Good day. My name is Kevin, and I'll be your operator today. At this time, I'd like to welcome everyone to The Kraft Heinz Company Second Quarter 2020 Earnings Call. I will now turn the call over to Chris Jakubik, Head of Global Investor Relations. Mr. Jakubik, you may begin.

Hello, everyone, and thank you for joining our business update. We'll begin today's call with an overview of our second quarter 2020 results, as well as an update on our path forward from Miguel Patricio, our CEO; Paulo Basilio, our CFO; and Carlos Abrams-Rivera, the Head of our U.S. business. We will then open the lines to take your questions. Please note that 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 today. These non-GAAP financial 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 with our – within our earnings release. Now let's turn to slide three, and I'll hand it over to Miguel.

Well, thank you, Chris, and good morning, everyone. I think it's appropriate to start today by saying that more than anything else, the strength of our second quarter results reflect the hard work and dedication of our remarkable employees around the world. Without them, we would not have reported numbers anywhere near what you saw in our press release today. On our April call, I said that the coming months would be critical in understanding the path forward and potential for our industry for Kraft Heinz and the pace of our turnaround. Three months later, I can tell you that while the path of the economy and consumer behavior remains difficult for any of us to predict, our team has done an excellent work, anticipating and responding with speed, agility and creativity. And we can see this in the quality of our second quarter results. More importantly, we continue to make great progress on our turnaround. Our people are driving functional excellence throughout the organization. We are developing better perspectives on where consumers are going and how we can win. Our productivity initiatives are progressing and strong free cash flow is further improving our financial profile. All these things are coming through in what we will cover today in our business update, where we will talk about how we are adapting to consumer needs, to Q2 results that were much stronger-than-expected, due to continued momentum and strong consumer demand for our brands, as well as better-than-anticipated costs and supply chain performance and the fact that our solid execution is keeping us cautiously optimistic for the rest of the year. Carlos and I will begin today with how our business has responded so far and our current thoughts about the path forward, before Paolo discusses the financials and then we'll take…

Thank you, Miguel and good morning, everyone. My comments today are going to focus on what we have experienced so far, how we are preparing for the road ahead and hopefully address a number of the questions many of you have raised about our recent performance. In terms of what we have experienced, to say it's being intense, dynamic and rewarding will be an understatement. We have been working hard to optimize our manufacturing capacity to meet extraordinary demand, running some of our plants 24/7. This has caused us to cancel some programming and reallocate spending to the second half of the year. So, for instance, we had to pull back on our Memorial Day event for the first time ever. And not having that event removed the drive period in the quarter when we typically have very high market share. And average price gaps increased versus the prior year as a result. In areas like our Oscar Mayer meat and Kraft single businesses, our share has been negatively impacted by sustained elevated consumption versus supply chain constraints, while more vertically integrated players have been able to shift capacity from their foodservice businesses to retail. So while we're growing strongly in those businesses, we are seeing some share loss. Elsewhere in the portfolio, Heinz, Jell-O, Ore-Ida are gaining share, even with this accelerated consumption. In a nutshell, promotional activity and the pace of inventory recovery, both ours and our retail partners, have been dictated by the balance of supply and demand. What that means for us is, growth has been good, but in certain categories, we know we can do better. If demand remains extraordinarily strong, growth should be fine, but share is likely to be challenging in certain categories. Which brings me to how we are preparing. From a…

Thank you Carlos and good morning, everyone. Before I get into the details of our results, I think it's useful to outline some overall key drivers of the quarter that were consistent across our different segments. On our April call, I outlined 4 factors we expected to drive better profitability in Q2 versus Q1. One, was improved product mix, mainly from categories within retail as well as a favorable shift between retail and foodservice. Two, higher volumes. Three, greater efficiency in operations as we were adjusting to the higher volumes. And four, a better balance between price and commodity costs. In the end, all these factors came into play and were directionally consistent with our expectations. What pushed our growth and profitability higher than anticipated was a combination of stronger retail demand for longer than we anticipated, a better than projected relationship between price and commodity costs and a more favorable category and product mix within our retail sales. These factors were most pronounced in our U.S. business. So that's where I will start. Organic net sales in the U.S. increased 8.5%. This was mainly driven by 6.2 percentage points of volume/mix growth, led by the strong retail performance Carlos described. Pricing was up, as it reflected lower promotional activity to capacity constraints in certain categories. Taken together, volume leverage, favorable canine product mix, as well as favorable pricing, adjusted EBITDA in the second quarter increased 17.6%. Specifically regarding mix, we saw favorable category mix in the form of relatively stronger demand and market share performance in areas like ketchup and condiments, mac and cheese and frozen potatoes. We also saw favorable SKU mix within categories due to supply chain constraints and, therefore, greater sales of core items within our product lines. Looking forward, we are not anticipating retail demand…

