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spk15: This conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. Thank you. Thank you. Good day, and thank you for standing by. Welcome to the Kraft Heinz Company fourth 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. To ask a question during this session, you'll need to press star, then 1 on your telephone keypad. Please be advised today's conference may be recorded. If you require operator assistance during the call, please press star, then 0. I'd now like to hand the conference over to Chris Jakubik, Head of Global Investor Relations. Please go ahead.
spk21: Thank you. And hello everyone. This is Chris Jakubik, head of global investor relations at the graph times company. And welcome to our Q and a session for our fourth 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 FCC. We will also discuss some non gap 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.KraftHeinzCompany.com. With that, let's take your questions.
spk15: If you'd like to ask a question at this time, please press the star, then the number one key on your touchdown telephone. Please stand by while we compile the Q&A roster. Our first question comes from Brian Spilling with Bank of America.
spk06: Thanks, operator. Good morning, everyone. Two questions for me. The first one for Miguel. You know, just given how fluid the environment is, using, I guess, Paolo's words, and just, you know, the macro pressures that we're seeing in the markets, You know, how has that impacted your ability to execute? And, you know, are you not executing, you know, as an organization, I guess, you know, up to or as well as you would like, you know, just given all the pressure?
spk14: Brian, thanks for the question. I mean, the micro-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, which is very different from two and a half years ago. 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 investing in our brands and our cash flow and balance sheet is much, much stronger than two years ago. Now, moving forward, I think that's 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 Cogni for us to speak a little bit more next week. Thank you for the question, Brian.
spk06: All right. Thanks, Miguel. And then, Paolo... I 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 first half, are there anything we should consider, I guess, if you're thinking about first quarter versus second quarter in terms of, I don't know, is inflation more pronounced earlier in the year, the impact of pricing to help offset inflation, like how that flows? And also... You know, in the prepared remarks, you talked a bit about or there was some discussion about supply chain. So are, you know, some of the supply chain disruptions may be 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.
spk10: Sure, Brian. So if stepping back a little bit, like, We closed 2021 very strong. Maybe that was $6.37 billion. And in this number, we had approximately $400 million of divested business. So we start from there. We are going to see, we're expecting to see the benefit of our sales growth, the combination of pricing plus efficiencies that we have in our plan, mitigating the inflation, the higher inflation that we're seeing, And also we expect some headwind from volume and mix. And we are assuming more conservative levels of consumption and elasticities as the stimulus and government support fades. And again, as you said, we are expecting closer to 47.53, 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 to $70 million. 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 and also the timing that we are executing our pricing. Okay.
spk05: That's helpful. Thanks, Paulo.
spk10: Thank you.
spk15: Our next question comes from Andrew Lazar with Barclays.
spk17: 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 fourth quarter and why 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 third 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 three buckets, that'd be really helpful.
spk11: Thank you, Andrew, and I'm happy to take it. So as you said, you know, in the prepared remarks, you know, I broke this out, but let me give you a little more color in each of those. So first it was the 40% of our share loss in Q4 was, as you said, was due to one-time supply losses. and some other challenges. And what I mean by that is things like we saw in places where Philadelphia cream cheese, for example, given some packages issues that we had, that we know what happened. Those are related more to whether it was packaging materials in the case of Philadelphia cream cheese, whether it was labor in case of Oscar Murray 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 then in a good place as we end Q2. And those are things where the actual production was driving the constraints. So think of those as, you know, 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 two in a much better way. And then the third bucket, you know, in some essentially is during categories and frankly, they're tilted towards frozen categories where we actually looking to implement new game plans this year and think of those essentially as new creative ways in which we can deliver strong demand. And, you know, 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. So thank you. Thank you.
spk15: Our next question comes from Chris Grote with Stiefel.
spk03: Hi, good morning. Good morning. I just had a quick question for you to understand, and I think this kind of follows on your answer there, Carlos, and Andrew's question. The production constraints you had, I think you said they're like 30% of the share losses. Can you help quantify how much that weighed on sales, what the missing opportunity was in the quarter? And then I also am just curious around that. you did talk about in your prepared room or the pre-recorded remarks about a real focus on market share in 2022. So I just want to get a better sense of kind of your expectations there and then how that could affect say volume pricing and promotional efforts, that kind of thing for the coming year. Thank you.
