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spk12: Ladies and gentlemen, thank you for standing by and welcome to the Kraft Heinz Company first quarter results question and answer session. I'd now like to turn the call over to your host, Chris Jakubik. You may begin.
spk08: 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 first quarter 2022 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 they are discussed in our earnings release and our filings with the SEC. We will also discuss the 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 net reconciliations within our earnings release and the supplemental materials posted at ir.craftheimscompany.com. Before we begin, I'm going to hand it over to our CEO, Miguel Patricio, for a few quick opening comments.
spk06: Well, thank you, Chris. I would just like to start by sharing how proud I am of our people and the truly transformational work they continue to deliver for our company. We've seen two years of a lot of disruption, and they continue to successfully address the short-term challenges at the same time that we are building the long-term advantages of our company and our brands. our teams delivered a strong start for the year, both on top line and bottom line. We remain on strategy with the strongest growth coming from our priority platforms, brands, channels, and markets. We are effectively managing our inflation, improving our supply constraints, while continuing to gain incremental efficiencies. We continue to make progress, building and deploying initiatives to accelerate our advantages in areas like becoming more agile, becoming much more creative in marketing, developing joint business plans between retail and food service, and capacity and locks in our grow and energize platforms. As you are now seeing, we are doing this through strategic partnerships with technology giants and cutting-edge innovators to accelerate our transformation and redefine best-in-class across our value chain. It is a very exciting time for Kraft Heinz, and I don't think we could be better equipped to build on our momentum through what promises to remain a very challenging environment. With that, well, let's take your question.
spk12: Ladies and gentlemen, if you have a question or a comment at this time, please press the star, then the one key on your touch-tone telephone. If your question has been answered or you wish to move yourself from the queue, please press the pound key. Our first question comes from Andrew Lazar with Barclays.
spk11: Great. Thanks for the question. Good morning. And, Chris, congratulations to you. Thank you for all the help over the, well, too many years to quantify. Appreciate it. My question really is around retail inventory. I guess where are you currently regarding retail the retail inventory rebuild versus where you want to be, and how much more opportunity might there be for shipments to exceed consumption going forward related to this dynamic, which I guess could be somewhat of an offset should elasticity ramp up a bit from here. And is there any indication that retailers may opt to hold more inventory going forward than they did pre-pandemic, having seen during the past two years how problematic out-of-stocks can be when there are supply dislocations? Thank you.
spk01: Andrew, this is Carlos. Let me take that one first, and also let me just echo Miguel's comment. I'm just so proud of how our teams have managed through all this, and the strong start of the year is a testament to the resiliency of the teams. Now, to your questions about retail inventories, they do remain fluid. If you recall, we existed last year below normal days of inventory from a historical perspective that were both in terms of the trade and in our warehouse. And if you look at in Q1, our actual production volume was actually 10% higher than it was a year ago. And we expect that to continue through the year end so that we can support the inventory recovery. And in Q1, you know, the way it looks is that we began to rebuild some of the retail inventories in certain categories. But in aggregate, we're still below historical levels. And our expectations as we continue through the year is that we'll recover our inventory levels by the end of the year. with service levels then returning to pre-pandemic levels early next year. Now, let me tell you, kind of our focus going forward is going to be in three specific areas. One is recovering the service constraint categories and focus on the key power SKUs. And as you saw, our increasing production level supports this initiative. Number two is improving the share of shelves and implement shelving principles. We have both detailed plans to do that and a strong collaboration with customers to do just this. And finally, creating in-store destinations so that we can launch meaningful, incremental, and disruptive innovation into the marketplace. And you are seeing this already from our award-winning Out of the Burger to creating different destinations and breakfast destinations in-store and online that leverage our scale in partnership with retailers. Now you asked specifically about kind of how to also think about the retailers and their inventory normalized. I would say it's difficult to say where exactly the retail inventory levels would normalize. The one thing I will kind of make you think about is the fact that if you keep in mind that pre-pandemic levels, the inventory levels actually saw quite a bit of re-inventory reduction in the two to three year period prior to the pandemic. So I would say it's hard to predict, but we know that as we continue to move forward, we are building that because there's still room for us to do that. Thank you for your question. Sure. Thanks very much.
spk12: Our next question comes from David Palmer with Evercore ISI.
spk02: Thank you. Interesting comments in those prepared remarks about the partnerships with Microsoft and Google. Maybe if you can touch on those a bit more and what What outcomes do you expect from those? What areas of improvement do you expect us to see? And what's first?
