Q2 2021 Kraft Heinz Co Earnings Call
[music].
Good day, and thank you for standing by and welcome to the Kraft Heinz Company's second quarter 2021 business update call at this time, all participants on a listen only mode. After the speaker presentation there'll be a question answer session.
Ask a question during the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I would now like to hand, the conference over to speak of today.
Chris could jacoby head of Investor Relations. Please go ahead.
Thank you and Hello, everyone. This is Christian Kubik head of global Investor Relations at the Kraft Heinz Company and welcome to our Q&A session for our second quarter of 2020, 1 and business update during our 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 earnings release, and our filings with the SEC.
We will also discuss some non-GAAP financial measures today during the call and these non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results and you can find the GAAP to non-GAAP reconciliations within our earnings release and supplemental materials posted at IR Dot Kraft Heinz company Dot com before we.
And again I'm going to hand, it over to our CEO Miguel Patricio for a few quick opening comments.
Yes.
Thank you, Chris and thank you everyone.
And just like too.
And our summarized and tell you debt we are very optimistic about.
How we are progressing.
And in our transformation of Kraft Heinz.
We've been taking.
Ventage of the scale that we have and we've been building the agility that we need.
And to build that.
And that of business for the future.
We posted sustainable topline and bottom line gains versus 19.
And we are encouraged because the strongest growth comes from priority platforms and markets.
We called the growth platforms placed elevation and.
And in emerging markets.
And we continue seeing retail very strong and we are coming back with foodservice, it's recovering and recovery of past.
Transforming.
Kraft Heinz is is you know what do we all have in mind, and we want to do debt maintaining industry leading profitability.
We are investing more and our brands and better as well.
Building a much more creative company.
We are also on track to deliver the 400 millions of dollars of gross efficiencies in 2021.
And and effectively managing inflation.
And the same time, we continue strengthening our portfolio and improving financial flexibility.
We are adding capacity to our products.
To drive growth.
<unk> platforms.
And in the emerging markets.
As you know closed the nuts Divesture and.
We expect to close the cheese divesture and the second half of this year.
Recently, we acquired of some foods and Turkey, It's a very small operation, but it is a very important step into our strategy because accelerates day celebration.
And is in emerging markets.
And we continue to pay down debt and improve our net leverage.
We continue to expect to.
Have a very good 2021 actually to deliver a stronger 2021 than we projected when we provided our initial outlook in February and that.
Speaks to the strengthened and potential of our ongoing business.
Thank you.
We are now.
Ladies and for your questions.
Ladies and gentlemen to ask a question.
You will need to press star 1 on your telephone and to withdraw your question press the pound key.
And by way of compile the Q&A roster.
Our first question on Pennsylvania, Chris Growe from Stifel You may begin.
Hi, good morning.
I just had a quick question for you if I could please in relation to pricing and.
I was just curious if you could maybe give a little more color around the price realization and how you're supposed to sort of kind of bills of the second half of the year and and just as a backdrop.
I look across your categories some of them.
And some cases Kraft Kraft pricing is above your category, so I'm, a little below but all and all are like the IRI data and the U S would say you price it at a little a little slower rate than what the category is our overall and so I'm just curious if that strategic and helping drive your share gains or if that's just timing and there's more of pricing coming in second half of the year. Thank you.
Okay. Thank you for your question.
Let me start and then.
And maybe carloads and Paulo can give you more color on that.
As I mentioned on the call, we believe that inflation and our business remains manageable.
And even with the inflation, we expect to deliver as I said, a stronger 2021, then we projected before.
We continue to invest in our brands.
Anticipated levels.
To drive our transformation and we will continue to monitor things and.
Take further action if of course, it is necessary, but Carlos maybe you can give more color on it and maybe Paulo as well.
Sure Miguel.
Thanks for the question first I think I would say is and the U S. We have said in the past. This debt we are proactively managing against the incremental inflation, we see.
And actually we feel good about our ability to implement those actions when and where we see the need.
So if you look on the inflation, we saw in Q2, mainly coming from ingredients and things like soybeans edible oils packaging and some transportation work well.
And it's very similar to what we so and the first quarter.
And most recently, we also saw from increases too, but driven by rest and caused and and from higher transportation rates now from a from a pricing perspective as I mentioned on the call. We of restarting key promotional activations to drive the business versus the pandemic induced pullback that we had in 2020.
Now as we have mentioned earlier and the year. Our goal continues to be to connect with consumers that now have discovered of read this COVID-19, our brands and drive the repeat rate among those households.
So in that context and birth of inflation again, we feel good about our ability to achieve the net pricing, we need to offset inflation and maintaining strong household and repeat rate.
Given that we are.
Renovating our portfolio to drive better value for consumers improve into the creative content of our marketing and strengthening and diversifying our media impressions.
But I would also add is that we're doing this primarily through 4 key revenue management initiatives.
First we are optimized and the frequency and depth of our promotions, while we restore of retail activation levels that I discussed on the call.
Second we are doing broad based pricing actions, which we have announced across our portfolio.
Third we're continuing to manage key commodity pricing and lastly, we're using all of the revenue margin lever, including price pack architecture, and and managing a category of price ladders.
So if you look at our revenue management initiatives. They are guiding our smart trade investments. So we can optimize returns on those investments and manage through the current inflationary environment.
And in the near term the timing of cost inflation versus price realization may lead to some degree of margin pressure, but this is reflected in and outlook and we see net pricing and costs coming into balance as we exit the year.
And with that let me pass relative to Paulo any of their comments you want to add Paulo.
Sure Carlos I think I think if we if you want to like frame of inflation and pricing from a total company perspective.
So break it down and first on inflation and whenever.
Recall that in April, we said that you're expecting inflation and the mid single digit range as a percent of Cogs, but at the lower end of debt range.
Since April of our costs have continued to move higher and now we're expecting inflation is still in the mid single digit range for the full year, but now it's slightly above the midpoint of the mid single digit range.
We got and pricing as we are mentioning and Carlos has just.
