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spk13: Good day and thank you for standing by. Welcome to the Kraft Heinz Company second quarter 2021 business update call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To 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 0. I would like to hand the conference over to your speaker today, Chris Jakubik, Head of Investor Relations. Please go ahead.
spk09: 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 second 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 with GAAP results. And you can find the GAAP to non-GAAP reconciliations within our earnings release and the supplemental materials posted at ir.krappteinscompany.com. Before we begin, I'm going to hand it over to our CEO, Miguel Patricio, for a few quick opening comments.
spk11: Miguel? Thank you, Chris. And thank you, everyone. I'd just like to add or summarize and tell you that we are very optimistic about how we are progressing in our transformation at Kraft Heinz. We've been taking advantage of the scale that we have, and we've been building the agility that we need to build a better business for the future. We posted sustainable top-line and bottom-line gains versus 19, and we are encouraged because the strongest growth comes from priority platforms and markets, what we call the growth platforms, taste elevation, and in emerging markets. And we continue seeing retail very strong, and we are coming back with food service. It's recovering and recovering fast. Transforming Kraft Heinz is what we all have in mind, and we want to do that, maintaining the industry-leading profitability. We are investing more in our brands and better as well, building a much more creative company. We are also on track to deliver the $400 million of gross efficiencies in 2021. and effectively managing the inflation. At the same time, we continue strengthening our portfolio and improving financial flexibility. We are adding capacity to our products to drive growth and energize platforms and in the emerging markets. We, as you know, closed the nuts divestiture, and we expect to close the cheese divestiture in the second half of this year. Recently, we acquired Assam Foods in Turkey. It's a very small operation, but it's a very important step into our strategy because it accelerates taste elevation and is in emerging markets. And we continue to pay down debts 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 strength and potential of our ongoing business. Thank you.
spk12: We are all now waiting for your questions. Ladies and gentlemen, to ask a question,
spk13: You will need to press star 1 on your telephone and to withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from Chris Grohl from Stifel. You may begin.
spk08: Hi, good morning. I just had a quick question for you, if I could, please, in relation to pricing. I was just curious if you could maybe give a little more color around the price realization and how you expect it to kind of build for the second half of the year. And just as a backdrop, as I look across your categories, in some cases, Kraft's pricing is above your category, some a little below, but all in all, like the IRI data in the U.S. would say, you're pricing at a little slower rate than what the categories are overall. So I'm just curious... if that's strategic in helping drive your share gains or if that's just timing and there's more pricing coming in the second half of the year. Thank you.
spk11: Okay, thank you for your question. Let me start and then maybe Carlos and Paulo can give you more color on that. You know, as I mentioned on the call, we believe that inflation in our business remains manageable. And even with inflation, we expect to deliver, as I said, a stronger 2021 than we projected before. We continue to invest in our brands at the anticipated levels to drive our transformation. And we will continue to monitor things and take further action if, of course, it's necessary. But, Carlos, maybe you can give more color on it and maybe Paulo as well.
spk04: Sure, Miguel. Thanks for the question. First, I think I will say is, you know, in the U.S., what we have said in the past is that 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 at the inflation we saw in Q2, it's mainly coming from ingredients, things like soybeans, edible oils, packaging, and some transportation as well. And it's very similar to what we saw in the first quarter. And most recently, we also saw some increases too, but driven by resting costs and and some higher transportation rates. Now, from a pricing perspective, as I mentioned on the call, we are restoring key promotional activations to drive the business versus the pandemic-induced pullbacks that we had in 2020. Now, as we had mentioned earlier in the year, our goal continues to be to connect with consumers that now have discovered or rediscovered our brands and drive the repeat rate among those households. So in that context and versus inflation, again, we feel good about our ability to achieve the net pricing we need to offset inflation and maintain strong household and repeat rate. Given that we are renovating our portfolio to drive better value for consumers, improving the creative content of our marketing and strengthening and diversifying our media impressions. What I will also add is that we're doing this primarily through four key revenue management initiatives. First, we're optimizing the frequency and depth of our promotion while we restore retail activation levels that I discussed in 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 other revenue management levers including price pack architecture and managing a category price ladders. So if you look at 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. Now 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 an outlook. And we see net pricing and cost coming into balance as we exit the year. And with that, let me pass it up to Paulo. Any other comments you want to add, Paulo?
