Kraft Heinz Q4 2021 [Q&A] Earnings Call Transcript

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February 16, 2022

There are 16 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the Kraft Heinz Company 4th Quarter Results Conference Call. At this time, all participants are in listen only mode. After the presentation, there will be a question and answer session. Please be advised, today's conference may be recorded.

Operator

I'd now like to hand the conference over to Chris Jakubik, Head of Global Investor Relations. Please go ahead.

Speaker 1

This is Chris Jakubik, Head of Global Investor Relations at The Kraft Times Company, and welcome to our Q and A session 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 the supplemental materials posted on ir. Krafttynescompany.com. With that, let's take your questions.

Operator

Our first question comes from Brian Spillane with Bank of America.

Speaker 2

Thanks, operator. Good morning, everyone. Two questions for me. The first one for Miguel. Just given how fluid the environment is using, I guess, Paolo's words, and just the macro pressures that we're seeing in the market.

Speaker 2

How has that impacted your ability to execute? And are you not executing as an organization, I guess, You know, up to or as well as you would like, you know, just given all the pressure.

Speaker 3

Brian, Thanks for the question. I mean, the macro pressures that you are mentioning, they've been here for a while now. And at the beginning, it was hard to adapt, but I think that this is the new normal and We are absolutely embracing the change of the macro pressures every day. I'm personally very confident about the path forward, First, because of our people. We have today a great team, very engaged and with a low turnover, It's very different from 2.5 years ago.

Speaker 3

Our business is growing and we've been relatively strong When we talk about gross margins, despite the inflation that we are seeing, which in a way has enabled us to keep invest In our brands and our cash flow and balance sheet is almost is much, much stronger than 2 years ago. Now moving forward, I think that what we have to do is even to accelerate The path and the speed To accelerate profitable growth and unlock greater efficiencies, but on that one, I will leave for the CAGNY for us to Speak a little bit more next week. Thank you for the question, Brian.

Speaker 2

All right. Thanks, Miguel. And then Paolo, Wanted to just ask if you could give us a little bit more help with phasing for the year. And I guess more specifically as we're looking at the Taff, are there anything we should consider, I guess, if you're thinking about Q1 versus Q2 in terms of, I don't know, is inflation Or more pronounced earlier in the year, the impact of pricing to help offset inflation, like how that flows? And In the prepared remarks, you talked a bit about or there was some discussion about supply chain.

Speaker 2

So are some of the supply chain disruptions maybe more pronounced Earlier in the year or earlier in the first half than the back half. So just any help you can give us in terms of the shape of the quarters would be really helpful.

Speaker 4

Sure, Brian. So if stepping back a little bit like we closed 2021 very strong. Our EBITDA was $6,370,000,000 in this number, we had approximately $400,000,000 of divested business, So we start from there. We are going to see we are expecting to see the benefit of our sales growth. The combination Of pricing plus efficiencies that we have in our plant, mitigating the inflation, the higher inflation that we are seeing.

Speaker 4

And also we expect some headwind from volume and mix, and we are assuming A more conservative levels of consumption and elasticities as they stimulus and government support states, okay? And again, as you said, we are expecting closer to $4,753,000,000 H1, H2, and this reflects Where we are currently on the inflation versus the price curve that we are implementing, also the recovery, as you mentioned, of the supply chain Constraints that we have that we expect this to improve through the first half. There is also here in terms of the curve, We are going to have this year 53rd week that will benefit our Q4 in the magnitude of $60,000,000 to $70,000,000 That's what we're expecting. And in terms of inside the first half between Q1 and Q2, we expect Q1 to be softer in relation to Q2 because of the timing of Easter shipments that we're going to have this year Thank you.

Operator

Our next question comes from Andrew Lazar with Barclays.

Speaker 5

Great. Good morning, everybody. I was hoping to get, a bit more clarity on the various buckets you broke out in the prepared remarks With respect to the supply chain constraints and market share, maybe could you be a bit more specific on sort of what the one time issues were in the 4th quarter And while you've got visibility to this being fixed by the end of Q1, is the second bucket you mentioned Of supply constraints, simply demand outstripping supply and not necessarily execution related. And then the 3rd bucket, I assume, are brands that are losing share for other reasons than supply constraints. So maybe if you can just sort of give us a little more clarity on those 3 buckets, That'd be really helpful.

Speaker 6

Thank you, Andrew. And it's Carlos, and I'm happy to take it. So as you said in the prepared remarks, I broke this out, but let me give you a little more color on each of those. So firstly, it was The 40% of our share loss in Q4 was, as you said, was due to one time supply and some other challenges. And what I mean by that Things like we saw in places where Philadelphia Creech is, for example, given some packages issues that we had, Do we know what happened?