We are using multiple revenue management and.
The average, including a lease price actions to manage the installation.
But I think it's important for us to keep in mind that we're gonna be facing and unusually difficult price comparison.
Second half last year.
Just to remind just for context last year second half hour price was more than 4% higher.
And then the prior year as we pulled back on promotion to better protect customer service.
And in terms of the timing and the pricing realization why.
And why we expect the timing of debt cost inflation versus price realization to soften our margin percentage lower than the run rate levels and the short term.
It is important to note that all of those impacts are already considered in the outlook that we have for the year.
And again as we mentioned at the beginning and we always do you expect you know and now expect and even stronger EBITDA dollars.
And then we anticipated before.
Okay.
Thank you for the color.
Our next question comes from from Alexia, Howard from Bernstein and Michigan.
Good morning, everyone.
Good morning, Good day.
Thank you Tony asked about.
The gross margin I know that.
It doesn't really appear anywhere except in the AR.
Total numbers and the press release, but it looks as though it's down about 150 basis points year on year.
And that some of that and Mike might not be adjusted gross margin, but in a situation of such intense commodity cost pressures and we're going through now I was just wondering how you're expecting that to shape out and the back half of the year, possibly out into 2022 any commentary and pretty much appreciated. Thank you.
On Alex I can start here.
This answer I think yes, there is some adjustments to make and the in the gross margin, but when you think about year over a year.
I think we need to remember that youre going to be left and we were we were lapping Q2, a peak quarter last year with the all of pantry loading and that's happened in the quarter. So our overall margins of the business and a very healthy in this Q2, So I think index in the second quarter, and we were able to price.
And we.
We had enough pricing to offset pricing plus our efficiencies were moderate and off to assert our hour of deflation of that we had.
But we work compared to a very heavy mix that we had.
In the last quarter.
Great and then going forward.
And how do you expect it to change and the back half.
Going forward, what is exactly I think of the sticky components that we are going to see in the back half is that true when they start to have and that's already embedded in our outlook. Okay.
We're going to start to having debt.
The restoration of some promotions that Carlos mentioned.
Also the mix impact that we're going to see when.
With that as the year goes on.
And also this timing between price.
Pricing and price and utilization of inflation.
Will impact our gross profit.
All of those impacts are already inside the outlook that we disclosed.
Great. Thank you very much and I'll pass it on.
Our next question comes from the line of Andrew Lazar from Barclays You may begin.
Great Good morning, and thanks for the question.
I guess, obviously, it's way too early to talk specifics around 2022, as we know much can still change, but I wanted to go back to the slide presented at the Investor Day.
In September of last year and from that presentation on.
And the base business, so excluding divestiture impacts.
EBITDA was expected to be roughly flattish in 'twenty 2 versus 21 and.
And I guess I'm trying to get a sense of at this stage, what would that still be the expectation and such.
Such that we just have to strip out divestitures to get a sense of it or maybe has the inflation environment and longer tail to add on meeting benefits sort of shifted this thinking it all thanks so much.
Let me.
And then maybe Paulo, you can bring more precise numbers to 200.
We are expecting of 'twenty to 'twenty 2 to be better than the strategic plan that we presented.
And to you.
And why is debt I think our transformation is ahead of our plan.
We have been.
Beating.
Our plans and on.
And on our budgets and we are optimistic.
And continue investing towards the future.
And he is still too early to talk for us to be talking ought to give you guidance about 2022.
And with all the volatility and the market I think it's spread and not to go further on on.
On that.
And Andrew just to complement here I think well I think as day year progresses, as Miguel mentioned modulating the EBITDA will be.
Providing more clarity about how we're seeing the 2022.
We are not discussing these today, but we can say debt we were.
We see inflation is a consistent theme for us and for the industry.
Of 22 and all of those.
Niche of deals in.
The actions that we're doing in terms of revenue management initiatives.
To manage the inflation, we're seeing based on expectation of that the inflation and we will continue into the next year.
I think those initiatives together with our savings program off of $2 billion savings program.
And then we will be sufficient.
Sufficient.
Together with investments that we're making to improve the relevance of our brands.
So again, we are we are we are very confident around our ability to manage a day inflation and support the investments behind the turnaround as we are exiting 'twenty, 1 and entering 2000 and entering 'twenty 2.
Thanks, everyone.
Our next question I was not born of Bryan Spillane from Bank of America, you may begin.
Thanks, operator, and good morning, everyone.
So I've got a question I guess for both Carlos and for Rafa. If you can both comment on this.
And in the quarter or even year to date.
Currently we're seeing basically all channels are up right I think it was I think thats been sort of 1 of the surprises.
As we move through 'twenty, 1 is that as away from home and foodservice channels have improved the at home consumption is also stayed relatively elevated so I guess my question for both of you is just simply.
How long do you expect this to continue.
And I guess as things normalize.
Would you expect the foodservice piece of it to really begin to accelerate more and somewhat offset the at home consumption and so just trying to get a sense of how youre thinking about those those 2 channels, especially since.
Right now they're both both both up.
Listen critical.
Critical thanks for the question I think it's very fair.
Let me start and then I'll wrap of kind of give a perspective on international I think from and the U S from an industry perspective.
Youre right channel trends are still normalizing, but I have to all of who say it's too early to tell how the share of stomach between away from home and and at home ultimately, it's going to kind of all net out.
Now recently it does seem like all channels all channels are growing but thats, probably not likely to remain the case and and Thats known bill knows how long and into our expectations.
Now in terms of about of our business. While we see is we are optimistic about our plans that we can actually drive sustainable growth in both the retail and foodservice.
And and I think it's fair to say that we also have big ambition from away from home business. We believe foodservice, it's actually both of the generation of of insights and innovation that can actually help and the retail side of the business and he is also capable of driving outsized growth because we have actually put a renewed focus on.
Culinary of distribution and channel expansion.
And some of those channel trends, while still normalizing its still little bit early to say predicting exactly what it's all going to happen now.