spk06: Carlos, do you want to answer that question, please?
spk01: Sure. So, you know, let me just say that, you know, part of the partnership that we're doing, it really is about supporting our Agile Scales initiatives. And for us, if you recall, when we talked in Cagney, we talked about how agile scale was going to help us in three ways. First, it was about us making sure we organize and embed and lead with agile values throughout the company. And we mentioned how we actually evolved our structure to be flatter and leaner with multidisciplinary teams on missions to attack a largest priority. And in North America, we actually instituted a rule of five where only five levels between our Myself and the entry positions in the business unit. The second part of that, and to your questions, is also that we were building a tech ecosystem to create end-to-end capabilities with leading tech companies to accelerate our solutions, to capture efficiencies and create a significant competitive advantage. What you're seeing in our partnerships between whether it's in Microsoft, whether it's in a partnership with Google, it also allows us to look for those partnerships partnerships that allow us to accelerate our moves to an agile scale. Because then once we build a tech ecosystem, we can then scale up to leverage those proven solutions and maximize the value creation. The reality is that we're also doing this across the entire value chain. I'm very pleased with the partnership we have with Microsoft because it's going to allow us to also look at things like areas in planning, in manufacturing, in logistics, in sales and marketing, that allows us to get closer to our consumer and making sure we actually are getting real-time information, that we improve the customer service by improving forecast accuracy and speed, and that it generates end-to-end efficiencies with new processes, tools, and structure. So, as you will see, we are going to continue to look for those partnerships in which we can actually work together to accelerate our journey towards agile on scale.
spk06: I would just like to add to what Carlos just said, that these partnerships go beyond just technology. So as you remember, we announced before the Nautico and the Simplot partnerships. These are other great examples of us to become more agile in all areas of the company. You know, we didn't... didn't have a good pipeline of plant-based products and would take a lot of time to develop, well, you know, partner with a company that can bring you solutions in a record time and great quality. We didn't have a solution for our business from a supply standpoint. Well, partner with the ones that can, you know, solve quality innovation and volume problems that we would eventually have moving forward. These are just great examples of partnerships that will just make us more agile and faster.
spk02: Thank you for that. And just on the marketing side or the actual spending side, what is your advertising as a percent of sales today in big picture? How has that shifted in terms of the percent of sales over the last few years? But also, how have you shifted that spending? I would imagine digital is a much higher percent today. Give us a flavor of what you're anticipating there. Thanks.
spk06: I can give you a better sense of the percentage of net sales because with all these changes we are having in net sales, I don't want to give you a number that is not precise. But let me tell you that It's not our intention to reduce investments in marketing. This year will either be flat or growing, depending on how the year continues, because we want to continue investing in our brands. Our investment in digital today is about two-thirds of all our investments, about 70% of our investment. But I would say that more than even the quantity at this moment, I'm really, really impressed with the quality and how we changed the way to communicate. Today we have, in all our views, our own development of digital marketing that gives us really the possibility of being at the speed of culture and producing from a day to another one great quality marketing that makes us much more engaging. It's very different, the quality of marketing that we have nowadays. You know, I don't know if you saw, but Advertising Age, you know, selected us as the best campaigner of the year. They put us among the five best marketers in North America and And more recently, they called Velveeta the best renovation or the best rebranding of the year. These are all consequences of a huge improvement of the quality of our marketing.
spk01: The one thing I guess I would build also, too, on Miguel's comment is that while it's true that we have invested about $100 million more in marketing since 2019, our focus really has changed, and it's what Miguel just highlighted. We are focused very much into earned media, which actually we have seen how we have proven that increases the return of that investment. So for us, it's how do we make sure that all the personalization and improved creativity that our teams are showing, translating us, creating more impactful campaigns that generates the earned media that improves the ROI. So it's not just the investment we make, but the amplifying effect that of our investment because of the quality of the work that we're putting out. And that's why we continue in this journey. Thank you.
spk12: Thanks. Our next question comes from Brian Splane with Bank of America.
spk09: Hey, good morning, everybody. I guess I wanted to ask about, you know, commodities and raw materials and not so much on cost but just availability. You know, given some of the supply chain, you know, issues, I guess, that have been caused by the war in the Ukraine, you know, and some of the agricultural commodities, you know, potentially being short supply, you know, just is that a concern on your end in terms of just, you know, availability of raw materials? Have you seen it at all crop up maybe competitively, you know, like smaller competitors having service issues? And then maybe if I could just tie to that as well, you know, given that you do have some exposure to it, just bird flu, is that something we should be worried about, you know, given that you do grow some turkeys?