spk11: First of all, thank you for the question. You know, I would say 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 a consumer demand in a stronger way. So we are something that is focused for us, and the reality is that 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. For us, it's You know, it's something that we as a company take very seriously. We mentioned the fact that, you know, we have great bright spots within our business, you know, 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 both in Q1 and Q2 as we exit the first half is going to help us actually continue to continue to grow in that perspective.
spk02: If I could just add many times, sorry, go ahead.
spk03: Please, no, go ahead. Okay, I was going to add real quickly just that many times a focus on market share can imply, you know, heavier promotional spending or those kinds of things. It sounds like you've got more new product innovation, those, you know, advertising, those kind of consumer pull more than consumer push to generate that market share. Is that fair to say?
spk11: I think for me, whenever I talk about market share, think of it as profitable market share. You know, I'm I've been working in food companies for a number of years, and there is no substitute to make sure that whenever we think about market share, it has to be done in a proper way. We have to make sure everything that we do is with a consumer-first approach to make sure we, in fact, bring in consumer solutions, whether that is location-based, in-store, and online. We'll always focus on making sure that it's done with a drive on profitable market share growth. Thank you. Thank you.
spk15: Our next question comes from Alexia Howard with Bernstein.
spk18: Good morning, everyone. Good morning.
spk16: Can I ask about what came through better than expected in the fourth quarter? When you reported at the end of October, You were talking about adjusted EBITDA, I think, in the $6.1 to $6.2 billion range, and it came through at $6.4. 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.
spk10: 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. It's fair to say that 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, you know, over-deliver in terms of efficiencies, I would add this third point, were the main factors of our strong performance in the fourth quarter. Great.
spk16: Thank you very much. I'll pass it on. Thank you.
spk15: Our next question comes from Rob Dickerson with Jefferies.
spk07: Great. Thanks so much. You know, just a question in the commentary around, you know, expected stronger consumption in 22. Obviously, that's despite higher, you know, pricing. And you said you're being somewhat conservative, it sounds like, on the volume side as you look to your internal forecast. I'm just curious, you know, when you come up with those forecasts, as we think about, like, back after the year, right, is the feel that, you know, you might just be a little bit better position given price points, maybe a little bit, you know, uh, more, uh, you know, um, uh, uh, uh, 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. And then I have a quick followup.
spk10: Well, I can start here and, and, and, and maybe cause can compliment if he feels the need. What we have embedded in our outlook is that we are, again, we expect, as we said, low single-digit organic sales growth in this year with greater contribution from the growth platforms that we have. Our food service channel is also recovering and gaining share, and all the emerging markets' performance and our continuous strong performance through distribution. And also, as I was mentioning before, some relief of the key supply chain constraints as the year progresses. But as we were discussing, we also are embedding in our forecast, in our expectation, some headwinds in volume and impact in volume in 2022 because we are taking into consideration the fact that we are going to be lapping, you know, stimulus 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 have assumptions that are more conservative in terms of elasticity and consumption that we're seeing today, but we think it is the appropriate way to go in our outlook.
spk11: Yeah, the one thing I guess I would add to what Paolo just said is that as we're doing that, we also continue to make investments to make sure we improve our brand value proposition. And we're doing that through renovation of our brands, driving disruptive innovation, and continue to service new occasion-based solutions, whether that's for in-store, online, for today's consumer's needs. So that continues even as we are continuing to progress throughout the year. Thanks for the question.
spk07: All right, super. And then very quickly, Paulo, you've done a very nice job of improving, you know, your leverage positioning at the end of the year still with a decent cash balance. Should we just be thinking as you go forward that, you know, kind of use of cash would either be for, you know, kind of smaller add-on acquisitions or just kind of an ongoing e-leverage cycle as you get through 2022? That's it. Thanks.
spk10: Now, sure, our leverage target is below four times, and we are well below that level today, and we expect to remain consistently below that going forward. I 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 to evaluate opportunities to accelerate our strategies. in a creative way and with price discipline. But we are really closing now. 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.
spk07: All right, super.