Do say is and I do believe we're going to be stronger versus what we saw pre pandemic and essentially for 2 key reasons.
First because our foodservice mix favor, our acute and <unk> and and accurately debt stands to recover and we're seeing that already faster than the rest of the foodservice channel and we also see that be more resilient and post pandemic.
And frankly early and the pandemic. We also made a strategic bet to support that growth and <unk> and it's paying off we now have 30% more capacity and our small packets of ketchup and sauces.
So that actually has been and seem to be working and.
And secondly, we see a more durable step up and at home consumption of that comes on the expense of other categories and brands with.
Without necessarily sacrificing foodservice recovery and growth and.
And then lastly, let me just give you a little more color on what's on the away from home.
And that we gain of point of market share foodservice recovery begins and much of that actually was fueled by the actions. We took in 3 areas that I've mentioned culinary and distribution and new channels.
In Q2, we actually executed 9 co branded culinary and limited time offers with <unk> partners.
Just 1 of those which actually so successful because it and it became part of our Permian permanent menu item and that was going to be in 'twenty 2 and.
And in and if you think about that context of the fact that we are being able to drive those kind of limited time offers with <unk> in 2019, we had none of those.
So we are certainly driving of different level of execution with curious are now the second part of that which is distribution.
And they grew key accounts by 20%.
The second quarter.
And then finally in our.
Consumer continues to evolve how they cook and eat and including the use of video delivery of kids, we actually inserting our Kraft Heinz brands into that equation. So we are working with 1 popular of direct to consumer company to develop things like our recipe specifically for our Philadelphia cream cheese as of May.
Ingredient and their products and that actual 1 per order was order of 200000 times with by consumers are really an all time record for net sales partner.
So when you look at it holistically.
Again, I feel very optimistic about our away from home business and that it actually is going to be a springboard for us to continue to drive retail growth.
And Thats, our perspective, and the U S and roughly if you want to add something in terms of the international business, how you see it.
Yes, Thank you Carlos and Hi, Brian.
Oh look on balance our developed markets.
<unk> very similar trends to retail and foodservice and U S and Canada and emerging markets on the other hand the foodservice.
And as actually rebounded stronger.
And then in developed markets right and most countries either had short or even stricter lockdowns.
Kept their economies open during the pandemic overall, so so I mean, the consumption of obviously differs country by country in home on and out of home.
The path of the pandemic Lockdown approach first vaccine of availability changes a lot and.
And given the Delta variant and now it's a bit early to tell.
How the channels, where the channels will stabilize and the second half.
All of that said I mean, we are seeing.
Lot of improvements on the retail channels, especially in day celebration.
And given and I was like a lot of confidence that we will come out of the pandemic well positioned right. After the pandemic on.
On the foodservice side.
Our mix is even more weighted towards <unk> and U S and the U S is sort of the format and this format is recovering very quickly.
So with distribution gains and emerging markets and the potential of the foodservice debt to have across our overall international.
2 quite optimistic that after the pandemic and who doesn't.
And that will be quite positive.
Great Thanks, Rob and thanks Carlos.
Our next question will come from the line of Ken Goldman from JP, Morgan and maybe.
And again.
Hi, Thanks.
Would you reconsider your policy of not guiding to annual sales and EBITDA.
I realize it's been it's been company policy for a long time, except in rare cases not to give much.
But I imagine you could avoid some confusion about let's say I guess quote good or not quite as good print outs.
Outside of basic bar against which to compare results and I guess and that way we can give you.
More credit when you do come in ahead of expectations. Just curious if that's a possibility and I guess, if nothing else it would probably make Chris as life slightly easier too.
Thanks for the thanks for that.
The comment again, we will discussed is down on the and we will let you know.
Thank you.
Okay.
And.
Our next question comes from the line of Jason English from Goldman Sachs and maybe again.
Hey, good morning, folks and thanks for slot ma'am.
Couple of quick questions. So you guys mentioned that you've implemented pricing actions began to raise those prices can you give us.
Can you give us some quantification there overall on average what is the price increase that you're pushing through and how does it vary across different products.
Well, let me say days and debt.
Let me I guess, let me a little bit more context, which is.
And if you think about our portfolio, we really more diversed and most of the peers that we compete with so so our approach to pricing and no unique in terms of just having 1 solution. So we are.
We have to be more precise and certain categories and really growth strokes across entire portfolio. So.
What I can tell you is that our actions that we have taken and pricing of cover the majority of the portfolio and that actually has quite a bit of <unk>.
Mid range of per census increases so it's hard to kind of give you a specific answer now.
What I would tell you is that we have taken actions to mitigate those incremental inflation that we're seeing.
And that we feel comfortable on approach that we feel very good about how we are managing and that we're going to continue to monitor things and take further actions if necessary.
Thank you for the question Jason.
But you don't know what your weighted average price increases across your portfolio.
Okay.
Listen I mean I think.
It's something that.
For us isn't something that we're gonna be discussing and but happy to.
Continues to have the conversations about how we are responding and this moment and how we are feeling very much of a manageable solution from us.
Okay and.
And 1 more then just on the inflation can you give us a quantification of what the rate was in the quarter and what you expect in the back half I see the of the total for the year of going from low end of mid singles to high high and low.
And it just zoom and a little bit on the near term. Thank you.
It's on a speed of my cheap debt in that range.
Jason I need to remember also that in the Q2.
Part of that we have.
A higher pressure on the on the meat commodities, especially and Bacon.
But I can tell you that and the first half of the year. It out of our of our inflation rate was and did low beer added low land of the of the of mid single digit range, including there's this there's this big 4 components.
And and that's that's the range that we saw for the quarter too.
Okay. Thank you I'll pass it on.
Uh huh.
Okay.
Our next question is coming.
And from the line of Carla Casella from Jpmorgan you may begin.
Hi, you mentioned that you are maintaining your leverage target of below 4 times and you're currently at 3 and.
And would you ever think of changing that target to lower it or are you leaving that flexibility.
And just given your outlook for either of the business or other potential either M&A or shareholder friendly activity.
