time, we will implement the revenue management initiatives to drive share growth and improve the returns.

I sit back and I tried to summarize kind of how the wish thinking through this.

The way I think of it it's the three pronged approach.

One making sure we continued the renovate our portfolio to drive better value for our consumers that we improve the creative content of our marketing and then we strengthened the diversifying of media impressions.

All said I feel good about the ability to deal with the inflation that we have been making sure. We do this and that way that it's part of it for the company.

Yeah.

Thank you very much I'll pass it on.

Your next question comes from the line of Jason English with Goldman Sachs.

Hey, good morning folks. Thank you for sliding me on.

To put a finer point on Alexia. The question do you expect pricing net of everything to be positive in the U S. In the back half of the year.

Hi, Hi.

Jayson on the east and as I met of practice, we do not forecast for IC.

But as we.

And again, we are seeing debt, you're gonna have I'm going to be up from the second half against some unusual comparisons from the back half.

But as Carlos mentioned, we are we.

We see a lot of the lever for us to manage inflation.

The through revenue management through savings. So that's the we're feeling very good about where we know how to manage all of profitability that's coming from the inflation impact.

Maybe to help us get them the more color on that but slipped to the cost side. I know you said sort of low end of mid singles plus 400 million of of cost base for the network to like a 2% sort of net inflation I think I can tell me at the wrong on that.

But what does the cadence look like as we go through the year, because I'm guessing given the move of some of these costs.

Your exit rate for the back half of the year, it's gonna be substantially above that.

And if I'm, if I'm off base on the police correctly.

Instead, we have a ramp up of cost inflation as the year progresses, but we also have a ramp up of our sales initiatives going on as the year progresses and on top of that we have our all of it all.

So our revenue management initiatives so again.

Not going to give exactly walk the Lee.

The number of levels here, but that's how you should think about the progression of the other of our base our cost base.

Okay. Thank you.

Okay.

Your next question comes from the line of chemicals men with J P. Morgan.

Alright, Thank you I'm going to.

To start beating on the the the.

The debt inflation horse here I know, we're talking about it a lot, but I just wanted to get a sense of how locked in you are on your raw materials for the rest of the year.

I guess, putting another way of putting it another way is it fair to assume you know unless there's some big spikes and items that are harder to buy ahead.

The mid single digit inflation, it's fairly safe to build in I'm, just trying to think of items like cheese and meat and coffee rise a bit higher you know these are items that historically kraft has.

You know locked in many months in advance at times. So I just wanted to get a sense of the risk either up or down to that the guidance of mid single digit inflation.

Hi, Hi, Hi, Canada. This galleries and again, we have specifically an hour of big for or are all the key big for commodities for the <unk>.

We have seen just slight slightly inflation okay.

Going to have all of the heaviest comp in Q2.

That's the we're gonna be lapping of very low pricing cheese last year and a high price of blackberries. These year.

But the overall it comes off the peak for years.

Inflation in terms of how we manage on the hedge does it varies by type of off off of areas. So there are some commodity debt to go a longer you know of.

Beyond six months nine months out all of the debt.

Charter, but it varies a lot, but what I can guide overall when you see the scenarios of course, there is a lot of other did it lead the market, but overall, when we see where the commodity start to day.

The range of mid single digits is what youre seeing and again as I said, we are seeing is overall as a percent of Cogs in the the in the low end of this range.

Very quick follow up what are your experts telling you about.

How valid some of these prices, we're seeing for corn and soybeans and meet our given supply and demand I guess I'm asking is there a little bit of froth co.

Aided by traders in the market right now.

And I I would not like to enter in this in this type of for gas to get more focused on to be sure that we manage our cost for different for.

For different levels of price simply if we provide to our business that the safety of hedging profile of that allow the business to plan itself.

Your next question comes from the line of Laurent Granddad with Guggenheim.

Yeah. Thank you good morning, everyone of them. Thanks for squeezing me in so two questions. One on Canada. So Canada is different improving so could you. Please give us a bit more color about what's going on there.

I was just the nickel on I'm not.

The gross.

The balance sheet.

It is for the next few months on the quarters.

Well, let me.

Answer that question I think you're absolutely right. The Canada is definitely improving kind of.

