Q2 2020 Kraft Heinz Co Earnings Call
[music].
Good day, Muddiness Covenant I'll be your operator today at this time I'd like to welcome everyone to the craft large company second quarter 2020 earnings call.
I'll now turn the colder Crystal Qubic head of global Investor Relations Mr. Qubic you may begin.
Hello, everyone and thank you for joining our business update.
We will begin today's call with an overview of our second quarter 2020 results as well as an update on our path forward for Miguel Patricio, our CEO, Paul a bit SILEO, our CFO and Carlos Abrams Rivera the head of our U.S. business. We'll 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 gap 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, Greece 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 members anywhere near what do you saw in our press release today.
On our April you'll call I said that coming months would be critical even understanding the path forward.
And the potential for our industry for Kraft Heinz and the pace of forward turnaround.
Three months later I can't tell you that.
While the path of the economy and consumer behavior remains difficult fourth annual first to predict.
Our team has done an excellent work and disability and responding with speed agility and creativity.
And we can see these in the quality of our second quarter results.
More importantly, we continue to make great progress on October 10 around.
Our people are running 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 movement to as Tony 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.
Card was a nice will begin today with how our business has responded so far and our current thoughts about the path forward.
Before Paul will discuss the financials and then we'll take your questions.
The first chart I wanted to share is our underlying year on year sales growth.
Hi, geography in both retail and foodservice channels.
He chose the progression from Q1 to the April Spike to that May June settling out to period.
There are three important points to take away from this chart.
First.
The tremendous an abrupt shifts in consumer behavior that we are witnessing.
He started seals for food and beverage brothers.
Not microscopes.
So to describe the magnitude of these channel shift as Unprecedent feels like an understatement.
Second the numbers in the chart at Kraft Heinz sales not the brother market not the brother categories, where we play.
And it's important to recognize that our supply chain capabilities are largely split between capacity to produce and services retail sales and producing and servicing foodservice sales.
There is little overlap in terms of production lines and route to market.
So what this charge reflects is that threed dispute, we have been able to successfully adapt to such an abrupt unprecedented change in consumer behavior.
Keep everyone of our plants around the world up and running producing at industry, leading quality and safety levels.
And therefore enable us to de lever more than 7% organic net sales growth in Q2.
This is not to say that we capture 100% of the opportunity.
As you know there are some categories, where we have lost share and we're working hard to fix that.
That said I have seen the creativity and agility our teams around the world have demonstrated in meeting peak demand.
Learning through the journey as we'd like to call it.
And let him, Italy, the leaving roughly twice the organic growth we expect to the in April.
Which brings me to the third point to source of Q2 upside.
I suppose our previous expectations.
The decline we signed foodservice sales on a global basis was largely consistent with what are we had forecasted.
Somewhat better in the U.S.
And at the softer and of the wrench in our international business.
At the same time, our retail performance was much better than anticipated.
In the United States, which Carlos will speak to.
In our international zone, where in condiments, and sauces, we grew double digits and in several markets achieve record market share.
And in Canada, where we had double digit growth and gain share in 80% of our retail categories. As the team invested strengthened brand really relevancy in areas like peanut butter pasta sauce and cross dinners.
In addition, what has not shown on this chart, but we will discuss later is the extraordinary retail sales growth came with favorable category and product mix.
Together, the combination of favorable channel category and product mix resulted in better than expected EBITDA margins versus what we originally expected.
Most notable in our United States business.
At the same time and the second part of the business update its important to rates rate that we remain at the beginning state.
As far as turn around.
And I still not where we want to be on several fronts.
We will talk about in great detail in September.
We have done a lot to adopt pandemic, but we are also implementing a new operating model to improve our performance Oh no sustainable basis.
We are making significant changes to how we work how we are organizing our business.
How we are developing our capabilities.
And how we are re vesting in the business.
Our actions have been broad based with the intend to create sustainable competitive advantage across our value chain.
For instance, we have continued to work urgently and diligently to ensure the health and safety off our employees.
Taking on additional costs for personal protected we keep month in our plants as well as to accommodate working from home.
At the same time during the second quarter, we rolled out our new company purpose.
Vision values and leadership principles, we are redefining for our employees for their long term, our truenorth and how we're going to win by working as a team expiring excellence and navigate our future.
I went to specifically mentioned one of our company values, we the men diversity.
We leave in a world where systemic race.
And inequality exists.
And writing these wrongs requires an equally systemic response from everyone, including global corporations like ours.
We have a responsibility to be part of the solution.