[Operator Instructions] Our first question comes from Chris Growe with Stifel. Chris, your line is open. Chris, if your line is muted, can you please unmute it? Do you want me to go ahead and on to the next question?

Yes. Let's go to the next question, we can come back to him.

Okay. Our next question comes from Rob Dickerson with Jefferies.

Great. Good morning everyone. So, great results in Q2. I guess, just to start kind of more broadly, as we think forward with respect to the turnaround. Now, obviously, there's been this tailwind, which is in place, which is great. But I guess if we think about later this year and then into next year and the go forward, this is probably more for Miguel, excuse me. How are you thinking now about specific brand strength and actual media spend reallocation? And then also just maybe further simplification of the portfolio, right? It sounds like you got to see some at-home lift in certain categories versus other more so, certain capacity constraints in certain categories versus more so, which would lead me to believe that you're able to kind of see maybe where you think you can more effectively compete, right, and get a higher lift off of further spend in some categories versus others. So, I'll just ask that and pass it on. Thanks.

Okay. Look, near-term, we are adjusting our content and delivery to reflect the greater household penetration and the new consumers that are rediscovering our brands and Carlos mentioned a little bit about that. But that is absolutely critical. I wanted to say it's critical. We are learning about who these new consumers are and that is our obsession at the moment, is to keep them with us. They are new consumers and they are repeating the purchase of our products. We cannot miss this opportunity. It's an unbelievable opportunity. I would say it's almost a sampling opportunity that we are having. And we have to keep these consumers with us. Beyond this, you are going to see us reorient around how consumers think to a few specific platforms that are globally relevant. In other words, we're going to share with you in September more choices and where we believe, we have a chance to accelerate big time our growth and giving the portfolio a role for different products for sure. Some will have a role of bringing more profitability and will have a role of growing net sales. At this moment, or until now, we never had this very clear. And so I think that, at the same time -- and that is why we are right now increasing, as Carlos mentioned, media in the second half to put more steam behind brands that we saw big household penetration growth. At the same time, we are making a big change in marketing overall the company. We just hired 3 new Heads of Marketing for each one of our geographic zones. We are changing and evolving. We want to be much more consumer-centric. We want to be much better in marketing and in consumer insight, in innovation, in communication and this transformation and this change is happening as we speak. And that's very exciting -- it's very exciting for the entire commercial organization that is seeing this evolution coming very fast.

Okay. Super, thank you so much.

Thank you, Rob.

Next question comes from Chris Growe with Stifel.

Hi, good morning.

Good morning, Chris.

Just so excited for that first question, I lost the line there, so sorry for that. I wanted to go back to some discussion you had, Paulo, around EBITDA growth for the second half of the year. You did talk about some of the drags you have on EBITDA growth, the commodities, McCafé, foreign exchange. And I think you gave some sort of offsets to that, if you will for the second half. So I wanted to just go back to that kind of discussion and what's going to offset some of those drags in EBITDA growth, number one. And then to understand like have you pushed marketing in the second half of the year? To what degree will that be kind of a further burden on the second half? And then what is marketing doing for the year and perhaps in relation to where you started your expectations for the year?