spk10: Thank you so much. Thank you.
spk15: Our next question comes from Pamela Kaufman with Morgan Stanley. Hi, good morning.
spk23: Morning. Morning, Pam.
spk20: 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 and what your visibility is on the cost outlook?
spk10: Sure. So let me take that first. Our Q4 inflation was higher than we expected in our October call. We ended up with a low double digit. But for 2022, we are likely to see or expect today an year of inflation of low things for the full year. And we expect this inflation to be higher in the first half than in the second half. And just to complement here, by the end of last year, 2021, we took the necessary actions to mitigate the inflation we were seeing. And since then, more inflation has come, and we are taking these additional actions as we've been discussing. And 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 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 hedged. So it's not material when we have a situation that we're having today that we're seeing inflation in pretty much all the lines of our COGS.
spk19: Thank you. That's helpful.
spk10: Thank you.
spk15: Our next question comes from Ken Goldman with JP Morgan.
spk09: 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 know, 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.
spk11: 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 we think about us going forward. For us, the important thing is to make sure we continue to stay 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, consumers actually have a way in which to acquire products from Kraft Heinz. And you see that in places like mac and cheese, where it goes 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 reduced kind of our exposures to private label and other places where historically has been more competitive. In fact, we've gone from 17% of exposure to private label to now 11%, and I think its industry average is around 20%. So 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. 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 CrowdFinds.
spk08: Makes sense. Thank you.
spk09: And then very quickly, follow up. Thank you. For the gross margin, the streets modeling pretty flattish figure in 2022 versus 21, you know, recognizing you don't provide specific guidance for this line item, just directionally, I guess, is it fair to say the gross margin is more likely to be down than flat? You know, just especially in light of, I guess, your reminder this morning that, you know, in the context of inflation, you're aiming to recapture gross profit dollars, not necessarily percentages.
spk10: Yes. Listen, when you think about as costs stabilize and price realization and efficiencies continue, our margin percentage will normalize. As we have mentioned before, we are expecting lower run rate margin percentage levels at the beginning of this year. And our actions are to protect the dollar profitability. So we're protecting the dollar margin year over year. That's how we are thinking here.
spk08: Great, thank you.
spk10: Thank you.
spk15: Our next question comes from Steve Powers with Deutsche Bank.
spk04: Yes, hey, and good morning. Thank you. Following up on the topic of elasticity, I was just wondering if you could 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 about how elasticity is anticipated to maybe vary across your platforms or across your geographic regions.
spk11: You know, I think, I'm guessing that you're referring mostly to our U.S. business, so let me just take that up first. You know, I think so far, and Paulo spoke to this a little bit earlier, you know, other expectations for elasticity have proven to be conservative. So as we go forward, you know, we're expecting some of those more, I would say, normal levels of elasticity to impact in 2022. 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, you know, overall kind of how the way, you know, 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 any one category, is really kind of impacting everywhere 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. I mean, just to give you a sense, I mean, when you think about Kraft Mac and Cheese, in our blue box, it's about $0.50 per serving. If you think about Oscar Mayer hot dogs, it's about $0.25 a piece. 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 we create great quality products in a way that consumers can afford. But we're also taking more actions than that. We also are using our design to value to make sure that 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 not 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 today. Thank you.
spk04: 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 Can you just talk about 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 know, you're thinking about and we should be thinking about as it relates to the new year?
spk13: Hi. Maybe I can take it here as Halfway speaking. Look, we continue to be very optimistic of our strategy with focus on emerging markets and this elevation. 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. It's paying off and we will continue.
spk14: Rafael, I would just add that the engine for growth in these emerging markets is really the brand Heinz 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 ketchup but other products. Emerging markets will continue to being a great engine of our growth. Okay, very good. Thanks to you all.
spk15: Thank you. That concludes today's question and answer session. I'd like to pass the call back to Chris Jakubik for closing remarks.
spk21: Well, thanks, everyone, for joining us today. For follow-up questions, myself and the rest of the RR team will be available for any additional questions. But thanks again for joining us today, and we'll see you at Cagney next week.
