Good day, and thank you for standing by. Welcome to The Kraft Heinz Company Fourth Quarter Results Conference Call. [Operator Instructions] Please be advised today's conference may be recorded. [Operator Instructions] I'd now like to hand the conference over to 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 fourth 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 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 on ir.kraftheinzcompany.com. With that, let's take your questions.

[Operator Instructions] Our first question comes from Bryan Spillane with Bank of America.

2 questions for me. The first one for Miguel. Just given how fluid the environment is using, I guess, Paolo's words and just the macro pressures that we're seeing in the market, how has that impacted your ability to execute? And are you not executing as an organization, I guess, up to or as well as you would like, just given all the pressure?

Bryan, thanks for the question. I mean, the macro pressures that you are mentioning, they've been here for a while now. And at the beginning, it was hard to adapt. But I think that this is the new normal, and we are absolutely embracing the change of the macro pressures every day. I'm personally very confident about the path forward. First, because of our people. We have today a great team, a very engaged and with a low turnover, which is very different from 2.5 years ago. Our business is growing and we've been relatively strong when we talk about gross margins despite the inflation that we are seeing, which in a way has enabled us to keep investing in our brands, and our cash flow and balance sheet is almost much, much stronger than 2 years ago. Now moving forward, I think that what we have to do is even to accelerate the path and the speed to accelerate profitable growth and unlock greater efficiencies. But on that one, I will leave for the CAGNY for us to speak a little bit more next week. Thank you for the question, Bryan.

All right. And then, Paulo, I wanted to just ask if you could give us a little bit more help with phasing for the year. And I guess more specifically, as we're looking at the first half, are there anything we should consider? I guess we're thinking about first quarter versus second quarter in terms of, I don't know, is inflation more pronounced earlier in the year, the impact of pricing to help offset inflation like how that flows? And also in the prepared remarks, you talked a bit about or there was some discussion about supply chain. So are some of the supply chain disruptions may be more pronounced earlier in the year or earlier in the first half than the back half. So just any help you can give us in terms of the shape of the quarters would be really helpful.

Sure, Bryan. So if -- stepping back a little bit, like we closed 2021 very strong. Our EBITDA was $6.37 billion. And in this number, we had approximately $400 million of divested business, okay? So we start from there. We are going to see -- we are expecting to see the benefit of our sales growth, the combination of pricing plus efficiencies that we have in our plan, mitigating the inflation, the higher inflation that we are seeing. And also we expect some headwind from volume mix, and we are assuming a more conservative levels of consumption and elasticities as the stimulus and government support states, okay? And again, as you said, we are expecting closer to 47, 53, H1, H2, and this reflects where we are currently on the inflation versus the price curve that we are implementing. Also, the recovery, as you mentioned, of the supply chain constraints that we have that we expect this to improve through the first half. There is also here in terms of the curve, we are going to have this year 53rd week that will benefit our Q4 in the magnitude of $60 million to $70 million. That's what we're expecting. And in terms of inside the first half between Q1 and Q2, we expect Q1 to be softer in relation to Q2 because of the timing of Easter shipments that we're going to have this year and also the timing that we are executing our pricing.

Our next question comes from Andrew Lazar with Barclays.

I was hoping to get a bit more clarity on the various buckets you broke out in the prepared remarks with respect to the supply chain constraints and market share. Maybe could you be a bit more specific on sort of what the one-time issues were in the fourth quarter and why you've got visibility to this being fixed by the end of Q1. Is the second bucket you mentioned of supply constraints simply demand outstripping supply and not necessarily execution-related? And then the third bucket, I assume are brands that are losing share for other reasons than supply constraints. So maybe if you can just sort of give us a little more clarity on those 3 buckets, that would be really helpful.

