Kraft Heinz Company (KHC) — Q4 2020 Earnings Call Transcript

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 during the call, and these 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 want to highlight that we will provide greater details on our 2021 initiatives during our presentation at the CAGNY 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.

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 full-year 2021, really in terms of your planning stance for demand. I guess 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. So 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.

Hi, Andrew, this is Miguel speaking. Well, we are looking at 2021 in a conservative way. However, I have to say that we saw very strong consumption gains in January, and February is coming good as well. 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 we gave you, and concentrate our minds and efforts on our transformation through our operating model. Paulo, I don't know if you have anything to add, but from my side...

No. That's it, Miguel. I think also it's worthy to comment that in our outlook, we are including the view that we have for inflation. We are also not considering the two divestitures that we've announced.

Great. Thank you very much.

Thank you.

Hi, good morning.

Good morning.

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 like the magnitude of the inflation. And I wondered if you could speak to that, excluding 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?

Sure. Chris, this is Paulo here. We are seeing the same inflation you're also observing, particularly stemming from non-key commodities, ingredients, especially packaging and transportation in the U.S. We feel that the level and the type of inflation we are experiencing is manageable, and it's reflected in our outlook, as I mentioned. We're confident regarding the supply chain efficiency programs we've implemented, which we expect will unlock savings across our supply chain. Additionally, our revenue management initiatives across the globe, combined with innovations and renovations in market investments we are undertaking can help us with pricing, if needed. As I said, we have incorporated this inflation into our outlook today. I don't know if Carlos wants to add anything on top of that.

No. I think to reiterate your point, Paulo, that we feel that it's manageable. I believe we are implementing the appropriate revenue management initiatives to ensure that we can handle these challenges as they arise. Thank you.

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

Yes. When you consider the non-key commodities, ingredients and packaging across the globe, and think about freight, the transportation aspect is more U.S.-focused. Regarding the key commodities—our big four commodities—we are not observing significant year-over-year inflation throughout the year. So, we’re primarily discussing non-key, non-big four commodities and the packaging and transportation in the U.S.

Thank you.

Welcome.

Hi, good morning. Just to stay on the subject of cost and pricing. A few years ago, some manufacturers tried to pass through some list prices because of higher transportation costs. I think some of their customers at that time, on the retail side, pushed back saying, 'Look, 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 different. I just kind of wanted to get a sense for, given your higher costs in packaging, higher transportation and 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 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?

Let me take that one. To give you some perspective on what we're experiencing in the U.S. with our customers: first, regarding our consumers, we've shifted our focus to better understand what they are going through. They are showing a significant amount of resilience in this process. Our emphasis is on driving the renovation of our portfolio to ensure we provide the right value for both ourselves and the consumer. We're also balancing this with the right revenue management initiatives. When I mention this, I refer to utilizing all the tools we have available to manage different pressures arising from inflation. Our priority is delivering better value to consumers by improving our portfolio, investing in marketing, enhancing the quality of our media, and observing how that translates into an improvement in our shares, as seen in 2020. Overall, these are things we can manage and do not see them as major derailers as we progress.

Thanks for the question.

Hey, good morning. So, I guess my question is just related to the divestitures. And maybe, Paulo, 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 is there any other meaningful cost that we should be thinking about as we're sort of trying to look at the model excluding divestitures?

Sure. When you look at this business, it has an average margin lower than the average margin of the company. We are really expecting minimal dilution from these divestitures. Also, we are working internally now until we close to minimize this further. What I can tell you today is that this business has a margin below the average of the company and we are expecting minimal dilution, and we have time to work on offsetting that.

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

When you look at the cheese divestiture, we expect around a 5% dilution. However, we likewise are working internally with both businesses until they exit the company to mitigate this effect.

Okay, great. Thank you.

Hey, good morning, folks. Thanks for sneaking 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 on EBITDA for the year. Can you put a finer point on the comment you made in your press release that you expect EBITDA to come in ahead of your strategic plan? What does it imply? Like 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.

So it's Paulo, again. We are not providing specific estimates for our full-year 2021 EBITDA. However, we are conveying here that as Miguel mentioned, we had a very good start for 2021. I think we provided good clarity on our Investor Day about the curve for our EBITDA compared to our strategic plan. We are observing some upside from several factors, including at-home consumption due to the COVID situation and better performance in many areas of the business, including our supply chain. While we will be lapping a strong performance in 2020, we're very confident in how we are starting the year and the potential upside we have. We're very pleased to observe a stronger beginning to the year and improved potential performance for us in 2021. Regarding the impact of divestitures, it's mainly as I previously indicated, where we expect minimal dilution from the Planters business, and we are working internally to offset even this dilution.

Hi, good morning. Just wanted to follow up on the cost picture, productivity savings, and other factors that might impact 2021 versus 2020. It sounded 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 against your productivity plans? Thanks.

Paulo, do you want to start on that one?

Sorry. Can you repeat the question? You cut off here.

Sure. A question on some of the gives and takes with regard to your margins and EBITDA for 2021.

Yes, now that's clear. We are experiencing the inflation as I mentioned earlier. When you separate this, we see inflation coming from the Type of inflation that you are seeing. It's a broad inflation from non-key commodities and also packaging. We also observe inflation in transportation in the U.S. Regarding the big four commodities, we are not seeing much inflation, okay? So it's more stable. As I mentioned, the type of inflation we are experiencing is manageable through not only our supply chain initiatives but also via the revenue management initiatives we discussed, which were mentioned by Carlos during several questions ago. Overall, we are seeing inflation and believe it is manageable and embedded in our outlook.

Thanks.

Welcome.

So you talked about the Taste Elevation platform doing very well, and you've got slide 7 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?