spk15: This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
spk12: Thank you. you
spk15: Good day and thank you for standing by. Welcome to the Kraft Heinz Company fourth 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. To ask a question during the session, you'll need to press star then one on your telephone keypad. Please be advised today's conference may be recorded. If you require operator assistance during the call, please press star then zero. I'd now like to hand the conference over to Chris Jakubik, Head of Global Investor Relations. Please go ahead.
spk21: Thank you, and hello, everyone. This is Chris Jakubik, Head of Global Investor Relations at the Graf Times Company, and welcome to our Q&A session for our fourth 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 on IR.KraftHeinzCompany.com. With that, let's take your questions.
spk15: If you'd like to ask a question at this time, please press the star, then the number one key on your touch-tone telephone. Please stand by while we compile the Q&A roster. Our first question comes from Brian Spilling with Bank of America.
spk06: Thanks, operator. Good morning, everyone. Two questions for me. The first one for Miguel. You know, just given how fluid the environment is, using, I guess, Paolo's words, and just, you know, the macro pressures that we're seeing in the market, you know, how has that impacted your ability to execute? And, you know, are you not executing, you know, as an organization, I guess, you know, up to or as well as you would like, you know, just given all the pressure?
spk14: Brian? Brian? Thanks for the question. I mean, the macro pressures that you are mentioning, they've been here for a while now. And, you know, 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... It's a great team, very engaged, and with a low turnover, which is very different from two and a half years ago. 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 investing in our brands and in our cash flow. and balance sheet is much, much stronger than two 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 Cogni for us to speak a little bit more next week. Thank you for the question, Brian.
spk06: All right. Thanks, Miguel. And then, Paolo, I 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 first half, are there anything we should consider, I guess, if you're thinking about first quarter versus second quarter in terms of, I don't know, is inflation – you know, are more pronounced earlier in the year, the impact of pricing to help offset inflation, like how that flows. And also, you know, in the prepared remarks you talked a bit about, or there was some discussion about supply chain. So are, you know, some of the supply chain disruptions may be 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.
spk10: All right. Sure, Brian. So if stepping back a little bit, like we closed 2021 very strong. Maybe that was $6.37 billion. And in this number, we had approximately $400 million of divested business. So we start from there. We are going to see, we're expecting to see the benefit of our sales growth, the combination of pricing plus efficiencies that we have in our plan, mitigating the inflation, the higher inflation that we're seeing. And also we expect some headwind from volume and mix. And we are assuming more conservative levels of consumption and elasticities as the stimulus and government support fades. And again, as you said, we are expecting closer to 47.53, 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, you know, in terms of the curve, we are going to have this year 53rd week that will benefit our Q4 in the magnitude of $60 to $70 million. 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 and also the timing that we are executing our pricing. Okay.
spk05: That's helpful. Thanks, Paulo.
spk10: Thank you.
spk15: Our next question comes from Andrew Lazar with Barclays.
spk17: 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 fourth quarter and why 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 third 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 three buckets, that'd be really helpful.
spk11: Thank you, Andrew. It's Carlos, and I'm happy to take it. So as you said, you know, in the prepared remarks, you know, I broke this out, but let me give you a little more color in each of those. So first, it was the 40% of our share loss in Q4 was, as you said, due to one-time supply losses. and some other challenges. And what I mean by that, it seems like we saw in places where Philadelphia cream cheese, for example, given some packages issues that we had, that we know what happened. Those are related more to whether it was packaging materials in the case of Philadelphia cream cheese, whether it was labor in case of Oscar Murray 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 then in a good place as we end Q2. And those are things where the actual production was driving the constraints. So think of those as, you know, 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 to in a much better way. And then the third bucket, you know, in some essentially is they're in categories and frankly they're tilted towards frozen categories where we're actually looking to implement new game plans this year and think of those essentially as new creative ways in which we can deliver strong demand. And, you know, 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. So thank you. Thank you.
spk15: Our next question comes from Chris Grote with Stiefel. Hi, good morning.
spk03: Good morning. I just had a quick question for you to understand, and 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 how much that weighed on sales, what the missing opportunity was in the quarter? And then I also am just curious around that. you did talk about in your prepared room or the, the prerecorded remarks about a real focus on market share in 2022. So I just want to get a better sense of kind of your expectations there. Um, and then how that could affect say volume pricing and promotional efforts, that kind of thing for, for the coming year. Thank you.
