Thank you for standing by. Welcome to The Kraft Heinz Company's Third Quarter 2021 results conference call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised today's conference may be recorded. [Operator Instructions]. I would now like to hand the conference over to your host today, Chris Jakubik, Head of Global Investor Relations. Please go ahead.

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 third quarter 2021 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 these are discussed in our earnings release and our filings with the SEC. We will also discuss the 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, and good morning everyone. I would just like to start by sharing how encouraging it is for us to see our Company leaning into a scale and agility that we have been talking about for some time, addressing short-term challenges at the same time that we are building the long-term advantage. We are today a much stronger Company and we are better positioned to address inflation that we're seeing. We are taking actions now to protect profitability through 2022 and our actions, and not just branching, we are also implementing price pack architecture, value-engineering, and leveraging our scaling procurement. At the same time, our team has continued transforming our business for long-term growth and advantage. Our momentum with the consumer is strong, and our consumer-focused platform-based approach is taking us to new occasions. We continue to invest, to improve relevance of our brands. They are making greater, more creative marketing investments. And at the same time, we are building agility that will deliver the 2 billion of gross efficiencies and looking to unlock more. We are continuing to pay down debt and improve our net leverage. And we continue to invest in our most important assets, our people. And as we mentioned in our remarks, we have done all of these while delivering better 2021 results than previously expected, which speaks to the strength of our business. Well, with that, let's take your questions.

Thank you. [Operator Instructions]. And our first question comes from the line of Andrew Lazar with Barclays. Your line is open. Please go ahead.

Great. Thanks so much. My question is actually for Rafa, if I could. We've been taking a look at some Nielsen trends and some key food categories in the U.S. and Western Europe. And while consumption obviously in the U.S. has certainly remained elevated, trends at least in some categories in Europe seems to be decelerating meaningfully, or I guess normalizing is a better word for it as those markets reopen at a faster pace than what we've seen here in the U.S. So I'm curious if KHC is seeing this dynamic play out at all for the Company, and if you see maybe certain trends in Europe as a fair leading indicator of what's to come in the U.S. around stickiness of demand. Or if maybe there are some differences suggesting that not a great set of data points to necessarily use to compare. Thanks so much.

Hi, Andrew. Rafa, here. Thanks for the question. From an overall market perspective in Western Europe, we have seen indeed more of a return to pre -pandemic consumption patterns than in other developed markets. That said, there is quite a bit per category, and we are seeing much greater stickiness in our base elevation platforms as the consumers continue to look to us to elevate their views. And this is quite positive to be honest to us, because if you recall, we have three key pillars on our international growth strategy and our base elevation platform, emerging markets and food service channel. So these demand stickiness in base elevation, and we will continue to see favorable levels of consumption, growth, and absolute terms on the platform. And we do the best when we are focusing at. So we continue to see this elevation demand sustaining. And in food service in particular, Western Europe is rebounding very fast. It is approaching 2019 levels. And on top of this, I agree we've been gaining a lot of share in almost every market in -- we operate in food service, so is another strength. As I said, overall, it's true is most of the market is coming back to pre -pandemic. In some platforms, they continue to be very strong and that has played out favorably for us, this elevation.

Great. Thanks very much.

Thank you. Our next question comes from the line of Jason English with Goldman Sachs. Your line is open. Please go ahead.

Thanks, folks. Appreciate you slotting me in. I guess I'll lean into price a little bit. You reiterated the comment today that during the prepared remarks that you expect the price to catch up with costs by the end of the year. Can you confirm that that's not just ingredient costs, but that's sort of the total supply chain pressure? And then looking at slide 8, is it fair to look at that as a price index? So, to say you came into the year with the index around 103 and you plan to exit a bit north of 106, you'd be carrying around 3 points of price into next year, or is that 106 a bit of an average and the real exit rates closer to 107 or 108? Thanks.

Hi, Jason, I'm Paulo, here. Let me try to help with this question. We expect to see similar level of inflation at the beginning of '22 as we are seeing now in the second half of '21. Most of the inflation that we're going to see is carried over for '21. We expect to enter '22 having executed the price plan that protects our profitability from current levels of cost. Current levels of cost that we're seeing now. And this should address the inflation that's expected in '22. So we are seeing our execution of pricing, protecting our profitability given the cost levels that we're seeing now and this should protect our profitability when we're entering into '22.

So we're probably looking at something closer to a mid-single-digit pricing as we enter next year if you're carrying high single-digits percent of COGS. That's just that the math on that. Is that unreasonable?

Listen, I don't want to get into the actual forecasting of pricing but I can tell you that the actions that we're taking now will protect the inflation that we're seeing, and it will protect our profitability from these inflation that we're seeing in the current cost levels. And this could put us in a good position to enter 2022.

