Q3 2021 Kraft Heinz Co Earnings Call (Q&A Session)
Good day and thank you for standing by welcome to the Kraft Heinz Company third quarter 2021 results conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that today's conference.
May be recorded I wouldn't if you require any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today Christy cubic head of global Investor Relations. Please go ahead.
Thank you and Hello, everyone. This is Chris Jakubik head of global Investor Relations at the Kraft Heinz Company and welcome to our Q&A session for our third quarter 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.
S. GAAP results you can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at IR Dot Kraft Heinz company Dot com.
Before we begin I'm going to hand, it over to our CEO Miguel Patricio for a few quick opening comments yeah. Thank.
Thank you, Chris and good morning, everyone.
I would just like to start by sharing how we pair.
Richie he'd eat or asked to see our company leaning into our scale and agility that we have been talking about for some time.
I see short term challenges at the same time that we are building the long term offense.
We are today, a much stronger company and.
Better position to address inflation that we're seeing now.
We're taking action now to protect profitability through 2020 two.
Our actions.
Not just pricing, but also.
Renting price pack architecture value engineering, and leveraging our scale in procurement.
At the same time, our team has continued transforming our business for long term growth and advantage.
Our momentum with the consumer is strong and our consumer focused platform based approach is taking us to new locations.
We continue to invest blue relevance of our brands.
Im making greater more creative smart investments.
And at the same time, we are building agility that will deliver the 2 billion of gross deficiencies and looking to unlock more.
We are continuing to pay down debt.
Proof, our net leverage and we continue to invest in our most important assets our people.
And as we mentioned in our remarks, we have done all of these while delivering better 2021 results than previously expected, which speaks to the strength of our business.
Well with that let's take your questions.
Thank you if you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been ancillary wish to remove yourself from the queue. Please press the pound key.
And our first question comes from the line of.
Andrew Lazar with Barclays. Your line is open. Please go ahead.
Great. Thanks, so much.
My question is actually for for Rafa, if I if I could.
We've been taking a look at some Nielsen trends in some key food categories in the U S and western Europe, and while consumption. Obviously in the U S is certainly remained elevated trends at least in some categories in Europe seem to be decelerating meaningfully or I guess normalizing is a better word for it as those markets reopened at a faster pace than we've seen here in the U S.
So I'm curious if if cade she has seen this dynamic play out at all four.
For the company and if you see maybe certain trends in Europe as a fair leading indicator of what's to come in the U S around stickiness of demand or if maybe there are some differences.
Suggesting that's not a great set of data points to necessarily use to compare thanks. So much.
Yeah.
Yeah, Hi, Andrew Harper here I think thanks for the question I mean from an overall market perspective in Western Europe, we have seen indeed more of a return to pre pandemic consumption patterns.
In other developed markets.
That said I mean, it varies quite a bit per category in Europe.
Much greater stickiness in our diesel efficient platforms.
Consumers continue to look to us to a little later.
Right and.
And this is quite positive to be honest was because if you recall I mean, we have three key.
Keep dealers on our international growth strategy.
Based TV platform emerging markets and foodservice channel right.
This demand stickiness in this elevation.
To see favorable levels of consumption.
And absolute terms on the platform and we choose our platform your folks yet right. So we continue to see the celebration diamond sustaining any food service in particular Western Europe is rebounding very fast I mean, this is approaching 2019 levels.
And then on top of this type of people, we've been gaining a lot of share in almost every market.
We operate in foodservice right. So it was another strength so as I said overall, it's two as most of the market.
Coming back to that.
Mike.
Some platforms. They continue to be very strong and that has played out favorably for us they television.
Great. Thanks very much.
Thank you and our next question comes from the line of Jason English with Goldman Sachs. Your line is open. Please go ahead.
Hey, Thanks folks I appreciate you letting me in.
I guess, I guess I'll lean into price a little bit.
You reiterated the comment today. They are in the prepared remarks that you expect price price to catch up with cost by the end of the year.