Hi Chris. So yes, so let's start from the last point. So as Carlos said, we are going to have a higher media spend, we're going to increase vesper year in the second half. Overall, in terms of marketing, total spend and the way that we've been planning to that, market is not going to be a significant drag for the second half of the year, okay, for us. I think the main area is that -- the main headwinds that we're going to have in our EBITDA are pretty much the four that I mentioned, like -- the same four items that we mentioned like end of last year, beginning of this year. That is pretty much incentive compensation, so variable compensation, when we compare versus prior year. Also, we are seeing a more unfavorable commodity cost, mainly in cheese with this recent volatility that we saw in the price of the commodity, the exit of McCafé and FX, right? So those are the -- those four compounds, the majority, the key headwinds that we see for the second half of the year. And in terms of offset, we still expect a strong -- we're still seeing a strong demand for the second half. I think we're operating much better in our mix, and also in our supply chain efforts that we're seeing. We also think it's going to be some areas of when you compare versus prior year. For example, supply chain losses, many other areas of the organization that we are evolving will be offsetting. We expect to offset these headwinds that we have. So again, sales mix, the pricing progress that we have, supply chain performance, I think, will be offsetting the headwinds that I've mentioned. Marketing is not -- should not be material for us when you compare to these other factors.

Just complementing what Paolo said, Chris, so we do not create confusion. Carlos mentioned a big increase in media in the second half, but we'll compensate that big increase with reduction on other parts of the marketing investment. It shouldn't be material to market increase. But what consumers see, which is media, it will be material.

That's great. Just a quick follow-up. Are you pricing to some of the commodity changes you're seeing right now? Is this an environment where you're doing that? Or is it simply managed via promotional spending, which has been down?

So in terms of overall, the company think about this commodity that is happening, we had some price. And you saw this in the beginning of the year; we had some price initiatives that we had to prepare for the year. And we, of course, our price strategy to commerce to follow the market. We also, as we said before, and as we mentioned in the call, we expect to have a more normal merchandising in the second half, that's what we saw in Q2. But we'll be operating in line with what is going to be the market for this commerce that we're seeing.

Okay. So if I was going to add something to what Paulo said, it simply is the pressure that we're seeing on the natural cheese. It really is a short-term thing because of the government program. But if we go into the second half, we -- there may be a small amount of unfavorable in our commodity, but something that we feel that we can handle as we go forward.

Thank you.

Thank you.

Our next question comes from David Driscoll with DD Research.

Great. Thank you. Good morning.

Good morning.

So I had two questions I wanted to ask. The first one was just on the capacity constraints. What are you doing to address these constraints? When do you think you'll see relief on some of the key constraints? And then was there any ballpark estimate you had on what those constraints theoretically cost you in the quarter? Could you have seen another three or four percentage points of revenue growth, if not for the supply constraints?

Let me start with the perspective in the U.S. So essentially, what we saw was some isolated capacity constraint on certain products. And if you think about areas like Kraft Singles and Mac and Cheese cobs, and no surprising some of our pork and beef based meats. Now we're working to mitigate those near-term capacity constraints, both in terms of their supply side and the demand side. So on the supply side, I'll tell you, listen, our employees have shown incredible dedication, adding weekends and overtime shifts, and we're securing more capacity with external manufacturers and we're also fast-tracking CapEx projects to improve even more our throughput. So moving forward, we actually have projects underway that we're going to reduce our downtime, reprioritize our CapEx and build additional raw material inventory. Now on the demand side, we've also rebalanced all of our merchandising, promotion, our marketing through the lens of that available capacity. And we are making sure that we safeguard our customer service to our – to the best of our ability. And I would say, to the end of your question, I will say, it's really difficult to quantify the impact of that, but I feel good as we stand here as we go into the second half.

Great. And then if I could just follow-up on one other item. I just want to say, it sounds like on a longer-term basis, all the things that are happening now in terms of the advantages of this demand from the consumers, combined with the reprioritization of your objectives, and I know you're going to lay out a lot more in September, but it just sounds like what you're saying in the future is that there doesn't need to be a significant earnings reset in 2021 and beyond, that you can go from here, reprioritize where you're putting your investments and get Kraft on a sustainable growth trajectory. This is a little bit of a – I'm trying to tease out maybe a little bit of what you might say in September, but are you willing to agree with my comment? Am I interpreting you correctly?

