Ladies and gentlemen, thank you for joining us for The Kraft Heinz Company First Quarter Results Conference Call. All participants are currently in a listen-only mode. We will have a question-and-answer session later, and instructions will be provided at that time. I will now hand the conference over to your host, Mr. Chris Jakubik, Head of Global Investor Relations for The Kraft Heinz Company. Please proceed, sir.

Thank you and hello everyone. This is Chris Jakubik, Head of Global Investor Relations at Kraft Heinz Company, and welcome to our Q&A session for our first quarter 2021 business update. As you know, 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 press 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. You can find the GAAP to non-GAAP reconciliations within our earnings release. Before we begin, I'm going to hand it over to our CEO, Miguel Patricio for a few quick opening remarks. Miguel?

Yeah. Well, thank you Chris. I just wanted to start our discussion today with a few overall thoughts. First, we have had a very encouraging start to the year, both topline and bottom line, with our strongest growth in priority platforms and markets, especially in under-developed countries, with very strong results. We were able to hold household penetration gains even as markets began to open while effectively managing inflation and supply constraints. We are also very encouraged by our progress with initiatives to accelerate our advantage in different areas such as marketing, being more agile and creative in retail and foodservice joint business plans, unlocking capacity in our Grow and Energize platforms, and also on bringing growth efficiency gains that we continue tracking to be about $400 million in the year. That said, we feel that it's still too early to change our outlook for the full year. We could expect 2021 financials to be ahead of our strategic plan, expecting mid-single-digit growth in Q2 2021 versus the same period in '19. At the same time, we should see stronger but manageable inflation beginning in Q2. Finally, we are pleased with the additional financial flexibility we are building. We continue to aggressively reduce debt, and our divestitures are on track to further increase flexibility. I will now hand it back to the operator and we can start the Q&A.

Thank you. Your first question comes from Andrew Lazar with Barclays.

Miguel, I know that organic sales growth guidance for 2Q is a bit better than what consensus was expecting. But it does represent a notable sequential deceleration versus 2019. I am trying to get a sense of, is this - I assume this is primarily just, a, 1Q was quite a bit stronger than you probably thought and maybe you're also trying to be thinking through and being prudent about what further sort of reopening and mobility means for sales trends going forward. And then I was hoping maybe Rafael could you comment even briefly just how you see the durability of the emerging market strength that we saw in the quarter? Thank you.

Hi, Andrew. Thank you for the question. Now, keep in mind that in the second quarter we are going to have a different mix. Foodservice will be stronger, and for sure with the opening of the market because of COVID fading, the mix will change, and that is one of the reasons. The second reason is that we should remember that McCafe was part of the numbers of '19 and is not in the numbers of '21, and that has a strong impact. I don't know if Paulo, you want to complement that question before passing to Rafael?

Miguel, thank you. I'll highlight the right points. We are calling down versus prior year low single-digit growth and the impact of McCafe is always about 1.1 percentage points. So it's not that dramatic of a deceleration, although as you mentioned we are seeing the reopening of the developed markets and there are some mix impacts that we're going to feel in the quarter.

But that said, first quarter was a very strong quarter as you mentioned in terms of net sales when compared with '19. Rafael, please?

Yes. Hi, Andrew. Thanks for the question. For us, emerging markets' consumption has held up relatively well during the pandemic, and I would say for two reasons. One is availability. Our customer servicing across international has been quite consistent during the whole pandemic. But also, the second reason is focus. We remain very focused on our emerging market strategy, centered around the Taste Elevation platform, combined with the localized, proven go-to-market expansion model. This has been performing quite well. Those two factors have helped us during the pandemic, and you can see on the results that it added a point of share. We've been gaining share also during the last three quarters in a row. So we do expect this momentum to continue as we move throughout the year based on the strong initiatives that we discussed during CAGNY.

Great. Thanks very much.

Your next question comes from the line of Robert Moskow with Credit Suisse.