Honest conversations with our.
African American business resource group led to a wrench off initiatives, including a 1 million dollar commitment to food programs and social justice organizations, serving black communities as well as our first the global day of service on June teens last month.
From internal mentoring and developing programs and expanded talent recruitment partnerships.
To spill supplier training programs for minority and women owned businesses.
And the creation of a cross functionally collision Council, we are pro active and hold our selves and our company accountable for bringing about positive change.
Changing times the meant fresh new approaches.
For consumers, we are actively mall billing multiple growth scenario.
And the finding new initiatives to adapt to each scenario.
At the same time, we have now reorganized our business units around new consumer led platforms. So we can better address our consumers.
With our customers then in marketing.
On improving communications today, but also how we deploy our resources to drive growth going forward.
With customers specifically collaboration has been key.
As we are creatively addressing immediate customer needs.
On one hand, while simultaneously trying to set plans for the coming year.
In supply chain the difference a year has made it seemed pretty incredible.
Finding efficiencies to mitigate incremental coffee costs, while taking actions to optimize and initial production.
At the same time, we continue to implement continues improvement process and programs for sustainable savings for the years to come.
In many ways, we are leveraging our intentional strategic changes to better respond to an environment with significant uncertainty.
As a result, I'm confident that will emerge a stronger kraft Heinz and the strategic direction. We have set is the right one.
And one that we look forward to discussing in details with you on September 15.
I will close my opening comments here.
Summarizing a few points.
We had stronger than expected Q2 results.
Reflecting continued its momentum and strong consumer demand for our brands.
We are implementing our new enterprise wide strategy at the same time, we are adapting to the pandemic.
After a year as CEO I can see our business transformation, well underway with strong employee more oh, well defined strategy and a team in place working together with speed to bring agility with scale.
And our work to date has only confirmed that we are on the right path.
To breed this more to lies I'm going to ask are those to provide more color on how our U.S. business is performing in the marketplace.
And how he sees the path forward.
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 experience to say being intense dynamic and rewarding will be an understatement.
We have been working hard to optimize our manufacturing capacity to meet extra ordinary demand running some of our plans 24 seven.
This has caused us to cancel some programming and relocate spend into a second half a year.
So for instance, we had to pull back remember moral day event for the first time ever I.
And not having that events removed the dry period during the quarter. What we typically have very high market share an average price gaps increased versus the prior year resort.
In areas like an outcome I need some craft single businesses, our share has been negatively impacted by sustain it only made a consumption versus supply chain constraints.
Well more vertically integrated players have been able to shift capacity from their foodservice businesses to retail. So we're growing strongly in those businesses, we're seeing some share loss.
Elsewhere in the portfolio Heinz yellow or either are gaining share even with this accelerated consumption.
In a nutshell.
Washington 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 remain extra ordinary strong growth to be fine, but share is likely to be challenging in certain categories.
Which brings me to how we are preparing.
From a consumption perspective, we're preparing for all the economic ladder. The v. The you the w. et cetera.
But with an eye to the long term investing to win on a sustainable basis.
So to that end.
We have no realign the U.S. business units structure designed around the new platform based strategy, which we will unveil September.
We're implementing a new operating model to ensure we operated with that growth mindset.
Hi level of accountability and streamlined roles responsibilities and decision rights for each role.
We are capturing saving from continuous improvements leveraging the upside we have seen to date to invest even more than anticipated to renovate and differentiate our brands and we're working hard to understand who is new to our brands and the best ways to meaningfully connect with them.
So regarding our path for while the depth and duration of the downturn will guy consumption in the near term we are transforming our business for a better growth trajectory in the medium to long term.
And consumers embraced meant of our brands I provides a significant opportunity right now.
For instance household penetration with one of the inherent strength of our portfolio relative to the industry and you will think that there was no much more room to go where our household penetration has strengthened further in the latest 16 weeks.
In fact, 75% of our brands are growing household penetration and the majority of our brands growing household penetration up double digit percentage points versus the same period last year.
Across our iconic brands, we are experiencing growing household penetration and increasing the rate of repeat among new buyers. This includes big brands that were already well established and significant leaders in their categories, such as high as in ketchup craft, Mac and cheese or Ida planters.
Yeah, the elsewhere and Capri Sun.
In terms of repeat rates, new buyers are repeating at higher rates than in the past and buying more frequently in fact, 75% of new buyer since the pandemic starter are still buying our products now.
And finally regarding new buyer demographics smaller households, including those with no kids are finding our brands and our new buyer housel skew to higher income younger and more diverse parts of the population areas, we have historically under indexed.
