Ladies and gentlemen, thank you for standing by, and welcome to the Kraft Heinz Company Frst Quarter Results Question-and-Answer Session. I'd now like to turn the call over to your host, Chris Jakubik. You may begin..

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

Well, thank you, Chris. I would just like to start by sharing how proud I am of our people, and the truly transformational work they continue to deliver for our company.

We've seen 2 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 advantage 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 foodservice and capacity unlocks in our Grow and Energize platforms.

As you are now seeing, we are doing this through strategic partnerships with technology clients 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 questions..

[Operator Instructions] Our first question comes from Andrew Lazar with Barclays..

Chris, congratulations to you. Thank you for all the help over the -- well, too many years to quantify. I appreciate it. My question really is around retail inventory.

I guess, where are you currently regarding the retail inventory rebuild versus where you want to be? And how much more opportunity might there be for shipments to exceed consumption going forward related to this dynamic, which I guess, could be somewhat of an offset, should elasticity ramp up a bit from here? And is there any indication that retailers may opt to hold more inventory going forward than they did pre-pandemic, having seen during the past 2 years how problematic out of stocks can be when there are supply dislocations?.

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 exited 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, 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 than returning to pre-pandemic levels early next year. Now, let me tell you kind of our focus going forward is going to be in 3 specific areas.

One is recovering the service constrained category and focus on the key power SKUs, and as you saw, our increasing production level supports this initiative. Number 2 is improving the share of shelf 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 destination so that we can launch meaningful incremental interruptive innovation into the marketplace. And you are seeing this already from our award-winning Art of the Burger to creating deepen destinations and breakfast destination 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 level will normalize.

The one thing I will kind of make you think about it is the fact that if you keep in mind that pre-pandemic levels, the inventory levels actually saw quite a bit of inventory reduction in the 2- to 3-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're building that because there's still room for us to do that. Thank you for your question..

Our next question comes from David Palmer with Evercore ISI..

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 outcomes do you expect from those? What areas of improvement do you expect us to see, and what's first?.

Carlos, do you want to answer that question, please?.

Sure. So let me just say that part of the partnership that we're doing is really, is about supporting our AGILE@SCALEs initiatives. And for us, if you recall, when we talked in CAGNY, we talked about how AGILE@SCALE was going to help us in 3 ways.

First, it was about us making sure we organize and embed and lead with agile values throughout the company. And we mentioned how we actually evolve our structure to be flatter and leaner, with multidisciplinary teams and missions to attack the largest priority.

And in North America, we actually instituted a rule of 5, where only 5 levels between myself and the interposition in the business units.

The second part of that, and to your question, 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 partnership between whether it's in Microsoft, whether it is in a partnership with Google, it also allows them to look for those partnerships that allow us to accelerate and move to an agile scale.

Because then, once we build up tech ecosystem, we can then scale up to leverage the proven solutions across -- 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 and planning, in manufacturing, in logistics and sales and marketing that allows us to get closer to our consumer and making sure we actually are getting real-time information that we improve the customer service by improving forecast accuracy and speed, and that it generates 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@SCALE..

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 NotCo and the Simplot partnerships, these are other great examples of us to become more agile in all areas of the company.

We didn't have a good pipeline of plant-based products and would take a lot of time to develop. Well, partner with a company that can bring you solutions in a record time and great quality.

We didn't have a solution for our line business from a supply standpoint, well, partner with the ones that can solve quality, innovation and volume problems that we would eventually have moving forward. We'll -- these are just great examples of partnerships that will just make us more agile and faster..

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 -- or have you shifted that spending? I would imagine, digital is a much higher percent today and give us a flavor of what you're anticipating there?.

I can’t give you a better sense of the percentage of net sales, because with all these changes we are having 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 the 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 2/3 of all our investment, 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 is very different, the quality of marketing that we have nowadays.

I don't know if you saw, but Advertising Age selected us as the best campaign of the year. It put us among the 5 best marketers in North America, and more recently, they called VELVEETA the best renovation or the best rebranding of the year. And these are all consequences of huge improvement of the quality of our marketing..