spk11: Uh, first of all, thank you for the question. You know, I would 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 a consumer demand in a stronger way. So we are something that is focused for us, and the reality is that 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. For us, it's You know, it's something that we as a company take very seriously. We mentioned the fact that, you know, we have great bright spots within our business, you know, 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 both in Q1 and Q2 as we exit the first half is going to help us actually continue to continue to grow in that perspective.
spk02: If I could just add many times, sorry, go ahead.
spk03: Please. No, go ahead. Okay. I was going to add real quickly, just that many times a focus on market share can imply, you know, heavier promotional spending or those kinds of things. It sounds like you've got more new product innovation, those, you know, advertising, those, the kind of consumer poll more than the consumer push to generate that market share. Is that, is that fair to say?
spk11: I think, I think for me, one, when I, whenever I talk about market share, think of it as profitable market share. You know, I'm, I've been working in food companies for a number of years, and there is no substitute to make sure that whenever we think about market share, it has to be done in a proper way. We have to make sure everything that we do is with a consumer-first approach to make sure we, in fact, bring in consumer solutions, whether that is location-based, in-store, and online. We'll always focus on making sure that it's done with a drive on profitable market share growth.
spk02: Thank you.
spk11: Thank you.
spk15: Our next question comes from Alexia Howard with Bernstein.
spk18: Good morning, everyone. Morning.
spk16: Can I ask about what came through better than expected in the fourth quarter? When you reported at the end of October, You were talking about adjusted EBITDA, I think, in the $6.1 to $6.2 billion range, and it came through at $6.4. 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.
spk10: 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. It's fair to say that 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, you know, over-delivery in terms of efficiencies, I would add this third point, were the main factors of our strong performance in the fourth quarter. Great. Thank you very much.
spk16: I'll pass it on. Thank you.
spk15: Our next question comes from Rob Dickerson with Jefferies.
spk07: Great. Thanks so much. You know, just a question in the commentary around, you know, expected stronger consumption in 22. Obviously, that's despite higher, you know, pricing. And you said you're being somewhat conservative, it sounds like, on the volume side as you look to your internal forecast. I'm just curious, you know, when you come up with those forecasts, as we think about, like, back after the year, right, is the feel that, you know, you might just be a little bit better position given price points, maybe a little bit, you know, more, you know, or let's say better position with respect to trade down risk. I'm just trying to get a sense as to, you know, why you think consumption would actually be up, at least in the at-home channel. And then I have a quick follow-up.
spk10: Well, 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 expect, as we said, low single-digit organic sales growth in this year with greater contribution from the growth platforms that we have. Our food service channel is also recovering and gaining share, and all the emerging markets' performance and our continuous strong performance through distribution. And also, as I was mentioning before, some relief of the key supply chain constraints as the year progresses. But as we were discussing, we also are embedding in our forecast, in our expectation, some headwinds in volume and impact in volume in 2022 because we are taking into consideration the fact that we are going to be lapping, you know, stimulus 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 have assumptions that are more conservative in terms of elasticity and consumption that we're seeing today, but we think it is the appropriate way to go in our outlook.
spk11: Yeah, the one thing I guess I would add to what Paolo just said is that as we're doing that, we also continue to make investments to make sure we improve our brand value proposition. And we're doing that through renovation of our brands, driving disruptive innovation, and continue to service new location-based solutions, whether that's 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.
spk07: All right, super. And then very quickly, Paulo, you've done a very nice job of improving, you know, your leverage positioning at the end of the year still with a decent cash balance. Should we just be thinking as you go forward that, you know, kind of use of cash would either be for, you know, kind of smaller add-on acquisitions or just kind of an ongoing e-leverage cycle as you get through 2022? That's it. Thanks.
spk10: No, sure. Our leverage target is below four times, and we are well below that level today, and we expect to remain consistently below that going forward. I 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 to evaluate opportunities to accelerate our strategies. in an accretive way and with price discipline. But we are really closing now. 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.
spk07: All right, super.
spk10: Thank you so much. Thank you.