Hi. Thanks for the question. I was wondering if you look at your U.S. retail mix as maybe more exposed than some of your peers to kids going back to school. You have Mac and Cheese, you have Kraft Singles, Oscar Mayer Lunch Meats, which are a lot of parents making lunches for their kids when they're at home. When they're going back to full-time schooling, do you think that these brands will face more than normal headwinds, or does it somehow kind of make up for itself somewhere along the way? Thanks.

Well, first of all, thank you for the question. Listen, we feel good about controlling the controllables. If you think about the gains we have made in household penetration, those are coming from younger, more diverse families, and we're seeing that those families are actually increasing consumption across different day-parts, whether it's Mac and Cheese or Oscar Mayer hot dogs, very consistently. Plus, even with brands that kids typically use at school, like a lunch box, we're also seeing gains on those even over the last six months. Our focus on continuing to retain those new households, regardless of the circumstances, is working, and that will continue to be our approach moving forward. Thanks.

Okay, thanks.

Your next question comes from the line of Bryan Spillane with Bank of America.

I've got two questions related to inflation. The first one, I think the guidance is for mid-single-digit cost inflation, and just wanted to get an understanding there of is that gross inflation or is that net of cost savings? And if not, just if you can give us a breakdown between the gross inflation versus net inflation?

Bryan, thanks for the question. The guidance that we provided in mid-single-digit is growth, so it's a percentage of our total COGS as gross inflation, okay? Actually, we are currently seeing that it would be at the low end of the mid-single-digit range and that's our view. When we see this happening today, we also saw, as many peers, the escalation of this inflation since our last call, but when we add, as we mentioned, our cost efficiencies highlighted around that, we are still seeing about $400 million in efficiencies in our supply chain. With all the levers we have for revenue management, we believe that the final number will be manageable for the company.

Okay, thank you. And then if I could follow-up Rafael, just in terms of inflation, could you give us a little bit of perspective on what tools you have available, especially in developing markets but also in Europe in terms of managing inflation? So is it different in terms of the way that you'll work through inflation in your markets than what we'll see in North America?

Yes. Hi, Bryan. Let me break down the two. In emerging markets, in general, acceptance of pricing is better, right, because inflation is more normal in the local economies. In developed markets, what I can tell you is we've already successfully closed negotiations with all our key retail partners, especially in key countries like France and Germany, and we have achieved the pricing and premiumization behind the brands that we needed. So we feel quite confident about that. In terms of comparison to the US, there are both similarities and differences. Similar to North America, the costs have moved against us in ingredients and packaging, but different in North America as logistics is not a major contributor to inflation in international markets. In terms of numbers, it aligns with what Paulo said, comparable to the mid-single-digit range for the total.

Okay, thank you.

Your next question comes from the line of Rob Dickerson with Jefferies.

Great, thank you so much. Miguel, I just had a question around your innovation plans, marketing plans, kind of vis-a-vis SKU rationalization. There has been a lot of optimization for the retailers to focus on those core SKUs, to maximize the benefits of velocity and scale, which you also speak to all the time. I'm curious as you look forward kind of around the creative development of the innovation, are there sizable pieces of the portfolio that you foresee rationalizing such that those tails come off, new innovation comes in, but still focused on the core high-velocity items? Thanks.

Let me answer your question and I ask Carlos to complement my thoughts. We see this as a great opportunity for us to focus on SKUs with higher rotation and also from a supply standpoint to improve efficiencies in our factories and on costs. So we see this move as very positive. Carlos, do you want to comment more precisely in terms of numbers of what's going on for us?

Sure Miguel. What I would say is a lot of it - we have done some optimization. So if you go, as we go into this year, we have reduced probably 20% of our SKUs versus what we had in '19. This has been done in collaboration with our retail partners. So we're building together a level of trust and transparency to ensure that we maintain focus on our core while driving better velocity and actually allowing us to better service our customers. So overall, I feel good about where we are and the progress we have made in this area. Thanks.