The one thing I guess I would be also to Miguel's comment is that while it's true that we have invested in about $100 million more in marketing to 2019, our focus really has changed and is what Miguel just highlighted, we are focused very much into earned media and which actually we have seen how we have proven that increases the return on that investment.

So for us is, how do we make sure that all the personalization and improved creativity that our teams are showing translating us creating more impactful campaigns that generate the earn media that improves the ROI.

So it's not just the investment we make, but the amplifying effect of our investment because of the quality of the work that we're putting out. And that's why we continue on this journey. Thank you..

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

I guess I wanted to ask about commodities and raw materials and not so much on cost, but just availability. Given some of the supply chain issues, I guess, that have been caused by the war in the Ukraine and some of the agricultural commodities potentially being short supply.

Just -- is that a concern on your end in terms of just availability of raw materials? Have you seen it at all crop up, maybe, competitively like, smaller competitors having service issues? And then maybe, if I could just tie to that as well, given that you do have some exposure to it, just bird flu, is that something we should be worried about, given that you do grow some turkeys?.

Thanks for the question. I'll get this one. Andre here. So yes, situations come up every day on the raw material and packaging materials side. So the situation continues to be challenging.

And I think the teams have been out for 2 years dealing with these challenges on a recurring basis, right? 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 from ever 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 challenges 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 for hedging.

So we haven't been speculating or trying to second guess, what's going to happen in the market. I have been maintaining our strategy to maintain a consistency.

And as we mentioned, some of the commodities have been the most impacted by the Ukraine conflict, like grains, oils, energy, we are hedged on those until Q4, which put us also in a good position..

But Bryan, the point about availability has been around for a long time now, before the war. Every day, there's one raw material that is short because the supply chain is very tight, overall. I think that in that sense, company 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 Bingham, which is raw material to do cream cheese, and we have a good inventory of that. So the smaller companies will have difficulty to have access to that business. And every day, we really have to adapt every day to a new problem. I think the teams have done a great job in that sense..

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

Yes. Let me touch on that then. I think first, let me give you a little bit of historical context. I mean, we have seen this before. And one thing that is different about this time around, is that we have the insight from the lessons we learned last time.

As we looked at it this time around, we are flexing our portfolio to address the short-term kind of poultry disruptions. We've had some experience doing this in the past 2 years on how we actually flexed our portfolio, so we can actually be very dynamic in our response. 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 those supply and will 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 in the past, we're applying those lessons, and reality is that we're flexing our portfolio in order to navigate through this..

Bryan, Rafa here. Just to compliment to you, you asked about exposure to Ukraine. For us, it's negligible, it's very small, okay, the exposure to raw materials in Ukraine..

Our next question comes from Jason English with Goldman Sachs..

Good morning, folks. Thanks for slotting me in. To echo the earlier sentiment, congrats, Chris. Your legend will miss you. And Marie, congrats on the escalation. Looking forward to working with you more closely going forward. To the questions I have, great to see your foodservice momentum. I think you gave 2 statistics, the growth in U.S.

and growth internationally.

Can you give us the blended growth rate like across all of foodservice, 12% of sales growing, what on average? And how close are you to 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?.

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 also indicated across the board, which put us in a very good position.

And the way things are trending so far, it's possible that already going to be ahead of 2019 levels, the list in North America, which is also great..

And I would add on the comments from Andre, that we are very excited with the foodservice. We see as the different from the past, there was a very transactional channel. Today, it’s 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 keep doing that through -- to through the future..

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?.

On the SG&A, we have in the first quarter having a onetime gain from last year that do not get repeated. So pretty much, that's what's driving the entire impairments that you're asking..

Our next question comes from Ken Goldman with JPMorgan..

And just to echo the prior comments. Chris, thank you for all of the help, you'll truly be missed and Ann Marie, congratulations as well on the new role. I wanted to ask, you've highlighted your reduced exposure to private label in the U.S., so I don't want to suggest 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, 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?.

So let me take that. I would say, 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 escalating for everyone. And in terms of Kraft Heinz, I mean, what I'll tell you is that we are stronger today than we have been in the past in 4 specific areas.

One, we actually have relatively low private label exposure. So today, we're about 11% of the portfolio exposed to private label versus 17% just a couple of years ago. And if you think about that number of 11% versus an industry average of about 20%, it certainly puts us in an advantage situation.

