Ladies and gentlemen, thank you for standing by and welcome to The Kraft Heinz Company First Quarter Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to your host, Mr. Chris Jakubik, Head of Global Investor Relations for The Kraft Heinz Company. Please go ahead, 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. And 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, that we have had a very, very encouraging start of the year, both topline and bottom line with our strongest growth in priority platforms and markets, especially in under-developed countries with a very strong result. We were able to hold household penetration gains even as markets begin to open and effectively managing inflation and supply constraints. We are also very encouraged by our progress with the initiatives to accelerate our advantage in different areas like in marketing, be more agile and more creative in retail and foodservice joint business plans, in unlocking capacity in Grow and Energize platforms. And also on bringing efficiencies - 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 and we are 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 additional financial flexibility that we are building. We continue to aggressively reduce debt and our divestures are on track to further increased flexibility. I will now hand it back to the operator and we can start the Q&A.

Thank you. [Operator Instructions] Your first question comes from the line of 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. And I'm 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. 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 opening of the market because of COVID fading the mix will change and so that is one of the reasons. The second reason also let's remember that McCafe that was in the numbers of '19 and that 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 1.1 percentage points. So it's not that dramatic of deceleration although as you are saying that we are seeing the reopening of the developed markets and there is some mix impacts that we're going to feel in the quarter.

But that said, yes, 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. Thanks for the question. I mean for us emerging markets consumption has held up relatively well during the pandemic, and I would say 2Q reasons. One is availability. I mean our customer servicing across international has been quite consistent during the whole pandemic. But also like the focus, right, second is the focus. We remain very focused on our emerging market strategy, I mean centered around Taste Elevation platform, right, and combined with localized — the proven go-to-market expansion model. And this has been performing quite well. There are two factors that - these two factors helped us during the pandemic, right, and you can see on the results, 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 and 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 there, you have Kraft Singles, Oscar Mayer Lunch Meats and that's a lot of, I guess, 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 - is it - does it 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. I mean, and 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 the consumption across different day-parts and that's happening whether it's Mac and Cheese, whether that's Oscar Mayer hot dogs, very consistent. Plus even if you think about brands that typically - kids use at school like a lunch box, we're actually also seeing gains on those even over the last six months. So what I would say is our focus on continue to retain those new households regardless of the circumstances is working and it will be the things that we'll continue to do 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. So, 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 seeing that it would be - currently in the low end of the mid-single digit range and that's our view. And when we see this happening today as we mentioned before, 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 that we highlighted around that we still seeing like $400 million in efficiencies in our supply chain. And all the levers that 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 for you — just in terms of inflation, could you just 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 I guess 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. Yes, look, so let me break down the two. In emerging markets, I mean, in general acceptance of pricing is better, right, because inflations are more normal on the local economies. In developed markets, I mean what I can tell you is we've already successfully closed negotiations with all our key retail partners and especially in key countries like France, Germany and we remain to achieve the pricing and premiumization behind the brands that we needed. So we feel quite confident about that. I mean, in terms of comparison, you said comparing to the US, I mean there are similar and differences, right, like similar to North America, the costs have moved against us in ingredients, in packaging, but different in North America overall, logistics is not a major contributor to inflation in international. So in terms of numbers is what in line with what Paulo said comparable to 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, right. So as we heard for over a year, right, there has been a lot of optimization for the retailers to kind of focus on those core SKUs, right, to just essentially maximize the benefits of velocity and scale, which you also speak to all the time. So I'm just curious as you kind of look forward kind of around that creative development of the innovation, are there sizable pieces of the portfolio that you kind of foresee rationalizing such that those tails come off, new innovation comes in, but still focused on the core on those high [ph] velocity items? Thanks.

Let me answer your question and I ask Carlos to complement my thoughts. We see this as a great - we have seen and this is a great opportunity for us to - exactly to focus on SKUs with higher rotation and also from a supply standpoint to improve efficiencies in our factories and also on costs. So we see this move as a 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 [Technical Difficulty]. So if you go — as we go into this year, we have reduced probably 20% of our SKUs versus what we had in '19. And I think this has been done to duration [ph] with our retail partners. So we're building together kind of level of trust and transparency to make sure that we impact, focus on our core but drive better velocity and actually allows us to have - to better service with 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. So 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 to first of all about the overall view of how we're thinking about our pricing and how that fits in terms of our promotions. I can tell you is, I feel good about our ability to pass through our cost inflation and as we see it and where we need to do it.

We lost Carlos. So 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 the - what we're seeing going on in the marketplace and what we see unfolding is in Q1 we were able to sort of 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.

