The Kraft Heinz (NASDAQ:KHC) Q4 2020 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by and welcome to the Kraft Heinz Company fourth quarter results conference call. At this time, all participants are listening on the mode. After the speaker's prepared remarks, there will be a question and answer session. To ask a question, please press star then one on your text tone telephone. As a reminder, today's conference call is being recorded. I will now turn the conference over to your host, Mr. Chris Ducubit. Sir, you may begin.

0:26 Thank you and hello everyone. Thank you for joining our Q&A session today. 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 The Gap to Non-Gap Reconciliations Within Our Earnings Release Before we begin, I do want to highlight that we will provide greater details on our 2021 initiatives during our presentation at the CAGNI conference this coming Tuesday. So today's session will be most productive if you limit yourself to one question and focus your questions on our results and the announcements that we have made today. With that, I'll hand it back to the operator and we can start the Q&A.

1:25 Thank you. Again, if you'd like to ask a question, please press star then 1 on your text phone telephone. One moment. Our first question comes from Andrew Lazar of Barclays. Your line is open.

1:37 Good morning, everybody. Good morning, Andrew. Good morning. Hi there. So I guess for my question, I'd like to explore a bit your expectations for a full year 21, really in terms of your planning stance for demand. Some companies have been more aggressive in terms of their expectations around return to normalization and the impact on consumption. Others may be somewhat more conservative. I'm just trying to get a sense of how KHC is thinking about this in its guidance or what end of the spectrum the company is on in thinking about this and how conservative or not your planning stance may be for 2021. Thank you.

2:18 Hi, Andrew. This is Miguel speaking. Well, we are looking at 2021 in a conservative way. But I have to say that we saw very strong consumption gains in January and February is coming good as well. And if this persists at this level, we may have an upside in our results. But I think that with the environment so volatile, we better continue taking a quarter-by-quarter approach, which was the outlook that we gave you, and really concentrating our minds and our efforts on our transformation through our operating model. Paulo, I don't know if you have anything to add, but from my side...

3:15 No, that's it, Miguel.

3:18 Thank you very much. Thank you. Thank you. Our next question comes from Chris Burrow of People. Your line is open. Hi, good morning.

3:47 Hi, I just had a question if I could. Have you defined the amount of inflation you expect for the year and then how you hope to overcome that? I suspect that's through a combination of pricing and promotional efficiencies, but I want to get a better sense of the magnitude of the inflation. And I wondered if you could speak to that, excluding inflation. Planters and Cheese. I know those were kind of pass-along commodity-type categories, but just trying to think about the ongoing portfolio and the effect on the business overall this year.

4:23 Sure, Chris. This is Paulo here. So we are seeing the same inflation. We're also seeing the inflation that you're seeing and coming from non-commodities, non-key commodities, ingredients, especially packaging in transportation in the U.S., We think that the level and the type of inflation that we are seeing is manageable and is in our outlook, as I mentioned. We have two reasons behind it. The first one is that we are very confident on the supply chain efficiency programs that we have that we expect to unlock savings across our supply chain. And the second is on our revenue management initiatives across the globe. That in combination with the innovation, renovation, market investments that we're doing can help us with pricing if we need.

5:19 And as I said, we have incorporated this inflation in our outlooks today. I don't know if Carlos wants to comment something on top of that.

5:29 No, I think to reiterate your point, Paulo, that we feel that it's manageable. And I think we are taking the appropriate revenue management initiatives to make sure that we can handle Those things as they come. Thank you.

5:45 Just to be clear on that, is that mostly U.S.-based inflation? As I think about freight in particular, that's more of a U.S. issue? Or is there kind of a wider array of inflation across the portfolio? Thank you.

5:59 When you think about the commodity, the non-commodities, ingredients and packagings across the globe, and think about the freight, the transportation is more focused in the U.S. and one thing also that you've mentioned, when you think about the key commodities, the big four commodities that we have, we are not really seeing a lot of year-over-year inflation through the year, okay, when you add all of them. So we were really talking about the non-key, non-big four commodities and packaging and transportation in the U.S. Thank you. Thank you. You're welcome. Our next question comes from Jan Kruise. Kim Goldman of JPMorgan, the line is open.