We are and we are we and thanks for the question Yeah, we are keeping and not changing that debt target of of leverage to be below 4 times and that you know.
And a consistent way.
That's that's remember also of that.
And these 3.1 times debt. We closed there is no debt would go to 3.4.
We adjusted by the the EBITDA that we lost that they're going to lose rights of pro forma adjusted EBITDA of nuts debt was the debt of debt, we divested but to keep it the same policy and to give us more flexibility to accelerate our our our strategy and again, we are going to operate with this flexibility.
Are you going forward.
Okay, great. Thank you.
Maybe just 1 more question.
And our last question will come from the line of Robert Moskow from Credit Suisse and will begin.
Hi, Thanks for the question, maybe a 2 parter.
1 is do you think that you will increase media again in 2022.
And then the second question is.
Regarding what's changed versus plan.
And it would seem like the biggest change has been of categories. Your category growth or at least resilience has been much stronger in 2021, and then expected I think you entered the year expecting market shares to grow. So maybe you could decompose those 2 things is too low.
Which of those really drove the outperformance in 2021, and then also for your back half guidance.
Second quarter categories have been pretty resilient and are you expecting a drop off and category performance and third and fourth as people go back to work and consumers go back to school, specifically North America retail.
Let me now.
Let me answer the first part regarding marketing and media.
And I will pass the second of went to Carlos to talk more specifically about the categories and U S.
And let me say debt.
First we are excited about the changes debt.
Debt, we have been making and our marketing programs and capabilities, we've been investing not Tony and our brands, but also and our people.
This is unheard of them very passionate about and you know of.
Given the importance of study it has to drive our growth.
We.
We are driving improvements actually.
A couple of ways of the first 1.
And is more marketing dollars.
And that we put.
$100 million more and marketing than than we had in 2019.
And and we said that we want to increase marketing.
Moving forward so it's it's out of.
And our intention.
However, I think it's not only about increasing market is really about efficiencies.
We are today of T V.
30% more of our consumers with the same spend.
By doing that of marketing.
And not only better marketing, but also better media.
And and.
Third I think they're very excited about.
And stepping up on creativity and our company today.
We started day and internal.
Agency in digital media and.
Canada and and in May of last year and today, we have.
12 of these internal hubs.
And.
And different places covering more than 30 markets around the world and debt is critical for marketing efficiency because of <unk>.
And it's faster better and much more creative and we can really have marketing and linked to to the culture and need to be very fast on debt. So.
Overall debt would be my question and answer for marketing Carlos you May answer the second 1.
Sure I can just build on of your point Neal.
Specific to market share and our performance I would say.
We're off to a very solid start to the year and so and the presentation. We are seeing household penetration and repeat rate growth rates.
And as hired of pre pandemic levels, and we are gaining share and actually 58 per cent of the business and.
And anything improvement from last quarter.
And certainly from what we saw in 2019 pre pandemic.
And I think that when you.
You take a step back and you look at overall, our overall performance I think what we're proving is that our consumer platform approach.
<unk> focus on renovation innovation and marketing and our retail activations and they're all working.
Now as we're going forward. We will continue this agenda, we're going to we're going to increase support around key holidays world.
And price promotional price.
I mentioned earlier all of their revenue management tools to manage the inflation.
Now for our total business and I think to your point about asking about the future.
There are several factors impacting the comparable performance.
I can tell you is the most important is that we believe we're and our strong position to balance share, which broke up with ability to continue delivering strong returns.
Thanks for the question.
And just 1 comment on debt to just to build on what we're seeing and what and and the question on the outlook I think I think it's also relevant to say that while our outlook implies a lower EBITDA margin and the short term.
But the second and the second half of the Q.
And we expect to we don't think that the debt EBITDA margin is representative of the run rate as I said and we expect that to improve.
Back to normal levels, as we enter into 2022 and west debt and.
And we and our price realizations and start to catch up.
And our results.
I'm, sorry, I, just I want to press a little bit more this is really a question about your categories. Like do you expect your categories too faced pressure and third quarter and fourth quarter compared to the first half because of people going more to work and because of students going back to school or do you think and will look more similar to second quarter.
Yeah.
Okay.
Okay.
And it's really more of yes, let me just give a perspective, I guess and the at least and in the U S piece.
I mentioned that there were several factors and that is.
And of taking consideration on how the categories of their behavior and and I think that they are.
3 states in particular that we are looking at.
That there are certain things around the fact that.
They are hybrid work and schedules.
And the home purchases and the renovations and the new consumer preference.
And there are actually likely to keep people at home.
And the higher level of Ohio, and Consumptions, and though we have seen in the past.
We are also now seeing the delta very end of the rising case counts because of the U S and and.
And those are effective and we also closely monitoring and and and particularly because they are important in terms of thinking about pharma and start preparing.
For the upcoming school year.
And I think they are all things that are.
And then make it very difficult for us to say at this point exactly how this is going to going to shape out what I can tell you with debt. We are focused on those things. We can control. So we our focus is on making sure we improve on our agility and execution and as Miguel said.
We continue to invest behind our brands to build relevance and compete for those locations.
Through our consumer platform based approach regardless of how we see this happening and unfolding and.
And so far we are pleased with how we're showing up so we believe we can continue to see and.
And the fact that we are able to drive that household penetration and repeat rates and.
And.
And I mentioned earlier and in the call you know right.
Right now your Seo channel is growing but.
Political debt is not right now our expectations as we go through the through of second half.
Okay. Thanks, Thank you for indulging me I appreciate it.
Yeah.
Great well, thanks, everyone for joining us today.
If you have any follow up questions.
Investor Relations and and the media teams will be available for your follow ups, but thanks, everyone for joining us today.
This.
On today's conference call. Thank you for participating you may now disconnect.
[music].
[music].
[music].
[music].
Good day, and thank you for standing by and welcome to the Kraft Heinz Company's second quarter 2021 business update call. At this time, all participants on a listen only mode. After the speaker presentation there'll be a question answer session.