spk15: Our next question comes from Pamela Kaufman with Morgan Stanley. Hi, good morning.
spk23: Morning. Morning, Pam.
spk20: 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 and what your visibility is on the cost outlook?
spk10: Sure. So let me take that step. Our Q4 inflation was higher than we expected in our October call. We ended up with a low double digit. But for 2022, we are likely to see or expect today an year of inflation of low things for the full year. 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, 2021, we took the necessary actions to mitigate the inflation we were seeing. And since then, more inflation has come, and we are taking these additional actions as we've been discussing. And 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 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 hedged. So it's not material when we have a situation that we're having today that we're seeing inflation in pretty much all the lines of our COGS.
spk19: Thank you. That's helpful.
spk10: Thank you.
spk15: Our next question comes from Ken Goldman with JP Morgan.
spk09: 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 know, 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.
spk11: 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 we think about us going forward. You know, for us, the important thing is to make sure we continue to stay investing in a differentiated portfolio. And we're doing this because we actually are able to provide consumers, you know, whether it's an entry into the category, a mainstream product or a premium product, consumers actually have a way in which to acquire a product from Kraft Heinz. And you see that in places like mac and cheese where it goes 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 reduced kind of our exposures to private label and other places where historically has been more competitive. In fact, we've gone from 17% of exposure to private label to now 11%, and I think its industry average is around 20%. So 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. 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 CraftFinds.
spk08: Makes sense. Thank you.
spk09: And then very quickly, follow up. Thank you. For the gross margin, the street's modeling pretty flattish figure in 2022 versus 21, you know, recognizing you don't provide specific guidance for this line item. Just directionally, I guess, is it fair to say the gross margin is more likely to be down than flat? You know, just especially in light of, I guess, your reminder this morning that, you know, in the context of inflation, you're aiming to recapture gross profit dollars, not necessarily percentages.
spk10: Yes. Listen, when you think about as costs stabilize and price realization and efficiencies continue, our margin percentage will normalize. As we have mentioned before, we are expecting lower run rate margin percentage levels at the beginning of this year. And our actions are to protect the dollar profitability. So we're protecting the dollar margin year over year. That's how we are thinking here. Great.
spk08: Thank you.
spk10: Thank you.
spk15: Our next question comes from Steve Powers with Deutsche Bank.
spk04: Yes. Hey, and good morning. Thank you. Following up on the topic of elasticity, I was just wondering if you could 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 about how elasticity is anticipated to maybe vary across your platforms or across your geographic regions.
spk11: You know, I think, I'm guessing that you're referring mostly to our U.S. business, so let me just take that up first. You know, I think so far, and Paulo spoke to this a little bit earlier, you know, other expectations for elasticity 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. 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 business is that demand really has remained pretty much intact. So the inflation, which is, as you know, bring broad base and not specific to any one category is really kind of impacting, you know, everywhere similarly. Now, if you look at it a deeper, you know, 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, you know, 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. I mean, just to give you a sense, I mean, when you think about Kraft Mac and Cheese, in our blue box, it's about $0.50 per serving. If you think about Oscar Mayer hot dogs, it's about $0.25 a piece. 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 we create great quality products in a way that consumers can afford. But we're also taking more actions than that. We also are using our design to value to make sure that 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 not 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. you know, 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 today. Thank you.
spk04: 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 Can you just talk about 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 know, you're thinking about and we should be thinking about as it relates to the new year?
spk13: Hi. Maybe I can think of you as halfway speaking. Look, we continue to be very optimistic of our strategy with focus on emerging markets and this elevation. 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. It's paying off and we will continue.
spk14: Rafael, I would just add that the engine for growth in these emerging markets is really the brand Heinz 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 ketchup, but other products. Emerging markets will continue to being a great engine of our growth. Okay, very good. Thanks to you all.
spk15: Thank you. Thank you. That concludes today's question and answer session. I'd like to pass the call back to Chris Jakubik for closing remarks.
spk21: Well, thanks, everyone, for joining us today. For follow-up questions, myself and the rest of the IRR team will be available for any additional questions. But thanks again for joining us today, and we'll see you at Cagney next week.
spk15: This concludes today's conference call. Thank you for participating. You may now disconnect.
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