Look, David, we've said that we expect to find efficiencies to pay for the necessary investments. This quarter is a great example of that. We had significant increase in supply costs in overtime, in bonus to employees, in PPES, hygiene, temperature checks. But even with all these increases, we were able to mitigate these costs and cost of goods sold. You can see they were very, very good. And so we remain confident that this will be the case. We'll give you more transparency, more details in September, but that's the way that we are working moving forward.

Thank you very much.

Our next question comes from John Baumgartner with Wells Fargo.

Good morning. Thanks for the question. Just – I wanted to come back to the U.S. and Carlos, you referenced being prepared to deal with any sort of path the economic recovery may hand you. And in that vein, how do you think about the portfolio of barbell strategy in terms of premium versus opening price points? In what parts of the U.S. portfolio, do you think you have the most premium opportunities in terms of development going forward? And then at the low end, the opening price point, how is the supply chain now in terms of being able to meet that demand at margins with minimal dilution, let's say?

John, thanks for the question. Let me – I guess, part of where I will start with is – let's put COVID aside for a second and I think getting to where your point is, which is what we see in the current economic pressures. Ultimately, that's going to be consumers, how they're going to be purchasing will be a function of basically how the economy is going to drop and how much time it will take to recover. Now both of those things, at this point, it's really hard to know how that's going to sort out. When we look back to some of the -- in the past of our recessions, whether that was in the U.S. in 2001, 2008 and 2009, our portfolio organic growth remain essentially largely consistent with what we saw pre the recession performance with the exception of foodservice. In foodservice, we actually saw a decline across both recessions because of the lower foot traffic in restaurants. So that takes me, I think, to your question of where do we stand today? What I would say is, I think we're well positioned. I think we have good momentum in the household penetration, as I mentioned. We are in better positioned on the promotional front end as we go into the second half of the year where we can invest back into our brands. And the investment is not just on the promotional event. As I mentioned earlier, we are also investing back in media. So we are seeing a 40% grade investment in the second half as we go into closing the year. So I think that from what we have learned and where we are today, I feel good about where we are.

Okay. And then just in terms of the write-downs taken in the quarter, there was also some commentary regarding increases in fair value estimates in other areas across the business. Can you walk through the areas of positive revisions and maybe elaborate a bit on the reference to recalibrating future investments going forward? Thank you.

No. Sure. I think when you look at -- we have many areas in our portfolio and that the values get ended up moving up, as I mentioned in the call, in areas like the value went down, the exercise that you do. And I guess, it's important to remember that listen, we do this annual test every year in Q2. And as you mentioned, we saw many areas in our portfolio that are doing now and have better strategy, and we expect to get, for example, our condiment and sauce portfolio across the globe, including the US, some meals portfolios that we have. We saw these reporting units going up even in escalated part of the business unit. Also, we have -- we saw some value increases. And the areas that we really -- the reporting units that went down was pretty much related to Canada, foodservice and retail, and also the food service in the US. But those are pretty much the areas that we saw ups and downs in terms of our impairment exercise.

Okay, thanks for your time.

Welcome.

Our next question comes from Michael Lavery with Piper Sandler.

Good morning. Thank you.

Good morning.

You mentioned that you expect more normalized merchandising levels in the second half. Would we hear that correctly to mean that you don't really have any need to pay back the savings from less promotional spending in the second quarter, or would be more normalized levels, maybe even have a little tick up to sort of smooth out the year?

Let me -- I guess I could take that question. When you look at our promotional activity, as we think about second half, what I would say is, right now, both our inventories or production levels, as they are improving, we are, in fact, going to be able to put some additional promotion activity in Q3. In fact, you'll see that in our first dry period, which is a big dry per happens around Labor Day. So we'll see that in our brands and categories. Well, we have -- so far, what we have been able to do is we have been able to be very surgical about pulling back on promotions. And you saw some of that in the scanner data, but that really has been very focused on certain categories. Now, in going forward, our focus continues to be, is making sure that we service demand because we know there is still a significant amount of pull there from our consumer base. So, we're going to -- yes, we're going to be building back our promotions. But at the same time, I feel like we're doing it in a balanced way as we are now being able to support those businesses that do have the dry level of inventory.