All this means we have a tremendous opportunity to build our base of loyal consumers and we're going after this aggressively with a second half plan that includes a 40% increase in working media dollars versus a year ago.
To close I, just want to say, how very proud I am of our colleagues for how they have responded to the challenges at the moment across our value chain and are showing tremendous agility in redeploying marketing investments to connect with the millions who are now making our brands, but are there everyday lives.
With that I'll turn it over to Paulo to talk through our financial results and outlook for the second half.
Thank you Carlos and good morning, everyone.
Before we get into the details of our results I think it's useful to outline some overall key drivers of the water that work on c. set across our different segments.
Well now APRU call outlined four factors, we expect us 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.
To higher volumes.
Three greater efficiency universe operations, as we were adjusting to the higher volumes and for a better balance between price and commodity costs.
Indiana All these factors came into play in worth Directionally consistent with our expectations.
Well, that's pushed our growth and profitability higher than anticipated was a combination off you stronger retail demand for longer than we anticipated.
Better than projected relationship between price and commodity costs in 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 off of volume mix growth led by the strong retail performance scholars described.
Pricing was up.
As it reflected lower promotional activity to capacity constraints in certain categories.
Taken together volume leverage favorable changes in product mix as well as well that's favorable pricing.
Adjusted EBITDA in the second quarter increased to 17.6%.
Specifically regarding mix, we saw favorable category mix in the form off relatively stronger demand in market share performance in areas like ketchup, and condiments, Mac and cheese and frozen potatoes.
We also saw favorable Jessica you mix, we think categories due to supply chain constraints, and therefore greater sales of core items within our product lines.
Looking forward, we're not anticipating retail demand to remain as strong as we saw in Q2.
Unlikely to moderate footer from recent levels with category mix normalizing and foot subs to being a greater part of total sales.
In addition, keep in mind that Dymek FX. It is now underway and we would therefore damper again to growth beginning Q3.
As a result at this point, while Q3 profits should be higher than we anticipated the two months ago.
Three margins are likely to be closer to prior year levels as a good key growth moderates the favorable mix. We saw in Q2 fades in pressures from the recent spike in commodity inflation, specifically chiefs come into play.
While this would represent a significant change sequentially from Q2, two Q3, we believe it is the most realistic expectation based on the best estimates and consumption and cost trends today.
Moving to our international segment results war, largely consistent with our initial expectations.
With organic net sales up 5.5% versus the prior year period, and roughly equal contributions from volume mix and pricing.
Pricing accelerated the two 2.6% from a combination of reduced promotional activity carryover benefits from previous pricing actions and inflation related pricing in Brazil.
Volume mix increased 2.9% from strong growth in condiments, and sauces, along with growth in yield oriented categories more than offset a decline in both foodservice and infant nutrition.
Looking forward, we are expecting the deceleration we saw in growth during the second quarter to continue into Q3 as markets normalize, particularly in our biggest market the UK.
And while that base of normalization is unpredictable, we currently anticipate back half results.
Both organic sales growth in margins to soften compared to the first half.
Finally is Canada, where the Q2 two in around we anticipated was even stronger than expected.
In April we said, we thought that organic sales growth would improve sequentially, but remain negative versus the prior year.
Even the Mecca exit lower foodservices sales and lower year on year price.
In the end, our Canada team delivered 2% again to growth with pricing turning positive for the first time in seven quarters and retail consumption growth in every category.
The positive pricing reflected a combination of reduced promotional activity versus the prior year as well as successful implementation of select but necessary these price increases.
Also volume mix was positive at the stronger than expected retail take away more than offset lower food service sales in a negative 4.4 percentage points impact from FX. It.
At EBITDA, we initially expected Q2 margins to begin returning to prior year levels.
Actual results were slightly better with an adjusted EBITDA margins up nearly 30 basis points versus the prior year as improving the supply chain performance added to gangs from pricing and volume mix.
For the second half of the year, we would expect they bluebird bio pharma in Canada to continue with our sustained recovery profitability, although with more normalized retail takeaway trends being offset by the ongoing headwinds from Mecca for exit and lower food services sales.
Turning now to total company results in our outlook for the year. There are just three additional notes I would make on our Q2 results.
First is that each business segment reported organic sales and EBITDA growth in Q2, and we hope this indicates more stable performance across our businesses going forward.
Second our Texas.
On our last call I flagged the possibility of a higher effective tax rate in Q2, two the possible enactment of UK tax legislation and the related noncash adjustment to deferred tax liabilities.