Can you confirm that that's not just ingredient costs, but that's sort of the total supply chain pressure.
And then looking at slide eight is it is it fair to look at that as sort of a price index. So to say you came into the year with our index around one O three and do you plan to exit a bit north of 106, you'll be carrying around three points of price into next year or is that one O six a bit of an average and into real exit rates closer to 107 or went away.
Hi, Jayson when possible here.
Let me try to help with this question.
We expect to see similar levels of inflation at the beginning of 'twenty two as we're seeing now in the second half of 'twenty one.
Most of the inflation that you're going to see is carryover from 'twenty one.
We expect the planned through 'twenty two heavy exiting Q2 the price plan.
That's sort of the BDC for current levels of course cause lots of cost that we're seeing now and this should address the inflation thats expecting 22, okay. So we are seeing our execution of pricing protecting our profitability there.
The levels that we're seeing now and this should protect our profitability when we enter into planning tool.
Okay. So we're probably looking at something closer to a mid single digit pricing as we enter next year, if you're carrying high single digit as a percentage of Cogs.
That's just the math on that is that.
Is that unreasonable.
I see.
I don't want to get into their apps don't forecast pricing, but I can tell me that they actually that's where I think now we will protect the inflation that we're seeing.
And therefore protect our profitability from these inflation that youre seeing in the current cost levels and this could put us in a good position plants of things too.
Just to complement what Paul was saying.
If eventually more inflation comes well, we will have to take action.
Sure sure it makes sense it makes sense and congrats on the pricing success, so far it's better than I expected.
Thank you.
Thank you and our next question comes from the line of Pamela Kaufman with Morgan Stanley. Your line is open. Please go ahead.
Hi, good morning.
Good morning can you elaborate on what drove the sequential softening in market share trends that you highlighted how is that right.
Driven by the capacity constraints or have there been other competitive dynamics contributing to this are performing and then how are you addressing the capacity constraints that you highlighted and.
And I guess, what do you see a thriving improve share performance going forward.
Lindsay.
Thank you Pavel for the question I imagine, although those questions. You had there I think there were three accounts that were related to the U S. So I'll take it.
I guess for me and I will say is first of all no.
The way I think about the businesses, we want to make sure. We continue to drive household penetration and repeat rates, which we are doing.
Well there were some short term share pressures in during the back to school as you know really the demand really out grow our capacity in a few categories.
Long term. The fact that we are driving household penetration and repeat rates shows the strength of our portfolio. The interests of our business on how we are actually monies for all that.
But I'll say, yes to that.
I'm pretty much focused on.
Making sure that we win by maximizing the controllable.
And our recipe for winning is to essentially consistently focus on satisfying the consumer needs better than anyone else and it doesn't matter exactly what happened at this particular moment.
As we go forward I would tell you I see three specific advances that for us is gonna be a play which we're going to win.
We have continued to renovate our portfolio, we have control their cost and our brands. So that we can optimize the body with a quote for our consumers and really that is the best recipe for us to kind of withstand against anyone else, who coming any competition that comes in.
And essentially what we're doing with we are increasing the equation of what it's worth buying for the shelf.
The second advantage, where we have also we're making sure that the.
That we are differentiated at each wrong over the price of leather whether it is entry to mainstream to premium so that consumers can stay within our franchise even at their circumstances may change and if you think about Mac and cheese. We go everywhere from an easy math to the original version for consumers.
And then the third piece I would say, yes, we are transforming our portfolio through all of the divestitures that actually have been significantly reduce our private label exposure.
So we have continued to renovate manage our costs. We have continued to bring making sure that we have differentiated products within our categories no matter, what the circumstance where consumers are and we have a private we have a portfolio that has mushroomed on should reduce versus private label and frankly, we continue to see opportunities to <unk>.
Profitable growth focusing on our consumer platforms. So we are executing with excellence and leveraging the broad renovation innovation and the arrest of creating that our teams are doing.
I think you also spoke a part of your question and then some other supply chain constraints that we're seeing.