Okay.

Just complementing what Paulo is saying. I think that if eventually more inflation terms, well we'll have to take action.

Sure. It makes sense. And congrats on the pricing success so far. It's better than I expected.

Thank you.

Thanks, Jason.

Thank you. And our next question comes from the line of Pamela Kaufman with Morgan Stanley. Your line is open. Please go ahead.

Hi. Good morning.

Morning.

Can you elaborate on what drove the sequential softening in market share trends that you highlighted? Has that primarily been driven by the capacity constraints or have there been other competitive dynamics contributing to the share performance? And then how are you addressing the capacity constraints that you highlighted, and I guess, what do you see is driving improved share performance going forward?

Thank you Pamela (ph) for the question. I imagine a lot of those questions you had there, I think there were 3 I counted, but they were related to the U.S. so I'll take it. I guess for me I will say, yes, first of all, the way I think about the business is we want to make sure we continue to drive household penetration and repeat rates, which we are doing. And while there were some short-term share pressures, and during the back-to-school as really their demand really out grew in our capacity in a few categories, over the long term effect that we are driving household penetration and repeat rates shows the strength of our portfolio interest of our business on how we are actually managed through all that.

But I will say yes to that. I'm very much focused on making sure that we win by maximizing the controls. And our recipe for winning is to be essentially consistent with focus on solidifying the consumer needs better than anyone else, and it doesn't matter exactly what's happening at this particular moment. As we go forward, I'd tell you, I see three specific advantage that for us it's going to be a play which we're going to win. We have continued to renovate our portfolio, we have controlled the cost in our brands so that we can optimize the value with our -- for our consumers and really that is the best recipe for us to withstand against any competition that comes in. And essentially what we are doing -- we're increasing the equation of what it's worth buying for at the shelf. The second event is where we have also -- we're making sure that we are differentiated at each rung of the price ladder, whether its entry to mainstream to premium so that consumers can stay within our franchise even if their circumstances might change. And if you think about Mac and Cheese, we've got everywhere from an easy mac to the original version for consumers. And then the third piece I will say is we are transforming our portfolio through all these divestitures that actually have a significantly reduce our private level exposure. So we have continued to renovate and manage our costs. We have continued to bring -- making sure that we have differentiated products within our categories no matter where the frequent consumers are. And we have a private -- we have a portfolio that is mostly going to reduce this private label. And frankly, we continue to see opportunities to capture profitable growth focusing on our consumer platforms. So we are executing with excellence and leveraging this broad renovation, the innovation, and the rest is creating that our teams are doing. I think, Pamela, you also spoke a part of your question within other supply chain constraints that we're seeing. I think the way I would look at it is, across the industry we're seeing a supply chain that is being tested on a daily basis. And what I will say is our supplying chain team has been very agile, taking advantage of our global scale. We're showing agility in labor, in manufacturing in logistics and I will give you some examples of what I mean. We are reducing the amount of time to hire and significantly increase the applicant pool by leveraging new digital tools at Kraft Heinz. We are improving the flexibility in terms of the materials that are available with a reeling ownership mindset across sales, procurement, and manufacturing.

And those things will change in our plans, 39 of them across the U.S. sometimes on a weekly basis. And then, in logistics we've actually increased the throughput on warehouses by shifting more of how we operate 24/7 and increasing the automations since the pre -pandemic time. So having said that, I will tell you that we do have a good line of sight of continue to improve our customer service levels as we move forward. And because frankly, restoring the top-tier customer service to the pre-pandemic level is a continued focus for us and the entire team. And thanks for your question, Pamela.

You also asked about moving forward in terms of capacity. On top of everything that the Carlos is saying, I just to add to that, we have been adding capacity. We increased substantially Heinz ketchup capacity, Mac and Cheese, on frozen snacks, [Indiscernible] max and bagel bites, on crops of cucumbers, on meal, and on kid's juices. So it's -- this investment in capacities is a great proof on our belief about the demand for our products in the future.

Thank you. Very helpful.

Thank you. And our next question comes from the line of Bryan Spillane with Bank of America. Your line is open. Please, go ahead.

Hi, thanks, Operator. Good morning, everyone. So my question is, I guess, tied to some of the themes here, just in terms of inflation and pricing and margins. Maybe if we could just step back pre all of this inflation and pre -COVID, there was a transformation in your supply chain in which that work had started. We look at gross margins or profitability of the gross profit line, and you've held up pretty well, relative to your peers; if anything, probably a little bit better. I guess as we're thinking about profitability going forward, knowing that there's some pricing that's coming through to cover inflation. But how much are you also still benefiting incrementally from some of the supply chain work you've done, and how much of that is going to be also a contributor to helping to offset all of the inflation and supply chain disruptions?

