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.

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 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 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.

Our first question comes from Andrew Lazar with Barclays.

Chris, congratulations to you. Thank you for all the help over the years. I appreciate it. My question is about retail inventory. Where do you currently stand on rebuilding retail inventory compared to your goals? Additionally, how much potential is there for shipments to exceed consumption in the future related to this situation, especially if elasticity increases? Lastly, is there any sign that retailers may choose to maintain more inventory than they did before the pandemic, considering the challenges posed by out-of-stocks during the past two years due to supply disruptions?

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 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. 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. 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 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-constrained category and focusing on the key power SKUs, and as you saw, our increasing production level supports this initiative. Number two is improving the share of shelf and implementing shelving principles. We have both detailed plans to do that and a strong collaboration with customers to do just this. Finally, creating in-store destinations so that we can launch meaningful incremental interruptive innovation into the marketplace. You are seeing this already from our award-winning Art of the Burger to creating deeper destinations and breakfast destinations in-store and online that leverage our scale in partnership with retailers. Now, you asked specifically about 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 make you think about is the fact that pre-pandemic levels, the inventory levels actually saw quite a bit of inventory reduction in the two to three years 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@SCALE initiatives. And for us, if you recall, when we talked in CAGNY, 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. We mentioned how we actually evolved our structure to be flatter and leaner, with multidisciplinary teams and missions to attack the largest priority. In North America, we actually instituted a rule of five, where only five levels are between myself and the interposition in the business units. The second part of that, and to your question, is also that we are 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 or in a partnership with Google, it also allows us to look for those partnerships that allow us to accelerate and move to an agile scale. Because then, once we build up the 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 becoming more agile in all areas of the company. We didn't have a good pipeline of plant-based products and it 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. These are just great examples of partnerships that will just make us more agile and faster.

What is your current advertising spending as a percentage of sales? How has that percentage changed over the past few years? Also, have you adjusted that spending? I assume digital advertising makes up a larger portion now. Could you share your expectations in this area?

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 two-thirds 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 we communicate. Today, we've, 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 one day to another, 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 five best marketers in North America, and more recently, they called VELVEETA the best renovation or the best rebranding of the year. These are all consequences of huge improvement in the quality of our marketing.

The one thing I guess I would also add to 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 is what Miguel just highlighted. We are focused very much on earned media and which actually we have seen how we have proven that it increases the return on that investment. For us, how do we make sure that all the personalization and improved creativity that our teams are showing translate into creating more impactful campaigns that generate the earned 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 wanted to ask about the availability of commodities and raw materials, rather than costs. Considering the supply chain challenges caused by the war in Ukraine and the potential shortage of some agricultural commodities, is availability of raw materials a concern for you? Have you noticed any competitive issues, like smaller competitors facing service challenges? Additionally, since you do have some exposure to it, should we be concerned about bird flu, especially since you 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. I think the teams have been out for two 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 since the pandemic level, and we have improved service levels. I think we are now on 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 in 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 consistency. 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 puts 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, a company with our scale should be able to navigate better. There are examples every day. I mean, there's a shortage, just as an example of Bingham, which is a raw material to do cream cheese, and we have a good inventory of that. So the smaller companies will have difficulty accessing that business. 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. 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 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 two 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 that supply and we will remain agile as we go forward. 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 complement, 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 two 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 the international zone and 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. The way things are trending so far, it's possible that we are already going to be ahead of 2019 levels, at least 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 it as different from the past; there was a very transactional channel. Today, it’s a truly 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 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 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 a one-time gain from last year that do not get repeated. So pretty much, that's what's driving the entire impact 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 is escalating for everyone. 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 four 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. 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 round of the price ladder. 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 blue box Mac & Cheese to an Easy Mac, they have something to come into and stay with our iconic brands. We also continue to improve the product design so that we can offer better value for the money, greater ingredient flexibility, less waste, and lower production costs; you'll see that in our marketing also as we go forward. 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 private label being affected 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 should remain consistent with 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? Looking at pre-pandemic levels, we were in the 24% range.

If we can take maybe one more question.

Our last question comes from Robert Moskow of Credit Suisse.

Thanks for the question, Chris. I congratulate you, and I’m a bit envious as well. My question is regarding your production volume being projected to increase by 10% compared to last year. However, there are many uncertainties surrounding elasticity, and many of your competitors anticipate that elasticity will pick up significantly by the end of the year. Can you provide more clarity on what that 10% increase entails? Is it dependent on the current demand situation?

Thank you for your question. We acknowledge Chris's situation. We expect an increase in elasticity moving forward, aligning more closely with historical levels. Prices are rising, and we recognize that much of the stimulus has diminished. Currently, elasticity is approximately 30% to 40% below historical norms. Our confidence in production stems from a sequential growth in consumption as we work to rebuild retail inventory levels. We are making progress against several supply chain challenges that have been impacting our market share. Therefore, our projected 10% increase in Q1 production is aimed at supporting the rebuilding of inventory levels that remain below historical figures. We are optimistic as we continue to provide that support.

And Rob, just to add to that. To be clear, right? 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? 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 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?

I think that's where the inventory review discussion comes from, which is important. We are currently rebuilding inventories, so even though volumes are down, we still need to produce significantly to recover the inventory levels. We do not anticipate any significant 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. 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. That's something we'll have to try to circle back to you.

It's a low single-digit impact to revenue. The important thing is that we said in the last call, we expect to continue to lose market share, but we expect it to improve, and we did. We did it in the places where we said we would, which is mostly coming from the places where we had big constraint at the end of last year. Our perspective is to continue to improve the trend moving forward as the service level recovers.

Okay. And just one more quick follow-up regarding pricing. You experienced more price increases in the second quarter. Considering this pricing along with the significant productivity savings, do you think this will be sufficient to counteract inflation once implemented? Are you currently aligned with the inflation levels based on the pricing you've announced?

We expect to address the inflation we have observed. In the guidance provided, we are already factoring in the inflation trends, which have slightly increased since reaching their peak. Currently, as shown in the graphs, our year-over-year pricing will surpass inflation. While we are still working to catch up with the inflation that began rising at the end of last year, our pricing on a year-over-year basis will exceed inflation.

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 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, 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. 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 we are in a much better place, not only because of the $2 billion that we talked about three 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 two years, it put us back in investment grade in record time, just in two years. Going forward, we will continue generating free cash flow conversion at a rate of 100%, and we'll look to acquire businesses and capabilities that can be much more powerful when combined with the scale of our portfolio. All of this, 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.