Speaker 6

Those are related more to whether it was packaging materials in the case of Yaurav Kakimchi's, Whether it was labor in case of Oscar Mayer bacon, so we have visibility on those and we know that we are able to actually come back and recover in Q1. The second bucket is around the 30% that was really due to more think of those as more production constraints That we actually expect to resolve in the first half to exit them in a good place as we end Q2. And those are things where the actual production What's driving the constraints? So think of those as Heinz gravy where capacity is limited and we were able but we are now doing things In order to free capacity to service the high demand that we're seeing, whether that was in places like launchables, where we have some Ongoing labor constraints that we are solving and we'll be able to again execute Q2 in a much better way. And then the 3rd bucket, In some essentially is there are categories and frankly they're tilted towards frozen categories where we're actually looking to implement new game plans this And think of those essentially as new creative ways in which we can deliver strong demand.

Speaker 6

And when you pull it all together, I can tell you that we have the clear visibility on what needs to be done and we actually have Clear actions as well to make sure it happens. So feel very good as we exit both Q1 and Q2 to recover this. Thank you. Thank you.

Operator

Our next question comes from Chris Growe with Stifel.

Speaker 7

Hi, good morning. I just had a quick question for you to understand, I think this kind of follows on your answer there Carlos and Andrew's question. The production constraints you had, I think you said like 30% of the share losses. Can you help quantify like what that how much that weighed on sales? What the listening opportunity was in the quarter?

Speaker 7

And then I also I'm just curious around that, you did talk about in your prepared remarks or the Pre recorded remarks about a real focus on market share in 2022. Just want to get a better sense of kind of your expectations there And then how that could affect, say, volume and pricing and promotional efforts, that kind of thing for the coming year? Thank you.

Speaker 6

First of all, thank you for the question. I will say rather I think it's a little bit difficult to quantify the share to the volume. What I can tell you is those are in that last 30%, those are categories again that we continue to see Opportunity for us to serve as consumer demand in a stronger way. So we are something that is focused for us And we are the reality is that we are being we are actually thinking through very creative ways in which we can actually satisfy that demand going forward. And to your point around our focus on share, absolutely.

Speaker 6

For us, it's something that we as a company take very seriously. We mentioned the fact that we have great bright spots within our business, big iconic brands that have been growing quite a bit of share. But as we think about going forward, we want to make sure that it's consistently across our businesses and us being able to deal with recovery in both in Q1 and Q2 as we exit the

Speaker 4

I was

Speaker 7

going to add real quickly just that many times a focus on market share can imply Heavier promotional spending, those kinds of things, it sounds like you've got more new product innovation, those advertising, those kind of consumer pull More than consumer push to generate that market share. Is that fair to say?

Speaker 6

I think for me, Whenever I talk about market share, think of it as profitable market share. I've been working in food company for a number of years And there is no substitute to make sure that we whenever we think about market share, it has to be done in a proper way. We have to make sure we do everything that we do is with a consumer first approach to make sure we in fact bring in consumer solutions, Whether that is occasion based, in store and online, we'll always focus on making sure that it's done with a drive on profitable market share growth.

Speaker 8

Thank you.

Speaker 6

Thank you.

Operator

Our next question comes from Alexia Howard with Bernstein.

Speaker 9

In the Q4. When you reported at the end of October, you were talking about adjusted EBITDA, I think, in the $6,100,000,000 to 6 $200,000,000 range and it came through at $6,400,000 That's a big step up for the last couple of months of the year. So Could you just walk us through what the positive surprises were and whether those are likely to continue? Thank you, and I'll pass it on.

Speaker 4

I think I hi, Alexia. Paolo here. I think I can take this one. I think we saw we were able to even with Many constraints. We were able to produce better.

Speaker 4

It's fair to say that if we're able to if we had more capacity, we would have sold even more, But we were able to operate in terms of volume and capacity better than we planned. And also our Promotion strategy came in better than we promoted less than we were expecting initially. I think Those two areas together with over delivering in terms of efficiencies, I would add this third point, What are the main factors to of the our strong performance in the 4th quarter?

Operator

Our next question comes from Rob Dickerson with Jefferies.

Speaker 10

Great. Thanks so much. Just a question and the commentary around expected stronger consumption in 2022. That was despite higher pricing and you said you being somewhat conservative, it sounds like on the volume side As you look to your internal forecast, I'm just curious, when you come up with those forecasts, As we think about like back half of the year, right, is the feel that you might just be a little bit better positioned given price points, Maybe a little bit more or let's say better position with respect to trade down risk. I'm Just trying to get a sense as to why you think consumption would actually be up at least in the at home channel?

Speaker 10

And then I have a quick follow-up.