Your next question comes from the line of Alexia Howard with Bernstein.

Good morning, everyone. Can you hear me okay?

Yes.

Perfect. I wanted to ask about the promotional path from here. You talked, I think in the prepared remarks, about pulling back on promotions in January and February during Q1. Does that mean that we're likely to see a more elevated level of promotion year-on-year given the pullback that happened last year? And what does that mean for net pricing over the next couple of quarters? Thank you, and I'll pass it on.

I can start. Let me at least give you a perspective on how we're thinking about our pricing and how that fits in terms of our promotions. I can tell you, I feel good about our ability to pass through our cost inflation and where we need to do it.

We lost Carlos. Let me just pick up on that. I think Carlos froze out a little bit, Alexia. So we're going to come back, but I think where Carlos was going is in terms of what we're seeing going on in the marketplace and what we see unfolding. In Q1, we were able to build further on — sorry, Carlos, why don't you go ahead. He froze out at the start there.

Sorry, my apologies. Hopefully, you can hear me okay now?

Sounds great.

What I was getting at is within the context of our pricing that we're looking at. In the last eight quarters, we were actually able to drive pricing as a positive contribution to our net sales. We are seeing that our iconic brands are showing pricing power. When you look going forward, we will return to supporting key promotional windows. If you think about coming up to Memorial Day, we will also ensure that we show up in those moments. At the same time, we will implement revenue management initiatives to drive share growth and improve returns. So I feel good about our ability to deal with inflation while ensuring a positive outcome for the company.

Great. Thank you very much. I'll pass it on.

Your next question comes from the line of Jason English with Goldman Sachs.

Hey. Good morning, folks. Thank you for sliding me in. To put a finer point on Alexia's question, do you expect pricing, net of everything, to be positive in the U.S. in the back half of the year?

Hi, Jason. As a matter of practice, we do not forecast pricing. But we are seeing that we will be up in the second half against some unusual comparisons. As Carlos mentioned, we see a lot of levers for us to manage inflation through revenue management and savings. So we're feeling pretty good about managing our profitability that comes from this inflation impact.

Maybe to help us get a little more comfort on that let's flip to the cost side. I know you said sort of low end to mid-single plus $400 million of cost saves. That's like a 2% sort of net inflation, I think. You can tell me if I'm wrong on that, but what does the cadence look like as we go through the year? I'm guessing given the move to some of these costs, your exit rate in the back half of this year is going to be substantially above that. If I'm off base on that, please correct me.

We have a ramp-up of gross inflation as the year progresses. But we also have a ramp-up of our sales initiatives going on as the year progresses. On top of that, we would also have our revenue management initiatives. So again, I'm not going to give exact quarterly numbers here, but that's how you should think about the progression of our cost base.

Okay, thank you.

You're welcome.

Your next question comes from the line of Ken Goldman with JPMorgan.

Hi. Thank you. I'm going to start beating on the debt inflation horse here. I know we're talking about it a lot, but I just wanted to get a sense of how locked in you are on your raw materials for the rest of the year? Is it fair to assume unless there's some big spikes in items that are harder to buy ahead, that mid-single-digit inflation is fairly safe to build in? I'm just trying to think if items like cheese, meat, and coffee rise a bit higher—these are items that historically Kraft has locked in many months in advance. I just wanted to get a sense of the risk either up or down to that guidance of mid-single-digit inflation.

Hi, Ken. This varies. In our Big 4 commodities for the full year, we are seeing only slight inflation, okay? We are going to have our heaviest comparison in Q2, where you're going to be lapping a very low price in cheese last year against a high price of pork bellies this year. But overall, regarding the Big 4, we are seeing slight inflation. In terms of how we manage and hedge, it varies by area. Some commodities we go longer, beyond six months or nine months, while others are shorter. This varies a lot. Overall, when we see the scenarios, there is a lot of volatility in these markets. But overall, we see that mid-single-digit range is what we're looking at.