You know I think but the way I would look at it is across the industry. We are seeing a supply chain that is being tested on a daily basis, and but what I will say is our supply chain team has been very agile taking advantage of our global scale, we're showing agility in labor and manufacturing and logistics.
Now I'll give you some examples of what I mean, we are reducing the amount of time to hire and significantly increase the applicant pool by leveraging new digital tools at Kraft Heinz.
We are improving the flexibility in terms of the materials that are available with a really an ownership mindset across sales procurement manufacturing and those things would change at our plants 39 of them across the U S. Sometimes on a weekly basis.
And then in logistics, we've actually increased the throughput on warehouses by shifting more of how we operate 24, seven and inclusion the automation since the pre pandemic time.
So.
Having said that I would tell you that we do have a good line of sight of continuing to improve our customer service levels as we move forward, because frankly restarting the top tier customer service to the pre pandemic level is a continued focus for us and an entire team.
And thanks for your question Pamela.
You also asked about.
Moving forward in terms of capacity.
On top of everything that the Carlos is saying just wanted to add that we have been adding capacity.
We increased substantially.
Our capacity Mac and cheese on frozen snacks, Panamax and bagel bites.
On Clos and cucumbers on meal.
And then on Keith's juices.
So it's it's you know.
These investment in capacities is a great proof point on our belief about the about the.
The demand for our credits in the future.
Yeah.
Great. Thank you very helpful.
Yeah.
Thank you and our next question comes from the line of Bryan Spillane with Bank of America. Your line is open. Please go ahead.
Hey, Thanks, operator, good morning, everyone.
My question is just I guess tied to some of the themes here just in terms of inflation and pricing and margins and maybe if we could just step back.
Pre all of this inflation and pre Covid right. There was a transformation in your supply chain, which you know that that work has started.
And you know.
As we kind of look at gross margin and <unk>.
Profitability at the gross profit line, you've held up pretty well right relative to your peers, if anything probably a little bit better.
I guess as we're kind of thinking about profitability going forward.
Knowing that theres, some pricing that's coming through to cover inflation, but how much are you also still benefiting incrementally from some.
Some of the supply chain work you've done.
And how much of that is going to be also a contributor to helping to offset all of the inflation and supply chain disruption.
So let me start here and then and then and then we can maybe build.
Someone else here can contribute on top off my answer.
You said is true like when we when we come back to when the time that's installed in 19 went we closed or we stopped as you beginning of 2020.
Yeah.
We were very focused on improving our gross profit over time.
And in order to do that we develop on mini programs in terms of efficiencies in supply chain and.
In terms of focusing on mix.
Also pricing.
Our new pricing strategy and revenue management strategy and this is taking place you can see that.
Today with all the.
Inflationary pressure that we're seeing in the gap that we had between the price realization and the cost inflation, we are keeping the gross profit margin.
At the same level that we have a deep on them and this gives us a lot of confidence in our plan going forward. So I would say that our strategy to improve profitability to gross profit margin is working.
Yeah, but.
Add to and you know think about our <unk>.
Overall progress in our transformation.
Is it both in terms of some of the things that you heard from me go earlier.
We are in fact, making a significant push on fast tracking critical projects on our capacity.
You know I think Miguel gave you. Some examples I'll give you a couple more which is if you think about catch up. The fact that you know in Heinz deepen squeeze kind of such a small package, we have nearly double that capacity by the end of next year.
If you think about Mac and cheese.
By the second half of next year, we've actually increased but 20% of our cups capacity and even in frozen and snacks by also by second half of next year, we will have a fleet increase of about a third our capacity in areas like deli mix.
And so both across you know these are some of the examples of things that we saw earlier in the in the sense in the pandemic, we made fast tracking our projects and we continue to do that more work to do ahead.
When you look at it as in terms of our how do we make sure we get more of our utilization of our assets and for me things like improving our OE, which we have now done 20 versus 21 and.