Let me start here and then we can maybe build -- someone else here can put -- build on top of my answer. What you said is true. When we come back to when the time that in 2019 when we close our strategy beginning of 2020, the -- we were very focused on improving our gross profit overtime. And in order to do that, we developed on many programs in terms of efficiencies in supply chain, in terms of focusing on these -- also pricing. A new pricing strategy and revenue management strategy and this is taking place. You can see that today with all the inflationary pressure that we're seeing in the gap that we're having between the pricing realization and the cost inflation, we're keeping the gross profit margin, the same level that we had pre -pandemic. And this gives us a lot of confidence in our brand going forward. So I will say that our strategy to improve profitability, to gross profit margin is working.

What I would add to and think about our overall progress in our transformation, in -- both in terms of some of the things that you heard from Miguel earlier. We are in fact, making a significant portion on fast-track in critical projects on our capacity. So as Miguel give you some examples, I will give you a couple of more, which is if you think about ketchup, the fact that in Heinz dip and squeeze kind of shares a small package, we have nearly doubled our capacity and by the end of next year, if you think about Mac and Cheese, by the second half of next year, we've actually increased about 20% of our cups' capacity and even in Frozen snacks, by -- also by second half of next year, we will have increased about a third our capacity in areas like daily mix. And so both across -- this are some of the examples of things that we saw earlier in the pandemic. We made fast-tracking of projects and we continue to do that, more work to do ahead. The other way I look at it is in terms of our -- how do we make sure we get more of our utilization of our assets and for me, things like improving our OEE, which we have now done '20 versus '21, and -- I'm sorry, '20 versus '19, '21 versus '20. It is also the way that we're going to continue to make sure that as we go forward, we attack in both ways, making sure that we are being smart about investing in our capacity. And we're getting more of our assets through improvements in our OEE. Thanks for your question, Bryan.

All right. Thank you.

Thank you. And our next question comes from the line of Robert Moskow with Credit Suisse. Your line is open. Please go ahead.

Hi, thanks. I just wanted to try to square the outlook for 2022 slide with your comments about pricing catching up to costs. Because if pricing is really catching up the cost that would imply that your EBITDA growth on a core basis divestitures should be able to grow in 2022. So if you're confident enough that the pricing is really catching up, why not take the extra step and, and talk about it in your outlook? As it stands, the slide is pretty general. It says that things are going to be strong, stronger than you thought post-pandemic but I'm not quite sure it points to EBITDA growth on a core basis yet.

Hi Rob. Let me start saying that we are not providing guidance for '22 and we're not providing also at this time any outlook for '22 besides the ones that we shared. We can say that we are very confident with our bets and we're very confident about our ability to retain consumers and retain volume that we're having today. And we're also confident in our ability to sustain these strong margins that we have. We -- our focus here is to protect the margin dollars from inflation as we mentioned and again, to give you a little bit more color if you can say that, and also we shared that in Q3, and we discussed that in Q3, we have lower the rate percentage margins and we expect these margins to improve as profit realization comes. But that is as far as we'll go in 2022. We're very confident with the fact that we have -- we are in a better space. We are a better Company in a better space with stronger consumption and with confidence in our ability to price the short debt inflation that we're seeing.

Okay. Well, I appreciate it. Thank you.

Thank you,

Thank you. And our next question comes from the line of Chris Growe with Stifel. Your line is open. Please go ahead.

Hi. Good morning. I just had a question for you in relation to promotions and you've talked about how you're rebuilding promotions in your business, especially in the US. I think you talked about a normalized promotional environment. So I just want to understand, and this gets back to a degree around pricing, as you recover promotions, especially against the period a year ago where they were lower, can you achieve price realization on a net basis that offsets inflation? And maybe related to that, would that rebuilding promotion or recovering promotion continue in the first half of 2022? Maybe a bit of an offset to the pricing you're taking in retail.

So Chris, let me answer that and try to explain. I think there are a couple of things you mentioned in your question. First, let me just put into context of the transformation that we've been having here at Kraft Heinz. I mean, if you think back, a critical aspect of our transformation is a consumer first approach to all that we do so -- which essentially is why our plan is to invest behind our consumer platforms during those even t windows where actually consumers are looking to us for solutions. So if we think about the gains that we have made so far, the fact that we have continued to drive brand household penetration and repeat rate, it is exactly because we have done that. We have been able to make sure that in moments during the year that consumers are looking for those specific solutions, that we can offer, essentially, the scale of what we -- of our products in a way that satisfies their needs better than anyone else. And we have been and expect to be as we look into 2022, more active with better execution than 2020 during this critical windows, but clearly not as deep as we were in 2019. And frankly, we continued to see opportunities to capture the growth. So as we are going to move forward, we are going to remain diligent on making sure [Indiscernible] satisfies our consumer needs better than anyone else, guided by our platform and our renewed focus on making sure that again, everything we do, as far as transformation, is with that consumer-first approach. Thank you.