These was delayed contributing to better than expected S. Any is now expected to happen in Q3.
So we would not expect a tax rate on adjusted earnings in the high Twentys for Q3, while our expectations for the full year remains in that 20% to 24% range.
Third is free cash flow, which is up significantly versus the prior year. When you have to date basis.
This has been driven by a combination of EBITDA growth lower working capital somewhat lower capital expenditure.
As well as significantly greater accrued liabilities due to the timing of cash outflows versus the prior year.
Looking forward, we expect working capital to revert as we build our inventories.
And cash outlays related to accrued liability for Texas trade spend in the marketing our second half weighted this year.
In addition, we continue to plan for Capex in roughly $750 million these year.
Although we have had some delay so far easier and may not spend the full plant.
Taking all of these into account we do feel good about the quality of our free cash generation year to date and are confident that's playing 20 free cash flow, we will exceed the 2019.
Which brings me to our financial outlook.
I think it's helpful to come back to the fact that we're in the first year of our multi year turnaround.
The current environment has presented us with opportunities to be there for our consumers.
And to the extent we're successful now it puts a wind at the back of our turnaround efforts.
And we'll be in a stronger position on a sustainable bases in the future.
To that point, we do expect the upside in results we have posted the doing the first half of the year, both sales and EBITDA to stick for the full year.
And while there is still significant work to do ahead of US. We believe that we are very well position with each of the three priorities, we set forth to a 20.
To establish a strong base of sales and earnings to rebuild underlying business momentum and continue to reduce debt, while maintaining our occurrence dividend.
That being said I think it's important to highlight the key drivers at work in the second half of the year as we establish that strong base of sales and earnings in the work to be viewed our underlying business moment.
Specifically, we see for this with factors the same before we have talked about before that we hold back second half EBITDA versus the prior year.
One is the Mecca for exit that has been underway in Canada and began in the United States in July.
Do you see higher incentive compensation, we mentioned on our prior call.
Three.
Is greater commodity volatility we had warned about in April and we now expect will result in an unfavorable key commodity costs in Q3, specifically now at U.S. jeans business.
And for its currency translation due to dollar's strength relative to last year.
Together. These factors currently represent an approximately 900 basis point headwind to second half adjusted EBITDA growth versus the prior year.
That's great and then the 700 basis point headwind, we were expecting when we last spoke at the end of April.
And we expect to slightly more of these pressure to fall in Q3 than Q4.
During the first half of the year incremental consumer demand more than offset these headwinds.
From where we stand today, we are anticipating again good growth will moderate in the favorable mix. We saw in Q2 will fade.
As a result in terms of adjusted constant currency Buda, We currently expect organic gangs and a 900 basis points of discrete headwinds I just outlined to essentially offset one another in the second half of the year.
The other part of publishing our abates comes from below EBITDA.
Where for the full year, we continue to expect roughly 38 cents headwind from the combination of lower other income a higher effective tax rate in higher stock based compensation versus the prior year.
Year to date, we have you seen roughly 19 cents off the 38 cents. So the second half should see another 19 cents off pressure versus the prior year.
As for our third priority for 2022 continues to reduce debt, while maintaining our current dividend we have made great progress in our well position going forward.
Through July we have now fully paid the $1 billion of our 2020 debt maturities with cash reducing our gross debt outstanding.
We fully repaid or precautionary revolver draw down at the end of Q2 and $4 billion remains available to us.
And we got an extremely strong liquidity position with more than $2 billion off cash on hand.
No meaningful refinancing needs for the next five years as a result of our leverage neutral tender and refinancing transaction in may.
And we simplified our capital structure, eliminating any remain secured debt.
So very strong position to continue reducing our debt, while maintaining our occurring to different.
Finally, I would also like to note that with the filing of the squatters 10-Q, we expect to have remediated, our previous material weakness indentified in our 10-K, we filed in June last year.
In summary, we have had is stronger than expected results through the first half of the year.
Solid execution across the company keeps us cautiously optimistic for the balance of the year.
And as we go sad our business transformation is well underway employee morale is strong we have a well defined strategy and our team is in place working together with speed to bring agility with scale.
Now we would be had to take your questions.
Ladies and gentlemen, you have a question or comment at this time. Please press Star then one key on your touched on telephone. If your question has been answered your stomach yourself from the Q. Please press the punky.
Our first question comes from Chris growing with Stifel.
Yes, I think just your line is open.
Perfect. Your line is mainly because the Cleveland here.