Speaker 4

Look, I can start here and maybe Carlos can complement if he feels the need. What we have embedded in our outlook is that we are again, we are going to we As we said, low single digit organic sales growth in this year with greater contribution from the growth platforms that we have, Our foodservice channel is also recovering and gaining share in all the emerging markets Performance and our continued strong performance through distribution. And also, as I was mentioning before, Some relief of the key supply chain constraints that as the year progresses. But we as we were We also are embedded in our forecast, in our expectation some headwinds in volume An impact in volume in 2022 because we are taking into considerations the fact that we are going to be lapping steams from the government Support that happened and also a more conservative levels of elasticity than we saw before. But net net, So that is that we are we have assumptions that we have assumptions that are more conservative in terms of elasticity

Speaker 6

Renovation of our brands, driving disruptive innovation and continue to service new occasion based solutions, whether that for in store, online, for today's consumers' needs. So that continues even as We are continuing to progress throughout the year. Thanks for the question.

Speaker 10

All right, super. And then very quickly, Paolo, You've done a very nice job of improving your leverage positioning the end of the year still with a decent cash balance. Should we just be thinking as you go forward that kind of use of cash would either be for kind of smaller add on acquisitions or just kind of an ongoing You leverage cycle as you get through 2022. That's it. Thanks.

Speaker 4

No, sure. We As you know, like our leverage target is below 4 times and we are well below that level today, and we expect to remain consistently below that going forward. Just want to highlight one point here. Investment grade for us remains really strategically important. And we have enough flexibility today in our balance sheet, in our capital structure to continue Vallejo Portunes to accelerate our strategy In an accretive way and with price discipline, but we are really closing out the way that we are today in terms of Flexibility in the balance sheet that we have, we feel the company in a very strong position.

Speaker 10

All right. Super. Thank you so much.

Speaker 11

Thank you.

Operator

Our next question comes from Pamela Kaufman with Morgan Stanley.

Speaker 12

Hi, good morning.

Speaker 3

Good morning. Good morning,

Speaker 13

Ken. Good morning. Can you comment on where overall inflation came in for 2021 and what assumption you're making for inflation in 2022? And then, I guess, just how much of your costs are covered For the year,

Speaker 14

what your visibility is

Speaker 13

on the cost outlook?

Speaker 4

Sure. So let me take that. Our Q4 inflation were higher than we expected in our October call. We ended up like With a low double digit. But for 2022, we are likely to see We're expecting today a near over inflation of low teens for the full year, okay?

Speaker 4

And we expect this inflation to be higher in the first half than in the second half. And just to complement, by the end of last year in 2021, we took the necessary actions to mitigate the inflation We are seeing and since then, more inflation has come, and we are taking these additional actions as we've been discussing. And we are when you look about in terms of our hedging position, we normally hedge Although we hedge a more significant part of the commodities, when you talk about our total COGS, We only hedge around 20% to 30% of the COGS. So because there are a lot of other costs that are not Only commodities in our cost. So again, that is the range that we have ahead.

Speaker 4

So it's not

Speaker 13

Thank you. That's helpful.

Speaker 3

Thank you.

Operator

Our next question comes from Ken Goldman with JPMorgan.

Speaker 15

Hey, good morning. Thank you. I'm curious, in your guidance for 2022, how much does the outlook require or bake in, I guess, what I would consider rational behavior from your competitors. In other words, are there any assumptions that as the consumer maybe gets a little bit more stretched As prices rise a little bit, as some of your competitors also add to their capacity, is there any expectation built in that there might be You talked about elasticity certainly being there, but maybe a little bit more of an aggressive stance from some of your rivals. I'm just trying to get a sense for what's baked in.

Speaker 6

The only thing I think that I'm not going to comment on what they're doing and how they're going to run their business. So let me tell you a little bit about How I see our business and why I feel good about the way kind of we think about us going forward. For us, the important thing is to make sure we continue to Investing in a differentiated portfolio and we're doing this because we actually are able to provide consumers Whether it's an entry into the category, a mainstream product or a premium product, consumer actually have a way in which to acquire product from Kraft Heinz. And you see that in places like Mac and Cheese, where it go from an Easy Mac to the original version of Mac and Cheese. We also are continuing to strengthen our portfolio because as you know, we have made some important divestitures that really have Reduce kind of our exposures to private label and other places where historically has been more competitive.

Speaker 6

In fact, we've gone from 17% of exposure to private label to now 11%, which and I think its industry average is around 20%. So we also we are making investments. We have a place in which consumers can come into the category. We're less exposed to historically private level businesses. And we continue to make sure we're offering great quality products at prices that consumers can afford.