You ask a question during the session and you'll need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you would.
Acquirer of any further assistance. Please press star zero and I would now like to hand, the conference over to speak of today, Chris Jacoby head of Investor Relations. Please go ahead.
Thank you and Hello, everyone and this is Christie cubic head of global Investor Relations at the Kraft Heinz Company and welcome to our Q&A session for our second quarter of 2021 business update.
During our 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 earnings release and our filings with the SEC.
We will also discuss some non-GAAP financial measures today during the call and these non-GAAP financial measures should not be considered a replacement for and should be read together with GAAP results and you can find the GAAP to non-GAAP reconciliations within our earnings release and supplemental materials posted at IR Dot Kraft Heinz company Dot com before we be.
Again, I'm going to hand, it over to our CEO Miguel Patricio for a few quick opening comments yeah.
Thank you Chris.
And thank you everyone.
And just like too.
To add are summarized and tell your debt we are.
Very optimistic about it.
And how we are progressing.
And in our transformation at Kraft Heinz.
We've been taking advantage of the scale that we have and.
And we've been building the agility that we need to.
To build a better business for the future.
We posted sustainable topline and bottom line gains versus 19, and we are encouraged because the strongest growth comes from priority platforms and markets.
Do we called the growth platforms. It takes elevation and.
And in emerging markets.
And we continue to see retail very strong and we are coming back with put surface pits recovering and recovery of past.
Transforming Kraft Heinz is is you know what do we all have in mind, and we want to do that maintaining the industry leading profitability.
We are investing more and our brands and better as well.
Building a much more creative company.
We are also on track to deliver the 400 millions of dollars of growth efficiencies and 'twenty 'twenty 1.
And and effectively managing inflation.
And at the same time, we continue strengthening our portfolio and improving financial flexibility.
Yeah, adding capacity to our products.
To drive grow and no test platforms.
And in the emerging markets.
We as you know closed of nuts, Divesture and we expect to close the <unk> divestiture and the second half of this year.
Recently, we acquired some fluids and Turkey, it's a very small operation, but he is a very important step into our strategy because accelerates day celebration and is any of emerging markets.
And we continue to pay down debt and improve our net leverage.
We continue to expect to.
Have a very good 2021 actually to deliver a stronger 2021 than we projected.
When we provided our initial outlook in February and.
And that speaks to the strengthened and potential of all of our ongoing business.
Thank you.
Oh no.
Ladies and for your questions.
Ladies and gentlemen to ask a question.
And we need to press star 1 on your telephone and 2 of drawing a question press the pound key.
And by the way compile the Q&A roster.
Our first question on Pennsylvania, Chris Growe from Stifel You may begin.
Hi, good morning.
I just had a quick question for you if I could please in relation to pricing and.
And I was just curious if you could maybe give a little more color around the price realization and and how you sort of thought to kind of build through the second half of the year and and just as a backdrop as I look across your categories some of them and us.
And some cases Kraft and Kraft pricing is above your category, So I'm, a little below but all at all on like the IRI data and the U S would say you price it out a little a little slower rate than what the categories. Our overall and so I'm just curious if that strategic and helping drive your share gains or if that's just timing and there's more pricing coming in second half of the year. Thank you.
Okay. Thank you for your question.
Let me start and then.
Maybe Carlos and and Paulo can give you more color on debt.
And as I mentioned on the call, we believe that inflation and our business remains manageable.
And then even with inflation, we expect to deliver and as I said, a stronger 2021than we projected before.
We continue to invest in our brands and that's the.
Anticipated levels.
To drive our transformation and we will continue to monitor things and.
Take further action if of course, it is necessary, but Carlos maybe you can give more color on it and and maybe Paulo as well.
Sure Miguel.
Thanks for the question first I think I will say is and the U S. What we have said in the past. This debt we are proactively managing against the incremental inflation, we see.
And actually we feel good about our ability to implement those actions when and where we see the need.
So if you look on the inflation. We saw in Q2 is mainly coming from ingredients and things like soybeans edible oils packaging and some transportation work well and.
And it's very similar to what we sell and the first quarter.
And most recently, we also saw from increases to be driven by rest and cost.
And from higher transportation rates now and from a from a pricing perspective as I mentioned on the call. We of restarting key promotional activations to drive the business versus the pandemic induced pullback that we had in 2020 now.
And now.
As we have mentioned earlier and the year. Our goal continues to be to connect with consumers that now have discovered of read this COVID-19, our brands and drive the repeat rate among those households.
So in that context and birth of inflation again, we feel good about our ability to achieve the net pricing, we need to offset inflation and maintaining strong household and repeat rate.
Even though we are.
Renovating our portfolio to drive better value for consumers improve into the creative content of our marketing and strengthening and diversifying our media impressions.
But I would also add is that you know we're doing this primarily through 4 key revenue management initiatives and our.
First we are optimizing the frequency and depth of our promotion while loop restore of retail activation levels of that I discussed and the call.
And we are doing broad based pricing actions, which we have announced across our portfolio.
And we're continuing to manage key commodity pricing and lastly, we're using all of the revenue margin levers, including price pack architecture, and and managing of category price ladders.
No.
We look at our revenue management initiatives. They are guiding our smart trade investments. So we can optimize returns on those investments and manage through the current deflationary environment now and the near term the timing of cost inflation versus price reputation may lead to some degree of margin pressure, but this is reflected in and outlook and.
And we've seen net pricing and costs coming into balance as we exit the year.
And with that let me pass it over to Paulo any of their comments you want to add Paulo.
Sure I think I think if we if you want to like frame inflation and pricing from a total company perspective.
So break it down and first on inflation and whenever we can.
Call of debt in April, we said that you're expecting inflation and the mid single digit range as a percent of Cogs, but at the lower and of that range.
Since April of our costs have continued to move higher and now we're expecting inflation of steel in the mid single digit range for the full year, but now it's slightly above the mid point of the mid single digit range.
Regarding pricing and as we are mentioning and Carlos has just.