If you want me to go hang onto the next question.
Let's go to the next question, we can come back to me.
Okay. Our next question comes from Rob bigger some adjustments.
Okay.
Great Good morning, everyone.
So great results in Q2, I guess just to start kind of more broadly or you know as we think there forward.
With respect to the turnaround.
Right now obviously, there's though you know this this tailwind which is in place which is great. But I guess you know if we think about later this year and then you know in next year and go forward.
This is probably more or.
For the Galaxy.
Yes, Hello, how are you thinking now about.
Big brand strength in actual media spend reallocation, you know and that also just maybe further simplification of the portfolio right. It sounds like you got to see some that help lift there are certain categories versus other more so certain capacity constraints in certain categories versus more so.
So which will lead me to believe that you're able to kind of see maybe where you think you can more effectively compete right you get a higher left off of further spend.
In some categories versus others.
This past that will pass along thanks.
Okay.
Look.
Near term, we we are.
We are adjusting out four continents and delivery to reflect.
The greater household penetration and the new consumers the tire rediscovering, our brands and and.
Carlos mentioned, a little bit about that.
But that is absolutely critical I wanted to say is critical we are learning about who this new consumers are.
And that is you know our obsession at the moment is to keep them with us.
Our new consumers and they are repeating to the purchase of our products.
We cannot meet this opportunity its a.
Unbelievable opportunities I would say its is almost a sampling opportunity that we are heavy.
And when we have to keep these consumers with us.
Beyond this.
You know you are going to see as reorient around how concerned are saying.
To a few specific platforms that are globally relevant.
In other words, we were going to share with you a nice September.
More choices and where we believe we have a chance to accelerate big time, our growth and given the portfolio.
Role for different products for sure some will have a role of bringing more profitability. Some will have a role of.
Growing net sales.
At this moment.
Till now we never had these 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 to put more steam behind.
Brands that that we saw a b household penetration growth.
At the same time.
We are.
Making a big change in marketing overall the company, we just hired three new heads of marketing for.
Each one of our geographic zones.
We are changing and evolving we want to be.
I'm much more consumer centric.
We we want to be much better.
In marketing and.
So in consumer insights in innovation in communication.
And this transfer station and this change is hoping it's happening as we speak.
And that's very exciting it's very exciting.
For for the entire commercial organization.
That is seeing this evolution coming very fast.
Okay Super Thank you Sir much.
Thank you.
Thank you Rob.
Our next question comes from Chris growing with Stifel.
Hi, good morning.
Hi, Good morning, So excited for the first question I lost the line there so sorry for that.
I wanted to go back to some discussion you had Apollo around EBITDA growth for the second half of the year you did talk about some of the drags you have on on EBITDA growth the commodities Mcafee Foreign exchange and I think you gave some some sort offsets to that if you will.
So for the second half so I wonder just the go back to that kind of discussion and what what's going to offset some of the strikes in EBITDA growth number one and then to understand like every push marketing in second half of the year to what degree will that be a kind of a further burden on the second half and and what does marketing doing for the year in press in relation to where you started the your expectations for the year.
Hi, Chris.
So yeah. So let's start from the last point into so as as a scalable sad were going to to have a higher a media expand.
But increase versus prior year, just second half overall dems of marketing totally span 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 okay for us.
I think the main the main areas that I mean headwinds that we're going to have in our EBITDA.
I pretty much a default that I mentioned I like are there you sent the did the same for 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 you're seeing a more favorable commodity.
Costs, mainly cheese with these recent volatility that we saw in the price of the commodity index. It off Mac affair and NFX rice. So those are there those for composite that the majority don't that the key headwinds that we see a for the second half of the your net debt was off offsetting.
Steve we still expect a.
Again strong are used to seeing a strong demand for the second half I think they're operating much about an hour in our mix a and also you know supply chain I efforts that were seeing also things going to be some some areas off when you compare versus prior year in for example supply chain losses, many other areas of the organization.
But we are evolving will be offsetting we expect to be.
What's that these headwinds that we have so again sales mix the pricing programs that we have supply chain performance I think we'll be offsetting the headwinds that I've mentioned marketing is not should should not be material.
For us when you compare when it when it comes back to these other factors.
Complementing what follow said agrees.
Year to not create confusion.
Carlos mentioned.
The big increases in media into second half, but but will will compensate that big increase with reduction on other parts of the marketing investment. So it shouldn't be material to marked increase but what consumer C, which is media it will be material.
That's great or you're just a quick follow up are you price seem 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 which has been down.
