Q1 2022 Kraft Heinz Co Earnings Call- Q&A Session

[music].

Ladies and.

Gentlemen, thank you for standing by and worked with the Kraft Kraft Heinz Company first quarter results question and answer session I would now like to turn the call over to your host Christopher cubic you may begin.

Thank you and Hello, everyone. This is Chris <unk> head of global Investor Relations at Kraft Heinz Company and welcome to our Q&A session for our first quarter 2020, a few business updates 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 discussed in.

In our earnings release, and our filings with the SEC.

We'll also discuss non-GAAP financial measures today during the call 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 the supplemental materials posted.

IR Dot Kraft Heinz company Dot com.

To begin I'm going to hand, it over to our CEO Miguel Patricio for a few quick opening comments.

Well, thank you Chris.

I would just like to start by sharing how proud I am of our people and the truly transformation transformational work.

They continue to deliver for our company.

We've seen too.

Yes.

Disruption and they continue to successfully address the short term challenges.

At the same time that we are building the long term advantages of our company and our brands.

Our team delivered a strong start.

For the year, both on topline and Bottomline.

We remain on strategy with the strongest growth coming from our primary platforms brands channels and markets.

We are effectively managing our inflation improving our supply constraints.

While continuing to gain incremental efficiencies.

We continue to make progress.

Building and deploying initiatives to accelerate our advantages.

And that is like becoming more style.

A much more creative and marketing.

Developing joint business plans between retail and foodservice.

Capacity and locks in our grow and advertising platforms.

As.

You are now.

Now see.

We're doing this through strategic partnerships with.

Guidance and cutting edge innovators.

Accelerate our transformation and redefine the best in class across our value chain.

It is a very exciting time for Kraft Heinz.

Don't think we could be better equipped to build on our momentum.

What promises to remain a very challenging environment.

With that well, let's take your questions.

Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone. If your question has been answered or you wish to move yourself from the queue. Please press the pound key our first question comes from Andrew Lazar with Barclays.

Great. Thanks for the question good morning, and Chris Congratulations to you. Thank you for all the help over the well to many years to quantify appreciate it my question really is around reach.

Retail inventory I.

I guess, where are you currently regarding the retail inventory rebuild versus where you want to be and how much more opportunity might there be for shipments to exceed consumption going forward related to this dynamic, which I guess could be somewhat of an offset should elasticity ramp up a bit from here and is there any indication that retailers may.

To hold more inventory going forward than they did pre pandemic, having seen during the past two years, how problematic out of stocks can be when there are supply dislocations. Thank you.

Andrew.

This is Carlos.

Let me take that one first.

So let me just echo <unk> comments.

Proud of how our teams have managed.

Through all this and the strong start of the year is a testament to the resiliency of the teams now.

Now to your questions about retail inventories they do remain fluid.

If you recall, we exited last year below normal days of inventory from a historical perspective that we're both in terms of the trade and warehouse.

And if you look at in Q1, our actual production volume was actually 10% higher than it was a year ago and we expect that to continue through the year and so that we can support the inventory recovery.

And in Q1 the way it looks is that we began to rebuild some of the retail inventories in certain categories, but in aggregate, we're still below historical levels.

And our expectations as we continue through the year. So we'll recover our inventory levels by the end of the year with service levels, then returning to pre pandemic levels early next year now.

Now, let me tell you kind of our focus going forward is going to be in three specific areas. One is recovering the service constrained categories and focus on the key power Skus.

And as you saw our increasing production levels supports this initiative.

Number two is improving the share of shelf and implements shelving principles. We have both a detailed plans to do that and the strong collaboration with customer to do justice.

And finally, creating in store destination, so that we can.

Lunch meaningful incremental disruptive innovation into the marketplace.

You are seeing this already from our award winning out of the Burger to creating different destinations and breakfast destination in store and online the leverage our scale in partnership with retailers.

Now you asked specifically about kind of how to also think about the retailers and their inventory normalize.

I would say, it's difficult to say where exactly the retail inventory levels normalize.

The one thing I would.

We'll kind of make you think about it is the fact that if you keep in mind that pre pandemic levels.

Inventory levels are actually so quite a bit of inventory reduction in the two to three year period prior to the pandemic.

So I would say, it's hard to predict but we know that as we continue to do more work we're building that.

There is still room for us to do that thank you for your question sure.

Sure Thanks very much.

Our next question comes from David Palmer with Evercore ISI.