spk05: Sure, Carlos. I think if we want to frame inflation and pricing from a total company perspective, To break it down first on inflation, we're going to recall that in April, we said that we're expecting inflation in the mid single-digit range as a percent of COGS, but at the lower end of that range. Since April, our costs have continued to move higher. Now we're expecting inflation 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. Regarding pricing, As we are mentioning, and Carlos has just said, we are using multiple revenue management levers, including least price actions to manage the inflation. But I think it's important for us to keep in mind that we're going to be facing an unusually difficult pricing comparison in the second half last year. Just to remind, just for context, last year, second half, our price was more than 4% higher than the prior year. Whereas we pulled back on promotion to better protect customer service. In terms of the timing and the pricing realization, why we expect the timing of the cost inflation versus price realization to soften our margin percentage to lower than the run rate levels in 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, we are still expecting, or now we're expecting, even stronger EBITDA dollars than we anticipated before.
spk12: Thank you for the caller.
spk13: Our next question comes from Alexia Howard from Bernstein. You may begin.
spk01: Good morning, everyone.
spk13: Good morning.
spk01: Can I ask... Yes, thank you. Can I ask about the... the gross margin. I know that it doesn't really appear anywhere except in the formal numbers in the press release, but it looks as though it's down about 150 basis points year on year. I imagine that some of that might not be adjusted gross margin, but in a situation of such intense commodity cost pressures as we're going through now, I'm just wondering how you're expecting that to shape out in the back half of the year, possibly out into 2022. Any commentary would be much appreciated. Thank you.
spk05: Alex, I can start here with this answer. I think, yes, there are some adjustments to make in the gross margin, but when you think about year over year, I think we need to remember that you're going to be lapping. We were lapping Q2, a big quarter last year with all the pantry loading that happened in the quarter. So our overall margins of the business are very healthy in this Q2. So I think in the second quarter, we were able to price and we had enough pricing to offset. Pricing plus our efficiencies were more than enough to offset the inflation that we had. But we were compared to a very heavy mix that we had in the last quarter. great and going forward um how do you expect it to change in the back half going forward what is exactly i think the key components that we are going to see in the back half is that we're going to start to have and that's already embedded in our outlook okay you know we're going to start to having the the the the restoration of some promotions that carlos mentioned Also, the mixed impact that we're going to see as the year goes on, and also this timing between pricing and pricing realization and inflation will impact our gross profit. All those impacts are already inside the outlook that we disclosed.
spk01: Great. Thank you very much. I'll pass it on.
spk13: Our next question comes from Andrew Lazar from Barclays. You may begin.
spk00: 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 want 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 22 versus 21. And I guess I'm just trying to get a sense of, at this stage, would that still be the expectation 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 at-home eating benefits sort of shifted this thinking at all? Thanks so much.
spk11: Let me... And then, you know, maybe, Paulo, you can bring more precise numbers to Andrew. We are expecting 2022 to be better than the strategic plan that we presented to you. And why is that? I think, you know, our transformation is ahead of our plan. We've been, you know, beating our plans and our budgets, and we are optimistic and continue investing toward the future. It is still too early for us to be talking or to give you guidance about 2022. With all the volatility in the market, I think it's prudent not to go further on that.
spk05: So, Andrew, just to complement here, I think as the year progresses, as Miguel mentioned, More in the late in the year, we will be providing more clarity about how we're seeing the 2022. We are not discussing this today, but we can say that we see inflation as a consistent thing for us and for the industry ahead of 22 and all those initiatives and actions that we're doing in terms of revenue management initiatives. to manage the inflation, we're seeing based on expectation that the inflation will continue into the next year. I think those initiatives together with our savings program of a $2 billion savings program will be sufficient together with investments that we're making to improve the relevance of our brands. So again, we are very confident around our ability to manage the inflation and support the investments behind our turnaround as we are exiting 21 and entering 22. Thanks, everyone.