Thank you, Andrew, and it's Carlos and I'm happy to take it. So as you said in the prepared remarks, I broke this out, but let me give you a little more color on each of those. So firstly, the 40% of our share loss in Q4 was, as you said, was due to one-time supply and similar challenges. And what I mean by that, it seems like we saw in places where Philadelphia Cream Cheese, for example, given some packages issues that we had that we know what happened. Those are related more to whether with packaging materials in the case of Cream Cheese, whether it was labor in case of Oscar Mayer Bacon, so we have visibility on those, and we know that we are able to actually come back and recover in Q1. The second bucket is around the 30% that was really due to more -- think of those as more production constraints that we actually expect to resolve in the first half to exit them in a good place as we end Q2. And those are things where the actual production was driving the constraint. So think of those as Heinz Gravy where capacity is limited, and we were able -- but we are now doing things in order to free capacity to work service the high demand that we're seeing, whether that was in places like launchables where we have some ongoing labor constraints that we are solving and we'll be able to, again, execute to in a much better way. And then the third bucket, in some essentially is they are in categories and frankly, they're tilted towards growth in categories where we're actually looking to implement new game plans this year. And think of those essentially as new creative ways in which we can deliver a strong demand. And when you put it all together, I can tell you that we have the clear visibility on what needs to be done, and we actually have clear actions as well to make sure it happens. So we feel very good as we exit both Q1 and Q2 to recover this. So thank you.

Our next question comes from Chris Growe with Stifel.

I just had a quick question for you to understand, and I think this kind of follows on your answer there, Carlos, on Andrew's question. The production constraints you had, I think you said like 30% of the share losses. Can you help quantify like what that -- how much that weighed on sales, what the listing opportunity was in the quarter? And then I also -- I'm just curious around that. You did talk about in your prepared remarks -- the pre-recorded remarks about a real focus on market share in 2022. So I just want to get a better sense of kind of your expectations there and then how that could affect, say, volume and pricing and promotional efforts, that kind of thing, for the coming year?

First of all, thank you for the question. I would say I think it's a little bit difficult to quantify the share to the volume. What I can tell you is those are in the last 30%, those are categories, again, that we continue to see opportunity for us to service the consumer demand in a stronger way. So we have something that is focused for us. And we are -- the reality is that we have been -- we are actually thinking through very creative ways in which we can actually satisfy that demand going forward. And to your point around our focus on share, absolutely. For us, it's something that we as a company take very seriously. We mentioned the fact that we have great bright spots within our business, big iconic brands that have been growing quite a bit of share. But as we think about going forward, we want to make sure that it's consistently across our businesses and us being able to deal with recovery, both in Q1 and Q2 as we exit the first half is going to help us actually continue to grow in that perspective.

If I could just add any -- sorry, go ahead.

Please. No, go ahead.

Okay. Just real quickly just at many times a focus on market share can imply heavier promotional spending or those kinds of things. It sounds like you've got more new product innovation, those advertising, those kind of consumer pull more than a consumer push to generate that market share. Is that fair to say?

Listen, I think for me, whenever I talk about market share, think of it as profitable market share. I've been working in food company for a number of years. And there is no substitute to make sure that we -- whenever we think about market share, it has to be done in a proper way. We have to make sure we do -- everything that we do is with a consumer-first approach to make sure we, in fact, bringing consumer solutions, whether that is location-based, in-store and online, we'll always focus on making sure that it's done with a drive on profitable market share growth.

Our next question comes from Alexia Howard with Bernstein.

Can we ask about what came through better than expected in the fourth quarter. When you reported at the end of October, you were talking about adjusted EBITDA, I think, in the $6.1 billion to $6.2 billion range, and it came through at $6.4 billion. That's a big step-up for the last couple of months of the year. So could you just walk us through what the positive surprises were and whether those are likely to continue?

I think -- Alexia, Paulo here. I think I can take this one. I think we saw -- we were able to, even with many constraints, we were able to produce better. It's fair to say that if we're able to -- if we had more capacity, would have sold even more, but we were able to operate in terms of volume and capacity better than we planned. And also our promotion strategy came in better than we promoted less than we were expecting initially. I think those 2 areas together with over-delivering in terms of efficiencies, I would add to this third point were the main factors to our strong performance in the fourth quarter.

Our next question comes from Rob Dickerson with Jefferies.

Just a question and the commentary around expected stronger consumption in '22. Obviously, that's despite higher pricing and you said you're being somewhat conservative, it sounds like on the volume side as you look to your internal forecast. I'm just curious, when you come up with those forecasts, as we think about like back half of the year, is the feel that you might just be a little bit better positioned given price points, maybe a little bit more -- or let's say, better position with respect to trade down risk? I'm just trying to get a sense as to why you think consumption would actually be up at least in the at-home channel. And then I have a quick follow-up.