And I'm, sorry, 'twenty versus 1921 versus 'twenty. It is also the way that we're going to continue to make sure that as we go forward, we get back in it both ways, making sure that we are being smart about investing in our capacity and we're getting more of our assets through improvements in the O E.
Thanks for your question Brian.
Alright, thank you.
Thank you and our next question comes from the line of Robert Moskow with Credit Suisse. Your line is open. Please go ahead.
Yeah.
Hi, Thanks.
I just wanted to try to square the the outlook for 2022 slide with your comments about pricing catching up to cost because.
If pricing is really catching up the cos that would imply that your EBITDA growth on a core basis ex acquisition divestitures should be able to grow in 2022. So if you're confident enough that that the pricing is really catching up why not take the extra step in and talk about it in your outlook.
As it stands.
The slides pretty general it says that things are gonna be strong stronger than you thought post pandemic, but I'm not quite sure it points to EBITDA growth on a core basis yet.
Hi, Rob.
Let me start saying that we.
We are not providing guidance for 'twenty, two and we are not providing all of us at this time any outlook for 'twenty two besides the one that we sure. We can say that we are very confident with our fast and we are very confident about our ability to retain consumers and we think volume that we are having today and we're also confident in our app.
Ability to sustain it.
The strong margins that we have we all of our focus here is to protect the margin dollars from inflation as we've mentioned.
And again to give you a little bit more color you can say that it also we should have that in Q3, and we discussed that in Q3, we have lower than relates percentage margins and we expect these margins to improve as price realization comes but that is as far as we'll go in 'twenty to 'twenty two we're very.
Confident with the fact that we have.
That is getting a better space, we're a better company and a battery space with stronger consumption and with confidence in our ability to price. These short term inflation that we're seeing.
Okay, well I appreciate it thank you.
Thank you.
Thank you and our next question comes from the line of Chris Growe with Stifel. Your line is open. Please go ahead.
Hi, Good morning, I just had a question for you in relation to promotions and you've talked about how you're rebuilding promotions in your business, especially in the U S. I think you've talked about a normalized promotional environment. So I just want to understand in this kind of gets back to a degree around pricing.
As you recover promotions, especially against the period a year ago, where they were lower can you achieve price realizations on a net basis that offset inflation and maybe related to that what would that rebuilding a promotion a recovering promotion continue in the first half of 2022 maybe a bit of an offset to the pricing you're taking at retail.
Yeah.
So Chris let me, let me answer that in <unk> and <unk>.
I tried to explain I think a couple of things you mentioned in your question.
First let me just put into context.
The transformation that we've been having here at Kraft Heinz I mean, if you think back a critical aspect of our transformation is a a consumer first approach to all that we do.
So which essentially is why our plan is to invest behind.
Our consumer platforms during those even windows, where actually consumers are looking to us for solutions.
So if we think about.
The gains that we have made so far the fact that we have continued to drive brand household penetration and repeat rate. It is exactly because we have done that we have been able to make sure that a moment during the year that our consumers are looking for those specific solutions that we can offer essentially the scale of our products.
In a way that satisfies their needs better than anyone else and.
And we have been in and expect to be as we look into 2022 more.
More active with better execution than 'twenty 'twenty doing just critical windows, but clearly not as deep as we were in 2019.
And frankly, we continue to see opportunities to capture that growth. So so as we are going to move forward. We are going to remain diligent on making sure. We're took satisfies our consumer needs better than anyone else guided but platform and a renewed focus on making sure that again everything we do as part of our transformation.
With a consumer first approach.
Thank you.
Thank you.
Thank you and our next question comes from the line of Alexia Howard with Bernstein. Your line is open. Please go ahead.
Good morning, everyone.
Good morning.
Okay. So in your prepared remarks, you alluded to an appetite for more acquisitions in the emerging market. So I think you referenced the FM foods in the the Hana.
The deals that you've done so far can you talk a little bit about what additional away you'll focus in terms of potential future deals Oh that particular categories particular regions that you're looking at can you say anything about the kind of scale.