spk13: Our next question comes from Brian Spillane from Bank of America. You may begin.
spk06: Hi. Thanks, Operator. Good morning, everyone. So I've got a question, I guess, for both Carlos and for Rafa, if you could both comment on this. You know, in the quarter or even year to date, you know, that currently we're seeing basically all channels are up, right? I think it's been sort of one of the surprises as we've moved through 21 is that as away from home and food service channels have improved, the at-home consumption has also stayed relatively elevated. So I guess my question for both of you is just simply, you know, how long do you expect this to continue? And I guess as things normalize, would you expect the food service piece of it to really begin to, you know, accelerate more and somewhat offset the at-home consumption? So just trying to get a sense of how you're thinking about those two channels, especially since, you know, right now they're both up.
spk04: Listen, first of all, thanks for the question. I think it's very fair. let me start and then I'll have Rafa kind of give a perspective on international. I think in the U.S., from an industry perspective, you're 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 home and at home ultimately is going to kind of all net out. Now, recently, it does seem like old channels are growing, but that's probably not likely to remain the case, and And that's not building into our expectations. Now, in terms about our business, what we see is we're optimistic about our plans that we can actually drive sustainable growth in both the retail and the food service. And I think it's fair to say that we also have big ambition from away from home business. We believe food service is actually both a generation of insights and innovation that can actually help in the retail side of the business. And it's also capable of driving outside growth because we have actually put a new focus on culinary distribution and channel expansion. And some of those channel trends, while still normalizing, it's still a little bit early to say predicting exactly what it's all going to happen. Now, what I do say is that I do believe we're going to be stronger versus what we saw pre-pandemic and essentially for two key reasons. You know, first, because our food service mix favored the QSR. And actually, that stands to recover, and we're seeing that already faster than the rest of the food service channel. And we also see that be more resilient post-pandemic. And frankly, early in the pandemic, we also made a strategic bet to support that growth in QSR, and that bet is paying off. We now have 30% more capacity in our small packet of ketchup and sauces than So that actually has been seen to be working. And secondly, we see a more durable step up in home consumption that comes at the expense of other categories and brands without necessarily sacrificing food service recovery and growth. And then lastly, let me just give you a little more call on the way from home. I mentioned that we gained a point of market share, food service recovery begins, and much of that actually was fueled by the actions we took in three areas that I mentioned earlier. culinary distribution, and new channels. So in Q2, we actually executed nine co-branded culinary limited-time offers with QSR partners. Just one of those was actually so successful because it became part of a permanent menu item, and now it's going to be in 22. And if you think about that context of the fact that we've been able to drive those kind of limited-time offers with QSR, In 2019, we had none of those. So we are certainly driving a different level of execution with QSR. Now, the second part of that, which is distribution, we actually grew key accounts by 20% over this quarter. And then finally, you know, as consumers continue to evolve how they cook and they eat and including the use of meal delivery kits, we're actually inserting our Kraft Heinz brands into that equation. So we are working with one popular direct-to-consumer company to develop things like a recipe specifically for a Philadelphia cream cheese as a main ingredient of their products. And that actual product was ordered over 200,000 times by consumers, really an all-time record for that sales partner. So when you look at it holistically, again, I feel very optimistic about away-from-home business. and that it actually is going to be a springboard for us to continue to drive retail growth. Now, that's a perspective in the U.S., and Rafa, if you want to add something in terms of the international business, how you see it.
spk03: Yes, thank you, Carlos, and hi, Brian. Look, on balance, our developed markets are experiencing very similar trends to retail and food service in the U.S. and Canada. Emerging markets, on the other hand, food service, has actually rebounded stronger than in developed markets. And most countries either had shorter or even stricter lockdowns, but kept their economies open during the pandemic overall. So, I mean, the consumption obviously differs country by country, in home and out of home. The path of the pandemic, lockdown approach, vaccine availability changes a lot. And given the Delta variant now, it's a bit early to tell how the channels, where the channels will stabilize, right, in the second half. But all that said, I mean, we are seeing a lot of improvements on the retail channels, especially in taste elevation, and giving us, like, a lot of confidence that will come out of the pandemic well-positioned, right, after the pandemic. On the food service side, our mix is even more weighted towards QSR than the U.S. is. And this format is recovering very quickly. So with distribution gains in emerging markets and the potential of the food service that we still have across our overall international, I'm still quite optimistic that after the pandemic ends, the net will be quite positive.