Right. I can start here and maybe Carlos can complement if he feels the need. What we have embedded in our outlook is that we are -- again, we are going to -- we expect, as we said, low single-digit organic sales growth in this year with greater contribution from the growth platforms that we have. Our foodservice channel is also recovering and gaining share in all the emerging markets performance and our continued strong performance through distribution. And also, as I was mentioning before, some relief of the key supply chain constraints that -- as the year progresses. But we -- as we were discussing, we also are embedded in our forecast, in our expectation, some headwinds in volume and in fact, in volume '22 because we are taking into consideration the fact that we are going to be having stems from the government support that happened and also a more conservative levels of elasticity than we saw before. But net-net, so that is that we are -- we have assumptions that are more conservative in terms of elasticity and consumption that we're seeing today, but we think it is the appropriate way to go in our outlook.

Yes. The one thing, I guess, I would add to what Paulo just said is that as we're doing that, we also continue to make investments to make sure we improve our brand value proposition. And we're doing that through renovation of our brands, driving disruptive innovation and continue to service new occasion-based solutions, whether that's for in-store, online for today's consumers' needs. So that continues even as we are continuing to progress throughout the year. Thanks for the question.

Super. And then very quickly, Paulo, you've done a very nice job of improving your leverage positioning at the end of the year still with a decent cash balance. Should we just be thinking as you go forward that kind of use of cash would either be for kind of smaller add-on acquisitions or just kind of an ongoing deleverage cycle as you get through '22? That's it.

Sure. We -- our leverage target is below 4x, and we are well below that level today. And we expect to remain consistently below that going forward. Just want to highlight 1 point here, investment grade for us remains really strategically important and we have enough flexibility today in our balance sheet, in our capital structure to continue to evaluate opportunities to accelerate our strategy in an accretive way and with price discipline. But we are really closing now the way that we are today in terms of flexibility in the balance sheet that we have we feel the company in a very strong position.

Our next question comes from Pamela Kaufman with Morgan Stanley.

Can you comment on where overall inflation came in for 2021? And what assumption you're making for inflation in '22? And then I guess, just how much of your costs are covered for the year and what your visibility is on the cost outlook?

Sure. So let me take that. Our Q4 inflation were higher than we expected in our October call. We ended up like with a low double digit. But for 2022, we are likely to see or expecting today near inflation of low teens for the full year, okay? And we expect this inflation to be higher in the first half than in the second half. And just to complement the -- by the end of next -- last year in '21, we took the necessary actions to mitigate the inflation we were seeing. And since then, more inflation has come and we are taking these additional actions as we've been discussing. And we are -- when you look about -- in terms of our hedging position, we normally hedge -- although we hedge a more significant part of the commodities, when you talk about our total COGS, we only hedge around 20% to 30% of the COGS. So -- because there are a lot of other costs that are not only commodities in our cost. So again, that is the range that we have ahead. So it's not material when we have a situation that we're having today that we are seeing inflation in pretty much all the lines of our COGS.

Our next question comes from Ken Goldman with JPMorgan.

I'm curious in your guidance for 2022, how much does the outlook require or bake in, I guess, what I would consider rational behavior from your competitors? In other words, are there any assumptions that as the consumer maybe gets a little bit more stretched as prices rise a little bit as some of your competitors also add to their capacity. Is there any expectation built in that there might be -- yes, you talked about elasticity certainly being there, but maybe a little bit more of an aggressive stance from some of your rivals. I'm just trying to get a sense for what's baked in.

The other thing, I think that -- I'm not going to comment on what they're doing, how they're going to run their business. So let me tell you a little bit about how I see our business and why I feel good about the way kind of we think about us going forward. For us, the important thing is to make sure we continue to stay investing it in a differentiated portfolio. And we're doing this because we actually are able to provide consumers whether it's an entry into the category, a mainstream product or premium products, consumers actually have a way in which to acquire product from Kraft Heinz. And you see that in places like Mac & Cheese, where it goes from an Easy Mac to the original version of Mac & Cheese. We also are continuing to strengthen our portfolio because, as you know, we have made some important divestitures that really have reduced kind of our exposures to private label and other places where historically have been more competitive. In fact, we've gone from 17% of exposure to private label to now 11, which -- and I think its industry average is around 20%. So we also -- we only -- we are making investments. We have a place in which consumers can come into the category. We're less exposed to historically private level businesses. And we continue to make sure we're offering great quality products at prices that consumers can afford. So we are focused on making sure that everything we're doing is around delivering great value, meaning quality products and a way that is accessible to consumers. That's what we're focused here in Kraft Heinz.