Very good quarter.

I think that we we did.

Much better job in terms of of the promotional calendar for Canada.

The last year, we started with big promotions in and the debt DIY was not exactly.

Great and we are being much more disciplined on.

On an hour for.

Shouldn't that and that's that's what it reflects the there was a big increase.

In margin from 16% last year to.

About 22 this year.

But he's not the only on on on margins that Canada is improving I'm very satisfied with the way that we are evolving on the innovation pipeline.

With the marketing and creativity and digital marketing I think we are having to pay the very different Canada than then we had to just Glenn in Europe.

On a half ago.

Thanks and maybe.

The broader question on the.

On your straight clients two of compared to just start on your brand you lay down the top of last year and now we're at six eight months within the in the implementation of the clients. So.

Could you maybe kind of what you think.

You have been very successfully on implementing in Europe ahead of what you expected and maybe some of some space or some.

Strategic initiative, where you see Europe U S team behind on in Hawaii.

Who.

I would say that overall, we are very excited with with the.

With our transformation.

Plant.

Sure.

And it's it's it's deep on is in all areas.

All evolving and after after one year I would say that we we are.

Go in a much more accelerated rate than then we could imagine.

And especially in the year debt that we are doing all of these.

The two to zoom meetings working from home so they it surprised us the.

Lots of tea at the utility we are heavy.

In all areas in all areas from supply to marketing to finance that.

Two two.

All areas of the company.

But this is this is the journey.

Using an analogy of baseball I would say debt.

Finished the first Tony we are now going through the second evening, but there's still a big game ahead of us the play, but we are excited about the the possibility.

The the evolution.

Thank you very much I'll pass it on then.

The constraining.

The good work thanks.

Thank you.

Your next question comes from the line of Steve powers with Deutsche Bank.

Yeah, Hey, thanks.

Maybe the build on the.

On that last question a bit I think it's instead of a little while since we spoke in detail about employee engagement and morale.

<unk> and to some extent also about <unk>.

Retailer engagement other Miguel you did speak to help the improves.

Customer satisfaction you in the prepared remarks, I guess as you step back and think about the the journey over the past year on the progress made since 2019 can you update us update us on on how you perceive.

Your current standing against those themes today and how that feeds into your your outlook because as you go forward into 'twenty one of them beyond.

Sure I will comment on on our employee engagement I will ask Carlos to talk about customer satisfaction engagement specifically in U S.

We have great progress on the part as well.

I would say that the you know.

On all things that we have been doing the be employee engagement is is the most of it is where we have the biggest shift.

With with the.

Our people much more engaged on when I say these these of course sort of quantitative research.

But also qualitatively some of our team is much more engaged working.

A much more cooperative way.

We've we've been eliminating silos debt to be heading the company in and this is Europe pandemic was.

We were already organized in a different way and we had to be much much faster in the play.

I would say that the morale is.

Much higher.

We have a much more engaged team.

They understand.

The strategy we have had.

And they are excited about the journey that the I believe it.

Debt that being said again.

Still have a room for improvement and we'll continue working.

In that sense kind of as maybe you can comment on the customer side.

Sure maybe I'll, thank you and I can testify to what Miguel let's say the we are seeing that across the entire company the level of engagement the way that the teams are working with them.

El mindset with the we do related to.

Our customers what I can tell you with.

We are now in a much different place than we were a year ago, we have now of being able to build trust with our key retailers. We are working in a partner.

The level of transparency that we hadn't seen in the past and in fact, the our retailers are also on partners are recognizing debt. So I think the now when we hear from them directly.

It feels like a new Kraft Heinz as you know we take that we've tried because it's because of the work that we have now collaborate in the collaborations where now we're doing with them in the <unk>.

Way that we hadn't done in the past so something for US the continued to build on the thanks for the question.

Thank you.

And at this time of the currently like to turn the call back over to Mr. Chris Jakubik.

Thank you and thanks, everybody for joining us today for analysts that have follow up questions, Andy Larkin and myself will be available to take them and for the media Michael ball on will be available for your calls so again, thanks to everybody for joining us today and have a great day.

Ladies and gentlemen, thank you for participating. This concludes today's conference call you may now disconnect.