Thank you.

Thank you, and our next question comes from the line of Alexia Howard with Bernstein. Your line is open, please go ahead.

Good morning, everyone.

Good morning.

Okay. So in your prepared remarks, you alluded to an appetite for more acquisitions in the emerging markets. I think you referenced the FM Foods and the [Indiscernible] deals that you've done so far. Can you talk a little bit about what additional or where you're focused in terms of potential future deals? Are there particular categories, particular regions that you're looking at? Can you say anything about the kind of scale of the pipeline in terms of which would you be looking just at tuck-ins or potentially something more medium sized? Thank you. and I'll pass it on.

Sure, Alexia. Maybe I can comment and then give the word to to Rafael, since he's responsible for emerging markets, among other things. We have, of course, today a portfolio that is better than we had 2 years ago and a much stronger balance sheet. And with that comes more flexibility, right? And you are right. I think that if we have opportunities for acquisitions, we'll look at them and always with price discipline. We like a lot to follow our strategy and as a consequence, taste elevation, which is the really one of the critical strategic pillar of the strategy of the international zone is in the place where we're looking for opportunities. And that helps also food service business. So yes, some business in Turkey that we acquired is the leading Company in food service. And we expect to grow to the retailers with that place in Turkey as well. And I will give the micro for the word to Rafael so he can give you more color about carriers that we're looking at.

Yeah. No. Thank you. The reason we are so excited about Assan Foods, about Hemmer is exactly as you have said, it's all strategy. They are strong margin categories in the right countries, as you said, base elevation and emerging markets and food service, those are the pillars for our strategy and what they can enable us in the future. I mean, each of those two businesses, I mentioned Assan and Hemmer. They are just short of a 100 million each. But with Assan we will not only be able to build Heinz as a bigger brand in Turkey, but we'll have capacity to grow much faster across the Middle East. And with Hemmer, I mean, Hemmer, we have announced, but we're now waiting for regulatory approval. It will not only strengthen our distribution, especially, in the south of Brazil, being we'll be able to participate in much more the gradual ladders of the the chain within Taste Elevation. And we can really leverage their portfolio to build our scale faster in [Indiscernible] and the food service channels. So they are definitely like, again, as I said, on strategy and that's what makes it the most exciting is Taste Elevation and within the core emerging markets that we want to grow. [Indiscernible] see a lot of opportunities.

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

Thank you and our next question comes from the line of Ken Goldman with JP Morgan. Your line is open, please go ahead.

Hi. Good morning. A couple of U.S. based food producers, they've suffered through some worker strikes recently. I'm just curious how you're feeling about your labor relations in general at the moment. And I guess how investors should think about the risk, if there is any, of Kraft Heinz perhaps facing some incremental challenges on this front?

Okay. Thanks for your question. I'm obviously not going to speak to anybody else's business. What I will tell you is that our teams, as I mentioned earlier, have shown tremendous agility of making sure that we are in fact, continue to have a focus on engagement of our workforce. As we sit here today, what I'll tell you is that we have seen pockets of some places where we've had some labor challenges in terms of shortages, but also they will have been very much focused on a few and isolated locations. As we move forward, I am actually confident that we have been able to actually and we'll continue to manage through specific areas where there have been some isolated situations in which we have had some labor shortages. But in a way that it's actually not a concern for us on a regular basis or on an ongoing basis as we move forward. So actually, I feel very good about where we are and how we continue to manage this in an agile way. I don't -- anything else you went to build up, Miguel?

No, I think that's -- the only thing I would add is that we've been working hard to improve the engagement of the Company overall and that brings us more confidence about the possible labor issues for the future. At this moment, we don't see any risk of a strike, but that doesn't mean that that's not possible. But we are confident about that.

No, I think as Miguel said. I think we're in a good position and really feel good about our -- the way to our teams have handled it and with the agility they have shown during this really difficult time. So thank you. I think we're about out of time there. So you -- we'll end it there. Thanks everyone for joining us today and for anybody who has follow-up questions, I'll be available to take your questions and for anybody in the media, Kathy Krenger and her team will be available for your follow-ups so thanks, everyone and have a great day.

Thank you.

That concludes today's conference call. Thank you for participating and you may now disconnect. Everyone, have a great day.