Makes sense. And then very quickly -- Paulo, thank you. For the gross margin, the Street is modeling a pretty flattish figure in 2022 versus '21. Recognizing you don't provide specific guidance for this line item, just directionally, I guess, is it fair to say that gross margin is more likely to be down than flat? Just especially in light of, I guess, your reminder this morning that in the context of inflation, you're aiming to recapture gross profit dollars, not necessarily percentages?

Yes. Listen, when you think about as costs stabilize and price realization and efficiencies continue, our margin percentage here will normalize, okay? As we have mentioned before, we are expecting lower run rate margin percentage levels in the beginning of this year and our actions are to protect the dollar profitability. So we are protecting the dollar margin year-over-year. That's how we are thinking here.

Our next question comes from Steve Powers with Deutsche Bank.

Yes. Following up on the topic of elasticity, I just wonder if you could provide any more context in terms of your assumptions for the coming year in that regard. And really, any variation you're thinking about and we should be thinking about, about how elasticity is anticipated to maybe very across your platforms or across your geographic regions?

I think, I'm guessing that you're referring mostly to our U.S. business. So let me just take that up first. I think so far, and Paulo spoke to this a little bit earlier, other expectation for elasticity have proven to be conservative. So as we go forward, we're expecting some of those more, I would say, normal levels of elasticity to impact in 2022. And just to be clear, our outlook contemplates both those elevated levels of elasticity and the continued investments on our brand value proposition. Now when you look at overall kind of how the way we look at the business is that demand really has remained pretty much intact. So the inflation, which is, as you know, being broad-based and not specific to one category is really kind of impacting everywhere similarly. Now if you look at it deeper, personal spending on food has been more stable than disposable income or even discretionary spending over time. And if you go even further, when you look at Kraft Heinz specifically, the reality is that we have, as I said earlier, quality products in categories in which we can compete at a price that is affordable to consumers. I mean just to give you a sense, I mean, when you think about Kraft Mac & Cheese, Blue Box is about $0.50 per serving. If you think about Oscar Mayer hot dogs, it's about $0.25 a piece. If you think about Heinz Ketchup, it's about $0.10 an ounce. So those are things that we continue to feel strong about because we have a way in which to create great quality products in a way that consumers can afford. But we're also taking more actions than that. We also are using our designed to value to make sure that we're thinking around how do we boost quality in our products while reducing cost, essentially making sure that we give consumers exactly what they're looking for and not the things they don't need. And lastly, we're also making sure that we're investing in better creative and communication so that we have, in fact, stronger relevance of our brands that actually are helping us make sure that we continue to drive better renovations, innovations in a way that matters to what consumers are looking for today.

Okay. Great. If I could follow up on a different topic actually. There’s a good deal of discussion about your strategy to expand and drive growth in emerging markets. And I guess as we think about the strategic investments that you’ve embedded in the ‘22 plan. Can you just talk about the sort of the allocation of those investments in your developed markets versus your emerging markets? And just how much of an accelerated push towards the emerging markets you’re thinking about and we should be thinking about as it relates to the new year?

Maybe I can take it here, it’s Rafa speaking. Look, we continue to be very optimistic of our strategy we focus on emerging markets, right, on Taste Elevation. And – I mean, we continue to expect double-digit organic growth, further gains of market share in the future and leveraging our repeatable go-to-market model. I mean this has been live in about 30% of the countries we operate today in emerging markets, and we look to continue growing this and boosting our go-to-market for the -- in 2022. So I mean, the strategy remains the same. We’ll play the – as we’ve been doing, we did 4 acquisitions in 2021 and add-ons in different markets that enable us to expand within our Taste Elevation focus in specific countries that we see a big opportunity for growth. So that strategy should remain is paying off and we will continue. A –Miguel Patricio: And Rafael, I would just add that the engine for growth in these emerging markets is really the brand Heinz that is an unbelievable shape and getting better every day from a consumer standpoint, which gives us a lot of opportunities for growth to expand Heinz further, not only Ketchup, but other products. So emerging markets will continue being a great engine of our growth.

That concludes today's question-and-answer session. I'd like to pass the call back to Chris Jakubik for closing remarks.

Well, thanks, everyone, for joining us today. For follow-up questions, myself and the rest of the IR team will be available for any additional questions. But thanks again for joining us today, and we'll see you at CAGNY next week.

This concludes today's conference call. Thank you for participating. You may now disconnect.