Okay, that's great. Thank you. And just one more looking ahead, as you start to plan for 2021, clearly, there's lots of uncertainty, but what's your planning stance as far as elevated demand levels? And do you anticipate that carrying into next year? And are you planning for that accordingly?

Look, as you said, it's very hard to anticipate the demand for 2021. I can tell you that we've been working on a lot of scenarios and building scenarios. The truth is that we -- at the same time, the same way that you, I'm sure, do not see a solution for the coronavirus in the short-term or -- and so we have to work with scenarios. I think that the best thing that we can do is to concentrate our energy and resources on really holding onto these new households that we gained. It is critical. This is a blast that we have new consumers trying, experimenting, repeating the trial and has to be our obsession to keep them with us so we can, in 2021, progress. If the pandemic continues in 2021, and we'll continue with that and that will play in our favor. If not, we have a base of consumers that is higher than we had before and they tried and they continue trying, they continue consuming, and we want them with us. We continue to carry out the strategy that we've set and look for additional and continuous improvement opportunities in everything we do. I think that one thing that is critical for us is that we are starting to share with our customers at this moment plannings already for what's going to happen in next year, and we'll start this now in the second half of the year. And that is crucial. We are -- we've been able to anticipate the planning cycle for the future, which will -- is very important both for us and for our customers.

That's helpful color. Thank you very much.

Our next question comes from Scott Mushkin with R5 Capital.

Hey guys. Thanks for taking my ques. So, I wanted to look at the third quarter just for a second. I know you said you're expecting things to kind of, I guess, slow down a little bit. And I was wondering, we're seeing, especially in the U.S., a resurgence of corona cases. And I know the retailers are seeing still very, very strong sales. So, I was wondering if you could maybe flush out a little bit why you think things are going to really take a step back in 3Q as far as sales in the U.S.?

No, listen. So, I can take that, maybe after Carlos can also build if needed. But again, at the end of the day, when we compare our Q3 expectations for Q2, we saw already inside Q2 the deceleration from the retail side of the business. We – on top of that, we also are seeing like a foodservice kind of recovering and offsetting part of this decline of the retail. We have McCafe also started playing. The exit of McCafe is also going to start impacting us. So, again, those are pretty much the deceleration effectors in sales that we're seeing for Q3 and second half versus the first half, the normal deceleration from the retail side. And the McCafe, they start playing out also – the exit of McCafe in the U.S. start impacting us in July. Margin-wise, when you talk about EBITDA that was the comment I made, I think there are two big components, right? One component is mix. I think the mix benefits that we saw in Q2 will fade, both because of the relative retail foodservice channel mix. And also, the category product level mix gains that we are expecting to see going forward versus what we saw in Q2. And the price relative to commodity, as I mentioned, with the spike mainly in the cheese cost that we're seeing this happen in Q3 versus what we had in Q2, that was a benefit for us. But those are the main drivers that we were seeing in terms of relative performance, year-over-year performance, year to go versus what we saw in the first half.

Okay, great. And as a quick follow-up. I was wondering, maybe you don't want to talk about this yet, but – maybe it's for September, but any thoughts on the innovation pipeline? You touched on it that you wanted to accelerate innovation and renovation, any further comments there? And then I'll yield. Thanks.

Let me – I guess, a comment on the innovation piece, and you're right. You're going to hear quite a bit more about our plans in September. So look forward to seeing you then. But I would tell you is that, I think, when we think about 2020, really, the impact has been kind of limited in terms of what we have seen and changing our plans of innovation. We – if you recall, we are actually, in 2020, have half the projects that we had a year ago. So we actually didn't see as much of an impact because of the changes. As we go to 2021, we'll be going to a little detail in September, but I can tell you that we're going to be focused on fewer, bigger innovation. And the good news is that, our R&D facilities actually have been open for about six, seven weeks. So actually, we feel very good about our pipeline as we go into next year. And I'm looking forward to kind of share with you the details of how that's going to come to live in September. Thank you.

Okay, guys. Thanks very much.