Okay. Listen, this is the new world that we're still working through. So I appreciate the people patience. What I was getting at is — within the context of our pricing that we're looking at do know that in the, if you think about our quarters, seven of the last eight quarters, we actually were able to actually drive pricing as a positive contribution to our net sales. So we are seeing that our iconic brands are actually showing the pricing power. Now, when you look going forward, we will return to supporting key promotional window. So if you think about coming up Memorial Day, we also are going to be making sure that we show up in those moments. At the same time, we will implement the revenue management initiatives to drive share growth and improve the returns. And if I sit back and I try to summarize kind of how that we're thinking through this, the way I think of it is this three-prong approach. One, making sure we continue to renovate our portfolio to drive better value for our consumers that we improve the creative content of our marketing and that we strengthened and diversifying our media impressions. So all said, I feel good about our ability to deal with the inflation that we have and making sure we do this in a way that is positive 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. Listen, as a matter of practice, we do not forecast pricing. But as we - and again, we are seeing that we're going to have - we're going to be up in the second half against some unusual comparisons in the back half. But as Carlos mentioned, we see a lot of levers for us to manage inflation through revenue management, through savings. So we're feeling pretty very good about where - how to manage our profitability that's coming 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 singles plus $400 million of cost saves, I mean, 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. And 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. And on top of that, we would have our - also our revenue management initiatives so again, I'm not going to give exactly quarterly number levels here, but that's how you should think about the progression of our base, 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? I guess, putting in another way, is it fair to assume unless there's some big spikes in items that are harder to buy ahead - mid single-digit inflation is fairly safe to build in. I'm just trying to think if items like cheese and meat and coffee rise a bit higher - these are items that historically Kraft has locked in many months in advance at time. So I just wanted to get a sense of the risk either up or down to that - the guidance of mid single-digit inflation.

Hi, Ken. This varies. And again, we have specifically in our Big 4 — our key Big 4 commodities for the full year, we are seeing just a slight inflation, okay? We are going to have our heaviest comp in Q2 that you're going to be lapping a very low price in cheese last year in a high price of pork bellies this year. But overall, in terms of the Big 4 we are seeing a slight inflation. In terms of how we manage and hedge, it varies by type of areas. So there are some commodities that we go longer, beyond six months, nine months, there are other that are shorter, but this varies a lot. But what I can tell is overall when we see the scenarios of course there is a lot of volatility in these markets. But overall when we see where the commodities start today — the range of mid single-digit is what we're seeing. And again, as I said, we are seeing as overall as a percent of COGS in the low-end of this range.

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

Ken I would not like to enter in this type of forecast. We are more focused on to be sure that we manage our cost for different levels of price and if we provide to our business specific hedging profile that allow the business to plan itself.

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. So Canada is definitely improving. So, could you please give us a bit more color about what's going on there and how sustainable and the gross and the rebound it is for the next few months and quarters?

Well, let me answer that question. I think you are absolutely right. Canada is definitely improving, had a very good quarter. I think that we did much better job in terms of promotional calendar for Canada that last year we started with big promotions and that the ROI was not exactly - it was great. And we are being much more disciplined on our promotions and that's what it reflects, so there was 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 way that we are evolving on innovation pipeline, with marketing and creativity and digital marketing. I think we are having a very different Canada than we had just one - a year and a half ago.

Thanks. And maybe a broader question on your straight [ph] brands so compared to [indiscernible] you laid down on that last year and now we are six, eight months within the implementation of that plan. So could you maybe tell us what you think - you've been very successful in implementing and you're ahead of what you expected and maybe some space or some strategic initiatives where you think you are sitting behind and why?

I would say that, overall, we are very excited with our transformation plan. And it's deep and it's in all areas. We are all evolving and after one year, I would say that we are going in a much more accelerated rate than we could imagine and especially in a year that we are doing all this through Zoom meetings, working from home. So it surprised us velocity, the agility that we are having in all areas, in all areas from supply to marketing to finance to all areas of the company. But this is a journey. Using an analogy of baseball, I would say that we finished the first inning. We are now going to the second inning. But there is still a big game ahead of us to play, but we are excited about the possibility, the evolution.

Thank you very much. I'll pass it on and [indiscernible] plan. Good work. Thanks.

Thank you.

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

Yeah, hey, thanks. And maybe 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. I guess 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 against 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. I will ask Carlos to talk about customer satisfaction engagement specifically in U.S. We have great progress on that part as well. I would say that among everything — all things that we have been doing maybe employee engagement is where we have the biggest shift with our people much more engaged. And when I say this, this is of course is from quantitative research, but also qualitatively. So, our team is much more engaged working in a much more cooperative way. We've been eliminating silos that we had in the company and this year of this pandemic was - we were already organized in a different way and we had to be much, much faster in that way. I would say that morale is much higher. We have a much more engaged team. They understand the strategy we have ahead and they are excited about the journey that they are leaving. That being said, again, we still have a room for improvement and we'll continue working in that sense. Carlos, maybe you can comment on the customer side?

Sure, Miguel. Thank you. And I can testify to what Miguel is saying that we have seen that across entire company. The level of engagement, the way that the teams are working with an agile mindset we do. Related to our customers what I can tell you is we are now in a much different place than we were a year ago. We have now been able to build trust with our key retailers. We are working in a part that includes a level of transparency, that we hadn't seen in the past and in fact our retailers are also - and partners are recognizing that. So I think that now when we hear from them directly that it feels like a new Kraft Heinz. We take that we've tried because it's - because of the work that we have now - and the collaborations we know we're doing with them in a way that we hadn't done in the past. So something for us to continue to build on, but thanks for the question.

Thank you.

And at this time, I would currently 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. And for the media Michael Mullen will be available for your calls. So again, thanks everybody 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.