spk07: Thanks for the question. I'll get this one. Andrea here. Yes, situations come up every day on the raw material and packaging material side. So the situation continues to be challenging. And I think the teams have been now for two years dealing with these challenges on a recurring basis. It requires a lot of resilience from our team, which have been demonstrating very strongly. Now, the great thing is, despite all these challenges, we have been able throughout the quarter to rebuild inventories for the first time probably since the pandemic level, and we have improved service levels. And I think we are now in a good trajectory to continue to do so into the second quarter. So despite the challenge that we continue to face in the whole market, we have been able to navigate through that. I think our scale also definitely helps on this regard. Regarding hedging, as we said before, we have been maintaining a very disciplined approach to hedging. So we haven't been speculating or trying to second guess what's going to happen in the market. So we have been maintaining our strategy, maintaining the consistency. And as we mentioned, some of the commodities that have been the most impacted by the Ukraine conflict, like grains, oils, energy, we are hedged on those until Q4, which puts us also in a good position.
spk06: But Brian, the point about availability has been around for a long time now. Before the war, every day there's There's one raw material that is short because the supply chain is very tight overall. I think that in that sense, companies with our scale should be able to navigate better. And there are examples every day. I mean, there's a shortage, just as an example of bean gum, which is raw material to do cream cheese, and we have a good inventory of that. the smaller companies will have difficulty to have access to that. This is an everyday. We really have to adapt every day to a new problem. I think the teams have done a great job in that sense.
spk09: And then if you could touch just on bird flu, is that a concern at all?
spk01: Yeah, let me touch on that then. You know, I think... First, let me give you a little historical context. I mean, we have seen this before. And one thing that is different about this time around is that we have the insights from the lessons we learned last time. You know, as we looked at it this time around, we are flexing our portfolio to address those short-term kind of paltry disruptions. You know, we have had some experience doing this in the past two years on how we actually flexed our portfolio. So we can actually be very dynamic in our response. You know, the regions from which we buy turkey have not been impacted so far. Now, we have seen price increases. That is true. So, what we're using is our strategic sourcing network that Miguel spoke about to provide a supply and we'll remain agile as we go forward. And we're working closely with our retail partners so that we can navigate as the situation evolves. But again, I think we have seen that we have learned the path. We're applying those lessons. And the reality is that we're flexing our portfolio in order to navigate through this. All right. Thank you. Thank you.
spk00: Brian Haffer here. Just to compliment you, you asked about exposure to Ukraine. For us, it's neglectable. It's very small, the exposure to raw materials in Ukraine.
spk12: Our next question comes from Jason English with Goldman Sachs. Hey, good morning, folks. Thanks for slotting me in.
spk03: To echo the earlier sentiment, congrats, Chris. You're a legend. We'll miss you. And Anne-Marie, congrats on the escalation. Looking forward to working with you more closely going forward. To the questions at hand, great to see your food service momentum. I think you gave two statistics, the growth in U.S. and growth internationally. Can you give us the blended growth rate, like across all of food service, 12% of sales growing what on average? And how close are you back to pre-pandemic levels? Have we pretty much closed the gap? Is that what's driving the majority of the growth? Or is this momentum over and above the recovery from COVID?
spk07: Okay, so look, I'm not going to quote specific numbers, but both across international zone in North America, we are growing north of 20% on both. Okay? And gaining share, as we indicated, across the board, which puts us in a very good position. And the way things are trending so far, it's possible that we're already going to be ahead of 2019 levels, at least in North America, which is also great.
spk06: And I would add on the comments from André that we are very excited with the food service. We see As a difference from the past, there was a very transactional channel. Today is a truly transactional, sorry, a strategic channel for us. It's a great way for us to launch new products, to test them, to sample them with the consumers, and then to leverage that sampling to the trade. In the presentation, you have a very recent example of that, but it's our intention to to keep doing that through the future.
spk03: For sure. Makes a lot of sense. And I appreciate the comment earlier on ad spend and the commitment to have it be flat, if not up, as a percentage of sales for the year. But can you unpack a little bit more on the SG&A efficiency this quarter? It's down pretty sharply year on year. Is that the efforts of your productivity, or is there some unique timing dynamics that we should be aware of?
spk07: On the SG&A, we have in the first quarter a one-time gain from last year that did not get repeated. So pretty much that's what's driving the entire variance that you're asking.