I think we can take one more question.

Okay. Our last question comes from David Palmer with Evercore ISI.

Thanks. A question on pricing net of commodities and also on market share and maybe how those are playing against each other. It looked like your pricing net of commodities was a positive in the second quarter specifically in cheese. We saw those prices low for much of the quarter. And you mentioned that cheese was flipping to a headwind and is one of the reasons why the EBITDA headwinds would be created. Is that simply because of the fact that we've seen the dairy spike in June into July here? Or is there some other reinvestment needed? I ask that because cheese, like some of your other commodity-oriented categories, you've had some sustained market share losses for a while. And I'm wondering if you're not just seeing a cycle reason, but perhaps you're drawing a line in the sand about market share in some of these categories and you're making a decision to defend on market share? Thanks.

I'll take that. I think the question is probably more about the U.S. So I guess I would say is let me start by -- I think the point that we have made earlier, but I'll revisit, which is our focus really is on driving household penetration and retaining all those new consumers that are coming to our brands. Now in the context of that market share specifically, what I would say is there's been -- the way I see it, there's been like three moments since the COVID began. I think there was an initial moment, in which the demand really spite and we had high levels of inventory, which is normal what we do at that time of year. So that actually helped us gain share. Now when we saw demand stay high through May and into June, we also wanted to make sure we better manage our service levels. So we actually lost some share in certain categories. And as I mentioned earlier, we pulled back on promotions in places like Memorial Day, which we have never done. We also focused our SKUs in our core businesses, so that we can maximize our throughput. That also had an impact on share as you think about the distribution. And then we also had to respond to the fact that there was some supply tightness across the value chain and from end-to-end in places like meat and in some parts of our -- mostly in pork and beef business. Now today, what I'll tell you is our retail demand remains strong. So we are -- because of the -- we're focused on areas that we can actually control. And let me tell you the three things we're doing. One, we're bolstering capacity to make sure that we get more of our assets and we are expanding our number of co-packers. That seem to be working. Now because of that, we are actually then expanding number of SKUs back into our shelves where customers really need them. And the third thing is we're also going back to investing. I mentioned we're investing back in promotional events in the second half and investing back in media as we go into the second half. So when you take these actions, the reality is that we're actually seeing progress. In fact, our share over the last two weeks have been positive, and we see that some improvement as we go forward. So when you take it all together, what I'll say is, our focus for our entire team is how do we make sure, as we go into the second half, we maintain the positive momentum in the business and we focus on connecting with our new and effecting consumers.

Thank you.

Thank you.

I would now like to turn the call back over to Miguel for any closing remarks.

Well, I wanted to thank you for all the time you've been on this call with us. And before finishing, I just want to summarize the way that we are seeing this quarter and moving forward. We, for sure, had stronger than expected Q2 results. And that reflected -- is reflecting our continued momentum and the strong consumer demand for our brands, and we are very excited with that. We had a strong category and brand growth on household penetration -- coming from household penetration, but also from repeat rates. We had better than anticipated costs and supply chain. And that's despite the fact that we had a big inflation, big cost increase because of the COVID. And now for 2020, our priorities and our actions are on track. And the results will be better than anticipated. We expect this first half upside to hold. And solid execution is making us cautiously optimistic for the second half. There's a lot of uncertainty. Are kids going back-to-school or not? Are we going to open our offices or not? This can change still a lot. But if the consumption stays strong, yes, we may have an upside on the second half. The other thing is, at the same time that we are dealing with this unprecedented change in consumption partners, and we've been adapting very fast, we are working on parallel on our transformation. Our transformation is underway. And in the – still in the early stages of bringing the agility to our company, we have a lean structure, a culture based on ownership, which is a critical ingredient for agility. And yes, we have to correct other things, but we are excited about bringing agility to the company that has the scale that we have. I think that together with the scale of our business, we are going to bring a benefit to our shareholders, to our customers and to our consumers. And looking forward, we are looking forward to provide you with more details on our strategy, priorities and initiatives and our new operating model during our virtual Investor Day on September 15. So thank you very much, and see you soon or talk to you soon.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.