Hum at the pipeline intensive which would you be looking just at tuck ins or potentially something more medium size. Thank you and I'll pass it on.
Sure sure ill, except maybe I can.
Commented then it gives the word F I L C.
He is responsible for the money markets among other things.
We we have of course today, a portfolio that is better than we had two years ago and in a much stronger.
<unk> shipped in and with that comes more flexibility right.
And are.
You are right I think that if we have opportunities for acquisition.
We'll look at them.
All of these with with price discipline.
We like a lot.
To follow our strategy and as a consequence.
Taste innovation, which is.
Which is really one of the.
Critical strategic pillars of this type of jump the international zone.
<unk> is the place where we are looking for opportunities.
And.
That helps also foodservice business like just.
Yes that business in Turkey that we acquired is the leading company in food service and we expect to grow.
222 to the retailers with that space.
In Turkey, as well and I'll give the microphone to work them off I also he can give you more color about areas that we're looking at.
Yeah no. Thank you I mean, the reason we are so excited about our son foods about hammer is exactly as you said its own strat that you're right. They are.
Strong margin categories in the right countries as you said deceleration in emerging markets and foodservice those are the pillars of our strategy.
And then what they can enable us in the future I mean each of those two businesses are mentioned my son a hammer.
They are just short of 100 million each but we saw some I mean, we will not only be able to build the Hines has a bigger brand in Turkey, but we will have capacity to grow much faster across the middle East.
And with him or I mean, Hema, we we have announced but we are now waiting for regulatory approval, we will not only strengthen our distribution, especially in the south of Brazil, I believe we'll be able to participate much more the value ladders of the the chain, we didn't pay for their vision and we.
You can really leverage the portfolio to build our scale faster I mean.
And the foodservice channels. So they are definitely like again as I said, one strategy and that's what makes it what was the most exciting news they set a vision and within the core emerging markets that we want to we want to grow it didn't we still see a lot of opportunities.
Great. Thank you very much I'll pass it on.
Thank you and our next question comes from the line of Ken Goldman with Jpmorgan. Your line is open. Please go ahead.
Hi, good morning.
A couple of U S based food producers they've suffered through some worker strikes recently I'm just curious how you're feeling about your labor relations in general at the moment and I guess, how investors should think about the risk. If there is any of Kraft Heinz you know, perhaps facing some incremental challenges on this front.
Thanks for your question.
Obviously, not going to speak to anybody else's business, what I would tell you is that you know.
Our teams as I mentioned earlier have shown tremendous agility of making sure that we are in fact continue to have a focus on engagement of our workforce.
You know as we sit here today, what I will tell you is that you know we have seen pockets of some places where we've had some labor labor challenges in terms of shortages, but also they'll have been very much.
Focusing on our feeling isolated locations.
As we move forward I am I am actually confident that we have been able to actually and we'll continue to manage through.
Specific areas, where there had been some some isolated.
Situations in which we have had some labor shortages, but in a way that is actually not a concern for us on a regular basis on an ongoing basis as we move forward. So actually I feel very good about where we are and how we continue to mine assisting ige outweigh.
Anything else you wanted to build up the hill.
So I think that's.
The only thing I would that is that we've been we've been working hard to improve the engagement of the company overall.
And.
And that brings us more confidence about that.
The possible labor issues for the future.
And at this moment, we don't see any any risk of a strike but it.
That doesn't mean that.
That's not a plus.
But so we are confident about that.
Yeah, No I think you all said I think yeah, no I think we're in a competition and really feel good about our the way our teams have handled it and and <unk> with the agility. They have shown during this very difficult time. So thank you. So I think we're about out of time there. So.
We'll end it there thanks, everyone for joining us today and for anybody who has a follow up question.
IR will be available to take your questions and for anybody in the media Kathy Cranberry and her team won't be there available for your follow ups. So thanks, everyone and have a great day.
Thank you.
This concludes today's conference call. Thank you for participating you may all disconnect everyone have a great day.
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