6:44 Hi, good morning. Just to stay on the subject of cost and pricing, you know, a few years ago, some manufacturers, you know, tried to pass through some list pricing because of higher transportation costs. I think some of their customers at that time on the retail side pushed back saying, look, you know, we'll give you some pricing when your ingredients go up. We've done that in the past, but kind of trucking is you're on your own. I would imagine that this time around it's a little bit different. I just kind of wanted to get a sense for, you know, given your higher costs in packaging, higher transportation, and given the lack of elasticity among consumers right now, how reluctant are some of your customers to allow you to take some pricing, whether it's on the list side or on fewer promos? I just wanted to get a sense for your relationship with them and how much pushback you're getting on any kind of price increases you're trying to push through.

7:40 Let me – I'll take that one just to give you kind of a view in terms of the U.S. and what we're seeing with our customers. You know, first I will say is what we're seeing – let me start with the consumer. Our consumer right now, you know, as we have shifted towards being very much focused on understanding what they're going through and so forth, I think they are certainly showing, you know, quite an amount of resiliency through this process. that we're going through. And I think for us, our focus is how do we make sure we drive the renovation of our portfolio to make sure that we in fact continue to drive the right value for us as, you know, for the consumer. Now, we're balancing that too with making sure that we have the right revenue management initiatives.

8:27 And when I say that, I say using the full availability of our tools in our toolbox to be able to kind of The way I think about it is our focus is driving that better value to consumers by making sure we are improving our portfolio, making sure we continue to invest behind the marketing and improving the quality of our media and making sure that we are seeing how that actually translating us driving our improvement in shares throughout like we did in 2020. So at this point, I will say, you know, these are things that we can manage, and we don't see that as a major derailer as we go forward.

9:19 Thank you.

9:20 Thanks for the question. Our next question comes from Brian Spillane of Bank of America, your line is open.

9:29 Hey, good morning. So I guess my question is just related to the divestitures and maybe Paolo could you give us a sense of I know we have a sense now of what the deleveraging impact will be but could you give us a sense of maybe what the dilution would be to EBITDA or to earnings and I guess trying to get underneath not just EBITDA going out the door but maybe the scope of stranded overhead or Are there any other meaningful costs that we should be thinking about as we're sort of trying to look at the Model X divestitures?

10:10 Sure. So when you look at this business, it's a business that has an average margin that is lower than the average margin of the company. And we are really expecting minimal dilution from these divestitures, okay? And and also we are also working internally here from now until we close to try to even offset that. So I think what I could tell you today is exactly that, that it's a business with a margin below the average of the company and you're expecting minimal dilution and I think we have time even for this minimal dilution to work internally to try to offset it.

10:58 And that's true for the cheese business as well. So when we look at both divestitures, we shouldn't expect a lot of earnings dilution from both of them.

11:09 When you look at the cheese divestitures, as I mentioned before, we were expecting around 5% dilution. But again, the same way for these divestitures, we are also working now with these two businesses Thank you. Our next question comes from Jason English of Goldman Sachs. The line is open.

11:47 Hey, good morning, folks. Thanks for stopping me in. I appreciate it. I guess I kind of want to come back to a similar question, but it's all about trying to determine where you're going to land. I need to talk for the year. Can you put a finer point on the comment that you made in your press release that you expect EBITDA to come in ahead of your strategic plan? What does it imply? Where would your strategic plan place you? How much upside do you see? And back to Spillane's question, how much EBITDA is leaving with planters and cheese, please? Thank you.

12:23 So, it's Paulo again. So listen, we are not giving point estimations for the full year 2021 EBITDA. But what we are conveying here is that we, as Miguel mentioned, we are having a very good start for 2021. I think we gave a good clarity on our investor day about the curve that we had for our EBITDA through our strategy plan. And again, we are seeing upside on that. and this upside is coming from not only from at-home consumption that we are seeing coming from the COVID situations, but also from better performance that we have in the business, in many areas of the business, including supply chain.

13:10 So that is how we are seeing that. And again, of course, we're going to be lapping at a very strong 2020 performance, but we are very confident in how we are starting the year and the potential upsides that we have. And I'm very happy that we are seeing a stronger beginning of the year and a stronger potential performance for us in 2021. About the impact from diversities, it's pretty much what I was mentioning the question before about we expect pretty much from the planters basis a minimal dilution and we are working internally to offset even this dilution, this small dilution that we can see now. Thank you. Our next question comes from David Palmer of Evercore ISI.

14:00 Your line is open.

14:05 Hi. Good morning. Just wanted to follow up on the cost picture, productivity savings, and other things that might impact 21 versus 20. It sounds like you said that commodity costs would be fairly benign, but perhaps you can dig into that versus freight and logistics where we've heard about some inflation and how that might net across against your productivity plans. Thanks.