We are using multiple revenue management and.
The average, including a lease price actions to manage the installation.
But I think it's important for us to keep in mind that we're gonna be facing and unusually difficult price comparison, and the second half last year.
Just to remind just for context last year second half hour price was more than 4% higher.
And then the prior year, whereas we pulled back on promotions to better protect customer service.
And in terms of the timing and the pricing realization are why we expect the timing of debt cost inflation versus price realization to soften our margin percentage lower than the run rate levels and the short term.
I think it's important to note that all of those impacts are already considered in the outlook that we have for the year.
Okay and again as we mentioned at the beginning of we always do you expect you know and now expect even stronger EBITDA dollars day anywhere.
Dissipated before.
Okay.
Thank you for the color.
Our next question comes from from Alexia Howard from Bernstein, you may begin.
Good morning, everyone.
Good morning, good morning.
Thank you and can I ask about and.
The gross margin I know that and it.
It doesn't really appear anywhere except in the yeah. The phone low numbers in the press release, but it looks as though it's down about 150 basis points year on year.
And that some of that and Mike might not be adjusted gross margin, but in a situation of such intense commodity cost pressures and we're going through now I was just wondering how youre expecting that to shape out and the back half of the year, possibly out into 2022 and any color shrimp and much appreciated. Thank you.
And Alex I can start here.
Does this answer I think yes, there is some adjustments to make and the in the gross margin, but when you think about year over a year.
I think we need to remember that we're gonna be left and we were we were lapping Q2, a peak quarter last year with the all of pantry loading and that's happened in the quarter. So our overall margins of the business and a very healthy in this Q2, So I think index in the second quarter, and we were able to price.
And and we had enough pricing to offset.
Pricing plus our efficiencies were moderate and off to assert our hour of deflation that we had.
But you know we work compared to a very heavy mix that we had.
In the last quarter.
Great and then going forward.
And how do you expect it to change and the back half.
So going forward what is that correctly I think the key components that we are going to see in the back half is that drug when they start to have and that's already embedded in our outlook. Okay. You know of.
We're going to start to having debt.
The debt the restoration of some promotions that Carlos mentioned.
Also the mix impact that you're going to see when.
With with debt, whereas S day it goes on.
And also this timing between price.
Pricing and price and utilization of inflation.
In fact, our all of our gross profit.
All of those impacts are already inside the outlook that we disclosed.
Great. Thank you very much and I'll pass it on.
Our next question comes from the line of Andrew Lazar from Barclays You may begin.
Great Good morning, and thanks for the question.
I guess, obviously, it's way too early to talk specifics around 2022, as we know much can still change, but I wanted to go back to the slide presented at the Investor Day.
In September of last year and from that presentation on the base business, so excluding divestiture impacts.
It looks like EBITDA was expected to be roughly flattish in 'twenty 2 versus 21.
And I guess I'm, just trying to get a sense of at this stage what would that still be the expectation.
Such that we just have to strip out divestitures to get a sense of it or maybe has 1 of the inflation environment and longer tail to add on meeting benefits sort of shifted this thinking it all thanks so much.
Let me and.
And.
And then maybe Paulo, you can bring more precise numbers to 200.
We are expecting in 2020.2 to be better than the strategic plan that we presented.
And to you.
And why is debt I think our transformation is ahead of our plan.
We've been.
Beating.
And our plans and in an.
On our budgets and we are optimistic.
And continue investing towards the future.
And he is still too early to talk about us to be talking ought to give you guidance about 2022.
And with all the volatility and the market I think it's spread and not to go further on on.
On that.
And Andrew just to complement I think well I think as day year progress it doesn't mention modulating day year, you'll be providing.
Providing more clarity about how we're seeing the 2020.2.
Discussing these today, but we can say that we see inflation is a consistent theme for us and for the industry.
Net of 22 and all of those.
Initiatives and the actions that we're doing in terms of revenue management initiatives.
To manage the inflation, we're seeing based on expectation of that inflation will continue into the next year.
I think of those initiatives together with our savings broken off of $2 billion savings program and.
And now we will be.
Sufficient.
Debt together with investments that we're making to improve the relevance of our brands.
So again, we are we are we are very confident around our ability to manage a day inflation and support the investments behind the turnaround as we are exiting 'twenty, 1 and answering to anything and entering 'twenty 2.
Thanks, everyone.
Our next question I've got 1 on Bryan Spillane from Bank of America, and maybe then.
Thanks, operator, and good morning, everyone.
So I've got a question I guess for both Carlos and for Rafa. If you can both comment on this.
And in the quarter or even year to date.
Currently we're seeing basically all channels are up right I think it was I think thats been sort of 1 of the surprises.
As we move through 'twenty, 1 is that as away from home and foodservice channels have improved the at home consumption is also stayed relatively elevated so I guess my question for both of you is just simply.
How long do you expect this to continue.
And I guess as things normalize.
Would you expect the foodservice piece of it to really begin to accelerate more and somewhat offset the at home consumption and so just trying to get a sense of how youre thinking about those those 2 channels, especially since.
Right now they're both both both up.
Listen.
First of all thanks for the question I think it's very fair.
Let me start and then wrap of kind of give a perspective on international I think from and the U S from an industry perspective.
Youre right channel trends are still normalizing, but I have to also say, it's too early to tell how the share of stomach between away from all of them and at home ultimately, it's going to kind of all net out.
Now recently it does seem like all channels all the channels are growing but thats, probably not likely to remain the case and and Thats known bill and they're selling it into our expectations.
Now in terms of about of our business. While we see is we are optimistic about our plans that we can actually drive sustainable growth in both the retail and foodservice.
And and I think it's fair to say that we also have big ambition from away from home business. We believe foodservice, it's actually at both of the and generation of of insights and innovation that can actually helping the retail side of the business and he is also capable of driving outsized growth because we have actually put a renewed focus on.
Culinary of distribution and channel expansion.
And some of those channel trends, while still normalizing its still little bit early to say predicting exactly what it's all going to happen now.