spk12: Okay. All right. Thank you. I'll pass it on. Our next question comes from Ken Goldman with J.P. Morgan.
spk13: Hi. And just to echo the prior comments, Chris, thank you for all of the help you'll truly be missed. And Anne-Marie, congratulations as well on the new role. I wanted to ask, you know, you've highlighted your reduced exposure to private label in the U.S., so I don't want to suggest Kraft is at any particular risk here. I'm really just curious if you're starting to see retail customers leaning in a bit harder to their store brands recently, you know, whether it's via incremental displays or other efforts. I guess to try and maybe highlight for consumers some other offerings that are at lower prices. Are there any behavioral changes you're seeing from those customers?
spk01: Well, let me take that. I would say, you know, so far, what we're seeing from private label is that they're actually increasing their prices in line with the branded players. The reality is the cost is escalating for everyone. And In terms of Kraft Heinz, I mean, what I can tell you is that we are stronger today than we have been in the past in four specific areas. One, we actually have relatively low private label exposure. So today we're at about 11% of the portfolio exposed to private label versus 17% just a couple years ago. And if you think about that number of 11% versus an industry average of about 20%, it certainly puts us in an advantageous situation. We're also making sure that we are launching products that are differentiated at each rung of the price ladder. So whether it's entry to mainstream to premium, so that consumer can stay with our franchise as their circumstances might change. Whether it's a blue box mac and cheese to a easy mac, they have something to come into and stay with our icon brands. And we also continue to improve the product design so that we can offer better value for the money and greater ingredient flexibility, less waste and lower production cost. And actually, you'll see that in our marketing also as we go forward. And then finally, we're also leveraging the breadth of our portfolio across categories so that we can provide comprehensive occasion-based solutions that the whole family can enjoy. So, We are in a very good place right now in terms of our exposures, and we are seeing kind of a private label being affected by the same way that we have.
spk13: Thank you. And then a quick follow-up for Andre. Andre, you mentioned that as inflation plateaus, you expect to see your margin percentage rebound. I understand that futures curves are volatile, but is there an estimate you have for when you expect your gross inflation, including hedges, to have peaked, might we be a little bit closer to that than maybe some bears are thinking about?
spk07: Thanks for the question. As we said before, we have been taking actions consistently to protect our margin dollars at this point. And we want to maintain our ability to invest in the business, as Miguel and Carlos pointed out, which is critical to us. The current percentage margin is lower than our own rates, I can tell you that. And you expect those margins to recover as costs stabilize and the price polarization comes through. As we're pricing at a lag versus inflation like the whole market is, so it recovers over time. Remember as well that beyond the short term, not just the beta margin evolution, this should remain consistent to the strategy that I have outlined before. which is to have better gross margins from variable cost, efficiency, stronger pricing, mix, and that will help us to fund higher investments in brand people and capabilities. So that's what we are seeking here. So even though I cannot go to a specific time on when we are going to recover the percentage margin, that should happen over time. So if you look at the pre-pandemic levels, we were in the 24% range, so
spk08: If we can take maybe one more question.
spk12: Our next question comes from Robert Moscow of Credit Suisse.
spk10: Hi. Thanks for the question. And, Chris, I congratulate you, and I'm jealous of you also. But I guess my question here is, Can you drill down a little bit more into, I think the comment was that your production volume will be up 10% versus a year ago. But this is an environment where there's a lot of unknowns about elasticity and I think a lot of your peers are expecting elasticity to really accelerate by the end of the year. So can you give me a sense as to what that 10% increase really means and You know, is it contingent upon what you see in the demand environment, obviously?
spk01: Well, thank you for your question. And I think we're all jealous of Chris, by the way. You know, what I'll tell you is that we expect an increase in elasticity going forward closer to historical levels. So, you know, prices are on everything is on the way up. And we know that most of the stimulus is gone. Now, today we're seeing that our system is running about 30% to 40% below historical levels. Now, the reason we're confident about our production is that we are also growing consumption sequentially as we rebuild rich elementary levels. So understand that we are actually making the advancements, again, many of the supply chain challenges that today are actually holding back on market share performance. That's why, as we think about the Q1 production of 10%, It is to support the rebuilding of that inventory levels that have been still below our historical levels, and that we feel confident about us continuing through that kind of level of support.
spk07: And, Rob, just to add to that, so to be clear, right, so the production went up 10%. It doesn't mean that we indefinitely go up 10%. We are just now ramping up production to rebuild the inventory levels at the retailer and in our warehouses. Okay, so we are not changing our inventory policy for the future. We just need to get to that level.