14:39 Paul, you want to start on that one?

14:41 Sorry, can you repeat the question? You're good here.

14:47 Sure. Question on some of the gives and takes with regard to your margins and EBITDA for 21. You mentioned commodity costs were fairly benign and I'm wondering if maybe you can put some expectations or quantify that a little bit more about your commodity outlook and also talk about freight and logistics. We've heard a good bit of inflation is out there on the shipping side. If you could maybe break that out or speak to that net of productivity plans for this year. Thanks.

15:26 Yes, that's clear. We are seeing the inflation as I was mentioning before. When you separate this, we're seeing inflation coming from the same type of inflation that we're seeing. It's a broad inflation from non-key commodities and also packaging. And we're also seeing inflation coming on the transportation in the U.S. On the big four commodities that we have, We are not seeing any of the inflation. So it's more stable. And as I was mentioning, the type of inflation that we're seeing and the level that we're seeing, we believe is manageable through not only the supply chain initiatives that we have, but also with the revenue management initiatives that we were describing, Carlos was mentioning in a few questions ago.

16:19 But again, we are seeing the inflation. We believe it's manageable. and is embedded in our outlet.

16:28 Thanks. You're welcome. Thank you. Our next question comes from Alexia Howard of Barnstein. Your line is open.

16:37 Good morning, everyone.

16:39 Good morning. Good morning.

16:42 So you talked about the taste elevation platform doing very well and you've got the slide seven to demonstrate that. Can you talk explicitly about exactly which products and which geographies are working best there and whether you expect that momentum to continue?

17:04 Well, actually, we are doing pretty well on test elevation across the board. There's not one specific country. Of course, since U.S. is so critical in our portfolio, U.S. is a big part of this growth. But I would mention Canada, UK, Australia, but even the emerging countries, right? Brazil, Russia, Middle East. We are doing very well in taste elevation. We are having record shares with our brand Heinz, with ketchup and sauces everywhere in the world. But it's not only Heinz. We have Lee & Perrins. We have Heinz Mayo, we have basically our portfolio, the entire portfolio on taste elevation doing very, very well, both growing volume and share.

18:01 And do you expect that momentum to continue even as the pandemic eases?

18:06 I do, and I think that we have a pretty strong innovation plan ahead that will strengthen that performance. I think we have great momentum, and that will continue. Great, thank you very much.

18:21 Just to build Miguel's point, you're going to hear more about it when we go through our kind of discussions, but I think that our taste elevation has proven to be an advantage part of our business that there will be something that we'll continue to lever as we go forward. Thank you.

18:39 Great, thank you all. And just to continue building on that, this is our true global platform and we are Thank you. Our next question comes from Michael Lavery of Piper Stanley. Your line is open. Good morning. Thank you.

19:17 You noted that your marketing spend was up 11% last year. Does that get you to where you think is about the right level or should we expect more investments there? And when you say further prioritization efforts are underway, is that a reallocation of spending or does that mean just giving more money to the priority initiatives or a bit of both?

19:42 So we, in our strategic plan, We talked about increasing 30% marketing in five years. So last year we increased more than what would be the CAGR for five years, of course. This year we are seeing great opportunities for us on efficiencies in marketing. We are buying media in a much better way. We have a new contract with Great savings on media. We are improving our creative and content and really, you know, sweating the assets and leveraging a better ROI.

20:31 So I think that things are in accordance to plan in marketing and we are going to get better every year. We are very excited with that. Carlos, I don't know if there's anything you want to add, but.

20:47 You covered it well. Thanks, Miguel.

20:51 Great. Thank you very much. Thank you. Again, if you'd like to ask a question, please press star and one on your telephone. Our next question comes from Jonathan Feeney of Consumer Ed. Your line is open.

21:05 Good morning. Thanks very much for the question. I look at the natural cheese divestiture versus planters, certainly some similarities around the challenges and differentiating the customer, but there's also some important differences. And I would love to know, what's the bright line within planters? You listed some things that make sense to me. but you have where you decided it was maybe something that wasn't a problem not worth trying to solve relative to many other brands where you are having success rethinking, reframing driving the brand to success where maybe it hasn't been in the past. What were the attributes of it that really put you over the line that this is something that's better in someone else's hands?

21:52 Look, Planters is A very iconic, very strong brand. So this is not something that we took lightly. But to improve our portfolio, we must focus on areas where we see the greatest competitive advantage, the greatest potential and returns. And when we look at planters, planters is one of the brands that is most affected by private label. In our portfolio, it's also, of course, affected as a commodity. And so when we looked at that, in order to have more flexibility towards the future on building a portfolio, I think that we made that choice and we are very happy with that.