spk06: Okay. Thanks, Rafa. Thanks, Carlos.
spk13: Our next question will come from Ken Goldman from JP Morgan. You may begin.
spk02: Hi, thanks. Would you ever reconsider your policy of not guiding to annual sales and EBITDA? I realize 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 what's a, I guess, quote, good or not quite as good print if Outsiders had a basic bar against which to compare results, and I guess in that way we could 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's life slightly easier, too.
spk05: Thanks for the comment, Ken. We will discuss this internally, and we'll let you know.
spk14: Thank you.
spk13: Welcome. Our next question comes from Jason English from Goldman Sachs. You may begin.
spk10: Hey, good morning, folks. Thanks for slotting me in. A couple quick questions. So you guys mentioned that you've implemented pricing actions, begun to raise those prices. 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?
spk04: Well, let me just say, Jason, that, you know, I guess let me give you a little bit more context, which is, you know, if you think about our portfolio, we're really more diverse than most of the peers that we compete with. So our approach to pricing is not unique and in terms of just having one solution. So we are, we have to be more precise in certain categories and really bro strokes across entire portfolio. So what I can say is our actions that we have taken in pricing covered the majority of the portfolio. And that actually has quite a bit of wide range of percentage increases. So it's hard to kind of give you a specific answer. Now, what I'll tell you is that, we have taken actions to mitigate those incremental inflation that we're seeing, that we feel comfortable in our 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. Thanks for the question, Jason.
spk10: Thanks. But you don't know what your weighted average price increase is across your portfolio?
spk04: Listen, I mean, I think It's something that, you know, for us, it's not something that we're going to be discussing and, you know, but happy to, you know, continue to have the conversations about, you know, how we are responding in this moment and how we are feeling that it's very much a manageable solution from us.
spk10: Okay. And one more then just on the inflation. Can you give us the quantification of what the rate was in the quarter and what you expect in the back half? I see the total for the year going from low-end and mid-singles to high-end. I'll just zoom in a little bit on the near term. Thank you.
spk05: It's pretty much in that range, Jason. You need to remember also that in the Q2, we have a higher pressure on the meat commodity, especially in bacon. But I can tell you that in the first half of the year, our inflation rate was in the very low end of the mid-single-digit range, including this big four component. And that's the range that we saw for the quarter, too.
spk10: Okay. Thank you. I'll pass it on.
spk13: You're welcome. Our next question is from the line of Carla Casea from JP Morgan. You may begin.
spk07: Hi. You mentioned that you're maintaining your leverage target below four times, and you're currently at three. Would you ever think of changing that target to lower it, or are you leaving that flexibility just given your outlook for either the business or other potential either M&A or shareholder-friendly activity?
spk05: Thanks for the question. We are keeping, we are not changing that target of leverage to be below four times in a consistent way. Let's remember also that this 3.1 times that we close, that would go to 3.4. if we adjust by the EBITDA that we lost, that we're going to lose, right, the pro forma adjusted for the EBITDA of nuts that we divested. But, yeah, our idea is to keep the same policy and to give us more flexibility to accelerate our strategy. And, again, we are going to operate with this flexibility going forward.
spk07: Okay, great. Thank you.
spk09: Maybe just one more question.
spk13: And our last question will come from Robert Moscow from Credit Suisse. We'll begin.
spk14: Hi. Thanks for the question. Maybe a two-parter. One is, do you think that you will increase media again in 2022? And then the second question is, you know, regarding what's changed versus planned, it would seem like the biggest change has been the categories. You know, your category growth, or at least resilience, has been much stronger in 2021 than expected. I think you entered the year expecting market shares to grow. So maybe you could decompose those two things as to, you know, which of those really drove the outperformance in 2021. And then also for your back half guidance, you know, second quarter categories have been pretty resilient. Are you expecting a drop off in category performance in third and fourth as people go back to work and consumers go back to school, specifically North America retail?