spk10: Okay, so you're not saying that production is going to be up 10% throughout the year? I thought that was what the comment meant.
spk07: Well, 10% in Q1.
spk10: Right, just Q1. Okay, last question. If volume continues to kind of be down in this like 4%, 5% kind of range, I think that's what your U.S. retail volume was down Does that do anything to your fixed cost leverage at the end of the year, or is there just going to be so much pricing it doesn't really matter what happens to the fixed cost leverage?
spk07: Look, I think that's where the inventory review discussion comes from, right, which is important, because we are rebuilding inventories right now. So despite the volumes are being down, we still need to produce a lot to recover the inventory level. So we don't expect any relevant impact from fixed costs. in this fiscal year.
spk12: Got it. All right. Thank you very much. Our last question comes from Chris Roy with Stifel.
spk04: Hi. Good morning. Thank you. And Chris, it's a congratulations to you. I'm just thinking 68 or so earnings reports over those 17 years, so it's kind of crazy when you put it in those terms. I just want to ask a quick question, if I could, on the supply constraints to your volume. You outlined in a chart like a 50 basis point market share decline as a result of those factors. How much of a revenue burden was that in the quarter, if you can say that?
spk08: The pause means that it's difficult to kind of back into that right now, Chris. I think from the perspective of kind of rebuilding the inventories and then net it against some of the the supply constraints and how that translated through the shell in addition to the Easter shift. There's a lot of variables moving through that. So that's something we'll have to try to circle back to Jan. Fair enough. No problem. Thank you.
spk07: Go ahead. It's a low single-digit impact on revenue, but I think the important thing is that we said in the last call we expected to continue to lose market share, but we expected to improve, and we did. And we did in the places where we said we would, which is mostly coming from the places where we had big constraints at the end of last year. And our perspective should continue to improve the trend moving forward as the service level recovers.
spk04: Okay, thank you. Just one other quick follow-on would be in relation to pricing. You have more pricing coming through in the second quarter. When you account for that pricing along with you've got a lot of productivity savings as well, Do you believe this pricing, along with the productivity savings, would be enough to offset inflation once it's in place? Are you going to be caught up now with the level of inflation based on the pricing you have currently announced?
spk07: We have been taking actions with the inflation that we have seen, and in the guidance that we have provided, we are already contemplating the inflation that we are seeing, even in the forward curves. which, by the way, they have been receding a little bit since the peak. So as of right now, in regards to what we provided to you, our price year over year will be ahead of inflation. Obviously, we are still catching up a little bit with the inflation that started to rise at the end of last year. But year over year, basically, our price will be ahead of inflation.
spk04: Okay. Okay. Thank you for that, Keller.
spk08: Great. Well, thanks, everybody, for joining us today. Let me turn it back to Miguel for a couple of closing remarks.
spk06: I opened today's call saying that it's a very exciting time to be at Kraft Heinz. And let me tell you why we think that way. First, we are very proud because, you know, we've been able to navigate through all the uncertainties of the last two years at the same time. that we are building a much better tomorrow. And that's not easy in moments like this. We are a very different company today. We are much more growth-oriented. We have improved our portfolio mix. And today, you know, just the platforms where we are working and we have focus, acceleration is about 30% of our business today. It's big. and growing and profitable. And just to put it in perspective, it's bigger and more profitable than McCormick, just to give you an example. We have consistent double-digit net sales growth in emerging markets. Our business in food service is strong and growing. And we are investing more in marketing in our brands and doing a much better job. So Really, the profile in terms of growth is very different. From an efficiency standpoint, I think that we are in a much better place, not only because of the $2 billion that we talked about three years ago and we delivered last year and the previous year on growth savings in supply, but efficiency is across the board. I mean, from marketing to distribution and and these partnerships now with technology companies that will help us accelerate these efficiencies. Finally, I think that we have a very different situation from a financial flexibility standpoint. With the discipline we had in these two years, it put us back in investment grade, and in a record time, just in two years. And going forward, we'll continue generating free cash flow conversion at a rate of 100%. And we'll look to acquire business and capabilities that can be much more powerful when combined with the scale of our portfolio. Always, of course, with a lot of discipline in price. So, you know, that's why it's exciting to be at this moment working at Kraft Heinz. Thank you. Thank you, Chris. Thank you, Chris.
spk12: Ladies and gentlemen, that concludes today's presentation. You may now disconnect and have a wonderful day.
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