Thank you.

Interesting comments in his prepared remarks about the partnerships with Microsoft and Google.

Maybe if you can touch on those a bit more and what what.

What outcomes do you expect from those what areas of improvement do you expect us to see.

And what's first.

Got it.

Do you want to.

To answer the question please.

Sure.

Let me just say that part of the <unk>.

We're doing it really is about supporting agile scale initiatives.

And for US if you recall when we talked at Cagny, we talked about how ideal scale was going to help us in three ways first it was about us making sure we organize and embed and lead with agile values throughout the company and we mentioned, how we actually evolve our structure to be flatter and leaner.

With multi disciplinary teams our missions to attack our largest priority and in North America, we actually instituted a rule of five were only five levels between myself and two positions in the business units.

Second part of that and to your questions is also that we were building a tech ecosystem to create end to end capabilities with leading tech companies to accelerate our solutions to capture efficiencies and create a significant competitive advantage. What are you seeing a partnership between whether its in Microsoft where there is a partnership.

With Google.

Allows us to look for those partnerships that allow us to accelerate our move to an idea of scale. Because then once we build the tech ecosystem. We can then scale up to leverage this proven solutions across and maximize the value creation.

The reality is that we also doing this.

Across the entire value chain I'm very pleased with the partnership we have with Microsoft because its going to allows us to also look at things like areas in planning and manufacturing and logistics and sales and marketing that allows us to get closer to our consumer and making sure. We actually are getting real time information that we improve the customer.

Service by improving forecast accuracy and speed and that it generates and two inefficiencies with new processes tools and the structure.

As you will see we are going to continue to look for those partnerships in which we can actually work together to accelerate our journey towards <unk> scale.

I would like.

Alright.

Two what Congress just said.

These partnerships.

Go beyond just technology. So as you remember, we announced before that not Cowen and <unk> plus partnerships is that other great examples of us to become monetize in all areas of the company.

We didn't you didn't have a good pipeline.

Plant based products and would take a lot of time to develop well partner with a company that can bring new solutions in a record time and great quality.

We didn't have a solution for our <unk> business from a supply standpoint, well partner with the <unk>.

Ken.

<unk>.

Quality innovation.

And volume problems that we would eventually have moving forward.

These are great examples of partnerships.

Bill just makes us more agile and <unk>.

Questions.

Thank you for that and just on the marketing side or the actual spending side. What is your advertising as a percent of sales today in big picture.

Has that shifted in terms of the percentage of sales over the last few years.

But also how have you shifted that spending I would imagine digital has a much higher percent today.

Give us a flavor of what youre anticipating there. Thanks.

Can give you a better sense sofa.

The percentage of net sales begins with all these changes we are having that sales to unwind it.

But that is not precise.

To tell you that it's not our intention to reduce investments in marketing.

This year, we will.

Flat.

Growing.

Depending on how the year continues.

We want to continue to invest in our brands.

Our investment in.

In digital today is about two thirds of all our investors about 70% of our investment, but I would say that.

More than even the quantity at this moment.

Really really impressed with the quality and how we changed.

The way to communicate.

Today, we have.

Our views.

<unk>.

Our own development of digital marketing.

That that gives us really the possibility of being at the speed of culture.

<unk> from a day to another one.

Great quality marketing.

That makes us much more.

<unk>.

It's a very different quality of market that we have nowadays.

I don't know if you saw that.

<unk>.

Selected.

The best campaign of the year.

Among the factors that marketers.

America and more recently, they called <unk>, the best renovation of the best.

Branding.

Of the year.

Consequences of that huge improvement of the quality of our democracy.

Yes, the one thing I guess I would be also to <unk> comment is that while.

While it's true that we have.

Invest another about $100 million more in marketing to 2019.

Our focus will really have changed and is well maybe I will just highlighted we are focused very much into earned media and which actually we have seen how we have proven that increases the return on that investment.

So for US is how do we make sure that all the personalization any group creativity that our teams are showing translating creating more impactful campaigns that generates the earned media that improve the ROI. So it's not just the investment we make both the amplifying inspect.

Our investment because of the quality of the work that we're putting out.

And Thats why we are continuing that journey.

Yes.

Thanks.

Our next question comes from Bryan Spillane with Bank of America.

Hey, good morning, everybody.

I guess I wanted to.

Ask about.

Commodities and raw materials and not so much on cost, but just availability.

Given some of the supply chain issues I guess that have been caused by the war in the Ukraine.