Very quick follow-up, what are your experts telling you about how valid some of these prices we're seeing for corn, soybeans, and meat given supply and demand? Is there a bit of froth created by traders in the market right now?

Ken, I would not like to enter into this type of forecast. We are more focused on ensuring that we manage our costs for different levels of price and if we provide our business with a specific hedging profile that allows the business to plan accordingly.

Your next question comes from the line of Laurent Grandet with Guggenheim.

Yeah. Thank you. Good morning everyone and thanks for squeezing me in. So, two questions. One on Canada. Canada is definitely improving, so could you please give us a bit more color about what's going on there and how sustainable the rebound is for the next few months and quarters?

Let me answer that question. You are absolutely right. Canada is definitely improving and had a very good quarter. We did a much better job in terms of the promotional calendar for Canada than last year. We started with big promotions, and the ROI was not exactly great. We are being much more disciplined with our promotions now, and this reflects a big increase in margin from 16% last year to about 22% this year. But it is not only on margin that Canada is improving. I'm very satisfied with the evolution of our innovation pipeline, marketing, creativity, and digital marketing. I think we are having a very different Canada than we had just one and a half years ago.

Thanks. And maybe a broader question on your strategic brands compared to what you laid down last year, and now we are six to eight months within the implementation of that plan. Could you tell us how you think you've been successful in implementation and you're ahead of what you expected, and maybe some strategic initiatives where you think you are behind and why?

Overall, we are very excited about our transformation plan. It's deep and covers all areas. After one year, I would say we are progressing at a much accelerated rate than we could have imagined, especially in a year that we are doing all this through Zoom meetings while working from home. It surprised us how fast and agile we have been in all areas—from supply to marketing to finance and more. We are still at the beginning of this journey. Using a baseball analogy, I would say that we finished the first inning, and we are now going to the second. But there is still a big game ahead to play, and we are excited about the possibilities and evolution.

Thank you very much. I'll pass it on. Good work. Thanks.

Thank you.

Your next question comes from the line of Steve Powers with Deutsche Bank.

Yeah, hey, thanks. To build on that last question a bit, I think it's been a little while since we spoke in detail about employee engagement and morale at Kraft Heinz, and to some extent also about retailer engagement—Miguel, you did speak to helping improve customer satisfaction in the prepared remarks. As you step back and think about the journey over the past year and the progress made since 2019, can you update us on how you perceive your current standing with those teams today and how that feeds into your outlook as you go forward into '21 and beyond?

Sure. I will comment on our employee engagement and ask Carlos to talk about customer satisfaction engagement specifically in the U.S. We have made great progress in that regard. I would say among all things we've been doing, employee engagement has seen the biggest shift, with our people being much more engaged. This is supported by both quantitative research and qualitative feedback. Our team is much more engaged and is working more cooperatively. We've been successful in eliminating silos within the company. This pandemic pushed us to be much faster in achieving those goals. Overall, I would say morale is much higher, and our team understands the strategy we have ahead; they are excited about the journey ahead. That being said, we still have room for improvement, and we will continue working in that aspect. Carlos, please comment on customer satisfaction?

Sure, Miguel. Thank you. I can attest to what Miguel is saying; we have seen a noticeable shift across the entire company. The level of engagement and cooperation reflect an agile mindset. Related to our customers, we are now in a much different place than we were a year ago. We have built trust with our key retailers, working on transparency that we had not experienced in the past. Our retailers are recognizing this progress. It feels like a new Kraft Heinz, and we are excited about the collaboration and positive momentum we have.

Thank you.

At this time, I would like to turn the call back over to Mr. Chris Jakubik.

Thank you, and thanks everybody for joining us today. For analysts that have follow-up questions, Andy Larkin and myself will be available to take them. For media inquiries, Michael Mullen will be available for your calls. Thank you again for joining us today and have a great day.

Ladies and gentlemen, thank you for participating. This concludes today's conference call. You may now disconnect.