So in terms of an overall the competency about this commodity that has happened we had some price.
You saw this in the beginning of the year, we had some price initiatives that we said to prepare for the year.
ER and you know we have twice our price strategy. The Komatsu followed their market. We also as we said before in was you mentioned the call. We expect to have a more normal merchandising in the second half glass, what we saw in Q2.
But to be ready now are in line with what's going to be the market for these fought for this got much that you're seeing.
Okay anytime somebody should add some.
That was going to add something Paul will follow said it simply is you know the pressure, we're seeing and to the natural cheese is really to short term thing.
Because of the government program, but you know if we go into into the second half.
We've done maybe a small amount of of unfavorable and our commodity but something that we feel that we can handle if we go forward.
Thank you.
Thank you.
Our next question comes from David Driscoll with BT research.
Great. Thank you good morning.
So my head down in Q2 questions I wanted to ask the first one was just on that 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 kind of 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, let me start with.
Perspective in the U.S. So you know we essentially what we saw was some isolated capacity constraint on certain products, maybe think about areas like craft singles and Mac and cheese clubs and you know for pricing some of our pork and beef base me.
Now, we're working to mitigate those numerator capacity constraints, both in terms of their supply side and the demand side.
So in the supply side I'll tell you. This in our employees have shown incredible dedication, adding weekends and overtime chips and were securing more capacity with external manufacturers and we also fast track in capex projects to improve even more our throughput.
Moving forward, we actually have projects under way 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 rebounds, all of our merchandising promotion our marketing through the lens so that available capacity and we are made.
Sure sure to we said guard our customer service.
Through our best of our ability.
And I would say you know through the end of your question paid its really difficult to quantify the impact that but I feel good if we stand here we go into the second half.
Great and then if I could just follow up on now on one other item.
I just want to say I it sounds like on a longer term basis. All the things that are happening now in terms of the advantages of this this demand from the consumers combined with the Reprioritization of your 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.
Future is that there doesn't need to be a significant earnings reset in 21 in beyond that you can go from here Reprioritize, where you're putting your investments and get craft on a on a on a sustainable growth trajectory.
This is a little bit of Oh, 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.
What we've said that's who we expect to find efficiencies to pay for for the necessary investments.
This quarter is a great example of that.
We we had significant decrease in supply costs in overtime.
In bonus to employees in PPS high teen.
Temperatures checks, but even with all these increases we were able to mitigate these costs and the cost of goods sold you can see they were very very good.
And so we remain confident that that this will be the case, we'll give you more transparency more details in September but thats the world trade that we that we are working moving forward.
Thank you very much.
Our next question comes from Dumbbell Gardiner with Wells Fargo.
Good morning, Thanks for the question.
Just wanted to come back to you to the U.S. and Ah, Yes, Carlos you referenced being prepared to deal with any sort of pass the economic recovery May hand, you and in that vein. How do you think about the portfolio 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 development going forward and then at that low end the opening price point you. How is the supply chain now in terms of deal to meet that demand that your margins with minimal dilution what's that.
So thanks for the question, let me I guess part of.
I will start with that let's cover the side for a second and I think getting to where your point is which is what we're seeing the current economic pressures.
Ultimately, that's gonna be consumers, how they're going to be purchasing it will be a functional and basically how the economy, it's going to its going to drop and how much time. It will take to recover now both of those things. This coin that it really hard to know how they come how that's going to talk about.
What are we look back to some of the into path of our recessions whether that was in the U.S. 2001 in 2008 or nine.
Our portfolio organic growth remain essentially largely consistent with what we so pretty the recession performance with exceptional foodservice and foodservice, we actually saw a decline across both recessions because of the lower foot traffic in restaurant.
So that takes me I think to your question, where do we stand today, what I would say I think we're well position I think we haven't good momentum in their household penetration as I mentioned, we're better positioned on the pull north promotional front end. If we go into the second half of the year, where we can invest back into it brands and investment it's not just under pressure.
Fortunately event.
As I mentioned earlier that we're also investing back in media. So we are seeing a 40% greater investment in the second house as we go into closing the year. So so I think that you know from what we have learned and when 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 and other areas across the business can you walk through the areas of positive revisions and let me elaborate a bit on the reference to recalibrating future future investments going forward. Thank you.
No sure I think when it when you look at Oh, we have we have many areas in our portfolio.
And and that you know the values are it ended up moving up has as I mentioned in the call in areas like the value went down with exercise that you do it I guess, it's important to remember that listen we do this annual past every every year in Q2.