And some of the agricultural commodities.

Potentially being short supply.

Is that a.

Churn on your end in terms of just availability of raw materials.

Have you seen it at all crop up maybe competitively like smaller competitors, having service issues.

And then maybe if I could just tie to that as well.

Given that you do have some exposure to it just bird flu is that something we should be worried about.

Given that you do grow from Turkey.

Thanks for the question.

There's one right here.

So yes situations come up every day on the raw material and packaging material sites. So situational continues to be challenging and I think.

And the teams have been now for two years dealing with these challenges on a recurring basis, but requires a lot of resilience from our team which have been demonstrating very strong.

Now the great thing is despite all these challenges we have being April throughout the quarter to reduce inventories for the first time, obviously as the pandemic level and we have improved service levels and I think we are now in a good trajectory to continue introduce so into the second quarter. So despite the challenge that you continue to face and I think the whole market.

We're able to navigate through that I think our scale also definitely helps in this regard.

Regarding hedging.

As we said before.

We have been maintaining a very disciplined approach our hedging so it hasn't been speculating or trying to second guess, what's going to happen in the markets that had been maintaining our strategy maintain the consistency and as we mentioned some of the comments that have been the most impacted by by the Ukraine conflict like grains <unk> energy, we are hedged on those.

In Q4, which put US also in a good position.

But the brand.

Point about.

Availability has been has been around for a long time now before the war.

Every day there is.

There is one raw material that it's short because the supply chain is very tight.

I think that in that sense.

With our scale should be able to navigate.

Better.

So there are examples everyday.

There is a shortage just as an example of green, which is raw materials to do.

In cream cheese, and how do we have a good inventory of that the smaller companies will have difficulty to to have access to that this is an everyday we really have to adapt.

Everyday to our new 12, new problem I think the teams have done a great job in that sense.

And then if you could touch just on bird flu is that a concern at all.

Yes, let me let me touch on that then.

I think first let me give you the historical context I mean, we have seen this before and one thing that is different about this time around is that we have the insight from the lessons were learned last time.

As we looked at it this time around we are flexing our portfolio to address those short term kind of poultry disruptions.

We've had some experience doing this in the past two years on how we actually flex our portfolio. So we can actually be very dynamic in our response the region from which we buy Turkey have not been impacted so far no. We have seen price increases that is true. So while we're using is our strategic sourcing network the Magellan.

Poke about to provide the supply and we will remain agile as we go forward and we're working closely with our retail partners. So that we can navigate the situation. When you bought but again I think we have seen that we have learned in the past we're applying those lessons.

Realities that we're flexing our portfolio in order to navigate through this.

Alright, thank you.

Thank you Brian .

Just to complement to you asked about the exposure to Ukraine.

For us is negligible very small exposure to raw materials in Ukraine.

Our next question comes from Jason English with Goldman Sachs.

Hey, good morning folks thanks for slipping me in.

To echo the earlier sentiments Congrats Chris Euro legend will Miss you and Ann Marie Congrats on the escalation looking forward to working with you more closely going forward.

To the questions and great to see your foodservice momentum I think you gave two statistics for growth in the U S and growth internationally can you give us the blended growth rate across all of foodservice, 12% of sales growing on average.

And.

How close are you to back to pre pandemic levels.

Pretty much closed the gap is thats what is that what's driving the majority of the growth or is this momentum over and above the recovery from Covid.

Okay.

Okay, so not going to quote specific numbers, but both.

International Zone in North America, we are growing north of 20%.

Both okay.

And gaining share.

The cases across the board, which puts us in a very good position.

The way things are trending so far.

Possible, that's already going to be ahead of 2019 levels.

North America, which is also great.

And I would add on the comments from us today.

We are very excited with the foodservice we see.

The difference from the past that was a very transactional channel today that truly transactional sorry strategic channel for us.

It's a great way for us to launch new products.

To test them to sample them with the consumers and then to leverage that sadly.

The trade in the presentation you will have a very recent example of that.

But it's our intention to keep doing that.

So sort of the future.

For sure it makes a lot of sense and I appreciate the comment earlier on AD spend and the commitment to have it be flat if not up as a percentage of sales for the year, but could you unpack a little bit more on the SG&A efficiency this quarter.

It's down pretty sharply year on year is that is that the efforts of your productivity or is there some unique timing dynamics that we should be aware of.

On the SG&A, we have in the first quarter, we are lapping.