I do say is that I do.
And do believe we're gonna be stronger versus what we saw pre pandemic and essentially for 2 key reasons.
First because our foodservice mix favor are the key with our and and actually debt stands to recover and we're seeing that already faster than the rest of the foodservice channel and we also see that'd be more resilient and post pandemic.
And frankly early in the pandemic. We also made a strategic bet to support that growth and <unk> and that debt is paid off we now have 30% more capacity and our small packets of ketchup and sauces.
So that actually has been and seem to be working.
And secondly, we see a more durable step up and at home consumption and that comes on the expense of other categories and brands.
With that and there shall be sacrificing foodservice recovery and growth and.
And then lastly, let me just give you a little more color on on the away from home.
And that we gain of point of market share foodservice recovery begins and much of that actually was fueled by the actions. We took in 3 areas that I've mentioned culinary distribution and new channels.
And Q2, we actually executed 9 co branded culinary and limited time offers with <unk> partners.
Just 1 of those which actually was so successful because it and it became part of our Permian permanent menu item and now is going to be in 'twenty 2 and.
And in and if you think about that context of the fact that we've been able to drive those kind of limited time offers with <unk> in 2019, we had none of those.
So we are certainly driving of different level of execution with <unk> now the second part of that which is distribution.
And the grille key account by 20% Okay.
This quarter and then finally.
Consumers continue to evolve and how they cook and eat and including the use of video delivery of kids, we actually inserting our Kraft Heinz brands into that equation. So we are working with 1 popular of direct to consumer company to develop things like our recipe specifically for our Philadelphia cream cheese as of May.
Ingredient and their products.
And that actual 1 brother was order of 200000 times with by consumers are really an all time record per debt sales partner.
When you look at it Holistically.
Again, I feel very optimistic about our away from home business and that it actually is going to be a springboard for us to continue to drive retail growth.
And Thats, our perspective, and the U S and roughly if you want to add something in terms of the international business, how you see it.
Yes, Thank you Carlos and Hi, Brian.
Oh look on balance our developed markets experienced very similar trends to retail and foodservice and U S and Canada and <unk>.
Most of your markets on the other hand, the foodservice has actually rebounded stronger.
And then in developed market right and most countries either had short or even stricter lockdowns.
Kept their economies open during the pandemic overall so.
So I mean, the consumption of obviously differs country by country in home on and out of home.
The rest of the pandemic Lockdown approach first vaccine of availability changes a lot.
And and and given the Delta and now it's a bit early to tell.
How the channels, where the channels, who stabilized right and the second half.
But all of that said I mean, we are seeing.
A lot of improvements on the retail channels, especially in day celebration.
And give us like a lot of confidence debt will come out of the pandemic well positioned right. After the pandemic on.
On the foodservice side, our mix is even more weighted towards <unk> and U S and the U S is sort of format and this format is recovering very quickly.
So with distribution gains and emerging markets and the potential of the foodservice debt to have across our overall international.
2 quite optimistic that after the pandemic and who doesn't.
That will be quite positive.
Okay, Thanks, Ralph and thanks Carlos.
Our next question will come from the line of Ken and Goldman from J P. Morgan you may begin.
Hi, Thanks.
Would you ever reconsider your policy of not guiding to annual sales and EBITDA.
I realize it's been it's been company policy for a long time, except in rare cases not to give much.
And I imagine you could avoid some confusion about let's say I guess quote good or not quite as good print outs.
Outside of basic bar against which to compare results and I guess I'm that way, we can give you.
More credit when you do come in ahead of expectations. Just curious if that's a possibility and I guess, if nothing else it would probably make Chris as life slightly easier too.
Thanks for the thanks for that.
The the comment again, we will discuss this down on the and we'll let you know.
Thank you.
Welcome.
Our next question comes from the line of Jason English from Goldman Sachs and maybe again.
Hey, good morning, folks and thanks for slot ma'am.
Couple of quick questions. So you guys mentioned that you've implemented pricing actions began to raise those prices can you give us.
Can you give us some quantification there.
Overall on average what is the price increase that you're pushing through and how does it vary across different products.
Well, let me just say Jason debt.
Let me I guess, let me give you a little bit of more contact which as you know.
If you think about our portfolio, we really more diversed and most of the peers that we compete with so so our approach to pricing is no unique and in terms of just having 1 solution. So we are.
We have to be more precise and in certain categories and really growth strokes across entire portfolio. So well.
And I can say is on actions that we have taken and pricing of cover the majority of the portfolio.
And that actually has quite a bit of <unk>.
Good range of percentage increase and its always hard to kind of give you a specific answer now.
What I would tell you is that we have taken actions to mitigate those incremental inflation that we're seeing.
And that we feel comfortable on approach that we feel very good about how we are managing and that we're going to continue to more interest me and thanks for their actions if necessary.
Thank you for the question Jason.
But you don't know what your weighted average price increases across your portfolio.
Okay.
Listen I mean I think.
It's something that.
For us isn't and something that we're gonna be discussing and but happy to.
Continues to have the conversations about how we are responding and this moment and how we are feeling very much of a manageable solution from us.
Okay and.
And 1 more then just on the inflation can you give us a quantification of of what the rate was in the quarter and what you expect in the back half I see the the total for the year of going from low end of mid singles to high high and low.
And it just zoom and a little bit on the near term. Thank you.
And I used to treat them like cheap debt in that range.
Jason I need to remember also that in the Q2.
We had part of that would have a higher pressure on the on the meat commodities, especially and bacon.
But I can tell you that and the first half of the day here at our of our of our inflation rate was and did low b of added low land of the of the mid single digit range, including there's this there's this big 4 components.
And and and that's that's the range that we saw for the quarter too.
Okay. Thank you I'll pass it on.
Right.
Okay.
Our next question is coming.
And from the line of Carla Casella from Jpmorgan you may begin.
Hi, you mentioned that you are maintaining your leverage target of below 4 times and you're currently at 3 and.