And as you mentioned I I, we saw many areas in our portfolios that are doing now and have better strategy and it based expect two to two to get for example, Laura condiments and sauces portfolio across the globe, including the Wes some used portfolios that we have.
We saw no business no is reporting when it's going up.
Even if it's great that part of the business. You will also we have we saw some very very very increases in the areas that we really are the reporting when it's that went down what's pretty much related to Canada, foodservice and retail and also the foot subs in the U.S., but those are pretty much there is that we saw.
$10 in terms of our impairment exercise.
Okay. Thanks for your time.
Okay.
Our next question comes from Michael Lavery with Piper settlement.
Oh good morning, Thank you.
On an event you mentioned that you.
Do you expect more normalized merchandising levels in the second half what we hear that correctly to win that you don't really have any need to pay back the the savings less promotional spending in the second quarter or would be more normalized levels, maybe even have a little tick up to sort of throughout the year.
Let me I guess I guess I can take that question.
When you look at our promotional activity as we think about it taken have but I will say is right now both our inventories our production levels as they are improving we are expand gonna be able to put some additional promotional activity in Q3. In fact, you will see value not worse dry period, which as you know a big director happens around.
Labor day, and so we'll see that.
In our in our in our brands and categories.
Well, we have so far what we have being able to do is we have been able to be very surgical about pulling back on promotions and you saw that some of that in the scanner data, but that really has been very focus of certain categories now and going forward. You know our focus continues to be is making sure we service demand.
Because we know there is still a significant amount of pool there from our consumer base. So are we gonna, yes, we're going to be building back a promotion, but at the same time I feel like we're doing a balanced way as we are now being able to support those businesses that do have the right level of inventory.
Okay. That's great. Thank you.
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.
Book.
As you said, it's very hard.
Two anticipated demand for 2021.
I can tell you that you know we've been.
Working on on a kind of scenarios and building scenarios.
The trust is that.
We at the same time the same way that you Im sure do not see you know a solution for the Corona fibers in in the short term more and so.
We have to work with with scenarios I think that.
The best thing that we can do is to concentrate our energy and resources on on really holding onto this new households that we gained that it is critical this is a blast that we have new consumers trying experimenting repeating the trial and has to be our obsession.
Keep them with us. So so we can you know we 2021 progress if if 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 the they tried and they continue to try.
And they continue consuming and we want them with us.
We continue to carry out.
That's the strategy that we've set and and and and look for additional and continuous improvement opportunities in everything we do.
I think that's one thing that is critical whereas is that.
We are starting to the two to share with with our.
Customers at this moment.
Plannings already for what's Gonna happening next year and we'll we'll start is in.
Now in the second half of the year.
And that is crucial we are they we've been able to anticipate the planning cycle for the future, which will will who is very important both for us and for our customers.
Well that's that's helpful color. Thank you very much.
Our next question comes from Scott Mushkin our capital.
Hey, guys. Thanks for taking my questions. So I wanted to look at third quarter just for a second I know you said, you're expecting things to kinda.
I guess slow down a little bit and I was wondering you know, we're seeing especially in the U.S. a resurgence of Corona cases, and I know that 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 threeq of as far as a sales in the U.S.
Oh listen.
Yeah, I can take that and that maybe after Carlos getting household abusive if needed.
But again at the end of the day when do we compare where our Q3 expectations. What Q2, we saw already can fight due to the a deceleration from the retail site.
Of the business.
You know we.
On top of that we also are seeing like foodservice.
Guidebook recovering and with music offsetting part of this.
Decline and of the retail we have Mecca Fair also you started playing.
No the exit of Mecca Fair, it's also going to start impacting us so again.
Those are the BT much that they're the deceleration factors and sales that were seeing for you know for Q3, a second half of after the first half that normal deceleration from there or retail site.
And the Mecca fair they start playing out also the exit of Mecca Fendi West Destocking backing as in July.
Margin wise when you talk about EBITDA that was the comment I made I think there too big components right. One cone point. It is meek mix I think the mix benefits that we saw in Q2, a will fade both because of the relative retail food serves genomics and also at a Coptic what product level mix.
Thanks.
That we are expecting to see going forward. The vast is what we saw in Q2 and you know the price relative to commodity as I mentioned, a you know we they spike in mainly in the cheese costs that we're seeing this happened in Q3, a vast as what we have we had in Q2 that was a benefit for us but those are the main drivers that.
We are you were seeing dams off relative performance year over year performance year to year to go versus what we signed the first half.