A one time gain from last year that did not get repeated.

Pretty much thats whats driving the entire variance that youre asking.

Okay, Alright, Thank you I'll pass it on.

Our next question comes from Ken Goldman with JP Morgan.

Our high end just to echo the prior comments, Chris Thank you for.

All of the help you will have you will truly be missed and Ann Marie congratulations as well on the new role.

I wanted to ask you've highlighted your reduced exposure to private label in the U S. So I don't want to suggest craft is it any particular risk here I'm really just curious if youre starting to see retail customers leaning in a bit harder to their store brands recently, whether it's via incremental displays or other.

Efforts to try and maybe highlight for consumers. Some other offerings that are at lower prices or are there any behavioral changes you're seeing from those customers.

Okay.

So let me take that I would say so far what we're seeing from private label is that they are actually increasing their prices in line with the branded players.

Is the cost of escalating for everyone.

And in terms of Kraft Heinz I mean without.

We are stronger today than we have been in the past. These four specific areas one we actually relatively low private label exposure.

So today, we're at about 11% of the portfolio exposed to private label versus 17% just a couple of years ago, and if you think about that number up 11% versus the industry average of about 20%.

It puts us in an advantage situation. We're also making sure that we are launching products that are differentiated at each wrong with the price ladder. So whether it's entry to mainstream to premium so the consumer can stay with our franchise as their circumstances change where there is a blue box Mac and cheese to a.

Easy Mac, they have something to come into and stay with our icon brands.

And we also continued to improve the product design. So that we can offer better value for their money in and greater ingredient flexibility less waste and lower production cost and actually youll see that in our marketing also as we go forward.

And then finally, we're also leveraging the breadth of our portfolio across categories. So that we can provide comprehensive location based solutions that the whole family can enjoy it so.

In a very good place right now in terms of our exposures and we are seeing kind of a private label being affected by the same way that we have.

Thank you and then a quick follow up for Andre Andre you mentioned that as inflation plateaus, you expect to see your margin percentage rebound I understand that futures curves are volatile but.

Is there an estimate you have for when you expect your gross inflation, including hedges.

Might we be a little bit closer to that.

Maybe some some bearish I'm thinking about.

Thanks for the question.

As we've said before we have been taking actions to protect our margin dollars at this point.

And we want to maintain our ability to invest in the business as Magellan Carlos pointed out which is critical to us.

The current percentage margin is.

Lower than our run rates are conducted that and we expect those margins should recover as costs stabilize.

In addition comes through as been pricing at our last vessel the whole market.

So recoveries over time.

Remember as well that beyond the short done.

Our adjusted EBITDA margin evolution. This should remain consistent with the strategy that we have outlined before but just to have a better gross margins from variable cost efficiencies stronger pricing mix.

And that will help us to fund higher investments in brands and capabilities.

That's what we're seeking here so even though I cannot go to a specific time on when we are going to report where the percentage margin that should that should happen overtime.

Okay. So if you look at the pre pandemic levels, we were in the 35% range. So.

Okay.

Can make take maybe one more question.

Our next question comes from Robert Moskow of Credit Suisse.

Hi, Thanks for the question Chris.

I congratulate you and.

Jealous of you also.

But I guess my question here is can you drill down a little bit more into I think the comment was that your production volume will be up 10% versus a year ago.

But this is an environment, where there is a lot of unknowns about the elasticity and I think a lot of your peers are expecting elasticity to really accelerate by the end of the year. So can you can you give me a sense as to what that 10% increase really means.

And.

Is it is it contingent upon what you see in the demand environment obviously.

Well. Thank you for your question and I think we're all jello, Chris by the way.

Well ill tell you is that.

That we expect an increasing elasticity going forward closer to historical levels. So.

Prices are.

Everything is on the way up and we know that most of the stimulus is gone now today, we're seeing that our system is running about 30% to 40% below historical levels.

Now.

The reason, we're confident about our production is that we are also growing consumption sequentially.

Billed retail inventory levels.

I understand that we are actually making the advancements again many of the supply chain challenges.

Today are actually holding back our market share performance. That's why as we think about the Q1 production up 10%. It is to support the rebuilding that inventory levels that had been still below our historical levels and that we feel confident about continuous into that kind of level of support.

Rob just to add to that so to be clear right. So the production.

You want 10% doesn't mean that we definitely go up 10%. We are just now ramping up production to rebuild inventory levels and there is data.