Well, actually, we are doing pretty well on Taste Elevation across the board, and there's not one specific country. Of course, since the U.S. is critical in our portfolio, it plays a big part in this growth. However, I would also mention Canada, the U.K., Australia, but even emerging countries like Brazil, Russia, and the Middle East are excelling in Taste Elevation. We are achieving record shares with our Heinz brand, particularly with ketchup and sauces globally. It's not only Heinz; our line of parent companies are also performing well. Additionally, our entire portfolio within Taste Elevation is doing very, very well, both in terms of growth volume and share.

Do you expect that momentum to continue even as the pandemic eases?

I do. I think we have a solid innovation plan ahead that will bolster that performance. We have great momentum, and that will continue.

Great. Thanks very much.

Just to reinforce Miguel's point, I think you’re going to hear more about it during our CAGNY discussions. This aspect of our Taste Elevation has proven to be a strong part of our business, and we will continue to leverage it as we move forward. Thank you.

Great. Thank you, all.

To build on that, this is our true global platform, and we're benefiting from the experiences and tests we're conducting in various countries, allowing us to scale more rapidly than we did before. We are collaborating much more effectively as a team.

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?

In our strategic review, we talked about increasing marketing by 30% over five years. Therefore, last year we increased more than anticipated for that CAGR over five years. This year, we see great opportunities for us regarding efficiencies in marketing. We're buying media more effectively. We have secured new contracts with substantial savings on media. We are enhancing our creative and content, maximizing the assets, and focusing on producing better ROI. I believe things are aligning with our marketing plan, and we will continue to improve year by year. We are genuinely excited about that. Carlos, do you want to add anything?

No, you covered it well. Thanks, Miguel.

Thanks very much for the question. I look at the Natural Cheese divestiture versus Planters; certainly, there are some similarities around the challenges in differentiating the customer, but there are also some important differences. I would love to know, what's the bright line regarding Planters? You listed some items that make sense to divest, but in contrast, you have many other brands where you are successfully rethinking, reframing, and driving the brand to success where it may not have seen that in the past. What attributes led you to decide that this was a brand better suited under different ownership?

Look, Planters is a very iconic, very strong brand. This is not something we took lightly. To enhance our portfolio, we must focus on areas where we perceive the greatest competitive advantage and potential returns. When I look at Planters, it is one of the brands most affected by private labeling within our portfolio. It is also impacted as it behaves like a commodity. Hence, when we evaluated this, we determined that in order to have more flexibility for future portfolio development, we needed to make that decision. We're pleased with it.

So I guess two follow-ups on the Planters divestment, if I could. First is just the 15 times EBITDA multiple you articulated 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 earlier question. Back in September, Real Food Snacking was something you highlighted as a growth platform, which I assume it still is. Planters was part of that. I'm curious if there was a strategic shift or something that happened between September and today beyond just an offer coming in that changed your perception of Planters. Given it was positioned as part of that growth platform five to six months ago. Thank you.

Okay. Let me address the first part of your question and then ask Carlos to respond to the second aspect. Yes, the multiple we disclosed, which is 15 times 2020 and 17 times 2019, includes a minor allocation of stranded costs in that figure. It incorporates a small part of that into both numbers, okay, regarding the 17 times from 2019 and the 15 times from 2020. Now I’ll pass it to Carlos for the second part.

Yes. Thank you. You are correct. We continue to focus on Real Food Snacking as our growth platform. The specifics we highlighted in the press release indicate there are still two specific areas within Real Food Snacking where we believe we have a competitive advantage, and we will continue to drive those areas forward. Specifically, we see substantial opportunities in real fuel for kids, where lunch is a cornerstone of this segment, and real meal alternatives targeting adults to substitute meals, similar to what we observe with products like P3, for example. Overall, our focus on Real Food Snacking remains unchanged, and today’s transaction is expected to provide us with additional resources to support the strategy laid out in September. Thank you for your question.

Thank you so much for taking the question. In your prepared comments, you said that IG was important to you, but obviously, without sacrificing the speed of 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.

Let me take this one. We believe investment grade is essential for the company. As previously mentioned, we closed the year at 3.7 times. Our goal is to consistently remain below 4 times net leverage in the organization. We believe we are on track to achieve this again, even without the two divestitures we've announced. The proceeds from these two additional divestitures will provide an additional 0.5 turns of deleveraging, offering us flexibility, which is important for accelerating our strategy. This acceleration may occur organically or inorganically through the initiatives we're developing. This is the current plan. We want to maintain leverage below four times, and we are on track to reach that goal. Additionally, the proceeds from the divestitures will further our ability to accelerate our strategy. We feel confident regarding our credit position and capital structure.

Okay. Well, I wanted to thank you all for being here with us. I just wanted to conclude by stating that I couldn't be more optimistic and positive about the momentum we have in the company right now. We are progressing quickly in our transformation journey. Today, we are a very different company compared to 12 months ago. We have a much better team and significantly improved employee morale and engagement, despite the circumstances of working from home. Our strategy and geographic priorities are well-defined, providing us with clear direction. We talked about efficiencies in our supply chain, and we've implemented them successfully, achieving the best year in quality and safety in our plants. We have reinvested $100 million in marketing in 2020. We're off to a strong start this year, with January and February performing well. We are gaining market share among new households every quarter. Our strong renovation and innovation efforts will be shared in more detail during CAGNY. Investment levels are rising. From a financial perspective, this transformation is underway. We are on track to stay below four times leverage, and our 2021 financials will exceed our strategic plan. The divestitures we announced will accelerate deleveraging and provide flexibility for accretive investments. A year ago, we had hopeful plans, and I would say we are ahead of where we thought we might be. Thank you very much for your time.