22:49 Clear answer. Thank you very much. I appreciate it. Thank you. Thank you. Our next question comes from Steve Powers in Georgia. Your line is open.

23:01 Yes. Hey, thanks. Thanks. So I guess two follow-ups on the planters' divestment, if I could. First is just the 15 times EBITDA multiple that you articulate on slide 22 of your deck today. I just want to clarify, does that include overheads in the implied EBITDA base that will be stranded? I appreciate that you'll try to offset that, but just wanted to confirm. And then strategically, I guess just to press a bit on Jonathan's question from a moment ago, back in September, real food snacking was something that you highlighted as a growth platform, and I'm assuming it still is. Planters was part of that. And so I appreciate and understand the rationale that you're articulating today. So let me get the first one.

24:13 Here and then ask Carlos to take the second part of your question. So yes, when we look at the multiple that we disclosed that is like 15 times 2020 and 17 times 2019, it includes some small allocation of strain costs, a small part of that. It includes in both numbers, okay? In the 17 times 19 and the 15 times 2020. I'm going to ask Carlos to get the second part of your question about the platform.

24:53 Yeah, thank you. You're right. The idea of us focusing real food snacking is something that we laid out in September and we continue to be very much focused on driving that as part of our growth platform. And that Just want to be clear, that has not changed. I think today you saw in the press release that we highlighted there's still two specific areas within real food snacking that we believe we have huge amount of advantages and we're going to continue to drive those as we go forward. Specifically, we think about real fuel for kids where Lunchables is a cornerstone of that particular area and segment as well as real meal alternatives where we think about adults opportunities to substitute meals, things like what we see in areas like P3, for example. So when I look at the entire strategy, I think it's for us, we continue to stay focused on real food snacking.

25:50 The transaction today is actually only going to help us add additional fuel to support the strategy that we laid out in September. Thanks for the question. Thank you. Our next question comes from Jenna Gianelli, Goldman Sachs, your line is open.

26:10 Hi, good morning. Thanks so much for taking the question. In your prepared comments, you said that, you know, IG was important to you, but obviously without sacrificing the speed of the transformation. I'm curious in your mind where the business and leverage needs to be in order to get to IG. And in your mind, what are the primary benefits of achieving that rating? Thank you.

26:33 Hi, let me take this one. Listen, we believe investment grade, as I said, is important for the company. As we were mentioning also, we closed the year 3.7 times. We want to be consistently below four times net leverage in the organization, and we believe we are on track to stay there, to get and stay below four times. The two divestitures that we've announced. The proceeds of these two additional divestitures would give us additional half a turn of the leverage.

27:20 And this would give us flexibility, and I think that is important, flexibility to accelerate our strategy. And this acceleration would come organically and organically with the initiatives that we are following here. And again, that is the plan that we have today. We want to keep the leverage below four times. And we are on track to be there. I think the proceeds from the divestitures are going to give us additional flexibility to accelerate our strategy. And again, we are very comfortable with the path that we have in terms of the leveraging with our credit position. So we are feeling very good on the capital structure and credit side.

28:09 Thank you. Thank you. At this time, I'd like to turn the call back over to Miguel Patricio for any closing remarks.

28:20 Okay, well, I wanted to thank you all for being with us here. I just wanted to finish and... and say that we couldn't be more optimistic and positive about the momentum that we have in the company right now. We are progressing fast in this transformation journey that we are. We have today a very different company that we had just 12 months ago. We have a much better team. We have a far better employee morale and engagement despite the fact that we've been all working from home. We have... The priorities in terms of strategy and geographies, very well defined. So we have a north.

29:05 We talked about efficiencies in the supply area and we brought them. We executed them despite the fact that we had the best year in quality and safety in our plants. We put back in marketing $100 million in 2020 and we are starting the year Jan and Feb are strong months for us. We have new households with getting better in market share every quarter. We have a very strong renovation in innovation that we are going to share with you better at Cagney. Investment levels are ramping up and from a financial standpoint this transformation is well underway.

29:54 We are on track to to remain below four times leverage. The 2021 financial will be ahead of our strategic plan and the diversions that we just announced will accelerate the leveraging, increasing flexibility for a creative investment. One year ago, we had a lot of hopes and plans. I would say we are ahead of where we thought we could be. Thank you very much. Thank you for your time. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating in the August Connect. Have a great day.