And would you ever think of changing that target to lower it or are you leaving that flexibility.
And just given your outlook for either of the business or other potential either M&A or shareholder friendly longevity.
We are and we are we and thanks for the question Yeah, we are keeping and not changing that debt target of of leverage to be below 4 times and that you know and a consistent way.
That's that's remember also that.
These 3.1 times debt to be closed you know there is no debt would go to 3.4 if.
If we adjust by debt to EBITDA debt, we lost that they're going to lose right of pro forma adjusted EBITDA loss nuts debt was did that Oh, that'd be divested, but yes that way to keep the same policy and to give us more flexibility to do accelerate our all of our strategy and again, we are going to look great with the effects of.
Ability going forward.
Okay, great. Thank you.
Maybe just 1 more question.
And our last question will come from the line of Robert Moskow from Credit Suisse and will begin.
Hi, Thanks for the question, maybe a 2 parter 1.
And is.
Do you think that you will increase media again in 2022.
And then the second question is.
And regarding what's changed versus plan.
It would seem like the biggest change has been the categories your category growth or at least resilience has been much stronger in 2021, and then expected I think you entered the year expecting market shares to grow. So maybe you could decompose those 2 things is too low.
Which of those really drove the outperformance in 2021, and then also for your back half guidance second.
And second quarter.
Categories have been pretty resilient are you expecting a drop off and category performance and third and fourth as people go back to work and consumers go back to school, specifically North America retail.
Let me now.
Let me answer the first part.
Regarding marketing and media.
And I will pass the second of went to Congress to talk more specifically about categories and U S.
And let me say that first and we are excited about the changes debt.
Debt, we have been making and our marketing programs and capabilities, we've been investing not Tony and our brands, but also we and our people.
And this is an area of them very passionate about and you know.
Given the importance of study it has to drive our growth.
We.
We are trying to improvements actually.
A couple of ways of the first 1 is more marketing dollars alright debt.
We have hundreds of millions dollars more and marketing than than we had in 2019.
And and we said debt you know we want to increase marketing.
Moving forward so it's it's Howard.
And our intention.
Hmm.
However, I think it's not totally about inquiries and market is really about efficiencies.
We are today of tea.
30% more of our consumers with the same spend.
Doing that of marketing.
And not only better marketing, but also better media.
And and.
Third I think they've been very excited about.
Stepping up on creativity and our company today.
We started and internal.
Agency in digital media and.
In Canada and and.
And in May last year and today, we have.
12 of these internal hubs.
And.
In different places covering more than 30 markets around the world and debt is critical for marketing efficiency because it's it's.
It's faster better and much more creative and we can really have marketing on <unk> 2 to the culture needs to be very fast on debt. So.
Overall debt would be my question and support marketing Carlos you May answer the second 1.
Sure I can just build on your point meal.
Specific to market share and our performance I would say.
We're off to a very solid start to the year and <unk>.
So and the presentation, we are seeing household penetration and repeat rate growth rates.
Such hired of pre pandemic levels, and we are gaining share and actually 58% of of the business.
And anytime improvement from last quarter.
And certainly from what we saw in 2019 pre pandemic.
And I think that what.
And you take a step back and you look at it overall, our overall performance I think what we're proving is that our consumer platform approach.
Focus on renovation innovation and marketing and our retail Activations Theyre all working.
Now as we're going forward, we will continue this agenda, we're going to dig and increased support around key holidays world.
Using price promotional kind of based on as I mentioned earlier all of the revenue management tools to manage the inflation.
Now for our total business and I think to your point about asking about the future.
There are several factors impacting the profitability performance.
And most importantly, we believe we're and our strong position to balance share, which broke up with the ability to continue delivering strong returns.
Thanks for the question.
And just 1 comment on debt just to build on what we're seeing and what and and the question on the outlook I think I think it's also relevant to say that while our outlook implies a lower EBITDA margin and the short term.
But the second and the.
The second half of Q3 and and and.
We expect to we don't think that's debt EBITDA margin is representative of the run rate as I said, and we expect that to improve a back to normal levels as we enter into 2022 and west debt and.
And we and our price realizations and start to catch up.
And our results.
I'm, sorry, I, just I want to press a little bit more and this is really a question about your categories. Like do you expect your categories too faced pressure and third quarter and fourth quarter compared to the first half because of people going more to work and because of students going back to school or do you think and will look more similar to the second quarter.
Yeah.
Okay.
That's cool.
Okay.
It's really more of yes, let me just give my perspective, I guess and the at least and in the U S piece.
I mentioned that there were several factors and that is kind of taking consideration on how the categories of behavior and I think that they are.
And 3 things in particular that we are looking at.
And that they are certain things around the fact that day.
Our hybrid work and schedules.
C and the home purchases and the renovations and a new consumer preference.
There are actually likely to keep people at home the.
And the higher level of Ohio, and Consumptions, and though we have seen in the past.
We are also now seeing the Delta variant and the rising case counts because of the U S and and.
And those are effective and we also closely monitoring and and and particularly because they are important in terms of thinking about primarily start preparing.
For the upcoming school year.
And I think they're all things that are.
And then make it very difficult for us to say at this point exactly how this is going on all going to shape out what I can tell you is that we are focused on those things. We can control. So we our focus is on making sure we improve on our agility and execution and as Miguel said.
We continue to invest behind our brands to build relevance and compete for those locations.
Through our consumer platform based approach regardless of how we see this happening and unfolding and.
And so far we are pleased on how we are showing up so we believe we can continue to see and.
And the fact that we are able to drive that household penetration and repeat rates and.
And.
And I mentioned earlier and in the call you know right.
Right now you see all channels growing but.
Political and that is not right now our expectations as we go through the second half.
Okay. Thank you for indulging me I appreciate it.
Yeah.
Great well, thanks, everyone for joining us today.
If you have any follow up questions.
Investor Relations and and the media teams will be available for your follow ups, but thanks, everyone for joining us today.
This concludes today's conference call. Thank you for participating you may now disconnect.