spk11: Let me answer the first part regarding marketing and media, and I will pass the second one to Carlos to talk more specifically about categories in the U.S. Let me say that, first, we are excited about the changes that we have been making in our marketing programs and capabilities. We've been investing not only in our brands, but also in our people. This is an area that I'm very passionate about, given the importance that it has to drive our growth. We are driving improvements actually in a couple of ways. The first one is more marketing dollars. We have $100 million more in marketing than we had in 2019. And we said that we want to increase marketing moving forward. So it's our intention. However, I think it's not only about increasing marketing, it's really about efficiencies. We are today achieving 30% more of our consumers with the same spend by doing better marketing. Not only better marketing, but also better media. And Third, I think they're very excited about stepping up on creativity in our company. Today, we started an internal agency in digital media in Canada in May last year and today we have 12 of these internal hubs in different places covering more than 30 markets around the world and that is critical for marketing efficiency because it's faster, better, and much more creative. And we can really have marketing linked to the culture and need to be very fast on that. So overall, that would be my question for answer for marketing. Carlos, you may answer the second one.
spk04: Sure. I can just build on your point, Miguel. You know, specific to market share and our performance, I would say, you know, we are we're up to a very solid start to the year. And you saw in the presentation, you know, we are seeing household penetration and repeat rate growth rates much higher than pre-pandemic levels. And we are gaining share in actually 58% of the business and it's an improvement from last quarter and certainly from what we saw in 2019 pre-pandemic. You know, and I think that When you take a step back and you look at overall performance, I think what we are proving is that our consumer platform approach, our focus on renovation, innovation, and marketing, and our resale activations, they're all working. Now, as we're going forward, we will continue this agenda. We're going to increase support around key holidays while using price, promotional optimization, and as I mentioned earlier, all 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 capability performance. But I would say the most important is that we believe we're in a strong position to balance share with profitability to continue to deliver strong returns. So thanks for the question.
spk05: Just one comment on that, just to build on what you're saying and the question here on the outlook. I think it's also relevant to say that while our outlook implies a lower EBITDA margin in the short term, in the second half, in the Q3, we don't think that that 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 when our price realizations start to catch up in our results.
spk14: I'm sorry, I want to press a little bit more. This is really a question about your categories. Do you expect your categories to face pressure in 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 it'll look more similar to second quarter?
spk09: Yeah, let me just give a perspective, I guess, at least in the U.S.
spk04: piece. You know, I mentioned that there were several factors that is kind of taking consideration how the categories are behaving. And I think that they are, you know, three things in particular that we are looking at. You know, that there are certain things around the fact that they are hybrid working schedules. You know, we see in the home purchases and the renovations and the new consumer preference that are actually likely to keep people at home the high level of home consumptions that we have seen in the past. We've also now seen the Delta variant and the rising case counts across the U.S., and those are factors that we're also closely monitoring, and in particular because they're important in terms of thinking about how families are preparing for the upcoming school year. So, you know, I think that all things that are important that make it very difficult for us to say at this point exactly how this is all going to shape out. What I can tell you is that we are focused on those things we can control. So we are focused on making sure we improve our agility and execution, as Miguel said, that we continue to invest behind our brands to build relevance and compete for those occasions through our consumer platform-based approach, regardless of how we see this happening and unfolding. And, you know, so far we are pleased with how we are showing up. So we believe we can continue to see the fact that we are able to drive the household penetration repeat rates. And I mentioned earlier in the call, you know, right now you see all channels growing, but realistically that is not right now our expectations as we go through the second half.
spk14: Okay. Thank you for indulging me. Appreciate it.
spk09: Great. Well, thanks everyone for joining us today. If you have any follow-up questions, Investor Relations and the media teams will be available for your follow-ups. But thanks everyone for joining us today.
spk13: This concludes today's conference call. Thank you for participating. You may now
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