Speaker 6

So We are focused on making sure that everything we're doing is around delivering great value, meaning quality products in a way that is accessible to consumers. That's what we're focused here in Kraft Heinz.

Speaker 15

Makes sense. Thank you. And then very clear follow-up. Thank you. For the gross margin, the streets modeling Pretty flattish figure in 2022 versus 2021.

Speaker 15

Recognizing you don't provide specific guidance for this line item, Just directionally, I guess, is it fair to say that gross margin is more likely to be down than flat? Just especially in light of, I guess, your reminder this morning that In the context of inflation, you're aiming to recapture gross profit dollars, not necessarily percentages.

Speaker 4

Yes. Listen, when you think about as cost stabilize and price realization and efficiencies continue, Our margin percentage will normalize, okay? As we have mentioned before, we are expecting lower run rate margin percentage levels At the beginning in the beginning of this year, and our actions are to protect the dollar profitability. So we're protecting the dollar margin

Operator

Our next question comes from Steve Powers with Deutsche Bank.

Speaker 8

Yes. Hey, and good morning. Thank you. Following up on the topic of elasticity, I just wonder if you can provide any more context in terms of your assumptions for the coming year In that regard and really any variation you're thinking about and we should be thinking about How elasticity is anticipated to maybe vary across your platforms or across your geographic regions?

Speaker 6

I think, listen, I'm guessing that you're referring mostly to our U. S. Business, so let me just take that up first. I think so far, and Paolo spoke to this a little bit earlier, other expectation for electricity have proven to be conservative. So as we go forward, we're expecting some of those more, I would say, normal levels of elasticity to impact in 2022.

Speaker 6

And just to be clear, our outlook contemplates both those elevated levels of elasticity and the continued investments on our brand value proposition. Now when you look at overall kind of how the way we look at the businesses that demand really has remained pretty much intact. So the inflation, which is, as you know, being broad based and not specific to anyone Casa Goli, it's really going to be back to everybody similarly. Now If you look at it deeper, personal spending on food has been more stable than disposable income or even discretionary spending over time. And if you go even further, when you look at Kraft Heinz specifically, the reality is that we have, as I said earlier, quality products In categories in which we can compete at a price that is affordable to consumers.

Speaker 6

I mean, just to give you a sense, I mean, when you think about Kraft Mac Cheese in our blue box is about $0.50 per serving. If you think about Oscar Mayer hotdog, it's about $0.25 apiece. If you think about Heinz Ketchup, it's about $0.10 an ounce. So those are things that we continue to feel strong about because we have a way in which to create great quality products We're thinking around how do we boost quality in our products while reducing cost, essentially making sure that we give consumers exactly what they're looking for And now the things they don't need. And lastly, we're also making sure that we're investing in better creative and communication So that we have in fact stronger relevance of our brands that actually are helping us make sure that we continue to drive better renovations, Innovations in a way that matters to what consumers are looking for us today.

Speaker 8

Thank you. Okay, great. If I could follow-up on a different topic actually. There's a good deal of discussion about Your strategy to expand and drive growth in emerging markets. And I guess as we think about, the strategic investments that you've embedded in the 22 plan.

Speaker 8

Can you just talk about the sort of the allocation of those investments in your Developed markets versus your emerging markets and just how much of an accelerated push towards the emerging markets you're thinking about and we should be thinking about

Speaker 11

Hi. Maybe I can take it here. It's Hafez speaking. Look, we continue to be very optimistic of our strategy. We focus on emerging markets, right, and the acceleration.

Speaker 11

And I mean, we continue to expect a double digit organic growth, further gains on market share In the future and leveraging our repeatable go to market model. I mean, this has been live in about 30% of the countries We operate today in emerging markets, and we look to continue growing this and boosting our go to market further In 2022, so I mean, the strategy remains the same. We'll play as we've been doing. We did Four acquisitions in 2021 add ons in different markets that enable us to Expand within our taste elevation focus in specific countries that we see a big opportunity for growth. So that strategy should remain is paying off and we will continue.

Speaker 3

And Rafael, I would just add that the engine for growth in these emerging markets is really the brand Hynes That is in unbelievable shape and getting better every day from a consumer standpoint, which gives us a lot of opportunities For growth, to expand Heinz further, not only CATU, but other products. So Emerging markets will continue being a great engine of our growth.

Speaker 8

Okay, very good. Thanks to you all.

Speaker 1

Thank you.

Speaker 6

Thank you.

Operator

That concludes today's question and answer session. I'd like to pass the call back to Chris Jakubik for closing remarks.

Speaker 1

Well, thanks everyone for joining us today for follow-up questions. Myself and the rest of the IR team will be available For any additional questions, but thanks again for joining us today and we'll see

Speaker 3

you at CAGNY next week.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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