In our warehouses.

Okay. So we are not changing our inventory policy for the future adjusted to get to that level.

Okay. So youre not saying that production is going to be up 10% throughout the year I thought that was what the comment Matt.

While 10% in Q1 right just to just Q1, Okay last question.

If volume continues to kind of be down in this like 4%, 5% kind of range I think thats, what your U S retail volume was down.

Does that do anything to your fixed cost leverage at.

At the end of the year for us. So it's just going to be so much pricing it doesn't really matter what happens to the fixed cost leverage.

Look.

I think thats, where the inventory reduced discussion comes from interest important because we are rebuilding inventories might also despite the volumes being down we still have to produce a lot that you recover the inventory level. So we don't expect any relevant impact from fixed Cogs.

In this fiscal year.

Got it alright, thank you very much.

Our last question comes from Chris Growe with Stifel.

Yes.

Hi, good morning, Thank you.

Chris just a congratulations to you I'm just thinking.

68, or so earnings reports over the 17 years. So it's kind of crazy when you put it in those terms.

I just wanted to a quick question if I could on the supply constraints to your volume you outlined.

So the.

Chart like a 50 basis point market share decline as a result of those factors how much of a revenue burden was that in the quarter. If you can say that.

The deposit means that it is difficult to kind of back into that.

Right now Chris.

I think so.

From the perspective of kind of rebuilding the inventories and then netted against some of the.

The supply constraints.

And how that translated through the shell. In addition to the Easter shift there's a lot of variables moving through that so.

That's something we want to try to circle back to you.

Fair enough Thats no problem. Thank you go ahead.

Low single digit impact on revenue, but I think the important thing is that we set in the last call. We expect that to continue to lose market share, but we expect that to improve and we did and we did in the places where we said we would which is mostly coming from the places where it has like.

Big constraints at the end of last year, and our perspective should continue to improve the trends moving forward as the service level of course.

Okay. Thank you and just one other quick follow on would be in relation to pricing you have more pricing coming through in the second quarter. When you account for that pricing along with you've got a lot of productivity savings as well do you believe this pricing along with the productivity savings would be enough to offset inflation once it's in place or you can.

Just sort of be caught up now with the level of inflation based on the pricing you have currently announced.

We expect we have been taking actions with inflation that we have seen I think the guidance that you have provided we are already contemplate the inflation that we're seeing even in the forward curves, which by the way that had been sitting on a little bit.

Okay.

So our as of right now with the gas. It provided you our year over year will be ahead of inflation.

Do you guys do catching up a little bit with the inflation that specialize agenda last year, but the year over year based on a precipice ahead of inflation.

Hey.

Okay.

Thank you for that color.

Okay, well, thanks, everybody for joining us today, let me turn it back to Miguel for a couple of closing remarks.

Today's call, saying that is a very exciting time to be at Kraft Heinz and let me tell you why we think Thats way first we are very proud of because.

We've been able to navigate.

Through all of the uncertainties of the last two years at the same time.

We are building a much better tomorrow.

And that's not easy in moments like this.

We are a company too.

Different company today.

Much more growth oriented.

<unk> improved our portfolio mix.

And.

And today.

The platforms.

We are working we have focused and salvation is about 80% of our business to date.

It's big and growing and profitable.

To put it in perspective is bigger and more profitable than Mccormick.

And to give you an example.

We have consistent double digit net sales growth in emerging markets.

Our business in foodservice is strong and growing.

And.

We are investing more in marketing our brands and doing a much better job. So really the profile in terms of growth is very different.

Bromine specialties.

<unk> points.

I think that we are in a much better place not only because of the $2 billion.

As we talked about.

Three years ago, and we delivered last year.

The previous year on gross savings and supply.

Patience is across the board.

From marketing to distribution.

And these partnerships now with technology companies that that will help us accelerate these efficiencies.

Finally, I think that we have a very different situation from a financial flexibility standpoint.

With the discipline, we had it.

Two years.

Put us back in investment grade investment grade then in a record time testing two years.

And going forward, we will continue generating free cash flow conversion at a rate of 100, and we will look to acquire business and capabilities that can be much more powerful when combined with the scale of our portfolio is of course with a lot of discipline in pricing.

So that's why.

It's exciting to be at this moment working at Kraft Heinz Thank you.

And thank you Chris.

Thank you Chris.

Very good.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.

Okay.

[music].

Yes.

[music].

[music].

[music].

[music].