Okay, great and as as a quick follow up I was wondering maybe you want to talk about this happens maybe is for September but any thoughts on the innovation pipeline or you touched on it that he wanted to accelerate innovation renovation any further comments, there and then I'll yield thanks.
Let me I guess I comment on innovation peak and you're right.
You're going to here quite a bit more about our plants in September so look forward to seeing you then.
But I would tell you is that at the only when we think about 2020 really the impact has been kind of limited in terms of what we have seen and changing our plant of innovation. We if you recall we are actually in 2020 have half. The project. So we had a year ago. Also so we are actually didn't see as much of any impact because of the changes that we go through.
2021 will be go into 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 opening for about six seven weeks. So so actually we feel very good about our pipeline as we go into next year and I'm looking forward to going to assure you with the details of how that's going to come to life in September. Thank you.
Okay. Thanks for taking one more question.
Okay.
All of question comes from different armed 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 Cheez whiz slipping to a headwind and is one of the reasons why the EBITDA headwind would would be created is is that simply because of the fact that we've seen that lead dairy spike in June into July here or is there.
Some other reinvestment needed I asked that because.
Gary cheese like some of the your other commodity oriented categories, you've had some sustained market share losses for awhile and I'm wondering if you're not just seeing a cycle reason, but perhaps you're you're drawing a line the sand about market share in somebody's categories again, 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 but I think a point that we have made earlier, but I'll I'll Revista, which is our focus really isn't driving household penetration.
And retaining all this new consumer that are coming to our brands now in the context of that market share specifically, but I would say is there the way I see it has been like three more months since recovered again I think there was a new show more many which are the demand really spiked and we had high level of inventories that which is.
Normally what we do and that kind of year, so that actually helped us gainshare.
Well, we still demand stay high through May into June.
We also want to make sure we better manage our service levels. So we actually lost some share in certain categories and as I mentioned earlier, you know we pulled back on promotions and in places like moral day, which we have never done.
We also focused our SK using our core businesses. So that we can maximize our throughput that also had an impact on chair as you think about less distribution.
And then we also have to respond to the fact that there was some supply tightness across the value chain and from end to win in places like meat and any some parts of our.
Mostly.
Pork and beef business.
Now.
Today, what I'll tell you is that retail retail demand remained strong.
So we are because of that we're focusing areas that we can actually control and let me tell you that three things. We're doing one we're bolstering capacity to make sure that we're getting more of our assets and we are expanding a number of co packers destined to be working.
Now because of that we'd actually then expand the number of SK use back into our shelves where customer really need them.
In the third thing is we're also getting back to invest in 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 you know the reality is that we actually seeing progress and in fact, our share over the last two weeks have come being positive and we see that you know some improvement as we go forward. So when you take it altogether, but I'll say is our focus for entire team is how do we make sure what's it going.
Into the second half we maintained a positive momentum in the business and we focus on connecting with our new and fixing consumers.
Thank you.
Thank you.
I would now let's turn the call back over to the Gulf for any closing remarks.
Well I wanted to thank you for for all the time you've been on on a on this call with us and before finishing you just want to summarize the way that we.
I see this quarter and moving forward.
We need for sure had stronger than expect Q2 results and that reflect that you know it was reflecting our continued momentum one and a strong consumer demand for our brands and we are.
Very excited with that we had the strong category and brand growth on on home household penetration coming from household penetration, but also from repeat rates.
We had better than anticipated costs and supply chain.
And that despite the fact that we had a big inflation big cost increase because of the cozied.
And now for 2020.
In our or priorities and an hour.
Actions that are on track and and the results will build better than anticipated.
We expect this first half upside through to hold.
And you know solid execution. This is making is cautiously optimistic for a second half. There's a lot of uncertainty are going to keeps going back to school or not are we going to open our offices are not just this can change.
Still a lots, but if the consumption stay strong well, yes. We will you may have an upside on the second half.
The other thing is is it the same time that we are dealing with this unprecedent change in consumption partners and we've been adapting very fast we are working on parallel on our transformation or transformation is underway.
And in the ceiling to the early stage because of bringing the agility.
To our company, we have a lean structure, a culture based on on ownership, which which which is a key critical ingredient for agility and yes, we have to correct. Other things, but we are we are excited about.
No, bringing agility to the company that has the scale that we have.
I think that together with the scale of our business.
We we agree to to bring a benefits to talk to shareholders to our customers and to our consumers.
And looking for work.
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 and see you soon or talk to your soon.
Ladies and gentlemen, just conclude todays presentation you may now disconnect and have a wonderful day.
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