We're also making sure that we are launching products that are differentiated at each round of the price ladder. So whether it's entry to mainstream to premium, so that consumers can stay with our franchise as their circumstances may change.

Whether it's a -- in a blue box Mac & Cheese to an 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..

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 you're thinking about?.

Thanks for the question. As we said before, we have been taking actions consistently to protect our margin dollars at this point. right? And we want to maintain our ability to invest in the business, as Miguel and Carlos pointed out, what is critical to us.

The current percentage margin is lower than our run rate, I can tell you that, and we expect those margins to recover as costs stabilize and the price realization comes through, as re-pricing at our last batch of inflation like the whole market is. So it recovers over time.

Remember as well that beyond the short term, our adjusted EBITDA margin evolution, this should remain consistent to the strategy that I have outlined before, which is to have better gross margins from variable cost efficiencies, stronger pricing mix, and that will help us to fund high investments in brands, people and capabilities.

So that's what we are seeking here. So even though I cannot go to a specific time or when we are going to recover the percentage margin, that should happen over time, okay? So if you look at the pre-pandemic levels, we were in the 24% range. So….

If we can take, maybe, one more question..

Our next question comes from Robert Moskow of Credit Suisse..

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

Well, thank you for your question, and I think we're all jealous of Chris, by the way. What I will tell you is that we expect an increase in elasticity going forward closer to historical levels. So prices are -- everything is on the way up, and we know that most of the stimulus is gone.

Now, today, we're seeing that elasticity 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 retail inventory levels.

So understand that we are actually making the advancements, again, many of the supply chain challenges that today, are actually holding back our market share performance. That's why as we think about the Q1 production up 10%, it is to support the rebuilding that inventory levels that have been still below our historical levels.

And that we feel confident about us continues into that kind of level of support..

And Rob, just to add to that. So to be clear, right? So the production in Q1 was 10%. It doesn't mean that we definitely go up 10%. We are just now ramping up production to rebuild the inventory levels at the retail and in our warehouses, okay? So we are not changing our inventory policy for the future. We just did to get to that level..

Okay. So if you're not saying that production is going to be up 10% throughout the year. I thought that was what the comment meant..

Well, it's 10% in Q1..

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?.

Look, we -- 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 COGS in this fiscal year..

Our last question comes from Chris Growe with Stifel..

Thank you. And Chris, congratulations to you. 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 it 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?.

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, netted against some of the supply constraints and how that translated through the shelf, 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 you..

Fair enough. No problem. Go ahead..

It's a low single-digit impact, right, to revenue.

But I think that the important thing is that we said in the last call, we expect it to continue to lose market share, but we expect it to improve, and we did, right? And we did it in the places where we said we would, which is mostly coming from the places where we have like a big constraint at the end of last year.

And our perspective is to continue to improve the trend moving forward as the service level recovers..

Okay. And just one other quick follow-on would be in relation to pricing. You had 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 sort of be caught up now with the level of inflation based on the pricing you have currently announced?.

We expect -- We have been taking actions with the inflation that we have seen. And in the guidance that you have provided, we are already contemplating the inflation that we are seeing even in the forward curves, which, by the way, they have been increasing a little bit since the peak.

So our -- as of right now, in the graphs 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 starts to rise at the end of last year, but on a year-over-year base, our price will be ahead of inflation..

Okay. Okay. Thank you for that color..

Great. Well, thanks, everybody, for joining us today. Let me turn it back to Miguel for a couple of closing remarks..

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 we've been able to navigate through all the uncertainties over the last 2 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 company -- in a very different company today. We are much more growth-oriented. We have improved our portfolio mix, and today, just the platforms where we are working, and we have focused, Taste Elevation 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 foodservice 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 3 years ago, when we delivered last year and the previous year on gross savings and supply, but efficiencies across the board, I mean, from marketing to distribution 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 the last 2 years, put us back in investment grade, and in a record time, just in 2 years.

And going forward, we will 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. All is, of course, with a lot of discipline in pricing. So that's why it's exciting to be at this moment working at Kraft Heinz.

Thank you..

Thank you, Chris. Thank you, Chris. You're pretty good..

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